Gold and silver rebound as buyers return, but the real test lies ahead

Key Points:

• Gold and silver have rebounded after successfully resisting renewed selling pressure, with gold finding support below USD 4,000 and silver below USD 57 before softer oil prices, a less-hawkish-than-feared Fed, yen intervention and weak US employment data helped trigger a sharp recovery.
• The demand picture is broadening again. Central banks and Asian investors continue to provide structural support, while Western ETF investors have started to return
• The macro backdrop has turned more supportive, but remains fragile. A softer dollar and reduced expectations for additional Fed tightening have helped precious metals, but renewed inflation pressure, another oil-price surge or stronger US data could quickly revive rate-hike expectations.
• Gold has defended the downside but has yet to confirm a renewed bull-market advance. Support around USD 4,200 is increasingly important, while the major upside test is once again focusing on the 200-day moving average, currently sitting just below USD 4,500.

Precious metals regain their footing

The most notable development across precious metals is not the strength of last week's rebound, but the sell-off that failed to materialise beforehand when gold repeatedly resisted selling attempts below USD 4,000, while silver found buyers below USD 57. This resilience came despite several headwinds that had weighed heavily on the sector during the second quarter, including elevated bond yields, renewed concerns about US rate hikes driven by rising inflation amid surging fuel costs, a stronger dollar and subdued investment demand from Western asset managers.

Gold had fallen sharply from its January record above USD 5,500, while second-quarter losses were the largest since 2013. Yet the inability of sellers to force a sustained break below USD 4,000 increasingly suggested that underlying demand remained strong enough to absorb liquidation from more rate-sensitive investors. That resilience last week drove a 7% rebound in gold, its strongest weekly gain since January, while silver climbed back above USD 65. Friday's weak US employment report provided the latest catalyst as it reduced expectations for another near-term Federal Reserve rate hike and helped push the dollar lower.

Fed, yen intervention and jobs data change the mood

The first important catalyst was the late-July FOMC meeting. The outcome was dovish relative to what had become increasingly hawkish market expectations rather than dovish in an absolute sense.

With higher energy prices feeding inflation concerns, markets had moved towards pricing a meaningful probability of another rate increase. The Fed instead left its policy rate unchanged with three regional Fed presidents dissented in favour of tightening, underlining that inflation concerns have not disappeared. The resulting modest reduction in rate-hike expectations took some of the wind out of the dollar's sails, providing initial support to gold and silver.

That was followed by the highly unusual US-Japan intervention episode after USDJPY surged towards a four-decade high near 164. Japanese authorities initially stepped in to support the yen, followed by intervention from the US Treasury through the New York Fed. The coordinated action briefly drove USDJPY down towards 155, adding further pressure on the dollar and providing another supportive impulse for precious metals.

Some of that impact has since faded, with USDJPY returning towards 160, highlighting the difficulty of reversing currency trends through intervention alone when underlying interest-rate differentials remain wide. Taken together, the sequence has been supportive: a less-hawkish-than-feared Fed, a weaker dollar, coordinated yen intervention, softer oil prices and finally weaker US employment data.

Western investors begin to return

Perhaps more importantly for the medium-term outlook, there are tentative signs that Western investment demand is beginning to recover. During much of the correction, central banks and Asian investors continued accumulating gold while many Western asset managers remained sellers, deterred by rising bond yields and the prospect of higher funding costs. This created an unusual divergence between strong underlying physical and official-sector demand and weak demand from the investors traditionally most sensitive to US monetary policy.

That gap may now be starting to narrow after the World Gold Council reported that global physically backed gold ETFs attracted USD 3 billion of net inflows during July, ending two consecutive months of outflows. Total holdings rose by 23 tonnes to 4,068 tonnes, with European funds driving most of the buying while North American inflows remained modest. Western investors are therefore returning, but there has not yet been a broad-based repositioning into gold, with North America still the only major region to record ETF outflows during the first half of the year.

Central banks and Asia continue to provide the foundation

While Western investment demand has fluctuated with interest-rate expectations, central-bank and Asian demand has remained an important source of underlying support. The World Gold Council reported a sharp rebound in official-sector purchases during the second quarter after an unusually weak start to the year. Although central-bank buying during the first half remained below the extraordinary pace seen during recent years, the underlying motivation for reserve diversification appears intact.

This matters because the experience of 2022–23 showed how central-bank and Asian demand can alter gold's traditional relationship with Western financial conditions. Aggressive central-bank tightening and rising real yields failed to produce the deep and prolonged correction many Western investors had expected, partly because physical and official-sector buyers repeatedly stepped in.

A similar dynamic has helped establish a floor beneath gold during the latest correction. The question now is what happens if that structural demand is joined by a sustained return of Western portfolio flows. The combination would represent a materially stronger demand environment than the one that merely prevented gold from falling further.

Silver joins the rebound

Silver has participated in the recovery, as per usual at a somewhat faster pace given liquidity constraints but overall the outlook remains somewhat different from gold's. The metal continues to benefit from its monetary characteristics and tends to amplify moves in gold when investment demand strengthens. At the same time, silver retains a sizeable industrial exposure, making its outlook more sensitive to global growth.

The Silver Institute expects the market to record a sixth consecutive structural deficit in 2026, while investment demand is expected to remain strong. However, industrial fabrication is forecast to decline by around 2%, partly reflecting continued thrifting and substitution in photovoltaic applications.

Silver therefore offers potentially greater upside participation should the precious-metals rally broaden, but also greater vulnerability if weaker US data develops into a more pronounced global growth slowdown.

What could still go wrong?

Despite the improving backdrop, several risks argue against becoming outright bullish just yet. The most obvious is inflation. The July Fed meeting reduced immediate tightening concerns, but three policymakers still wanted higher rates. A renewed acceleration in inflation could quickly rebuild expectations for another hike, pushing Treasury yields and the dollar higher and once again challenging investment demand for gold from rate sensitive investors.

Oil and especially fuel prices remain particularly important in this respect. Lower prices helped the precious-metals recovery last week, but the latest renewed rise following fading hopes for a US-Iran agreement serves as a reminder that the energy shock has not disappeared. A sustained oil rally could revive inflation concerns and complicate the Fed's policy choices.

There is also no guarantee that the recent ETF inflows represent the beginning of a sustained allocation shift. July's improvement was encouraging, but North American participation remains limited. Finally, stronger-than-expected US economic data could reverse some of the recent moves in yields, the dollar and rate expectations. The market has rapidly shifted away from expecting imminent tightening, leaving precious metals increasingly sensitive to incoming inflation and activity data.

Gold faces its next technical test

From a technical perspective, gold has, after finding support below USD 4,000, broken above recent resistance, with the former resistance area around USD 4,200 now acting as support. However, the bigger test sits around USD 4,500, where the declining 200-day moving average currently sits ahead of the 38.2% Fibonacci retracement of the January-to-June decline at USD 4,585. A sustained break above this zone would strengthen the technical outlook considerably and could open the way towards the 50% retracement near USD 4,690, followed by the 61.8% level around USD 4,860.

Conversely, a rejection at or before the USD 4,500 area would suggest that the consolidation has further to run, potentially bringing the USD 4,000–3,960 support zone back into focus. For now, the precious-metals outlook is showing signs of improving, not least underpinned by ongoing structural demand that helped prevent a deeper correction, while the macro environment has become more supportive and Western investors are showing tentative signs of returning.

That is a constructive combination, but not yet confirmation that the next sustained leg higher has begun. Gold has demonstrated where buyers are prepared to defend the market. The next test is whether they have sufficient strength to break the sequence of lower highs.