Gold, silver, and copper experienced significant declines on Thursday, with silver falling nearly 5%, as a result of a rebound in the US dollar and concerns surrounding China’s economic recovery.
These precious metals have been a popular choice for safe-haven investors amid uncertainty and inflationary pressures due to the pandemic, with gold even hitting its highest level since January earlier this week. However, their prices have taken a hit as the US dollar gains strength and concerns surrounding China’s economic recovery intensify.
“The weakness in Chinese inflation data has intensified concerns about demand from the world’s second-largest economy, where the recovery appears to be fading alarmingly,” said Fawad Razaqzada, market analyst at StoneX. July silver fell $1.23, or 4.8%, to settle at $24.42 an ounce, posting its most significant one-day percentage decline since February.
Gold also experienced a decline in its price, with June gold futures falling by $38.10, or 2%, to settle at $1,822.80 an ounce. This marks its lowest finish since May 14 and its largest one-day percentage drop since February 25. Gold prices were also affected by the release of the US Consumer Price Index (CPI) on Thursday, which showed that prices for goods and services rose by a more significant percentage than expected in May.
“The gold prices plunged… in the wake of the stronger-than-expected US May CPI numbers that surpassed the consensus forecasts. These figures heightened the inflation fears and propelled the US dollar higher in the market, subsequently pushing the prices of the yellow metal lower,” said Lukman Otunuga, a senior research analyst at FXTM.
Copper prices also marked their lowest finish since November last year, with July copper futures dropping by 13 cents, or around 3%, to settle at $4.47 a pound. Copper, a critical metal in the manufacturing sector, has experienced shrinking demand from China, impacting its prices. The weaker-than-expected Chinese inflation data only worsened the demand outlook for the metal, contributing to its price decline.
The US dollar, on the other hand, saw a robust increase in its value amidst these precious metal declines. The ICE US Dollar Index, which measures the value of the US dollar against a basket of global currencies, rose 0.6% on Thursday. The increase in the dollar value is said to be a result of investors seeking a safer store of value, as concerns about inflation become more prominent.
Despite their recent declines, some experts still see potential in these metals as a hedge against inflation. George Gero, managing director at RBC Wealth Management, said earlier this week that both gold and silver still have a “positive outlook” and expects them to “rally in the next few months.”
However, other experts are more skeptical about their potential, particularly as prices for gold and silver are expected to face headwinds in the short term due to the issues surrounding the global economy and inadequate momentum for inflation. Michael Armbruster, managing partner at Altavest, said that gold prices would likely face headwinds from the strong dollar and that silver would most likely follow the path of gold.
On the flip side, other analysts see an opportunity in the price decline of these metals, particularly as they have been considered as safe-haven investments against market uncertainty.
“With equities near record highs and [Federal Reserve] rhetoric indicating that it’s willing to tolerate higher inflation, conditions are ripe for increased investment interest in these alternative forms of exposure,” wrote Vivek Dhar, mining and energy analyst at Commonwealth Bank of Australia, in a note to clients. “That may see gold and silver prices reach new highs over the coming months.”
In conclusion, while the recent price declines of gold, silver, and copper are a result of the rebound in the US dollar and concerns over China’s economic recovery, some experts still see potential in these metals as a hedge against inflation. However, the short-term outlook for these metals remains uncertain, given the global economic issues and insufficient momentum for inflation.
As such, investors would be wise to keep an eye on the various factors influencing the prices of these metals, such as the US dollar and China’s economic data, and remain aware of potential headwinds or opportunities that may arise in the coming months.
