Gold and silver soar to record highs as Fed rate cuts loom

A stellar year for precious metals

Gold prices continue to rally after delivering 4.8% returns in August, the strongest month since April. Gold has just broke a new record at $3547 per ounce yesterday, representing a remarkable 35% year-to-date gain. This extraordinary rally has shattered multiple records, with the precious metal hitting new all-time highs throughout the year.

Silver has been even more impressive, rising over 41% year-to-date. It surpassed $40 per ounce for the first time since 2011 on Monday. This performance has finally closed some of the performance gap between gold and silver.

The rally in both metals has been nothing short of spectacular when viewed against broader market performance. They have both outperformed all major asset classes so far this year, including the Hang Seng Index (+27%) and Bitcoin (+19%). Higher interest rates would normally weigh on non-yielding assets like gold and silver, yet both continue to attract significant investor interest amid ongoing uncertainty.

Figure 1: Gold and silver year-to-date performance

Performance driven by Federal Reserve rate policy

The Federal Reserve's (Fed) monetary policy stance remains a crucial driver for precious metals prices. Market expectations of future rate cuts have provided significant tailwinds for precious metals. The bond futures market is pricing in 92% probability for a rate cut in September, and a 85% chance of two or more cuts by the end of the year, with Fed officials noting that risks of higher unemployment and inflation have risen.

Lower interest rates reduce the opportunity cost of holding non-yielding assets like gold and silver. When central banks cut rates, the respective currency becomes less attractive, redirecting investments toward precious metals as alternative stores of value.

US job data this week, including the Job Openings and Labour Turnover Survey (JOLTS) results tonight and the non-farm payrolls report due Friday, will play a critical role in shaping the monetary policy path ahead.

Geopolitical uncertainties fuel safe-haven demand

Heightened geopolitical risks continue to provide substantial support for precious metals prices. The sharp rally this year has been propelled by President Trump's tariffs, urging investors to seek refuge in tangible assets that maintain value during periods of policy uncertainty.

Trade tensions between the US and China add another layer of uncertainty. President Trump's focus on tariffs has created additional market volatility, with investors seeking refuge in tangible assets that maintain value during periods of policy uncertainty. With the federal appeals court's ruling most of the tariffs illegal, investors are even more puzzled on what this entails for the US as tariff revenues are at stake while the bridges with allies have already been burnt.

Another wildcard that may change the geopolitical picture is the ongoing conflicts between Russia and Ukraine. There has been little progress made on resolving the conflict since the talk between Trump and Putin. A de-escalation in the conflict may reduce interests for precious metals.

US dollar's status questioned

Recent political developments have raised concerns about Federal Reserve independence. The dismissal of Fed Governor Lisa Cook over alleged misconduct created uncertainty about policy stability, causing the US dollar index to slip and supporting precious metals prices.

Mounting government debts have also reduced the dollar's appeal as a store of value given the fiscal instability. The US Dollar index (DXY) declined 9% so far this year and has been a significant catalyst for precious metals strength.

In a recent survey conducted by the World Gold Council, 73% of the central banks respondents expect to reduce US dollar reserves in the next five years while 76% anticipate to increase gold reserves. Central bank demands remain strong with 123 tonnes of net purchases in the first half of 2025.

Strong investment demand drives prices higher

Silver investment demand through physical silver and ETPs is forecast to rise 9% in 2025 compared to 2024 according to the Silver Institute. Retail investors are increasingly viewing silver as an alternative to gold, attracted by its lower entry price and industrial applications. This dual appeal as both a monetary and industrial metal makes silver a unique asset class to invest in.

Investment demand for gold is also robust. Global physically-backed gold exchange-traded funds (ETF) attracted over $3 billion net inflows last week, which marks the strongest weekly inflows since mid-April.

Figure 2: Global gold ETF flows

Technical analysis shows bullish momentum continues

Gold's technical picture remains compelling, with the metal supported by all major moving averages in what has been a textbook uptrend. Tuesday's decisive break above the previous peak at $3500 also cleared the upper boundary of an ascending channel, suggesting the bulls are firmly in control.

The Elliott Wave count points to gold currently in Wave 5 of its uptrend from the May lows. A 100% Fibonacci extension of Wave 1 targets resistance around $3638, providing a logical area where significant sell-off could emerge.

That said, the relative strength index (RSI) is flashing overbought warnings that traders should heed. While this doesn't necessarily mean the rally is over, it does suggest a period of consolidation or modest pullback could develop. Any dip should find support at the 20-day moving average around $3398.

Figure 3: Spot gold (daily) price chart

Silver's chart tells a similar story of strength, though the white metal faces a crucial test at current levels. The $41 resistance encountered this morning aligns perfectly with the 61.8% Fibonacci extension of the July-to-August rally, making it a technically significant level.

The Elliott Wave pattern suggests silver is also in its fifth and potentially final wave of the current advance. If this interpretation proves correct, we could see some consolidation around these levels before the next major move develops.

Should the current resistance hold, a 38.2% retracement would target the $39.15 area, which coincides with July's resistance that has now turned support. This would represent a healthy pullback in what remains a strong uptrend. However, a clear break above $41 would open the path to $43-44, where silver last traded during August 2011.

Figure 4: Spot silver (daily) price chart