Metal prices soar as Fed and China’s stimulus ignites market activity

Over the past two weeks, both precious and industrial metal prices have experienced strong gains, driven by the policy tailwinds of major central banks, particularly the Federal Reserve (Fed) and the People’s Bank of China (PBOC).

Gold repeatedly reached new highs, with spot gold rising by €90 per ounce as of Thursday’s close, or 4% since 18 September, when the Fed delivered a significant 0.5% rate cut last week.

Similarly, spot silver surged 5% to €28.64 per ounce during the same period. In dollar terms, silver soared to a 12-year high of $32.71 per ounce before retreating.

Furthermore, China’s substantial package of easing measures announced on Tuesday triggered a spike in industrial metal prices, with copper futures contracts on the LME surging 6% to $10,080 (€9,024) per metric tonne this week, marking the highest level in two months.

Meanwhile, other industrial metals, including aluminium, zinc, and tin, also saw price increases amid optimistic demand forecasts. The surge in metal prices may not end here, as the macroeconomic environment continues to support upward momentum.

While gold and silver prices are closely linked to shifts in Fed policy, copper and other industrial metals are more responsive to China’s growth prospects.

As a result, metal markets are likely to continue their upward trend as policymakers in the world’s two largest economies implement further easing measures.

The Fed on course for more rate reductions

The Federal Reserve plays a key role in driving precious metal prices, as precious metals and the US dollar typically have an inverse relationship. When the Fed cuts rates and the dollar weakens, the opportunity cost of holding gold and silver decreases, making it more attractive.

Gold and silver often rise during periods of low interest rates, as investors seek better stores of value, particularly in a low-yield environment.

Mounting US government debt and the risks of an economic downturn are likely to prompt the Fed to reduce interest rates at each meeting for the remainder of the year.

According to Fed funds futures pricing at CME Group, there is a 50% chance of either a 0.25% or 0.5% rate cut in November, followed by a 0.25% cut in December. Anticipation of much lower interest rates is likely to continue supporting gold and silver prices.

Additionally, rapid rate cuts and easing measures also signal deteriorating economic conditions in major economies, driving increased demand for safe-haven assets, particularly gold.

Silver tends to follow gold’s trend, with investors closely monitoring the gold/silver ratio, the number of ounces of silver it takes to equal the value of one ounce of gold, to inform their investment strategies.

Demand outpaces supply in industrial metals

Though silver is classified as a precious metal, it is also a critical component in electrical and electronic applications, such as solar panels and aircraft.

The global industrial shift towards renewable energy, electric vehicles, and the burgeoning AI sector has collectively bolstered the demand outlook for silver and copper, with both surging to all-time highs in May due to concerns over undersupply.

China’s policy actions were also a catalyst for the price spike, as the Chinese Finance Ministry announced plans to issue 1 trillion yuan in ultra-long bonds for investment in infrastructure that month, thereby boosting demand forecasts for industrial metals.

Copper prices also seeing a major surge in price levels

In a similar vein, silver and copper prices soared as Beijing’s easing measures this week reignited optimism regarding the country’s demand for these industrial metals.

According to S&P Global, “Copper prices are anticipated to rise in the long term as a result of the clean energy transition, notwithstanding prevailing short-term apprehensions.”

The organisation forecasts that copper demand will double, reaching 50 million metric tonnes by 2035. The most significant demand is expected to originate from the US, China, Europe, and India.

The Silver Institute stated: “From electrical switches and solar panels to chemical-producing catalysts, silver is an essential component in many industries. Its unique properties make it nearly impossible to substitute, and its uses span a wide range of applications.”