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Gold & Silver Outlook: A Recession Signal & Haven Flows

It’s been a volatile month for gold and silver prices, driven up and down by haven flows, a Fed rate hike and potential supply disruptions. What comes next?

The recent recovery in risk sentiment has fuelled a reversal in haven flows with gold prices correcting by almost 10%. Silver prices have seen a similar move, coming under heavy selling pressure as risk flows rebound. 

 

Gold & Silver - 4 months

Source: TradingView / FlowBank

 

Best quarter for gold in nearly 2 years

Following news of Russia invading Ukraine on February 24th, haven flows saw gold prices surging higher, with the market coming close to printing new record highs in early March. The rally saw silver prices dragged higher too, with spot XAG/USD hitting the highest peak since August 2021 as risk sentiment cratered.

 

Risk Sentiment Improves on Ceasefire Hopes

The driver behind the shift in risk appetite is largely a function of the shifting views on the conflict in Ukraine. With Russia failing to seize control of the country and suffering heavy losses as the invasion drags on to over a month in duration, investors now appear hopeful that a ceasefire or peace deal can be agreed.  

Russia has this week announced that it will dramatically reduce its military operations near Kyiv and Kharkiv as a show of good faith to increase trust in the talks. With negotiations heading in the right direction, metals prices are likely to remain under pressure as risk assets continue higher. 

 

Hawkish Fed Outlook Weighs on Gold & Silver

Away from the geo-political factors impacting the metals market, gold and silver have also been knocked lower by a much more hawkish shift from the Fed. The March FOMC meeting saw the central bank sharply upgrading its rate path projections over the coming year and next. Indeed, following that meeting, we’ve heard firmly hawkish comments from Fed chairman Powell who warned that the Fed stood ready to lift rates at a faster pace than normal in order to cool soaring inflation. 

So, given the shift in narrative over March, the question now is where are gold and silver headed over the coming months? Is the current pullback in metals merely a correction, or the start of a fuller reversal lower?

 

Is the Yield Curve Pointing to A US Recession? 

In terms of gauging the likely direction of metals over coming months, one important development to note is the flattening and now inversion of the US yield curve. The 5s10s spread then the 2s10s have now inverted. Such a move is always seen ahead of a recession in the US, though a recession doesn’t always follow the signal. Put bluntly, this can be a false signal. 

If investors take this signal seriously, gold prices in particular might be expected to rally over the coming months as investors seek protection in ‘safer’ assets as a store of value. 

However, in this instance, the flattening and inverting of the yield curve might not necessarily mean a recession is coming. The reason is that the bond market has been heavily distorted by the Federal Reserve depressing rates. The Fed is now set to push short term rates up, recalibrating following the seismic shift in policy over the pandemic. Long term yields are rising too, just not at the same pace because they are not as impacted by near term changes in monetary policy.

 

Yield Moves Not Necessarily Marking Recession 

The Fed has said that it will continue to hold its longer-term debt until after short-term rates have been brought up to an effective level. With this in mind, one way of looking at the current yield curve flattening is that the market is on board with the Fed’s message on monetary policy. 

Alternatively, the market might be wary of Powell’s hawkishness, judging that it will have a longer-run impact on employment and growth, though this doesn’t necessarily mean a recession is coming. 

 

Precious Metals Outlook 

With US rates set to rise sharply over the remainder of the year, the outlook for gold and silver looks likely skewed to the downside. Given the focus we are now seeing on peace talks between Russia and Ukraine, it is looking increasingly likely a deal will be done. Such an announcement would be firmly bullish for risk sentiment, putting further downward pressure on gold amidst a weakening in safe-haven inflows. 

 

Source: TradingView / FlowBank

 

Looking at the long term chart for gold, from a technical standpoint we are potentially seeing a double top formation, further encouraging a bearish view over the coming months- even years. This perspective is strengthened further by the huge volume we saw going through on that last peak in gold, suggesting capitulation at the highs. 

 

Gold/Silver Ratio Pointing to Lower Silver Prices

The gold/silver ratio is currently around the 78 mark, having moved up off lows around the 63 level, but below the 200-week average of 82. Periods during which the gold:silver ratio rises, the gold price tends to rise.

 

Source: TradingView / FlowBank

 

Beware the Upside Risks

While the base case scenario is for metals to move lower over the coming months as risk sentiment continues to rebound and the Fed continues tightening rates, it is important to consider the upside risks. 

Should peace talks between Russia and Ukraine breakdown, or if we see a fresh escalation of the violence, this would no doubt weigh heavily on risk sentiment, sending gold and silver higher. 

Equally, looking ahead, the decades-high inflation is clearly a reason to worry the inverted yield curve will correctly predict a recession this time, likely creating natural support for gold prices. If growth slows and a recession becomes more likely, we would then expect strong inflows for gold, taking silver higher also. 

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