Pull-backs on gold and silver set shivers across the precious metals market
The spot price of gold fell by more than 9% a week ago in its sharpest one-day drop since 1983, and the market shuddered.
Given that the gold price has risen more than 300% over the past decade and 75% since last April, a drop of less than 10%, even in a single day, gives little cause for alarm.
By mid-week the dollar price of gold was down around 6.5%, while silver had fallen by more than 22%.
Gold’s annualised volatility stands at about 17%, so price fluctuations are normal.
By February 4, the price had climbed back above $5,000 per ounce.
The Kevin Warsh effect
The price drop came at the same time as President Trump’s nomination of Kevin Warsh to succeed Jerome Powell as chairman of the US Federal Reserve.
Warsh has been viewed as likely to resist White House pressure for interest rate cuts. Particular attention focused on a speech he gave in April, where he appeared to criticise the Fed for evolving into a broad government agency rather than a strictly focused central bank.
Printing money
At its core the Fed has two goals: controlling prices and maximising employment. Warsh has expressed regret over the Fed’s huge expansion of its balance sheet through various quantitative easing programmes, which grew from around $800 billion in December 2005 to nearly $9 trillion by late 2022.
This conservative approach appealed to risk-averse investors, who saw Warsh as someone who would restore the central bank to a more traditional role in financial markets and reduce the dangers of an overgrown balance sheet.
Does this even matter for gold?
While having a risk-averse figure lead the Fed is welcome, does it truly matter for gold?
Owning gold serves as a safeguard against uncertainty. It sits outside the banking system, carries no counterparty risk and acts as a vital portfolio diversifier.
Gold can also function as an alternative to fiat currency for everyday purchases. Unlike fiat currencies, gold supply cannot be expanded by government decisions. Since the 2007-08 global financial crisis, fiat currencies have been printed in vast amounts across many countries, leading to inflation, uncertainty and social disruption.
Solid US economic performance
In the US the headline Consumer Price Index inflation rate stood at an annual 2.7% in December, still above the Fed’s 2% target. The US economy remains robust, with third-quarter growth at 4.4% and forecasts for annual growth in 2026 exceeding 2%.
This solid US economic performance has sparked concerns among major investment managers about a potential US-driven inflationary boom, which has delayed anticipated interest rate reductions.
The Fed maintained its benchmark rate in the 3.5% to 3.75% range at its January meeting, and the consensus points to only one modest cut this year. A similar outlook applies in the UK. Lower interest rates make holding non-yielding assets like gold less costly.
Gold remains a strong bet in every scenario
The nomination of Warsh has been cited as the primary reason for the gold price dip, but that explanation is overly simplistic. He is perceived as someone who will keep inflation in check, yet no certainty exists on that front.
Other factors carry greater assurance. The dollar faces ongoing pressure. Geopolitical tensions have not improved since the price fall. The purchasing power of fiat currencies keeps eroding.
National governments face rising demands for expanded welfare provision while tax revenues approach their limits. The underlying conditions that drove gold’s strong rise last year remain unchanged.
Gold is a long-term asset, not a quick hit
Financial advisers often stress that timing is everything in investing, and that holds at least partial truth. However, buying gold during rapid price surges in hopes of quick profits misses the point of ownership.
Such short-term speculation undermines the core purpose of holding gold: it is a genuine long-term asset that can shield against various crises. By holding the physical asset using platforms such as Glint, gold acts as money in the way fiat currencies were originally intended to.
NOTE: This is the opinion of this columnist and should in no way be viewed as independent investment advice. The core source for this piece was Glint, the mobile app for buying, saving, selling and spending physical gold and silver.
