Have precious metals prices finally hit bottom? After peaking during the last days of January, gold, silver, platinum and palladium prices have fallen sharply for three reasons.
First, the Kevin Warsh factor. When news of Warsh's nomination leaked on January 29th, it dashed expectations for a more dovish, less independent Fed chair.
Second, the war. While geopolitical instability and higher inflation might benefit precious metals over the long term, the war-related spike in inflation shifted interest rate expectations in the direction of rate hikes, which increases the attractiveness of holding fiat currencies like the U.S. dollar.
Third, the end of the Fed's easing bias. At its June FOMC meeting the Fed announced that it was no longer leaning toward cutting rates, reinforcing traders' impression that Warsh is a monetary policy hawk.
A Shift Since Late June
Yet the picture has grown more nuanced. Since late June, even with interest rate expectations tilting further in the direction of rate hikes, precious metals prices have remained stable and even begun to rise again.
The Two Factors to Watch
So, have precious metals prices hit bottom? The answer is possibly. But look at these two factors closely: first, rate expectations, and secondly the Bloomberg U.S. dollar index. A rise in either rate expectations or the U.S. dollar could send precious metals prices lower still.
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