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The US stock market has rebounded this week, driven by softer-than-expected Producer Price Index (PPI) inflation data. The PPI, which measures the average change in selling prices received by domestic producers of goods and services, rose by a modest 0.1% in July—below the 0.2% expected for the month. This puts PPI inflation at 2.2% year-over-year, signaling that inflation continues to cool.

Despite the bounce in US stocks, the outlook remains cautious, and elevated volatility is still a concern. For its part, gold continues to trade within a healthy range of USD $2,425-$2,475 per ounce, with a solid floor seemingly established at $2,400. Silver’s surprising lag has left investors scratching their heads. However, perhaps we shouldn’t be surprised; central banks don’t stockpile silver as a risk hedge, and Eastern investors tend to focus on gold bullion.

Aside from continued market volatility, here are three factors currently supporting gold:

1) High expectations for a Fed rate cut in September: Analysts are now questioning whether it will be a 25 or 50 basis point cut. Cuts are supportive of a higher gold price.

2) Escalating tensions between Israel and Iran: The Israeli military announced it was at “peak readiness” yesterday, preparing for potential retaliation from Iran and its regional proxies. Meanwhile, the U.S. military is moving a guided-missile submarine into the region, and a White House spokesman stated that U.S. intelligence suggests an attack on Israel is “increasingly likely” and “could happen as soon as this week.”

3) Ongoing conflict in Ukraine: Russian President Vladimir Putin lashed out at the West yesterday over Ukraine’s weeklong incursion into Russia’s Kursk region, stating, “The enemy will certainly get the response he deserves, and all our goals, without doubt, will be accomplished.”

In summary, we are facing market turmoil, expected rate cuts (perhaps larger than initially anticipated), one escalating conflict in the Middle East, and one ongoing, major conflict in Europe. All of this equates to heightened macro risk, which will likely lead to continued Central Bank buying and increased market participation overall. There’s no reason to believe that gold prices will drop anytime soon. Silver should start to follow suit again.

Sources: MKS PAMP, NY Times

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