There were several causes of the upward move. The US Federal Reserve has indicated that it will reduce the scale of future rate hikes, which the market has taken to mean that the Fed will no longer raise rates in increments of 75 bps, pricing in 50-bp rate hikes over the coming months. There has also been a modest rise in longer-term inflation expectations in most developed economies, which is a benign signal for precious metals. Meanwhile, the USD has weakened since the Fed’s November meeting and because that is the currency precious metals are priced in, their value increases with dollar depreciation.
Coming into year-end and the New Year, we hold a constructive outlook for the main precious metals. There are several reasons for this. First, we think that forward-looking real interest rates have likely already peaked, and as they gradually decline, precious metals will go up. Second, we believe that the USD is tremendously overvalued and as it corrects towards more sustainable levels, this will propel both gold and silver higher. Our models show that a 1% decline in the US Dollar Index is consistent with a USD 7 rise for gold prices, and in our view gold may surge to around USD 1,850 by the end of 2023. Assuming that silver maintains its high beta to gold, this suggests further upside for silver too – a rise to USD 24 per oz is feasible by the end of 2024. Third, we note that investor positioning is running substantially below normal levels in both gold and silver, and as investors rebalance their portfolios towards historical averages, this will lead to further upside pressure on position adjustments. Fourth, we expect central banks to continue to increase allocations towards gold, given that in Q3 alone central banks purchased USD 400 bn worth of the yellow metal. Fifth, we anticipate that geopolitical risks will remain extremely elevated over the coming years, with an increasing focus on US–China rivalries, and this will give a modest boost to prices.