The gold-to-silver ratio remains at a relatively high level, and the medium and long-term investment outlook for gold remains bullish [institutional commentary]

The impact of the US's "reciprocal" tariff policy will gradually emerge, and the US economy may face certain pressures. The US Fed remains in an easing cycle, providing continued support for gold's financial attributes. However, the policy path remains highly uncertain and may depend on economic data performance. Additionally, due to the high uncertainty surrounding the US's "reciprocal" tariff policy and geopolitical situations, short-term gold price volatility may intensify.

Medium and long-term, there is a strong likelihood of a US Fed interest rate cut. The underlying logic of major power rivalry has not substantially changed, and the risk of global geopolitical conflicts may not see substantial easing. Therefore, the medium and long-term upward trend of gold as a core allocation asset remains unchanged. For silver, attention should be paid to the inflection point of industrial demand, seizing wave opportunities, and continuously monitoring the US Fed's policy moves and risk events.

Market risk aversion sentiment persists.

Since the beginning of the year, global trade and geopolitical situations have remained highly uncertain. Recently, geopolitical rivalry has heated up, with the Israel-Iran tensions escalating again and the sixth round of US-Iran negotiations collapsing. Investors' risk appetite has cooled, and global stock markets have plummeted. Additionally, the progress of the US's "reciprocal" tariff negotiations has been slow. Apart from reaching a formal agreement with the UK, the US's tariff negotiations with other countries have not been ideal. Japanese Prime Minister Shigeru Ishiba reiterated that Japan is not in a hurry to reach a trade agreement with the US. Japan welcomes progress in the ongoing tariff negotiations with the US but will not sacrifice national interests for the sake of a quick agreement. Since Trump announced the so-called "reciprocal" tariffs, the US and Japan have conducted multiple rounds of trade negotiations. In addition to the negotiations with Japan, from June 9th to 10th, the first meeting of the China-US economic and trade consultation mechanism was held in London, UK. Both sides engaged in candid and in-depth dialogues, exchanged in-depth views on economic and trade issues of mutual concern, reached a principle agreement on the framework of measures to implement the important consensus reached in the June 5th phone call between the two heads of state and consolidate the outcomes of the Geneva economic and trade talks, and made new progress in addressing mutual economic and trade concerns. However, no formal agreement has been reached between the two sides so far. As the 90-day suspension period for the US's "reciprocal" tariffs approaches, the tariff issue may once again become a focal point of market attention. It is expected that the tariff issue will provide strong support for gold prices.

The probability of a US Fed interest rate cut has increased.

The impact of the Trump administration's tariff policy on the US economy has not yet been reflected in inflation data. In May, the US CPI index increased 2.4% YoY, higher than the previous value of 2.3% and in line with expectations. The MoM growth rate was 0.1%, lower than the previous value of 0.2% and also below the expected value of 0.2%. Core CPI increased 2.8% YoY and 0.1% MoM, both below their respective expected values of 2.9% and 0.3%. In May, US energy prices fell by 1% MoM, while prices for new and used cars dropped by 0.3% and 0.5%, respectively. The main factors boosting price increases in the same month were food and housing prices, both of which rose by 0.3% MoM. In May, US housing prices increased by 3.9% YoY, marking the slowest growth rate since year-end 2021.

Previously, price increases expected due to US tariff policies did not materialize; instead, prices pulled back. However, if Trump's tariff policies do have an impact on the US economy, it will eventually be reflected in data on inflation, employment, and economic growth over the next few months. The 90-day suspension period for the Trump administration's global "reciprocal" tariffs will end on July 9. Before this date, the US Fed is unlikely to hastily ease monetary policy.

As trade tensions eased, US consumer confidence improved for the first time in six months, and pessimism about a potential surge in underlying inflation significantly diminished. The one-year US inflation rate expectation fell from 6.6% last month to 5.1% this month, while long-term inflation expectations declined for the second consecutive month, from 4.2% in May to 4.1%. Both indices are at their lowest levels in three months. Due to the pullback in US inflation expectations and the improvement in consumer confidence, market expectations for a US Fed interest rate cut in September this year have increased. The market expects the US Fed to maintain current interest rates in June, with investors focusing more on the signals that the Fed's updated economic and interest rate forecasts in June will release regarding the future path of interest rate cuts.

The SHFE/LME price ratio of gold and silver has seen a mild recovery.

From the perspective of the SHFE/LME price ratio trend, previously, influenced by factors such as disruptions from US tariff policies and rising expectations of an economic recession, the SHFE/LME price ratio of gold and silver continued to rise to around 105, a level close to the historical peak of 123 during the 2020 pandemic and significantly higher than the long-term average of 60-70. Recently, the SHFE/LME price ratio has continued to recover to around 90, but it remains at a relatively high level, indicating that silver prices are undervalued relative to gold prices, and there is a motive for funds to short the SHFE/LME price ratio, thereby also bringing about differences in trading-level drivers.

This round of SHFE/LME price ratio recovery has been driven by an increase in silver prices. As a metal with stronger trading and industrial attributes, silver has greater upward price elasticity during a US Fed interest rate cut cycle. From an asset allocation perspective, after risk-aversion sentiment drives up gold prices, funds often shift to silver, which has a lower valuation and higher elasticity, to capture catch-up gains. Additionally, the divergence in US Fed policies exacerbates fluctuations in US dollar credit, and expectations of lower interest rates may reduce the opportunity cost of holding non-interest-bearing assets, further driving the rotation of funds from gold to silver.

(Author's affiliation: Huishang Futures)