Over the past year or so, bullion spot prices have been relatively stable. Although the metals trended upward in 2017, the movement was largely gradual with few dramatic swings. However, this environment has changed in recent weeks. All four major metals have experienced greater volatility on both a day-to-day and intraday basis. That is, not only are the metals moving quite a bit from one trading session to the next, but they’re also shifting rapidly within the span of the day.
Why is this happening? As is often the case, the explanation is somewhat complex. A wide variety of factors influence precious metals prices. While the dynamic can be complicated and multifaceted, a few major issues are having an outsized effect today. In 2018, these four factors are moving the precious metals markets:
- Weakness in the U.S. Dollar: Precious metals, like most commodities, are traded worldwide in U.S. dollar terms. A weak dollar means higher precious metals prices—and vice versa. Knowing that such a close relationship exists, analysts are constantly looking at trends in the foreign exchange markets. While the Federal Reserve seems willing to raise interest rates (which would strengthen the dollar), market participants doubt they will come through on this plan. Why? This brings us to our next few points.
- Inflation: This issue is the ultimate double-edged sword for the metals. Higher inflation means the U.S. dollar has less and less purchasing power; this scenario tends to be very bullish for bullion. After all, precious metals are meant to be a hedge against fiat paper money that can lose its value. On the other hand, higher consumer prices could be an indicator of a strong economy. This might lead the Federal Reserve to raise rates further. Which interpretation is correct? Even seasoned observers are divided, hence the recent volatility.
- Volatility in the Stock Market: Logical or not, rising markets attract attention and money. The U.S. stock market hit record highs in 2017 and drew a tremendous amount of new investment in the process. Along the way, funds were siphoned out of other asset classes including precious metals. When the Dow dropped a record 1,000+ points in a single day, many scared investors began looking for safer alternatives. The long-overlooked precious metals space suddenly became much more attractive—and visible.
- Government Deficit Concerns: Depending on who you ask, the recently-enacted tax bill is either a massive boon to business or a concerning expansion of the federal deficit. Opinions vary widely, but many view this legislation as a grand experiment. Investors are nervously dissecting every available piece of economic data to monitor the bill’s success. The stakes are high and could have a profound impact on the American economy. If the tax cut isn’t effective (i.e. it fails to spark significant economic growth), the result will be more government debt and the Fed’s inability to raise interest rates. That situation would be extremely bullish for metals.
Granted there are many other influences not listed here, but these factors are causing metals to experience big swings in a very short time period. Every economic report, sentence uttered by the Federal Reserve, tick in the Dow, and move in the U.S. dollar is having an outsized impact on spot prices. Regardless of which direction you believe metals are headed, increased volatility means one thing: a better chance of your price targets coming true. For those waiting for a specific price to buy or sell, stay tuned to precious metals prices. If the beginning of 2018 is any indicator, the rest of this year could prove to be a wild ride.
Where do you see metals prices headed, and why? Will 2018 continue to be a wild ride or will the waters calm? We’d love to hear your take on the market. Share your thoughts and insights in the comments section below.