The global unrest over the past three years has seen upward pressure on the price of gold as countries stockpile this precious metal and investors seek refuge in it as a store of value. While this is positive, capital is now flowing into the stock market, which can hurt the price of gold. Given this, I expect some short to medium-term weakness before it continues its run up.
During times of high inflation, gold shines as investors hedge against the eroding value of paper currencies. While we have seen this in the past few years, inflation now looks like it is easing globally. As mentioned last week, falling inflation leads to lower interest rates and higher consumer sentiment, which is good for the stock market.
During periods of low inflation, the demand for gold slows, so we can say that gold generally negatively correlates to stocks and riskier-type assets. That said, when interest rates fall too low, gold shines again as it becomes more attractive than other interest-yielding assets.
While silver shares some similarities with gold, there are certain differences in how it reacts. Like gold, silver can experience a negative correlation with strong stock market performance. However, unlike gold, a significant portion of the demand for silver comes from industrial applications, such as electronics, solar panels, medical equipment and various industrial processes.
As such, silver tends to be more volatile than gold due to its dual role as a precious metal. This means during periods of low inflation, demand for silver can increase due to its industrial applications.
So what does this mean for investors?
Given the continuing global unrest, I expect upward pressure on the price of gold to continue as countries stockpile this precious metal as a hedge against uncertainty. However, given the increased capital flowing into the stock market, there will be some short to medium-term weakness in the price of gold before it continues its run-up.
Silver may also have some downward pressure in the short to medium term if industrial demand slows due to sluggish growth in global economies.
Many factors influence the price of precious metals, with some contradicting others. While it is wise to take these into consideration, I wouldn’t base your buying decisions solely on these. I strongly recommend analysing a chart of both commodities as this will tell you a lot more about where the price is heading and, in my opinion, now is a perfect time as I can see many opportunities coming from this space in the future.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au