This week’s US inflation report brought back memories of the 1980s, with gold and silver reacting positively to the news despite a stronger US dollar and higher real US bond yields. Higher energy prices are the dominant driver of inflation, which will remain elevated in the short term but should decline again in the medium to long term. With this in mind, we see gold and silver prices moving lower rather than higher unless the war in Ukraine worsens and inflation gets out of control.

The gold and silver markets’ focus seems to have shifted from the war in Ukraine back to the inflation issue, with energy prices building a bridge between the two.

Consumer prices in the US rose to 8.5% year-on-year in March, bringing back memories of the double-digit inflation rates of the early 1980s. Gold and silver reacted positively to the news, rising above $1,980 and $25.5 per ounce. What makes the move even more noteworthy is the fact that both the US dollar and real US bond yields also gained ground on the news, reaching multi-month highs. Typically, they move in opposite directions compared to gold and silver.

While gold and silver have a reputation as inflation hedges, this relation has historically not been straightforward. Instead of tracking inflation one-to-one, gold and silver have rather reacted to a high degree of inflation uncertainty, which we do have at the moment, while generally moving much more closely with real bond yields.

Our take on US inflation is that the numbers have been pushed up primarily by energy prices, while fewer supply bottlenecks suggest that underlying upside pressures have peaked. While inflation rates will remain elevated in the short term, prompting the US Federal Reserve to raise interest rates, we project a significant decline in the medium to longer term, first and foremost due to lower energy prices.

As the inflation issue continues to dominate the headlines, we still see the demand for gold and silver from safe-haven seekers as the dominant driver of prices. For gold, the inflows into physically backed products have accelerated again since the US inflation report was published, while for silver there have not been any inflows since the war in Ukraine broke out. With that in mind, what is the outlook for gold and silver prices from here?

Should our take on inflation be right and should we not witness another worsening of the war in Ukraine, prices are very likely to move down from current levels. The memories of the 1980s are not a good guide in our view, as the overall backdrop back then was very different from today. The gold market was still finding its balance after the collapse of the Bretton Wood System while monetary policy had just entered into a new era, catching policymakers on the wrong foot.

Last but not least, the economic impact of the Second Oil Crisis was much more severe than what the world is facing currently because of the war in Ukraine.

(The author is Head of Next Generation Research, Julius Baer. Views expressed are personal.)