The price of gold and silver have dipped this week, pulling back from recent highs as markets turned to a more risk-on sentiment than in the past few weeks. Gold has fallen to £1,600 and silver to £18.23, but there are plenty of signs of financial turmoil that suggest further opportunity for gains to come.
Similar to the situation seen with Ukraine and Russia in 2022, the prospect of the conflict in Israel and Gaza turning into a drawn-out invasion without major involvement from other countries has seen markets turn back towards riskier investments, with stock markets rising in the past few days. The S&P 500 is up 4.2% in the past five days, the Dow Jones 3.2%, and the FTSE 250 3.5%. The situation remains volatile however and could still turn into a wider conflict across the Middle East with even more serious implications.
Precious metals weren't the only commodity to see prices fall. Oil has fallen back to levels last seen in July, giving up all the gains made since the events in the Middle East began. A decline in industrial output from countries like China and Germany has seen demand for oil fall. Although the lower oil price is good news in the struggle to bring inflation down, the reasons behind the fall may be more of a concern for markets.
Germany was the manufacturing powerhouse of Europe, but the country’s industrial production output peaked six years ago, and has fallen by 12% since then. Despite bouncing back from a crash in 2020 due to Covid, the country’s output has been on a steady decline now since 2017, and is in dire need of some spark to turn the trend around.
Iowa's Citizen Bank became the latest (and the fifth major bank in the US) to collapse in 2023, a reminder that although March's banking crisis was contained, many banks remain under significant pressure. Moody's estimates that US banks are sitting on unrealises losses of at least $650 billion, while US debt is growing at an alarming rate. In the UK, Metro Bank recently saw heavy cash withdrawals from customers ahead of a last-minute rescue deal. High interest rates and bond yields have pushed the financial system to its limit and leaves the likes of the Fed and the BoE in a very limited place when it comes to hiking rates further to bring inflation down.
The global buying spree of gold reserves also continues to support the metal. China in particular continues to buy gold reserves, after reporting a further purchase of 23 tonnes in October. This is the twelfth month in a row China has added more gold to its reserves and globally, central banks have added 800 tonnes in reserves so far in 2023. 2022 was already a record year for gold purchases, and at the current pace 2023 will be similar. Many countries are turning away from the dollar for cash or bond reserves and are turning to gold as a way to protect their national wealth.
Gold saw record highs in most major currencies in the past few weeks, and to have achieved this in an environment of high interest rates and bond yields is a strong indicator in favour of the precious metal. When interest rates do come down (expected in 2024) then the price of gold should climb even higher, with the Federal Reserve in the US likely to be the main driver.
If the economic troubles listed above do worsen however, then this could prompt an earlier pivot than expected, and 2023s new all-time highs could be soundly beaten in 2024.