Investors cash in: Gold and silver see year-end profit-taking

Gold and silver investors increasingly turn defensive ahead of year-end as they seek to protect and lock in gains following a very strong year. This year has seen gold’s record-breaking rally deliver the best annual return since 2010, while silver has managed to keep up with gold, reaching a 12-year high during the October run-up to the US presidential elections.

Both metals currently trade up more than 27% on the year—a very impressive performance considering the headwind from a stronger dollar, which has climbed more than 6% against a basket of major currencies. It is currently on track to record its best year in a decade. In addition, US bond yields have been rising despite the start of a rate-hiking cycle amid worries about fiscal instability as governments—particularly in the USA—continue to spend money they do not have, leading to an increased debt burden.

Note below the strong correlation between a rising yield gap between the US and Europe and the weaker euro against the dollar. In the short term, relative US yield strength and investor demand for US equities may continue to limit gold and silver’s upside potential as it drives the dollar higher.

While the US rate-cutting cycle began in 2024, the prospect of aggressive cuts began to deflate almost as soon as the first cut was delivered in September. From an expected December 2025 low of around 2.75%, the Fed Funds futures market is now pricing in fewer than three additional cuts, including the one the FOMC is expected to deliver this Thursday, to around 3.9% by this time next year.

So why have precious metals, despite these apparent headwinds, been doing so well in a year that equity markets have also performed very well, albeit concentrated in a few (US) mega-cap stocks?

One year ago, when we wrote our Year of the Metals 2024 outlook, we foresaw gold and silver prices trading higher on a combination of US recession risks and falling inflation, leaving the door open to rate cuts. Additionally, these metals were already being supported by safe-haven bids following the October 2023 Hamas attack on Israel and Houthi rebels attacking ships in the Bab el-Mandeb Strait, thereby reducing shipping traffic through the Red Sea. On top of these factors, central bank buying was expected to continue due to a diversification focus away from the USD and US Treasury bonds.

While a US recession failed to materialise and US rate-cut expectations faded, most of the developments that have supported these substantial gains are unlikely to disappear anytime soon and, therefore, will continue to support prices of both metals into 2025. There are several, and while we have mentioned most already, here is a quick summation:

• Central Bank is buying to diversify holdings away from the US dollar and government bonds.
• Interest rate cuts reduce the “cost” of holding gold compared to investing in secure short-term government bonds.
• Sticky inflation emerging as a theme, helping to offset the potential negative impact of reduced rate cut expectations.
• Safe-haven demand amid a fractured world with unresolved conflicts in the Middle East and Russia-Ukraine and risks of trade wars and tariffs lifting inflation in 2025.
• Chinese investors are turning to gold amid record-low savings rates and property market concerns.
• Concerns over fiscal instability as governments worldwide increase debt burdens, not least in the US as President-elect Trump rolls out his radical and high-cost policies.

These developments may continue to play an essential role into 2025 and beyond, providing precious metals with enough support to reach fresh highs in the coming year(s). With this in mind, we see gold reaching USD 3,000 next year, representing a 10% gain from current levels. At the same time, silver, supported by tightening supply and tailwind from industrial metals, may do even better. Based on the XAU/XAG ratio returning to 75 (ounces of silver to one ounce of gold) from around 85, we could see silver targeting USD 40, representing a 25% upside.

Will gold and silver see another Santa rally?

This headline was given to an article I wrote a year ago in response to data that showed gold and silver had both seen strong December rallies in the previous six years. As it turned out, silver failed, while gold recorded a slight 1.3% gain to end 2023 at USD 2,062. Fast forward and halfway through the month, the chances of a repeat have diminished. While the fundamentally supportive outlook into 2025, in our opinion, has not changed significantly, another positive month of December is currently being challenged by dollar and yield strength and the temptation to reduce positions following a record-breaking year.

Spot Gold: Gold’s early November USD 253 correction was the biggest of the year, but considering how far the metal had travelled in the previous months, the correction only saw prices retrace half the June-to-November rally, with support emerging ahead of an important area around USD 2,530. Resistance around USD 2,722 currently prevents further gains towards the November record high at USD 2,790.

Spot Silver: Silver’s strong run to a 12-year high in October proved unsustainable and eventually forced a strong reversal, as fading support from gold, copper, and the dollar left many recently established longs above USD 32.30 nursing losses. Support has now twice been found around USD 29.70, the 0.618 retracement of the August-to-October rally, with additional support below being the trendline from the February low. Around USD 29.70, the 0.618 retracement of the August-to-October rally, with additional backing below being the trendline from the February low.

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Last Updated on 5 days by News Desk 1