Precious Metal ETFs Strengthen on Bets of Lower Rate Hikes Ahead

Precious metals-related exchange traded funds rallied on Thursday after the Federal Reserve’s less aggressive stance in the face of weakening U.S. economic data helped support the case for hard assets.

Among the better-performing non-leveraged ETFs of Thursday, the ETFMG Junior Silver Miners ETF (NYSEArca: SILJ) advanced 3.6%, the VanEck Vectors Gold Miners ETF (NYSEArca: GDXJ) increased 3.4%, the Global X Silvers Miners ETF (NYSEArca: SIL) rose 3.6%, and the VanEck Gold Miners ETF (NYSEArca: GDX) gained 1.8%.

Meanwhile, the SPDR Gold Shares (NYSEArca: GLD) was 1.2% higher and the iShares Silver Trust (SLV) was up 4.7% as Comex gold futures pushed 2.1% higher to $1,773.7 per ounce and Comex silver futures increased 7.5% to $20.0 per ounce.

After the Federal Reserve hiked interest rates by 75 basis points again, Chairman Jerome Powell revealed that the central bank could begin to slow its monetary policy tightening some time ahead, Bloomberg reported.

“Wall Street is convinced that the Fed will likely pivot to a slower pace of tightening in September,” Ed Moya, senior market analyst at Oanda Corp., said in a note. “The unexpected contraction of the US economy means that both the peak in Treasury yields has been made and a bottom has been formed for gold. The stagflation playbook is bullish for gold prices.”

The U.S. economy has registered its second consecutive quarterly decline in the gross domestic product, officially slipping into a recession per the common definition. Consequently, market observers anticipate that the Fed could give up its aggressive rate hike outlook.

“The absence of a specific timeline pertaining to the moderation of interest rate hikes still carries some form of vagueness,” Yeap Jun Rong, market strategist at IG Asia Pte, told Bloomberg. “Gold prices are riding on the hopes that with it being brought up by Powell at the meeting, some consideration is in place and moderation could come sooner rather than later.”

Meanwhile, silver prices rallied on what could be a short squeeze play as short traders are forced to cover their bets and take a long position, further fueling gains on Thursday.

“Money managers are short covering across gold and silver, but in gold you have another cohort taking the other side, where as in silver, you don’t,” Daniel Ghali, the director of commodity strategy with TD Securities, told MarketWatch.

Brien Lundin, editor of Gold Newsletter, also argued that the pullback in the precious metals space may have been overdone, so a rebound was inevitable.

“Gold and silver are in dramatically over-sold territory, so all the ingredients for a price rebound fell neatly into place,” Lundin told MarketWatch.

“Economic growth is throttled, and today’s situation seems harder to resolve, and not without considerably higher wages,” Lundin added. “That adds up to both a deeper and longer recession and continued inflationary pressures, which present quite a quandary for the Fed.”

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