Gold and silver October 2016 futures are trading at $1,340 and $20.08, respectively, with increased trading volatility stemming from renewed global economic uncertainty.
But that's a trend that shouldn't last, precious metal experts say, as larger economic forces should act as an upward driver of gold, silver and other precious metal prices through the end of the year. Futures prices reflect that view, with February 2017 gold prices trading at $1,347 and March 2017 silver contracts trading at $20.18.
"After a torrid beginning to the year that saw gold and silver prices rally over 25% and 45% during the first half of 2016, respectively, one of the popular views circulating right now is that the precious metals rally is exhausted," says Joseph Yaffe, co-owner of Gainesville Coins in Gainesville, Fla. "That's mainly the reason for the soft trading patterns in the precious metals market in the past few weeks."
"However, the macroeconomic factors that are largely responsible for the rally-slow global growth, unconventional monetary policy, overcrowding in the bond markets, and inflated equity valuations-are all still firmly in place," he adds. "In other words, nothing has changed in the fundamental picture for the precious metals. We're seeing a pullback from the recent highs in the near-term while these markets remain in a medium-term upward trend, nonetheless."
Conventional wisdom and recent history show that silver prices are generally more volatile than gold prices and therefore offer greater upside, Yaffe notes. "While we do expect gold to trade higher in the fourth quarter and continue to rise into next year, silver will likely run ahead of its precious metal cousin," he says. "Plus, there is no compelling reason for investors to avoid any of the precious metals, but it is worth noting that platinum and palladium tend to outperform when gold and silver rallies become mature and prices begin to consolidate, and that's a strategy that should play well in 2017, particularly because factors like low interest rates from the Fed and stagnant economic growth are all but certain to remain a fixture."
Maxwell Gold, Director of Investment Strategy at ETF Securities, says the Fed's decision this week to keep their policy rates unchanged came as no surprise. "They have been very vocal on remaining data dependent and U.S. economic data this year has been mixed with tepid growth, low inflation, and real wages still struggling to pick up materially," Gold says. "Overall, this remains a constructive macroeconomic environment for precious metals as driven by negative real interest rates, a range bound dollar, and continued accommodative monetary policies globally continue to spur demand for hard assets such as precious metals. Further economic and political uncertainty will likely continue to weigh on investors and provide further support for safe haven purchasing heading into the end of 2016."
"Gold and silver will likely continue to perform well in a lower-for-longer environment, particularly as uncertainty and diverging monetary policies will continue to drive market volatility," Gold adds. "Palladium is another precious metal likely to see support from attractive fundamentals, continued recovery in global growth, and strong auto sales in China, which are up 26% year over year as of August 2016."
Others say that tying precious metal prices to any strong Federal Reserve interest rate activity isn't viable going forward.
During the next few years, we view the probabilities of an extended Fed tightening cycle as extremely remote," says Trey Reik, senior portfolio manager at Sprott Asset Management in New York. "Regardless, economic indicators such as the Fed announcement do not hold much bearing on gold's investment relevance."
In the meantime, whenever short-term Fed rate handicapping moves provides downward pressure on the gold price (as may have been the case since gold's July 7, 2016 intraday high of $1,375.45.) Reik views such trading as providing a "fortuitous" buying opportunity for both gold and gold shares. "Between June 2004 and June 2006, the Fed raised rates at 17 consecutive FOMC meetings -- more than quintupling the Fed Funds rate from 1% to 5.25%, and spot gold rose 73% over the interim," Reik says. "In that regard, we do not think the Fed's current pace of a quarter-point increase every year or so presents much challenge to firm gold prices."
Not every commodities watcher agrees with that sentiment. "Gold plays different roles for different investors, but historically it has been seen as an inflation hedge and as a currency hedge," says Charles Sizemore, portfolio manager on Covestor, an online investing company and chief investment officer and Sizemore Capital Management in Dallas. "That doesn't bode well for gold at the moment, because most measures of inflation are well below the average levels of the past 50 years."
"Given that the Fed is likely to raise rates in December -- which should mean a stronger dollar, everything else being equal -- gold will be facing headwinds on that front as well," he adds. "Consequently, gold is not cheap at today's prices, and the future macro outlook doesn't support higher gold prices."
For now, though, sentiment of a sluggish precious metals market may be exaggerated, and that's being reflected in trading prices across the board. Most metals experts say that's a trend that should continue into 2017.