Why Gold and Silver Suddenly Lost Their Shine

Reasons Why Gold and Silver Prices are Falling

To understand the reasons, we must understand the factors that were influencing the rise of these precious metals.

#1 Trade Wars

In a nutshell, uncertainty surrounding US President Donald Trump's tariff policies raised the appeal of precious metal like gold and silver.

This was due to their safe-haven appeal during times of uncertainty. Markets don't like uncertainty regarding trade.

This caused investors to think about the impact of disruptive trade policies on the profits of various companies. A fallout of this is that some investors have become defensive and moved their funds into gold and silver.

However, trade tensions are easing. The US and India are nearing a trade deal. The US and China have made significant progress in their trade talks.

And now that the US has worked out agreements with most major trading partners, the market thinks it's unlikely that Trump will impose any more tariffs in the short term.

#2 Geopolitics

During times of war or geopolitical uncertainty throughout history, people have chosen to hold on their wealth in precious metals instead of any other asset. This won't change in the foreseeable future.

The tensions between the US and Iran had sparked fears of another major war. After the US actions against Venezuela, the markets were worried about this potential scenario.

However, recent events have calmed nerves somewhat in financial markets. Talks are to be held this Friday and if all goes well a war could be avoided.

The markets have taken confidence from the fact that the Gaza peace is holding up. If the US-Iran tensions subside then only the Russia-Ukraine war will remain as a major geopolitical hotspot.

Of course this assumes that no other geopolitical event flares up somewhere else in the world. After all, the US' military operation in Venezuela took the markets by surprise.

But for now the markets seem calm about the chances of a flare up in tensions. Only time will tell if this sentiment was justified.

#3 Speculation

And then there was good old fashioned speculation.

While its all well and good to be bullish on gold and silver, we should not forget that a large part of the run up in these metals was speculative in nature, especially silver.

Many people who had never traded any commodity had begun punting in the futures market. The idea was that if these metals were going up then might as well make some quick profits using leverage.

Many investors become traders just because they thought the prices would continue to rise... and for no other reason. This was highly risky behaviour.

It was a case of FOMO (fear of missing out) at work.

However, speculative assets rise only as long as the speculation goes on. The moment it stopes or even reduces in magnitude, prices fall.

Conclusion

This is what Rahul Shah, Equitymaster's Co-Head of Research, wrote in Profit Hunter recently...

• Between 2012 and 2019, gold did almost nothing.
  
  It sat flat for seven years.
  
  During that time, even a humble fixed deposit would have made you more money.
  
  We don't have a crystal ball; gold could easily enter another long "flat" period just when you need your money to be working for you.
  
  I'm not saying you should never own gold.
  
  It is a great insurance policy against "bad times" or a falling currency.
  
  If it helps you sleep better, it is perfectly fine to keep 5% to 10% of your wealth in gold.
  
  If you feel the world is becoming more uncertain, you might even increase that allocation slightly to act as a hedge.
  
  Stick to the discipline.
  
  Use stocks for growth and cash for safety.
  
  Leave the gold for a separate insurance fund.

At Equitymaster, we believe in having 5-10% of one's portfolio in gold at all times.

However, investors should not see gold as a potential substitute for any other asset.

It makes sense to hold some precious metals in one's long-term portfolio, but it does not make sense to speculate on short term price movements.

While considering an investment in gold, have a time horizon well beyond 2026. Just because prices have gone up a lot recently, doesn't automatically make gold a great investment.

Do your due diligence.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...