Gold and Silver Rally After SVB. New Uptrend?

Gold and silver have soared substantially over the past few sessions as markets adjust to the new post-SVB reality and monetary policy outlook. The latest CPI has taken some of the momenta away, but can it trigger further losses for metals?

It’s Not Just Banks Breaking

Gold has since Thursday, breaking the $1900 handle as investors drastically cut back expectations of Fed hikes. Silver soared more than 10% since Friday for an attempt at $22. Through the early part of the year, gold and silver had been under pressure as the Fed was expected to keep hiking. The situation was even worse in early March, as comments from Fed Chair Jerome Powell shifted expectations that the Fed could hike by 50bps at the next meeting. Following the collapse of three regional banks, the Fed is expected to at most hike by 25bps now. Some outliers, like Nomura, even called for the Fed to cut by a quarter of a point.

With the shift in expectations, bond yields crashed, and investors piled into safe havens. The uncertainty of whether other banks were affected and stocks of the sector plummeting at the start of the week brought with it demand for gold and silver. Both are hedges against inflation, and the belief that the Fed gave up the fight against inflation to shore up the banking sector led to higher inflation expectations.

Latest Inflation Data Matters

The market was on tenterhooks for the release of the CPI figures yesterday, as a beat of expectations was seen as inclining the Fed to be more aggressive in hiking with a 50bps move. But inflation came broadly in line with expectations, with the month-on-month core reading up by just a decimal point from the consensus. Expectations around the Fed have not changed by the inflation number, and gold retreated a bit as investors regained some confidence. 

Barring another bank being taken over by the FDIC, market attention now turns to the Fed, particularly concerning the trajectory of gold and silver. The market is currently pricing in just 25bps of hikes over the next couple of meetings and then two hikes later in the year. If the Fed moves to pause, it could substantially weaken the dollar, pull down bond yields and raise concerns about a resurgence in inflation. All of that could push gold and silver higher. But if the Fed keeps its focus on slowing inflation - assuming that the new backstop mechanism is enough to shore up the banks, they could give back recent gains.

SPOT Silver Takes Breather

Silver prices in the spot market have had an impressive rally from the March low of $19.90 per ounce, soaring to a high of $21.97 on Tuesday. The commodity seems to be putting in a correction pattern, be it flag, pennant or triangle, implying drops might provoke further long bets. 

Typically, corrections in that early stage of reversals retrace more than 50% of gains, which suggests a downward leg to $21 or lower may be due. $21.50 and $21.20, being major Fibonaccis, may act as supports. Breaking higher will expose spot silver prices to additional gains, potentially equal to 100% of the length of an expected correction to $21.50. This would bring silver around $22.50 per ounce until the next FOMC provides more clarity.

Source: Spreadex

Key Takeaways

Gold and silver have seen considerable gains over the past few sessions due to lowered expectations of Fed hikes. The CPI figures released yesterday were broadly in line with expectations, resulting in a slight decrease in gold and silver prices. However, the market is still pricing in 25bps over the next few meetings, potentially weakening the dollar and raising inflation concerns. If the Fed keeps the narrative neutral, it could drive prices higher again.