US Fed's "Hawkish Interest Rate Cut" Hits Precious Metals; Spot Silver Back-and-Forth Negotiations Between Upstream and Downstream Remain Intense [SMM Commentary]

SMM December 19 News:

Although the US Fed implemented a 25-basis-point interest rate cut as expected during its December policy meeting, Fed Chairman Jerome Powell stated that Fed policymakers want to see more progress in reducing inflation before considering the future path of rate cuts. The Fed's "dot plot" indicates that only two more rate cuts are expected by 2025. Compared to the September dot plot, the planned rate cuts have been halved—previously, four rate cuts were anticipated for next year. The Fed's "hawkish rate cut" has pressured precious metals. As of 17:24 on December 19, COMEX gold was at $2,643.4/oz, down 0.72%; COMEX silver fell 2.37% to $30.01/oz; SHFE gold dropped 0.67%; SHFE silver declined 2.46% to 7,505 yuan/kg.

Spot Silver Falls Below 7,500 Yuan/mt; December Production May Continue to Decline Slightly

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In the spot market, spot silver prices fell on the morning of December 19. According to the SMM survey, the ex-factory reference average price of SMM #1 silver on the morning of December 19 was 7,481 yuan/kg, down 225 yuan/kg from the previous trading day, a decrease of 2.92%. After silver prices reached a recent high of 7,929 yuan/kg on December 11, they have generally pulled back, with the average price of SMM #1 silver dropping by 448 yuan/kg, or 5.65%, over more than a week. According to SMM, despite the significant pullback in silver prices, there has been no substantial increase in restocking activity. Currently, back-and-forth negotiations between upstream and downstream remain intense. Upstream mines are reluctant to lower prices due to tight raw material supply, while downstream producers believe silver prices still have room to pull back and have not yet reached their psychological price level, leading to a lack of enthusiasm for restocking. Market transactions are still primarily driven by just-in-time procurement.

Production: According to SMM, silver production declined in November, with 16 companies reporting reduced output. The reasons for the production decrease include: 1) annual plans being nearly completed, leading to controlled production; 2) fluctuations in silver content in raw materials; 3) reduced market recycling and procurement enthusiasm due to rising silver prices in October; and 4) lower production and sales enthusiasm due to falling prices in November. Meanwhile, 11 companies reported increased production, attributed to: 1) resumption of production after maintenance; 2) fulfillment of long-term contracts and export orders; and 3) catching up on production plans. The reduction in production outweighed the increase, resulting in an overall downward trend in production. In December, with renewed expectations for US Fed interest rate cuts, market prices have slightly risen. However, as the market prepares for the New Year and adjusts inventory according to annual plans, December production is still expected to decline slightly.

Institutional Comments

Guotou Futures Research Report pointed out: The US Fed implemented a 25-basis-point interest rate cut overnight as expected. The dot plot shows that the forecast for next year's rate cuts has been adjusted from four to two. Powell believes that future rate adjustments can be approached more cautiously, as the Fed is nearing a slowdown in rate cuts. Following the meeting, the US dollar rose above 108, and precious metals pulled back. Recent geopolitical developments have shown some positive progress, and the adjustment in precious metals is expected to continue, with gold prices possibly testing support near the November low.

Jinyuan Futures Research Report stated: The US Fed implemented another 25-basis-point rate cut as expected but hinted at a slower pace of future rate cuts. The forecast for next year's rate cuts has been halved compared to the previous expectation. Under the guidance of a hawkish rate cut, gold and silver prices have dropped significantly. The confirmation of the Fed's slower pace of rate cuts supports Jinyuan Futures' view that precious metal prices are currently in a phase of adjustment, with this adjustment expected to last for a relatively long period.

Everbright Futures Research Report noted: During last night's final policy meeting of the year, the US Fed implemented another 25-basis-point rate cut as expected, with one voting member dissenting. The Fed hinted at a slower pace of rate cuts, with the dot plot showing next year's rate cuts halved to two. Powell stated that the Fed is "close to or has reached" the period of slowing or pausing rate cuts, and future rate cuts will require new progress in inflation. From the feedback of the US financial market last night, the market quickly priced in expectations for a slower pace of Fed rate cuts. US stocks fell sharply, the US dollar surged, and gold prices dropped again. Previously mentioned, the focus from now until Q1 next year may be on geopolitical developments. If the overall geopolitical situation continues to ease, it will be challenging for gold prices to remain optimistic, potentially driving further downward adjustments. However, geopolitical progress remains relatively slow, with geopolitical factors causing gold prices to fluctuate at high levels.

CITIC Securities Research Report believes that under the dual effects of stagnating growth in primary silver production and the accelerated penetration of N-type batteries, global silver is likely to maintain a long-term supply shortage. In the future, as industry chain inventory continues to be digested, the correlation between silver prices and supply-demand dynamics is expected to recover, potentially boosting the long-term price center of silver. With synchronized restocking domestically and internationally and global economic recovery, the industrial attributes of silver combined with delayed realization of investment attributes are expected to catalyze high elasticity in silver prices. The timing for elasticity recovery in silver prices is gradually approaching, and the silver sector's allocation value is promising. It is recommended to focus on companies with high purity in silver mining operations.

Commerzbank expects silver prices to rise to $32/oz by mid-next year and reach $33/oz by the end of 2025.

JPMorgan maintains its long-term bullish outlook on gold, forecasting gold prices to rise to $3,000/oz next year. It also expects silver prices to reach $38/oz by the end of 2025 and platinum to strongly rebound toward $1,200/oz. JPMorgan stated that the rebound in precious metals will continue, with supply constraints laying the foundation for a strengthening of base metal prices in late 2025.

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