Why Gold And Silver Prices Spike Higher: The Next Move Could Be Fast

Precious Metals Market Update - February 20th, 2024 (CPM Group)

Key Concepts:

• Comex: The primary futures and options market for precious metals in the US.
• PCE Price Index: Personal Consumption Expenditures Price Index – a key inflation metric tracked by the Federal Reserve.
• Open Interest: The total number of outstanding futures contracts for a specific commodity.
• Huatong Silver Exchange (Shanghai): The Chinese exchange facilitating physical silver transactions to industrial users and fabricators.
• Shanghai Futures Exchange: Trades silver futures primarily with institutional investors.
• GDP: Gross Domestic Product - a measure of the size and health of a country's economy.
• PDAC: Prospectors & Developers Association of Canada - a major mining conference.

I. Economic Data & Market Reactions

This morning’s economic data releases – including GDP, Personal Consumption Expenditures (PCE), and the PCE price index – are impacting precious metals markets. The fourth quarter GDP figure came in lower than expected (1.4% increase vs. an expected 2.8%), while personal consumption expenditures continue to show weakness. However, the PCE price index remains high, around 2.8-3.0%, still a concern for the Federal Reserve. This presents a mixed picture for gold – weakening GDP is generally positive, but persistent inflation is also supportive.

The Supreme Court ruling deeming Trump-era tariffs unconstitutional is viewed as potentially positive for the US and global economies, potentially leading to rebates of collected tariffs and increased economic activity. This could be slightly negative for precious metals as a safe haven asset, but overall is considered more positive.

II. CPM Group’s Market Outlook & Bubble Chart Analysis

CPM Group’s monthly bubble chart indicates a predominantly positive outlook for gold and silver. The chart categorizes factors influencing precious metals prices: green balls represent positive factors, red negative, and blue neutral. Currently, all factors are clustered in the upper right corner, signifying their importance and potential impact over the next six months. No significant negative factors are currently identified.

III. Investment Demand & Lunar New Year Impact

Investment demand for gold is strong globally, evidenced by sharp increases in ETF shares and physical gold holdings through January. This demand is broad-based, encompassing both institutional and individual investors. The Lunar New Year, a traditional period for gold gifting in East and Southeast Asia, is underway. While high prices may limit demand, initial indications suggest it remains robust.

IV. Short-Term Price Projections & Comex Dynamics

CPM Group anticipates a potential spike in silver prices next week (last week of February), with gold, platinum, and palladium likely to follow. A temporary dip similar to early February is possible on Monday/Tuesday, but is expected to be short-lived, followed by rising prices throughout the week.

Looking into March, a pullback from the spike is expected, followed by a gradual increase, potentially entering a seasonal pattern of sideways movement in the second and third quarters, with higher prices anticipated later in the year. This short-term outlook is heavily influenced by the open interest situation in the Comex silver futures market. Specifically, the rolling over of March contracts to May contracts is expected to exert upward pressure on prices.

V. Comex & Shanghai Futures Exchange Comparison

Jeffrey Christian clarifies the distinction between the Comex and Shanghai Futures Exchange. Comex is the dominant global market for silver futures. The Shanghai Futures Exchange primarily caters to institutional investors trading futures contracts. The Shanghai Huatong Silver Exchange, a partner of CPM Group, facilitates physical silver transactions to industrial users and fabricators.

Data from the Shanghai Futures Exchange shows a sharp increase in trading volume through January, but open interest has actually declined. This suggests institutional interest in participating in price spikes, rather than long-term positioning. Current inventories on the Shanghai Futures Exchange are around 20 million ounces, adequate for current trading activity.

VI. Silver Demand & Solar Panel Industry Shift

CPM Group projects a potential decline in silver demand from the solar panel industry by 2026. Two major solar panel manufacturers are transitioning to technologies utilizing copper instead of silver, with one expecting to eliminate silver use by the second quarter of this year. This shift is driven by high silver prices and technological advancements, not a lack of silver availability. This represents a potential “storm cloud” for silver bulls.

VII. Comex Silver Futures Market Analysis

Open interest in the March Comex silver contract has significantly decreased, with over half rolling over to the May contract. This roll is expected to contribute to upward price pressure. Comex inventories have declined in January and February, but remain at a substantial 367 million ounces, not posing a delivery concern. CPM Group does not anticipate a shortage or delivery issues in the March contract.

VIII. Platinum & Palladium Market Overview

Platinum and palladium prices are currently tracking gold and silver. The platinum market is becoming tighter, with the surplus shrinking, while the palladium market may be in a deficit this year, creating upward price pressure.

IX. US Housing Market Assessment

Recent US housing market data (December figures) beat expectations, with 745,000 new homes sold. The market has largely returned to the healthy levels seen in the 1970s, 80s, and 90s, despite affordability and supply issues. Housing purchases are driving demand for related goods and contributing to overall economic activity.

X. Upcoming Events & Resources

• Next Video: Tuesday, February 27th
• Silver Facts & Fantasies Online Seminar: Thursday, February 29th (registration at cpmgroup.com)
• Silver Facts & Fantasies Video Part 1: Friday, February 27th
• PDAC Conference (Toronto): CPM Group will host a silver reception on March 1st and attend through Wednesday, March 6th. No video will be released on Tuesday, March 5th.
• April 22nd: Client Open Forum
• Resources: CPM Group’s website (cpmgroup.com) offers access to the silver report, yearbooks, precious metals advisory, and a retail investor program.

Notable Quote:

“We wouldn’t be surprised to see that [silver price] next week.” – Jeffrey Christian, referring to a potential price spike.

Conclusion:

CPM Group maintains a generally positive outlook for precious metals, particularly silver, in the longer term. Short-term price volatility is expected, driven by Comex dynamics and potential market corrections. However, underlying fundamentals, economic conditions, and geopolitical factors support higher prices. The potential decline in silver demand from the solar panel industry is a notable risk factor to monitor. Investors are encouraged to stay informed and utilize CPM Group’s resources for detailed analysis and insights.