After months of massive gains, prices collapsed on Friday – seemingly out of nowhere. What’s going on, asks Catherine McGregor in today’s excerpt from The Bulletin.
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Why gold and silver suddenly fell back to earth
Anyone half-following the financial headlines over summer may have noticed gold and silver apparently going stratospheric – only to tumble sharply late last week. As Australian political scientist Henry Maher explains in The Conversation, the turning point was confirmation that Donald Trump plans to nominate Kevin Warsh as the next chair of the Federal Reserve, the US central bank. After months of gains driven by inflation fears and worries about political pressure on the Fed, prices for both gold and silver reversed fast, with gold dropping about 9% and silver close to 30%, the latter experiencing its worst day since 1980. More than $US15 trillion ($AU21 trillion) was wiped from the gold and silver price over 24 hours,” reports news.com.au. “This is half the size of the entire US economy.”
As Maher explains, the sell-off came as markets reassessed how risky the outlook really is. Many experts had feared Trump’s nominee would be an economic kook eager to follow Trump’s demand to immediately cut interest rates. Warsh is a steadier, safer choice than they had feared.
A wild month for precious metals
The sudden drop came after months of massive price increases for both gold and silver. Gold has long been seen as a safe haven, somewhere investors stash their cash when the world feels unstable, while silver picked up extra momentum because it is used in everything from solar panels to electric vehicles.
But the surge was not just about long-term trends, say finance lecturers Jason Tian and Angel Zhong, also in The Conversation. Many everyday investors piled in after prices had already jumped sharply, often through newer online platforms that make buying precious metals as easy as buying shares. If that sounds familiar to you, the Herald’s Liam Dann agrees. “I think gold has been cryptofied,” he writes. “Since Wall Street has accepted Bitcoin as a legitimate asset class, gold has joined the party.” And as any Bitcoin investor can tell you, a crypto-style rush can push prices higher very quickly – and send them lower just as fast when sentiment turns.
NZ poised to take advantage of weaker US dollar
Alongside the precious metals drama, the US dollar has been sliding, and that has more immediate implications for New Zealanders. As Damien Venuto explains in Stuff, the US dollar has long been viewed as a financial safe haven, “with many people looking to acquire cash when world events become more volatile,” he writes. “But this isn’t the case this time. While gold (the benchmark of safe havens) is hitting fresh records, the US dollar is struggling.”
For New Zealand, a weaker USD can help lower the cost of imported fuel, food and consumer items, and make overseas travel and online shopping cheaper. But it’s not all good news, market strategist Greg Boland says. If the US dollar is falling because investors are becoming less confident about the long-term stability of the US economy, that could bring more turbulence to global markets – which could mean higher interest rates and yet another hurdle for the long-promised economic recovery.
How the gold rush reached New Zealand
Back when prices were still climbing in mid-January, the global rush into gold and silver was already spilling over into New Zealand. RNZ’s Susan Edmunds spoke to dealers at The Gold Exchange in Wellington who reported unusually strong demand through what is normally a quiet summer period, and lots of new buyers dipping their toes into the precious metal market for the first time. At the time, gold was selling for just over $8000 an ounce – it would go on to add another $1000 before prices collapsed on Friday. Whether the price will surge again remains to be seen.
