After reaching an all-time high of almost US$5,600 per ounce in the last week of January, the gold price made a dramatic U-turn on January 30, falling to a low of US$4,400 in early morning trading on Monday (February 2).
That is a loss of more than 21 percent in a very short time.
Silver is also on this rollercoaster trend. As usual, the white metal slid even faster than gold, falling from an all-time high of over $120 an ounce to a low of around $71 on Monday, a precipitous drop of 35 percent from its peak.
As the trading day progressed, gold and silver prices stabilized with slight rebounds; However, volatility remains the key to the game as investors take the time to decipher what the shift means for the precious metals markets.
Let’s take a look at the main driver behind the turmoil in gold and silver prices and what it could mean for investors.
Trump’s appointment as Fed chairman calms the sense of risk
Precious metals are a complex market and prices are determined by many factors.
For this latest price movement, the biggest trigger was that of US President Donald Trump nomination from Kevin Warsha former governor of the Federal Reserve, to replace Jerome Powell as the next chairman of the Fed.
Powell, whose term ends next May, has faced heavy criticism and targeted legal attacks from the Trump administration, which wants the Fed to quickly cut rates.
For months, market participants have been piling into gold in the belief that Trump would try to use his position to appoint a puppet dove as Fed chairman and push for greater influence over monetary decisions.
If that were to happen, it would not only undermine the Fed’s independence, but looser policy decisions could in turn further weaken the US dollar on the global stage and lead to higher inflation.
Such an environment is price positive for safe haven assets such as gold and silver. But with the more aggressive Kevin Warsh as candidate, there is a belief that quick interest rate cuts are not necessarily on the table.
“The appointment of Kevin Warsh as the next chairman of the Federal Reserve is an important development that will bring clarity to markets and investors. Warsh’s mix of policy experience and market insight positions him well to lead the Fed through a complex economic landscape,” Thomas Hulick, CEO of Strategy Asset Managers, told the Investing News Network (INN) in an emailed note.
“His focus on real-time data and fundamentals could provide a much-needed modernization of the Fed’s framework at a time when investors are looking for transparency and credibility in monetary policy.”
That shared sentiment among investors caused the US dollar to rise sharply in value. The precious metals and the U.S. dollar share an inverse relationship: Since gold and silver are typically priced in U.S. dollars, a stronger dollar makes their purchase much more expensive for foreign buyers. This leads to lower demand and downward pressure on prices.
Will gold and silver prices recover?
Does the biggest correction in decades mean the party is over for gold and silver prices?
More likely, it’s a healthy correction in an otherwise strong bull market for precious metals. Remember, one policy event does not predict the complete collapse of the strong fundamentals underlying the gold and silver markets. There is still a very strong case for a bull market for precious metals, given the high demand for gold from central banks and institutional investors. And industrial demand for silver is still expected to eclipse available mining supply.
“Nothing goes straight up without taking a breather, but you can still coexist. That can come with long-term bullishness, and I’m extremely bullish on the long term,” Andy Schectman, president of Miles Franklin, told INN in an interview in which he discussed the factors moving gold and silver, emphasizing that their long-term drivers are still in place.
Not to mention that there is still optimism that the Fed will have to cut rates to handle the country’s ever-increasing mountain of debt – which would be impossible to pay off at higher rates.
“Our view remains that structural forces continue to support a lower interest rate environment, which should be constructive for risky assets. We remain focused on the fundamentals and position our client portfolios accordingly,” Hulick said.
For investors who are still optimistic that gold and silver are in the early stages of a bull market cycle, this drop in gold and silver prices could represent a buying opportunity.
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Securities Disclosure: I, Melissa Pistilli, have no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the views of the Investing News Network and do not constitute investment advice. All readers are encouraged to conduct their own due diligence.
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