Gold: precious metals facing uncertainty after a weak month of June

Precious metals prices experienced their biggest drop in June in almost 5 years. What's next?

Gold and silver had one of the most brutal months in recent history last month. The decline came amidst a more hawkish tone from the Fed at the June meeting, which strengthened the USD overall.

A hawkish tone suggests that rates will rise from their lows due to stronger economic growth. Bonds have fallen, yields have risen, and the price of gold has fallen accordingly.

But as it fell, the price of gold reached dynamic long-term support at $1,768. It has since recovered and is currently trading above $1,800.

Gold fell more than 6.9% in June, while silver fell 6.80%. That means gold gave back all of its May gains, as did senior gold stocks tracked by the Solactive Gold Miners Custom Factors Index (SOLMCFT), which fell more than 12% in June.

At the same time, the dollar index had one of the best months in recent years, up 2.90%, the biggest monthly change since the fourth quarter of 2016. In other words, a stronger dollar has led to lower precious metal prices.

What can we expect in the third quarter?

The long-term fundamentals of the gold market remain strong. Due to unprecedented monetary and fiscal expansion, inflation is expected to exceed the Fed's target in the short to medium term.

Silver is still moving within a possible bullish flag, a technical setup that typically leads to higher prices.

The only unknown for the price of gold comes from its inverse relationship with the U.S. 10-year yield. Yields have an inverse relationship with bond prices, but bond prices are heavily influenced by the quantitative easing program still in place.

When the Fed reduces and ends its bond buying program, yields will reflect the real state of the U.S. economy. Rising yields should put additional pressure on gold, while rising inflation supports the price of gold as investors seek safety in the yellow metal.

Overall, an interesting quarter lies ahead. How the Fed communicates its intentions will be key to the evolution of the precious metals markets.