Why Gold and Silver Prices Surged: What Happens Next?

Key Concepts

• FOMC Interest Rate Reduction: The Federal Open Market Committee (FOMC) has reduced interest rates.
• Precious Metals Prices: The video discusses the price movements and outlook for gold, silver, platinum, and palladium.
• Interest Rate Impact on Precious Metals: The relationship between interest rates and precious metals prices is analyzed, with a focus on opportunity cost and economic sentiment.
• Investor Sentiment and Demand: The role of investor sentiment, disenchantment, and demand in driving precious metals prices is highlighted.
• Economic and Political Environment: The influence of economic and political anxieties on investment decisions and precious metals prices is emphasized.
• Rate of Change Analysis: The importance of analyzing the rate of change in interest rates and precious metals prices for accurate correlation.
• Real Interest Rates: The correlation between changes in real interest rates and changes in gold prices is examined.

Precious Metals Market Overview

Gold Prices

• Recent Performance: Following the FOMC's 25 basis point interest rate reduction, gold prices have reached a new high, breaking above $3,700 per ounce. As of the morning of Friday, September 19th, gold was trading around $3,679 per ounce.
• Outlook: CPM Group expects gold prices to continue rising over the next several months and potentially through most of 2026, driven by an increasingly hostile economic and political environment.
• Price Targets: The expectation is for gold to trade around $4,000 per ounce by the end of the current year (less than three and a half months away).
• Recent Surge: The price has risen sharply since late August, coinciding with the Kansas City Fed's Jackson Hole conference.
• Risk Management: CPM Group's recent gold trade recommendation included a stop-loss at $3,650, acknowledging the possibility of a temporary dip. A break below this level could lead to a decline to $3,500. Some analysts predict a potential fall to $3,000-$3,300, though CPM Group believes this is unlikely given current investor anxieties.
• Supporting Factors: Continued strength is anticipated through the fourth quarter of the current year and most of 2026, fueled by investor anxieties.

Silver Prices

• Current Levels: Silver prices have also been rising, showing support around and above $42 per ounce. As of this morning, it was trading around $42.30 per ounce.
• Investor Demand: Strong investment demand is a key driver.
• Historical Indicator: Investor Selling: The video highlights the historical significance of investor selling as a leading indicator for silver prices.
  • 1973-1975: Investment demand pushed prices from around $1 to $5.
  • 1975-1978: Disenchanted investors sold silver as prices trended lower.
  • 1978-1979: A decline in gross selling by disenchanted investors preceded a price rise, culminating in a surge to $50 in January 1980.
  • Late 1990s - Early 2000s: A similar pattern emerged where declining investor sales from disenchanted holders (who had seen prices fall from $50) preceded a price rise from below $5 in 2005 to $50 in 2011.
• Current Situation: Over the last few years, particularly in 2023 and 2024, disenchanted investors sold silver at prices of $28, $30, and $32 per ounce. A dissipation in this gross sales rate over the last few months is seen as a potential leading indicator of a sharper upward move in silver prices.
• Silver Lease Rates: There is some market discussion about high silver lease rates, which will be addressed in a future video.

Platinum Prices

• Recent Performance: Platinum prices have spiked, exceeding $1,450 per ounce. As of this morning, they were trading at $1,386 per ounce.
• Long-Term Investment Pattern:
  • 1990s: Limited investment.
  • 2000-2007: Significant purchases (several million ounces), largely by hedge funds and fund managers.
  • Post-2007: A power outage in South Africa in early 2008 disrupted production, causing a spike to around $2,200. Subsequent recession and reduced auto production led to the auto industry selling existing platinum inventories.
  • Late 2011 - Mid-2014: Disenchanted investors sold several million ounces of platinum.
  • First Half of 2014: A six-month strike in the South African platinum industry did not cause a price rise, leading to flatlining.
  • Post-Strike: Prices fell from $1,600-$1,800 to $800 per ounce within six months. Investors stopped selling physical platinum and hedged by going short on the NYSE. This led to a surge in non-commercial short positions on the NYMEX platinum exchange in the second half of 2014 and 2015.
  • 2015 - June 2024: Prices largely flatlined between $800 and $1,100.
• Recent Spike Drivers: The recent spike from $1,100-$1,000 in May to $1,500 in July is being analyzed for potential new bullish fundamental stories or speculative activity.
• Investor Position: Many investors who purchased platinum between 2000-2007 at prices below $1,450 still hold profitable positions.

Palladium Prices

• Recent Activity: Palladium saw significant purchases over the last decade. Prices spiked in early 2020 due to the Russia-Ukraine invasion, then quickly retreated.
• 2023 Trends: Prices drifted lower throughout 2023, trading between $800-$900 and spiking up to $1,200.
• June 2024 Spike: Palladium prices began spiking higher in June, seemingly driven by inventory building and speculative demand.
• Current Situation: Prices reached nearly $1,400, retreated to around $1,100, and were trading at $1,179 per ounce as of today.
• Outlook: CPM Group expects this to be another speculative spike, similar to those seen in late 2023 and mid-2024, and anticipates prices will drift lower.
• Interplay with Gold and Silver: While gold and silver prices are expected to remain strong due to investment demand driven by economic and political concerns, platinum and palladium prices may be supported by them, even as they face downward pressure from lower fabrication demand and auto production/sales.

Interest Rates and Their Impact

Historical Context of Interest Rates

• Recent Trends: While media reports suggest interest rates have shot up since 2022 and are now coming down, they remain at high levels.
• Long-Term Perspective: A historical view back to 2010, and even further to the mid-1970s, reveals that even at their peak before the Fed's rate cuts, short-term interest rates (Fed funds rate) were lower than they had been for most of the period since the mid-1970s.
• Comparison to Post-GFC Era: Current rates are high compared to the zero interest rate policies (ZIRP) pursued after the Global Financial Crisis and Great Recession, but historically low.

The Complex Relationship Between Interest Rates and Gold Prices

• Simplistic View: Many focus on the decline in interest rates from the 1980s onwards and the corresponding sideways to rising gold prices, concluding that lower interest rates are good for gold.
• Mechanisms of Impact:
  • Opportunity Cost: Lower interest rates reduce the opportunity cost of holding gold, as investors forgo less potential return from interest-bearing assets.
  • Economic Activity: Lower interest rates often reflect or contribute to lower economic activity, leading to less demand for credit and potentially making investors nervous, prompting them to buy gold.
• Interdependence, Not Causation: A crucial point is that interest rates and gold prices often react to the same underlying economic and political factors, rather than gold prices solely reacting to interest rates.
• Historical Examples of Co-movement:
  • 1973-1975: Interest rates and gold prices rose together due to high inflation and economic problems.
  • 1975-1977: Both fell during a period of declining economic risks.
  • 1977-1980: Both rose together.
  • 1980-1985: Both declined.
• Importance of "Why": Understanding why interest rates are moving is critical, as different drivers have different implications for gold prices.

Analyzing Correlation: Rate of Change is Key

• Apples to Oranges vs. Apples to Apples: A common mistake is correlating the absolute level of interest rates with the absolute price of gold. This is like comparing apples and oranges.
• Correct Methodology: To achieve a more accurate correlation, one must compare the percentage change in interest rates with the percentage change in gold prices. This measures "apples to apples."
• CPM Group's "Gold Gearbook 2025" Finding: The correlation between changes in real interest rates and changes in gold prices is negative 16%.
• Scatter Plot Analysis: A scatter plot shows that 84% of the time, gold does not move in the opposite direction of interest rates. This challenges the simplistic inverse relationship.

Current Economic Environment and Investor Behavior

• Economic Activity: While current economic activity is described as "pretty strong," signs suggest this could change quickly, leading to a recession or significantly lower growth.
• Credit Markets: A recession or lower growth would result in lower demand for credit and potentially higher supply of credit.
• Investable Funds in Cash: There is currently a higher percentage of investable funds held in cash, bank CDs, treasuries, and short-term interest-bearing assets than ever before. This is seen as a warning sign, indicating investors are seeking attractive investments.
• Stock Market Levels: Record stock market levels can create nervousness. Investors who have profited from stocks may be taking profits but are holding them in cash while seeking new investment opportunities.

Conclusion and Call to Action

CPM Group anticipates continued strength in gold and silver prices due to economic and political concerns, with a potential economic downturn in the coming years. While platinum and palladium may be influenced by gold and silver, their prices could also be pulled down by lower fabrication demand and auto production. The analysis of interest rates emphasizes the need for a nuanced understanding beyond simple correlations, focusing on the underlying reasons for rate movements and the rate of change in both interest rates and asset prices. Investors are advised to consider the current economic climate and the significant amount of cash seeking investment.

For further information, readers are directed to CPM Group's website for yearbooks, precious metals and base metals advisories, and other services. Contact can be made at [email protected].