At first, gold and silver breathed a sigh of relief as the US Federal Reserve pointed to a slower path of interest-rate increases but took a U-turn as the ultimate interest-rate level could be higher than expected. These moves again underpin the dominance of monetary policy for gold and silver.

Ultimately, the key question remains whether the US economy will slip into recession.

While recession risks have increased due to the potential over-tightening of monetary policy, in our base case we are still confident that it can be avoided. This would sustain the strength of the US dollar in the short term and lead to a further fading of safe-haven demand in the medium to longer term.

Thus, we stick to our neutral views on gold and silver. An over-tightening of monetary policy would likely lead to an undershoot of prices, which would then represent a buying opportunity.

Considering how bearish the mood in the gold and silver markets already is today, we believe that prices should remain rather range-bound in this scenario, i.e. between USD 1,650 and USD 1,600 per ounce.

The bear case for gold would be more dollar-driven and market-mood-driven selling by investors, most likely due to a continued aggressive tightening of the Fed. This should then lead to a short-term undershooting of prices. Gold could fall as low as USD 1,400 per ounce in our view, opening up a buying opportunity as in this case a recession would be a question of when but not if.

Last but not least, an outright US recession remains the bull case, as much of this year’s damage in the gold and silver markets would be undone. The Fed would need to reverse course, which would weigh on the US dollar and US real bond yields. This would lead to a swift reversal in the market mood from bearish to bullish, and lure safe-haven seekers back into the markets. Gold prices could rise as high as USD 1,900 per ounce, while silver would underperform due to its industrial applications.

(The author is Head Next Generation Research, Julius Baer)