Precious Metals Plunge: Can Gold, Silver, Copper Rebound?

The year 2024 has been dubbed the "Metal Boom Year," with major metals such as gold, silver, and copper all reaching historical highs. Recently, metals have collectively retraced, with the decline in expectations for Federal Reserve rate cuts and the pullback in overseas manufacturing PMI being the main reasons.

Gold prices struggled at the end of May, soaring to a historical high above $2,450 on May 20th, then falling for two consecutive weeks, now hovering around $2,330. The previous decline in rate cut expectations did not substantially affect gold, but the recent continuous plummet in expectations has finally begun to hit gold speculators. Silver and copper, which have industrial attributes, have had a harder time; silver retreated from around $33 to below $30. Copper, one of the best-performing base metals year-to-date, with a maximum increase of 36%, has seen a sharp drop of over 10% in the past two weeks. The market is starting to worry that the short-term fundamentals are not sufficient to maintain copper prices at historical highs, and whether downstream demand can keep up is key.

Traders and analysts interviewed by First Financial believe that the end of May has been tough for both base and precious metals. Gold seems to have held up, but silver may not, and copper depends on the subsequent recovery progress of China's economy and the momentum of global manufacturing. In the second half of this week, the US non-farm employment data and the European Central Bank's interest rate decision will more clearly outline the prospects for rate cuts in the US and Europe, which are also the most important risk events of the week.

Advertisement

Gold has experienced a long-awaited significant drop.

Gold spot prices broke through historical highs in May this year, reaching a maximum of $2,450. Data also show that "global central banks" have become the most powerful gold buyers, with a year-on-year increase of over 20%. The People's Bank of China increased its gold reserves by 60,000 ounces in April, achieving an "18th consecutive increase."

However, in the past two weeks, gold prices have plummeted by nearly $100, which has surprised market participants who have been continuously betting on rising gold prices. StoneX's Senior Market Strategist, David Scutt, told reporters that the previous gold price drop was mainly driven by profit-taking. "After gold prices briefly broke through the historical high in April, they failed to maintain above that high. This gave investors a reason to lock in profits after a strong performance in recent months."

Jia Sheng Group's Senior Analyst, Jerry Chen, also mentioned to reporters: "The technical side is very unfavorable for gold prices. The current monthly chart shows two consecutive long upper shadows, and the weekly chart shows a bearish engulfing pattern, suggesting the risk of gold prices continuing to retrace. The 50-day moving average may not be able to form support; if broken, it will test the $2,280 level, and completing a double-top structure implies a larger-scale adjustment. The non-farm payrolls on Friday will be key in determining the direction of gold and the US dollar."

In his view, the one-week implied volatility of gold is 14.8%, essentially unchanged from last week, meaning that gold prices are likely to fluctuate between $2,278.3 and $2,375.5 this week.

As the market expects the Federal Reserve to cut rates by less than 40 basis points in 2024, the timing of the US rate cut seems to have become "obscure," which is also a major factor hitting gold prices.

Overall, US economic data in April were below expectations, with employment data, CPI, and retail sales all lower than the market's general expectations. Core PCE is currently below 3% and appears to continue falling. However, the minutes of the Federal Reserve's May meeting conveyed the opposite message, with policymakers still significantly lacking confidence in whether the US economic condition is weak enough to warrant a rate cut. The hawkish meeting minutes contrast sharply with the statements made by Federal Reserve Chairman Powell after the meeting.The latest U.S. consumer confidence index for May was announced at 102, significantly better than the expected 96, and the previous value for April was revised up to 97.5. This has also led the market to start worrying whether there will be a rate cut this year.

On June 3, the U.S. May ISM manufacturing PMI unexpectedly dropped to 48.7, below the boom-or-bust line for two consecutive months. The Atlanta Fed model predicts a 1.8% GDP growth for Q2, significantly lower than last week's 2.7%. This temporarily supports gold prices, but given the volatility of recent U.S. data, it is difficult for this data to completely reverse market expectations.

UBS Global Chief Economist Arend Kapteyn told reporters that the main issue the Federal Reserve faces is the need to wait for inflation to improve for several months in a row. Obviously, this means that a rate cut before September is unlikely, as there is not enough time to obtain data showing a sustained improvement in inflation.

As the Federal Reserve is a central bank that takes into account the "dual mandate," namely controlling inflation and achieving full employment, a weakening in the data related to one of the goals may be enough to trigger a rate cut in September. However, Kapteyn also said, "We certainly agree that the Fed can wait patiently for inflation data to improve before cutting rates, as long as the labor market does not slow down sharply. They would be concerned that cutting rates too early could cause inflation expectations to become unanchored."

Selling silver on the rise has temporarily become the mainstream trade.

Compared to the less than 5% decline in gold, the declines in silver and copper prices in the past two weeks have reached about 8% and 11%, respectively.

In fact, silver's gains this year once exceeded those of gold. In the week of May 17, silver surged 11.8%, breaking through the $30/ounce mark, with cumulative gains of over 30%, surpassing gold's nearly 20% increase, making it one of the best-performing major commodities of the year.

"In the short term, there may be some resistance, such as a rebound in the over-sold dollar or profit-taking. But as long as it does not fall below the $28.80 mark, there is hope to continue the upward momentum. After stabilizing at $30, it will completely open the door to $35. The prospect of rate cuts is the main reason the market continues to be optimistic about precious metals," a commodity trader from a foreign bank told reporters at the time.

However, it is precisely because of the recent sharp drop in rate cut expectations that led to the Waterloo of silver, and silver, which also has industrial attributes, has been dragged down by the weakening of global economic data.

Scott told reporters that compared to gold, silver is more susceptible to the recent downturn, and the price broke through the upward trend since early May in the night session last week."As the momentum indicator declines, after experiencing a dramatic market movement, silver appears to be exhausted. Silver gives the impression that it needs to go down first before it can go up again, attracting more bulls to enter at more attractive points." He stated that if a rebound occurs, $30.96 and $30.08 are two potential trading targets, and currently, selling on the rise or shorting on a breakout is more favored.

The room for short-term copper price increases may be limited

Due to the recovery of the global manufacturing industry, the demand for energy transition, and the tightening of supply, copper, as one of the best-performing precious metals year-to-date, has been favored by the market. The US Comex copper price rose to a historical high of $5.20 per pound ($11,464 per ton) on May 20th, and the London LME March contract rose to a historical high of $11,104 per ton. Goldman Sachs called for a copper target price of $12,000 at the beginning of the year. However, starting from the end of May, copper prices turned and plummeted.

"Although market participants are very optimistic about the copper market, believing that the global green transition and copper mine shortages will tighten the medium and long-term fundamentals, copper prices have been continuously questioned by the market after rapid increases, worrying that the short-term fundamental reality is not sufficient to maintain copper prices at historical highs. Under the extreme pull between 'strong expectations' and 'weak reality,' it is expected that copper prices will fluctuate within the high range of $9,500 to $10,500 per ton for some time in the future," said Fu Xiao, head of commodity market strategy at Bank of China International, to reporters.

She believes that although it is not ruled out that copper prices may set a new historical high again, before significant downstream demand improves and the expectation of the Federal Reserve's interest rate cut strengthens, the rise in copper prices may provide opportunities to sell on the rise.

China's economic recovery process also affects copper, as China's copper consumption accounts for nearly 50% of the global total. In the future, can "strong expectations" be realized? Fu Xiao said that since March, the PMI of the United States and China has entered the expansion range. On the supply side, due to the continuous downward adjustment of concentrate supply, the extremely tight situation in the concentrate market has not been alleviated. On March 28th, the China Smelters Purchase Team (CSPT) held a meeting advocating a production reduction of 5% to 10% (but in fact, it has not been implemented). The recent rebound in macroeconomic indicators and supply tightening have attracted some institutions and algorithmic trading funds that were on the fence to return to the copper market. Therefore, after the introduction of stimulus policies, the pace of China's economic recovery is crucial.

The commodity market made a strong comeback in 2024, and an important factor is that the Federal Reserve may start an interest rate reduction cycle. However, over the past few months, US inflation has declined slowly. The Federal Reserve Board admitted in the meeting statement issued in early May that "there has been a lack of progress in achieving the goal of an inflation rate below 2% in recent months," which obviously makes interest rate cuts more difficult. Traders generally believe that as the expectation of the Federal Reserve's interest rate cut continues to be delayed, the room for short-term copper price increases may be limited.