Against the backdrop of Fed 's continued tightening, gold and silver prices at home and abroad continue to fall. As of September 20, the price of COMEX gold fell by more than 19% from its high this year, and the price of COMEX silver fell by nearly 30% from its high this year. Although the Russian-Ukrainian conflict escalated in September, the rebound in gold prices, which was expected and driven by the market, did not appear. As the current market safe-haven funds poured into US dollar assets, the index of rose sharply, and the market panic was far lower than that of the beginning of 2022.
Looking ahead, the nominal interest rate of USD has driven the upward momentum of real interest rates not yet ended, gold investment demand continues to weaken, and it is difficult for gold prices to stop falling for the time being, while silver financial attributes are weaker than gold, and the gold-silver price ratio has fallen from a high level, and the gold-silver price ratio may continue to recover in the future.
The escalation of the Russian-Ukrainian conflict has not triggered the gold safe-haven buying
Since February 24 this year, the conflict between Russia and Ukraine has lasted for nearly 7 months, and the war has been escalating since mid-September. Ukrainian President Zelensky said on September 11 that the Ukrainian armed forces controlled kikarovsk in in Kharkiv Prefecture . The Ukrainian army said it was stepping up a counterattack to control the wider area of Kharkiv Prefecture, including the strategic center of Ijium2. Russian Ministry of Defense On September 11 local time, local time, the Russian army continues to attack Ukrainian troops in Kharkiv, Khlsong Prefecture and Donetsk .
From the perspective of the financial market, the escalation of the conflict between Russia and Ukraine did not cause extreme panic in the market, and gold safe-haven buying did not appear. The VIX index, which reflects market panic sentiment, was above 20 points in September. According to historical experience, the VIX index at 20 points means that the market is panicked, but it is above 30 points that the market is extremely panicked. In addition, according to historical experience, after the market is extremely panicked, it will return to rationality and gold safe-haven buying will also fade.
The Federal Reserve still has strong tightening efforts
On September 21, the Federal Reserve held a interest rate meeting, and the tightening efforts are still strong. The question is, will the slowdown in the US economy hinder The Fed's interest rate hike ? We don't think so. The U.S. job market has performed well this year, with the unemployment rate falling in the first seven months. Although the unemployment rate rebounded slightly in August, the ratio of occupational vacancies to unemployed people in July is about, meaning that each unemployed job seeker has about two positions to choose from, which is not only higher than 1.15 at the end of 2019 before the epidemic, but also higher than most periods since 2000. Currently, the US GDP is negative month-on-month, but the employment market is still strong.
From the perspective of economic growth drivers, a slowdown or even a recession in the US economy may be inevitable. Federal Reserve Chairman Powell insists that the Fed's goal is to achieve a "soft landing", that is, to try to slow the economy to a level that is enough to curb high inflation, but not to put the economy into recession. The implicit meaning is that the United States may not fall into recession. However, the economics community believes that the United States needs a "miracle" to avoid a recession.
On the one hand, against the backdrop of high inflation and rebounding interest rates, the growth rate of US residents' consumption expenditure is likely to slow down, and the main driving force of US economic growth comes from private sector consumption, so the possibility of the US economy falling into recession in the fourth quarter is very high. The University of Michigan consumer confidence index has shown a trend of decline since June 2021, reflecting consumers' lack of confidence in personal income, business environment and purchasing power. In June 2022, the University of Michigan's consumer confidence index fell to 50 points at one point and rebounded to 59 points in September, but it was still far lower than 72.8 points in the same period last year.
On the other hand, the shrinking of the US fiscal deficit and rising interest rates may curb public sector and private sector investment, so the pull of investment on the US economy is not strong in the fourth quarter. In September 2022, the US Sentix investment confidence index fell to -10.8 points, setting a record low since September 2020. In the second quarter, the month-on-month pull of US private investment in GDP was -2.67 percentage points.
However, we believe that the US recession may be moderate, so the Fed still hopes that the economy will slow down to drive demand to cool down, thereby reducing inflationary pressure.Judging from the balance sheet, financial institutions currently have few non-performing assets, and the residents' sector has performed relatively healthy due to several rounds of fiscal subsidies from 2020 to 2021. Therefore, the low leverage of will not cause a serious crisis in the US economy, which may be an economic recession within the medium. However, if interest rates rise to a certain height, the US private sector leverage ratio may climb beyond expectations. According to data released by Bank for International Settlements , in the first quarter of 2022, the leverage ratio of the U.S. residents' sector was 77.2%, far lower than 98% during the subprime mortgage crisis ; the leverage ratio of non-financial enterprises was 80.6%, which fell from 85% during the epidemic. In addition, the transmission of economic growth slowdown to the labor market has a certain time-lag effect.
During the currency tightening period, the demand for gold and silver investment declined significantly
According to the experience of the 1970s, the price of gold and silver in stagflation period rose astonishingly, but the price of gold and silver in this round of stagflation (currency tightening period) continued to fall, mainly because the Fed tightening process was faster than in the 1970s, and the nominal interest rate rose faster than the inflation rate, which led to a rapid rebound in the real interest rate of the US dollar. Data shows that as of September 19, the 10-year TIPS yield representing the real interest rate of the US dollar rose to 1.15%, setting a record high since November 13, 2018.
The real interest rate of the US dollar can be regarded as the opportunity cost of holding gold and silver. The rising opportunity cost will inevitably lead to a decline in investment demand for gold and silver. Data shows that as of September 19, the world's largest gold ETF , the SPDR gold holdings fell to 957.95 tons, compared with 1,001.66 tons in the same period last year; the world's largest silver ETF SLV silver holdings fell to 14,905 tons, compared with 16,939.71 tons in the same period last year.
The chart shows the comparison between COMEX gold futures prices and SPDR gold holdings
Therefore, we cannot simply judge that the current gold and silver prices will rise sharply based on the experience of sharp rise in gold and silver prices during the stagflation period in the 1970s. Before the Fed's tightening pace has ended, the rise in real US dollar interest rates and exchange rate will suppress gold and silver prices. Due to the high inflation or low interest rates in the past two years, the gold-silver price ratio is relatively high. This year, with rising interest rates and cooling investment demand, silver's financial attributes are weaker than gold, and the decline will be slower than gold supported by industrial demand, and the gold-silver price ratio will continue to fall.
The picture shows the changes in the price comparison of gold and silver in the past few decades
If you look at the data, the price comparison of gold and silver in the past few decades has changed a lot. Erik Norland, senior economist and executive director of CME, pointed out that one ounce of gold can buy 30 ounces of silver in 2011 and 120 ounces of silver by 2020. In the early stages of the epidemic, one ounce of gold bought 60 ounces of silver, and currently it can buy about 90 ounces of silver. The current economy is full of uncertainty, which also has an impact on the trend of gold and silver prices. (Author Futures Investment Consulting Certificate No. Z0010160)
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