(Kitco News) After vastly underperforming in the first half of the year due to aggressive Federal Reserve rate hikes, gold and silver look "underpriced" going into the second half of 2022, said MKS PAMP.
Both gold and silver defied seasonal patterns so far this year, with gold trading down 4.3% year-to-date and silver down 14.5% year-to-date.
"The severe seasonal under-performance was due to 1) recession fears crimping demand & China lockdowns (white metals) and 2) fears of Fed hikes driving a stronger US$ & higher real US rates trumping inflation/war risk (Gold)," said MKS PAMP head of metals strategy Nicky Shiels.
Historical trends point to precious metals as traditional winners until Labor Day. And going into that period, gold and silver are looking underpriced.
Several triggers could help precious metals turn things around. And that includes a slowdown in Fed rate hikes.
"If 1) markets start pricing in a Fed pivot (a Fed 'done' hiking by 2023), 2) risk improves with Russia/China COVID catalysts & risks less bearish into H2, 3) broader acceptance of low likelihood of a big recession and/or large credit event, 4) contrast of "max bearish" paper positioning in Precious with "max bullish" physical positioning (in Gold & Silver, not PGMs), —> then precious are rather underpriced heading into 2H," Shiels wrote in a report this week.
Gold could start pricing in a Fed pivot, especially after Fed Chair Jerome Powell said that the U.S. central bank might soon be ready to slow down its tightening. Powell told reporters on Wednesday that after the second 75-basis-point hike in a row, the U.S. monetary policy is now at neutral, which means that the Fed could soon start slowing its rate hike pace.
"Now that we're at neutral, as the process goes on, at some point, it will be appropriate to slow down. And we haven't made a decision when that point is, but intuitively that makes sense. We've been front-end loading these very large rate increases. Now we're getting closer to where we need to," he said.
Peak hawkishness is already behind the market, but gold is yet to price that in, Shiels explained.
"Back in Q2'22, [gold] preemptively fell ~$75 from $1900 in the 6week leadup to the mid-June 75bp Fed hike (May FOMC to June FOMC), which was driven by -4.8mn oz of investor outflows (ETF + COT). In this similar 6week leadup to [July meeting], gold has fallen ~$160 from ~$1850 through $1700, driven by -10.5mn oz of investor outflows. That's double the $-price fall and double the pace of investor outflows."
And now, the outlook could be changing with rising recession risks and falling commodity prices signaling deflationary forces.
"Just a few things need to come together for a larger tactical bounce … Fundamentals should win out if (when?) financial deleveraging dries up, the US$ convincingly turns over (probably the most consensual trade out there), the Fed is relatively more dovish and/or risk appetite improves," Shiels said. "Structurally, the verdict is still out whether $2000+ is revisited since if the recession is mild, with inflation buoyant, there is simply much less fiscal and monetary room to launch another war-like QE/stimulus program."
