This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Chris Howard, Director of Bullion at the Royal Mint asks how precious metals fare in the face of declining trading
Although gold has been trading at a low for a number of months now, its decline is not indicative of it being out of favour as a safe haven asset. And it’s not just gold. Silver was recently at a two-year low and platinum at levels not seen in 14 years. However, when assessing how precious metals are likely to fare over the coming months and beyond, it’s important to look a bit closer at what’s been happening to drive these changes.
It has been an odd time in the precious metals space for a while now; established rules of behaviour are being challenged. For as long as many can remember, gold has reacted favourably to geopolitical turbulence – as uncertainty increases, the rush to gold as a haven has been the counterbalance.
In 2008 as the global financial crisis erupted and the banking sector crashed, gold became the ‘go to’ commodity for financial safety. Again and again, historically, as uncertainty increased, so did precious metal prices. There was a strong correlation with the global ‘fear index’, the Cboe VIX Volatility Index, and this was something that investors could rely on for market stability and predictability.
But in recent times, this established paradigm has been challenged. In a recent article, Richard Hayes, CEO of the Perth Mint commented “investors have grown immune to the economic and geopolitical risks that typically drive demand for gold”.
He added “the world, to some degree, has become quite used to bad news”. Now, an unpredictable Trump administration in the US, Brexit, North Korea, Russian-alleged poisonings and Turkish sanctions all have little impact on the prices of precious metals.
Have Investors Reached Inertia?
Perhaps investors have become complacent to negative news. Or at least unmoved. Or even still, have we have become numbed by fake news?
Despite the comments above, it’s interesting to see that retailers of physical precious metals globally are reporting a period strong sales, with investors seemingly taking advantage of the low prices. It seems that this is likely to remain as long as these metals are valued so low. Demand across all three main precious metals – gold, silver and platinum – has been consistent, with platinum increasing in popularity in the current market.
Beyond this, the argument for owning precious metals remains strong as global debt climbs. US Government debt has more than tripled since 2007; according to Bloomberg the US budget deficit will reach $US1 trillion in 2020.
Rick Rule, CEO of Sprott US Holdings commented “the risk-off mood where precious metal is no longer seen a safe refuge will not last”. He adds that “the fight really does seem to be between the dollar and gold, and gold seems to be losing. I don’t think that will continue, but can’t say when that will change”.
This is something that rings very true; precious metals are and have always been a long-term investment, with gold in particular having consistently stayed true to its value over the years despite its highs and lows. When you consider just how long it has served as a reliable store of wealth for so many people around the world and throughout the centuries, it is clear that it has withstood the tests of time before and will do so again.
What we are seeing currently is a momentary shift in market behaviour whilst the world learns how to react to the constantly-changing news agenda, and to cut through the irrelevant noise.
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