Overview

- Central banks around the world are purchasing gold on a record scale.

- The demand for silver is strong due to emerging technologies.

The metal market has undoubtedly been volatile this year, with significant fluctuations in gold, silver, and copper. Recent television reports have frequently covered these developments. With the surge in demand for gold and silver, the prospects for precious metals and industrial metals seem optimistic. However, the copper market may have a more unique situation.

The decisions of the Federal Reserve and the possibility of interest rate cuts are the main factors driving the rise in metal prices. As of early August, the prices reflected by the CME FedWatch tool indicate a close to 100% probability of an interest rate cut in September and approximately an 80% probability of further cuts in November and December. Commodities have always been seen as the main hedge against inflation. While the US dollar has risen alongside these metals, it has experienced a setback in August.

As the US dollar weakens, commodities such as metals and oil typically perform well because people can buy more of these commodities with their dollar, and those using non-US currencies can buy more dollars with their own currency. This process involves the fundamental economic principle of supply and demand. These three metals are either currently in short supply or may soon be in short supply.

Copper and Artificial Intelligence

The price of copper reached its all-time high in May and has since fallen by about 20%. Driven by the production of artificial intelligence chips and electric vehicles, coupled with market participants' considerations of a possible supply delay in copper, the market demand for copper has increased. This year, trading volume for COMEX copper futures has reached a historic high.

However, due to the recent sell-off of global technology stocks and market doubts about the growth prospects of the AI industry, copper prices have been hit hard. China is the largest copper consumer, and recent economic data from China indicates that the Chinese economy has not yet recovered. If China's orders and demand continue to be weak, it may indicate that copper prices will not be able to reverse their downward trend in the short term.

Countries around the world are hoarding gold.

Interest rate cuts and continued geopolitical risks are important bullish factors for gold. Due to the ongoing uncertainty, an increasing number of market participants are flocking to safe-haven assets, driving the daily trading volume of mini gold futures in July to increase by 68% to reach 106,000 contracts.

In addition, central banks around the world are buying gold at a record pace. Data from the World Gold Council (WGC) shows that central banks purchased 1,037 tons of gold in 2023, with China ranking first. The WGC's annual survey data also shows that 29% of central banks expect to increase their gold reserves in the next 12 months.

The gold/silver price ratio remains high.

Due to strong demand for silver in emerging technologies (especially considering its conductivity is faster than other metals), mini silver futures have risen this year. According to a report from the Silver Institute, the silver deficit in 2023 reached 0.1843 billion ounces against a backdrop of strong industrial demand. With the continuous increase in industrial demand for silver, the supply-demand imbalance is expected to persist, and the silver shortage may continue beyond 2024.

The correlation between silver and gold is also being closely watched. The calculation method for the gold/silver price ratio is to divide the current price of one ounce of gold by the current price of one ounce of silver. Based on historical trends, when this ratio exceeds 80, it indicates that silver is relatively cheap compared to gold. The subsequent gains in silver have reached 40%, 300%, and 400% in the last three occurrences of this ratio. When this ratio falls below 20, it indicates that gold is relatively cheap compared to silver.

Currently, this ratio is still at a historically high level. The last time there was a situation where silver was relatively cheap compared to gold can be traced back to the beginning of the COVID-19 pandemic in 2020, when the gold/silver price ratio reached a record high of 123:1, but quickly fell back to 60:1.

The possibility of a rate cut and ongoing geopolitical events could both push gold and silver higher by the end of this year. Copper has a relatively close correlation with China's economic data, so it may lag behind in the near future.