Gold is overbought, but silver prices see fresh support from Indian demand – Heraeus

In the company’s latest report, the analysts noted that bad news on the geopolitical and inflation fronts has been good news for gold.

“The gold price pencilled in a joint record weekly close of $2,395/oz last week, even as Fed chairman Jerome Powell signalled that he would keep interest rates at current levels for as long as necessary to bring down inflation,” they wrote. “US Treasury yields rose across the curve with the short end closing in on 5%, and the US dollar rose to the strongest level in five months.”

The analysts said that under normal conditions, higher yields would be a headwind for gold, but it seems now that gold buyers appear to be “pricing the Fed lagging inflation” as it remains above their 2% target. “This driver is compounded by the ongoing risk of regional escalation in tensions in the Middle East,” they said.

On the demand side, Heraeus sees little support for gold prices outside of China. “Withdrawals of 522 tonnes from the SGE in Q1 were the highest since 2019, backed by elevated trading volumes of the Au(T+D) contract (mainly investment related) that were 25% higher year-on-year in March,” they noted. “Chinese ETFs have bucked the trend of outflows experienced in the rest of the world, having seen four consecutive months of inflows.”

“This has taken total holdings to ~67 tonnes (+32% year-on-year), which goes some of the way to explain why the gold price has reversed its typical relationship with yields and the dollar,” they added. “The gold price is overbought and showing divergence with the daily RSI, so could struggle to make further headway near term.”

Gold prices were in the midst of a sharp correction lower on Monday morning, with spot gold down 2.20% on the session, last trading at $2,339.73 per ounce at the time of writing.

Turning to silver, the Heraeus analysts said that the gray metal is seeing a rebound in fabrication demand from India.

“Following a 25% decline in silverware and jewellery fabrication in India last year (source: The Silver Institute), trade data suggests restocking is underway, which tends to be bullish for short-term demand,” they wrote. “Imports of silver picked up in Q4’23 and continued in January (latest data). A total of 637 tonnes of silver was imported at the start of the year, 138% higher than the five-year average and a suggestion that after a slack year, 2024 could see demand rise.”

The analysts pointed out that with 47% of global jewelry demand, India is the largest fabricator, and the strength of their overall economy bodes well for silver prices this year.

“Outperformance in economic growth and a growing middle class in India could be positive drivers this year, as well as the high gold:silver ratio,” they wrote. “With silver perceived as a bargain relative to gold, demand could push higher. The risk is that the silver price outperforms gold later in the year, which could crimp demand to similar levels as those in 2023. Nonetheless, 2023 demand was considerably higher than the 10-year average for Indian jewellery fabrication.”

Heraeus noted that silver has continued to follow gold’s lead as both metals have traded at elevated levels. “The gold:silver ratio dipped to a four-month low of 81 before rebounding to above 83, as ETFs experienced significant outflows of 16.8 moz this week,” the analysts said. “This suggests gold still outperforms silver as a preferred safe-haven asset amid turbulent geopolitics.”

Silver has also followed its yellow cousin lower, with silver prices declining sharply in Monday trading. Spot silver last traded at $27.535 per ounce, down 3.93% on the session at the time of writing.