For thousands of years, gold and silver have been enduring symbols of wealth and power. Today, precious metals are also a separate asset class, from stocks and bonds, that offer a safe haven for investors amidst uncertainty.
Typically, investors are deterred from investments that do not provide any income (i.e. gold and silver) during a higher interest rate environment. This is because the opportunity cost of holding gold is higher.
Instead, bonds can provide good interest income, while defensive stocks can provide steady dividend stream.
Contrary to this conventional view, gold and silver have emerged as bright spots in the past 18 months. We have to look beyond the higher interest rate environment to understand why.
In recent months, investors have turned to safe-haven assets like gold and silver for reassurance against market volatility – introduced by inflation and geopolitical uncertainties globally.
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How Does Higher Inflation Affect Gold And Silver Prices?
Higher inflation tends to have a negative impact on stock markets. This is because central banks often respond by increasing interest rates to counteract higher prices.
As there is a limited supply of gold and silver in the world, it cannot be easily manipulated in the same manner as fiat currencies (i.e. paper money). This solidifies the role gold plays in hedging against inflation and preserving wealth.
Research conducted by the World Gold Council spanning half a century backs this. During instances where inflation surpassed 3%, gold price enjoyed an average annual return of 15%. This contrasts sharply with its 6% average return during periods of lower inflation, below 3%.
This showcases the tendency of gold to outperform when inflationary pressures intensify. Diversifying our investment portfolio with gold can provide greater stability and even reduce volatility.
Gold And Silver: Really Safe Haven Assets During Economic Uncertainties?
Unlike paper money, there is a finite supply of gold. This can make it a standout choice for many investors, especially in times of economic uncertainties and high inflation.
Gold’s unique characteristics also make it an ideal diversification tool for portfolios. Unlike stocks and bonds, which often move in tandem, gold price tends to show little correlation with these assets. This can reduce overall portfolio risk and volatility without sacrificing potential returns.
Historical examples, such as the 2008 Global Financial Crisis, prove this. As the financial crisis was unfolding, and stock markets crashed more than 50%, gold price hit a new all-time high of just over US$1,000 per ounce.
In more recent times, gold has also outperformed in periods when geopolitical events brought about volatility in financial markets. When Russia invaded Ukraine in early 2022, the price of gold increased by more than 10% in less than six weeks.
There is an increasing number geopolitical tensions globally with the potential to boil over – including the US-China trade war, attacks on freight shipping in the Red Sea, the ongoing Russia-Ukraine war, and the Israel-Hamas war.
What Will Happen To Gold And Silver Prices If Interest Rates Are Cut In 2024?
Sentiments of interest rates cut by the US Federal Reserve in 2024 is rising. When interest rates go down, the expectation is that the US dollar may decline. As a result, investors, including institutions and central banks, may shed US dollars and seek asset diversification.
Gold again emerges as a natural destination in this flight to safety. Data from J.P. Morgan Research indicates that global central banks acquired a net 800 tonnes of gold reserves in the first three quarters of 2023.
These purchases were led by China’s central bank, with the country remaining a steady buyer of gold. Beyond just diversifying reserve assets outside of the US dollar, China’s accumulation of gold may also indicate its view of geopolitical uncertainty globally.
As central banks continue this trend to accumulate gold reserves, it further solidifies gold’s status as a preferred safe-haven asset and underscores its enduring appeal as a store of value amidst shifting market conditions.
Investing In Gold And Silver In 2024
Even with expectations of rate cuts in 2024, the global economic landscape has to adjust to a higher for longer interest rate environment.
The culprit: persistent inflation. A “sticky” inflation environment accentuates the attractiveness of assets like gold and silver. Investors seeking to hedge against the erosive effects of inflation and the uncertainties surrounding central banks’ monetary policies can be appeased by gold’s historical track record as an effective store of wealth.
Geopolitical tensions add another layer of complexity to the health of the global economy. The risk of armed conflicts spilling over further bolsters gold’s allure as a diversification tool. Amidst the backdrop of geopolitical uncertainties and currency fluctuations, gold stands out as a reliable asset that can help investors spread risk and preserve wealth.
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