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Financial Poise
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What Moves the Needle on Precious Metals Spot Prices? 

Factors that Influence Silver and Gold Price Predictions

According to projections by Commodity Markets Outlook, the World Bank’s Precious Metals Price Index is expected to increase by 2.9% this year. Gold price predictions are especially high with experts predicting a 3.2% increase in 2019. Despite weakness early this year, precious metals spot prices have increased due to anticipated cuts in interest rates by the Federal Reserve Bank, as well as tense trade talks with China.

The future of gold and silver is optimistic, but why? What moves the needle when it comes to precious metals spot prices in the precious metals market? Well, if we truly knew, you and I would probably own a private island by now. As with most market activity, the answers are much more mysterious.

That being said, this article will tackle a few of the factors that tend to have an obvious bearing on spot metal prices.

The Stock Market vs Precious Metals

Some are fairly well known, such as the stock market’s inverse relationship with precious metals value. The recent mini-rally in precious metals value began after President Trump announced additional tariffs on Chinese imports. Gold strengthened by 8% as the equity market dipped.

Stock market instability (at home and abroad) began to shake investor confidence, sending them  rushing to safe havens like physical gold. So, the precious metals spot prices shot up.

Gold ETFs (exchange-traded funds), like the SPDR Gold Shares ETF and the VanEck Vectors Gold Miners ETF, also outperformed the global equity markets. Dave Nadig of ETF.com told CNBC’s “ETF Edge”: “By the amount of gold in the vault, ETFs are at about 80% below all-time highs [from 2012]. All we’ve got is demand from folks who are looking for safe-haven assets on days like today.”  . All of a sudden, and due in large part to global market instability, investors were quickly looking to shore up their accounts and stabilize their returns.

How Whispers Turn to Precious Metals Investments

Statements and rumors about recession fears, bond yields and cuts on interest rates can influence the appeal of precious metals. Words spoken aloud, even simple hints, have the ability to drive precious metals prices up or down. In early September, New York Fed President John Williams hinted at lower interest rates (a good thing for gold) when speaking about low inflation as “the problem of this era.” He stated, “I am carefully monitoring this nuanced picture and remain vigilant to act as appropriate to support continuing growth.” He did not mention further interest rate cuts, but analysts and investors took it as such, and gold prices closed on a high soon after.

Three Factors that Influence Precious Metals Spot Prices

When looking at spot prices for precious metals like gold and silver, keep in mind that there are factors that “move the needle” short-term (as we’ve seen above) and factors that affect the long-term price predictions. A few long-term examples include:

  • Inflation—Investing in gold is typically seen as hedging against future inflation. History shows us that economies and markets are quite cyclical. While we are in a state of low inflation and weak growth, things do change. And when this cycle begins to turn, the price of commodities begins to rise. What you’ll usually end up with is positive trending prices in gold.
  • Geopolitical events—The world–especially the Middle East–is rife with “hot spots” where aggression, war and terrorism attacks are sadly frequent. The instability and uncertainty of several failed states have provided a breeding ground for groups like ISIS. While the effect is currently limited, any major event could disrupt global markets, highlighting long-term value for precious metals.
  • Central Bank purchases—Gold purchases by Central Bank decision makers have grown steadily since 2010. Here’s why: If governments need to diversify themselves from USD and EUR denominated assets, it usually lifts the upside potential of metals.

The single most important factor in determining the future direction of the gold market may very well be interest rates. Sure, a decline in the dollar index or a sell-off in equities can also move the gold price higher. But keep in mind, with the Fed governors seemingly in the news every week and taking different positions, all this does is create volatility in the gold market. Case in point: Sept. 19 saw gold reverse course and close down after the Fed cut interest rates in what was seen as an effort to head off recession.

As we’ve seen, factors both large and small have a way of “moving the needle” on the spot prices of precious metals. After 40 years in the business, I still haven’t seen it all, but I hope this information educates investors on precious metals spot prices and what to look for when considering precious metals as part of a balanced investment portfolio. Keeping an eye on the stock market, interest rates and global and economic events can help direct your silver and gold price predictions and investments.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Basic Investment Principles 101 – From Asset Allocations to Zero Coupon Bonds and Goal Based Investing – Planning for Key Life Events. This is an updated version of an article originally published on March 7, 2016.]

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About Walter Pehowich

Walter Pehowich is executive vice president of precious metals investment services for Dillon Gage Metals, an international precious metals wholesaler. With over 40 years in the precious metals trade, Pehowich shares his industry insights and market analysis several times a week on Dillon Gage web site. Pehowich began his career in 1977 at Bache, which…

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