(Kitco News) – Contradictory economic indicators are exerting equal and opposing forces on gold prices, while silver gains production in one region only to risk losing it in another, according to precious metals analysts at Heraeus.

In the company’s latest report, the analysts noted that one of the most important and consistent relationships between gold and the financial world has broken down over the past two years.

“Since around the year 2000, gold has exhibited a relatively strong inverse relationship with yields on the 10-year US Treasury note,” they said. “This is to be expected as the non-yielding nature of bullion means that as the coupon paid on very low-risk US government debt rises, the opportunity cost of holding gold also rises, and the interest in buying falls.”

They noted that to date in 2024, bond yields have risen as interest rate cut expectations have fallen. “Meanwhile, gold has made successive all-time highs, with particular strength shown in the last month prior to the recent correction,” they wrote.

Control over gold’s price action has also moved from the West to the East during this period, Heraeus pointed out. “The fundamental drivers of the gold price change over time, and for now the dollar and US yields have taken a back seat,” they said. “Strong physical demand from Chinese investors and the People’s Bank of China are contributing to the froth in the gold market. China is the largest market for retail gold demand, and struggles in the property sector along with a long drawdown in the Chinese stock market may have pushed more investors into gold.”

The analysts pointed to the sharp rise in trading volumes on the Shanghai Gold Exchange and the Shanghai Futures Exchange as proof of their assertion. 

They cautioned however, that correlation does not equal causation. “Higher gold prices coinciding with higher US Treasury yields does not necessarily mean higher yields are now driving the gold price,” the analysts wrote. “For now, other factors appear to be outweighing the yields’ influence on the gold price. Reserve asset diversification and global geopolitical instability are boosting gold’s appeal as a hard asset, particularly as US government debt obligations rise over the next few years.”

Drilling down into gold’s recent price performance, Heraeus noted that receding tensions in the Middle East have sapped the precious metal’s momentum. “Gold had retreated to $2,337/oz by Friday, after experiencing the largest one-day drop in two years earlier in the week,” they said. “Two failed attempts to gain a foothold above $2,400/oz signalled the start of the correction, though there are upside factors that could push prices higher again.”

The analysts said that last Thursday’s weak U.S. Q1 GDP report helped support gold prices. “Theoretically, weaker economic growth should prompt the Fed to act faster, though hotter inflation, and a firm jobs market overshadowed weaker growth, and in reaction, the options market reduced its rate cut expectations late last week,” they wrote. “The Fed is expected to hold rates this week, with a cut now only priced in for December. Traders see just 33bp of interest rate cuts by yearend (source: Bloomberg), down significantly from the more than six 25bp cuts expected at the beginning of 2024.”

They also noted the key role played by Chinese investors during April’s rally. “A weaker yuan, a volatile stock market and lower deposit rates compared to other advanced economies motivated investors to find alternatives for their savings,” they said. “Customs data shows China imported 565.9 tonnes of gold in Q1’24, a 34.2% year-on-year increase. The surge in physical demand corroborates reports that mini gold bullions are becoming popular among young retail investors.”

Gold prices have whipsawed within a $30 channel to start the week but are currently up on the session. Spot gold last traded at $2,343.89 per ounce, up 0.19% at the time of writing.

Turning to silver, the Heraeus analysts noted that the supply of the gray metal is expected to decline even though Mexico’s production is recovering. “Global silver supply is forecast to fall by ~1% this year to 824 moz, from 831 moz last year (source: The Silver Institute), marking the second year of decline,” they wrote. “Newmont reported that it expects silver production to bounce back to 34 moz this year, an increase of 16 moz versus last year when the Mexican Peñasquito mine suffered a quarter of lost production owing to industrial action. Additionally, Fresnillo’s Juanicipio mine, also in Mexico, is now fully ramped up, producing 2.5 moz in Q1’24 after having been in pre-production this time last year.”

The analysts said that these gains could be offset by a potential production decline in Peru. “Several of Peru’s largest mines are struggling with permitting issues and this is expected to negatively impact the country’s production,” they wrote.

They also noted offsetting gains and losses in Q1 silver sales through the mints. “US Mint sales reached 8.3 moz in Q1’24, a 44% year-on-year increase,” they said. “However, it is partially offset by the Perth Mint’s lower sales of 2.6 moz in Q1’24 (a 41.9% year-on-year decrease).”

Silver prices have spent most of the session in positive territory on Monday, with spot silver last trading at $27.285 per ounce, up 0.41% on the day.