• Your Questions, Our Answers

Q: Normally gold and silver prices start rising at this time of year due to rising physical demand but this year, the precious metals still seem to be stuck at low prices. Why?

A: It may be a bit early to draw conclusions about whether gold and silver prices will enjoy their normal seasonal strength from September to March, but there are certainly other larger short term factors currently weighing down these precious metal (pm) prices.

First, the recent strength of the USD$ tied to an improving US economy puts a dampening effect on all commodity prices. All the talk this year by the US Federal Reserve Bank about raising interest rates has really put pressure on the pm's because conventional wisdom would have us believe higher rates attract global capital away from commodities into USD equities and bonds. Interestingly, a quick review shows that the last five times the US Fed raised interest rates, the gold price INCREASED by an average of 10% in the following three months, and in three of the cases, continued to appreciate for two years. In other words, the markets discounted the rate increases beforehand and sold off after the fact.

Second, the recent crash in Chinese equities spilled over into other global equity markets, sparking a rush to the "safety" and liquidity of the USD, and a sharp increase in pm shorts, which were only partially covered over the past two weeks. This causes a domino effect because equity investors trading on margin (like Chinese speculators) then have to sell other investments (like gold) to cover their margin calls. In the past, such periods were ephemeral and passed relatively quickly.

Third, the recent devaluation of the Chinese yuan actually made gold and silver prices higher in their currency, reducing demand and further depressing the seasonal effect. In fact, many emerging country currencies have and are depreciating against the USD so gold is rising in many local currencies. However, gold has continued to decline in Indian rupees so it is reasonable to assume that physical demand in India should resume after the current liquidity crisis passes.

I think all these events and recent market volatility are directly related to the ongoing debt and deficit crisis in many developed countries especially Europe and China. Such global issues are the main reason why investors hold gold and silver as stores of value, but they take time to unfold.

Back to the media page m