As gold enters a period of adjustment, which of these two metals performs better?

The recent trend of gold has been poor. UBS released a research report on Monday stating that the decline in gold is mainly due to short-term position adjustments by investors before the release of key macroeconomic data in the United States. In the face of the adjustment in gold, UBS expects that silver, which is in short supply, will have the opportunity to continue outperforming gold, while platinum is also favored by investors.

Gold Decline Due to Short-Term Position Adjustments, Summer Adjustment Helps Stabilize Long-Term Trends

The research report indicates that the heavy trend of gold has had an impact on other parts of the precious metals market. The recent weak performance seems inconsistent with signs of a slowdown in the U.S. economy, as data released last Friday showed a decrease in the core PCE inflation rate.

UBS believes that the recent price fluctuations are more related to short-term position adjustments before key data and events, end-of-month trading activities, and considerations of relative performance, rather than fundamental changes in sentiment. These key data and events include this week's U.S. non-farm payroll data, next week's CPI data, and the FOMC meeting.

According to the report, the overall commodity market is also trending lower. The relative performance of different asset classes since the beginning of the year and in recent weeks suggests that there may have been some profit-taking recently.

Silver, industrial metals, and gold have outperformed other assets since the beginning of the year, but have lagged behind in recent weeks.

According to the latest trader positioning report, as of last week, net speculative futures positions in gold Comex slightly increased. However, as of last Friday, open interest decreased by about 2.6 million ounces. UBS believes that some short-term profit-taking and end-of-month adjustments before key data and events are reasonable.

UBS expects that the gold market will also enter a relatively calm period in the coming months, as at these higher price levels, physical demand has decreased, usually resulting in weak demand in these months. The summer months in the northern hemisphere may also bring subdued price movements as many market participants go on vacation.

Last Friday, trading volumes for the four precious metals generally decreased after higher volumes at the beginning of this week. **UBS believes that the price of gold falling below $2,300 is healthy for the market, helping to restore physical demand and allowing investors to enter the market at better prices After a period of liquidation, it may establish a more stable foundation for the next round of rise. UBS expects that the gold price will not stabilize for too long and will resume its upward trend. However, strong positive sentiment and a large amount of FOMO (fear of missing out) still exist, increasing the risk of the market continuing to be well supported and ultimately limiting the downside space.

Silver is expected to continue outperforming gold

Data shows that as of last Friday, silver net futures positions decreased by 10 million ounces, and open interest decreased by about 21 million ounces.

In recent trading, the gold-silver ratio has risen, although it is still below 80. UBS stated that this was expected considering the pressure on the precious metals market due to weak gold.

UBS expects silver to continue outperforming gold, and the gold-silver ratio will further decline. Silver has performed well recently, with many market participants showing interest in silver, believing that silver has the potential to be a high beta trading asset.

At the same time, considering the strong positive correlation between gold and silver, as well as silver's underperformance compared to gold in recent years, the research report believes that a strong belief in bullish gold will help silver strengthen. The report also states that investors are also paying attention to the supply and demand fundamentals of silver, with expectations of market tightening supporting price increases.

The report points out that silver supply is usually sufficient, with a large part coming from by-products of other minerals (gold, copper, lead/zinc), and investor interest is a necessary condition to absorb excess supply. Since the launch of silver ETFs, there has been no physical shortage in the market for a long time, but deficits have emerged since 2021, and UBS expects deficits to persist.

The tense situation in the silver market is the result of the combined effect of supply and demand factors. However, if we take the demand growth of the past 30 years as a background, silver demand has grown rapidly in the past 5 years, with average industrial demand increasing by about 56% compared to the 1990s. During this period, the share of silver demand from the solar industry has increased from about 17% in 2019 to over 40% last year, accounting for approximately 18% of total consumption. At the same time, the demand for silver bars and coins in the past 5 years is more than 7 times that of 30 years ago.

Investors Prefer Platinum Over Palladium

In the precious metals market under pressure, platinum has performed relatively well. Last week, platinum was the only white metal with a net increase in long futures positions; as of last Friday, the increase in open contracts may indicate a further increase in positions.

Inflows into platinum ETFs accelerated in May, increasing by nearly 300,000 ounces, compared to an increase of about 142,000 ounces in April; since the beginning of the year, platinum ETFs have increased by about 447,000 ounces, a growth of 15%. Analysts believe this may be due to concerns about supply from South Africa, especially with uncertain election results that could support prices.

In contrast, palladium is under pressure again, with prices falling near their lows. Last week, net short positions in palladium increased, and considering the increase in open contracts as of last Friday, this situation may continue.

With palladium's one-month forward swap rate close to 5%, UBS stated that rolling short positions remain attractive as long as signs of market tension have not yet emerged.

However, UBS believes that palladium shorts need to remain cautious, as the marginal changes in fundamentals are generally positive, and market sentiment is starting to shift. Data shows that palladium ETF holdings continue to increase, with an increase of about 85,000 ounces in May, and a total increase of about 154,000 ounces since the beginning of the year, a growth of 26%