Gold and Silver: Speculations about Fed Interest Rate Cut Drive Precious Metals

The prospect of interest rate cuts by the US central bank Fed and a tighter physical supply situation are currently providing tailwinds for gold and silver. A recent market report from the precious metals firm Heraeus demonstrates how significantly the prices of both precious metals are influenced by shifting interest rate expectations and dwindling inventories.

Gold in Focus of Fed Interest Rate Expectations

The market-implied probability of an interest rate cut at the Fed meeting on December 10 has significantly increased over the past two weeks. This is driven by statements from individual central bank representatives regarding potentially lower interest rates, as well as weaker sentiment data, even though employment and inflation have not yet signaled clear pressure for action.

Heraeus notes that the upper bound of the Fed’s interest rate range is currently only about 50 basis points above the yield of two-year US Treasury bonds. Consequently, many market participants see scope for an initial rate cut. In this environment, the gold price climbed last week above the $4,200 per ounce mark, which had been considered resistance at the beginning of November. Gold has remained above this level at the start of the week; the spot price was recently around $4,214 per ounce.

Silver: Inventories Decline, Prices Rise

Silver is also benefiting from the improved sentiment in the precious metals sector, but is increasingly driven by physical scarcity. According to Heraeus, inventories at the Shanghai Futures Exchange (SHFE) have fallen to approximately 559 tonnes, shrinking by 61% since the beginning of the year. Since early October, around 644 tonnes of silver have been withdrawn.

This has resulted in a backwardation of the silver curve in China: spot prices are now above later delivery dates, a typical signal of scarce available supply in the spot market. Concurrently, inventories at the US futures exchange COMEX have decreased to an eight-month low of approximately 457 million ounces, about 14% below the record level of 532 million ounces in October.

ETF Inflows Reinforce Silver Trend

Silver receives additional impetus from robust ETF inflows. Last week, according to Heraeus, silver ETFs registered purchases totaling 9.5 million ounces, with 7.5 million ounces occurring on a single day – marking the highest daily inflow since 2021. This brings the net inflow for November to 16 million ounces, more than offsetting the 13 million ounces of outflows recorded in October.

Against this backdrop, silver continues to outperform gold. Following a weekly gain of over 12% and a new all-time high of $56.42 per ounce, silver is now trading above $57. While gold primarily reacts to anticipated Fed policy, the silver market currently reflects a combination of tight physical availability and sustained investment demand.