Precious Metals Rally Fades as Central Banks Signal Policy Patience

Commodity markets took a breather on Thursday as precious metals gave back recent gains amid shifting central bank rhetoric and renewed dollar strength. February COMEX gold declined 9.40 points (-0.21%), while March COMEX silver retreated 1.682 points (-2.51%), reflecting profit-taking after silver’s sharp three-week rally to record highs earlier this week.

The pullback in precious metals wasn’t driven by broader market weakness—stocks actually rallied on Thursday, reducing safe-haven demand for traditional hedges. More significantly, hawkish signals from major central banks reshaped the outlook. ECB President Lagarde described the Eurozone economy as “resilient,” while BOE Governor Bailey suggested the bar for further rate cuts has risen. These comments collectively signaled that monetary easing cycles may be approaching their end, pressuring assets that benefit from lower rates.

Dollar Recovery Amid Mixed Economic Signals

The dollar index (DXY) posted modest gains of +0.05% on Thursday despite an initially choppy session. US weekly initial jobless claims fell 13,000 to 224,000, matching expectations and providing some support for the greenback. However, softer-than-anticipated inflation data created competing dynamics: November CPI rose +2.7% year-over-year (below the +3.1% forecast), with core CPI advancing just +2.6% annually—the slowest pace in 4.5 years.

The weakness in these economic releases initially pressured the dollar, as markets interpreted the data as dovish for Fed policy. Adding to dollar headwinds, the December Philadelphia Fed business outlook survey unexpectedly fell to -10.2, well below the +2.3 consensus. These soft data points have already begun pricing in market expectations: swaps now show a 27% probability of a 25 basis point Fed funds cut at the January 27-28 FOMC meeting.

Yet the dollar still managed to recover, supported by declining EUR/USD, which fell -0.14% on Thursday. The euro initially rallied after the ECB held rates steady at 2.00% and raised its 2025 Eurozone GDP forecast to 1.4% from 1.2%. However, the initial strength proved temporary. Bloomberg reporting that ECB officials believe the rate-cutting cycle is “most likely over” sent the euro lower. Additionally, fiscal pressures weighed on EUR sentiment after Germany announced a nearly 20% increase in federal debt sales next year—reaching a record 512 billion euros ($601 billion)—to fund expanded government spending.

Yen Strength Tests USD/JPY; BOJ Rate Hike Expected

USD/JPY declined -0.08% on Thursday, with the yen receiving support from two key factors: weakening Treasury yields and anticipation of BOJ tightening. Markets are now pricing in a 96% chance of a 25 basis point rate hike at the BOJ’s Friday policy meeting, making the yen particularly sensitive to any hawkish surprises.

Japanese fiscal concerns have partially capped yen gains, however. Kyodo News reported that the Japanese government is considering a record budget exceeding 120 trillion yen ($775 billion) for fiscal 2026, raising questions about long-term monetary policy independence.

Central Bank Support Battles Market Technicals

Despite Thursday’s weakness, precious metals maintain structural support from multiple sources. The BOE’s 25 basis point rate cut on Thursday boosted demand for gold and silver as inflation hedges. Strong institutional buying continues, with China’s PBOC reserves rising by 30,000 ounces to 74.1 million troy ounces in November—marking thirteen consecutive months of reserve accumulation. Globally, central banks purchased 220 metric tons of gold in Q3, up 28% from Q2.

Silver faces its own supply dynamics, with Shanghai Futures Exchange warehouse inventories falling to just 519,000 kilograms on November 21—the lowest level in a decade. Fund positioning has also improved, as silver ETF long holdings rebounded to a nearly 3.5-year high on Tuesday after earlier liquidation pressures.

Geopolitical uncertainty and tariff concerns continue supporting precious metals demand, while concerns over President Trump’s potential appointment of a more dovish Fed Chair—with Bloomberg reporting National Economic Council Director Kevin Hassett as the likely choice—could signal easier monetary conditions in 2026. Trump indicated the Fed Chair announcement would come in early 2026.

Beyond these policy considerations, the Fed’s own liquidity operations remain in focus: the central bank has been purchasing $40 billion monthly in Treasury bills since last Friday, adding to money supply pressures and creating structural support for alternative stores of value.