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LAWRIE WILLIAMS: Disappointing start for precious metals but will that persist?

After the encouraging period between Christmas and the New Year when prices rose sharply, gold and the other precious metals all took a sharp turn downwards on what was effectively the first full trading day of 2022.  Asian and European markets saw the beginning of a decline, but then prices fell fast once North American markets opened – a pattern followed by bitcoin with BTC dropping below $47,000 again, although U.S and European equities moved a little higher, following an overnight fall in Asian ones.

The sharp falls in precious metals seem to have been precipitated by a decent rise in the U.S. dollar index up to over 96.60, and in U.S. bond yields, although conversely the oil price also moved higher.  Gold even fell back below $1,800 again and silver was down to $22.80 after trading at around $1,830 and $23.30 respectively right at the end of 2021, although there was a small partial recovery late in the day and in early trade on Tuesday.  However this nowhere near took them back to the immediate post-Christmas heights. 

Platinum and palladium were also off sharply in North American trade, with the gap between the two pgms narrowing to a little over $820, although there was again a small recovery on Tuesday morning with the dollar index falling back a little   Precious metals investors will be hoping that the early falls are not a portent of things to come.  It will be interesting to see what happens to the prices when the North American markets open later today.

The key influences on precious metals prices at the moment appear to be dollar strength and the inflation level.  Some respected economic commentators consider the dollar index way too high at the moment and foresee it coming back down to around the 90 level, or even below.  This may well be wishful thinking given that the factors which should be weakening the dollar also apply to many of the competing currencies against which the dollar index is calculated.  However there is the definite chance that all will weaken against gold which is seen as something of an indicator of economic weakness, regardless.  If this does happen we could also see something of a price recovery in silver too, as it still tends to take a lead from the gold price.  The pgms, though, seem to show rather less of a correlation with the gold price – palladium in particular - and as industrial metals they tend to be more economic growth dependent.

Gold is also seen as a beneficiary from sustained high inflation levels, as at least maintaining much of its inherent value in such times as a wealth protector.  We do look as though we may well be entering a period of sustained inflationary pressure, with Fed chair, Jerome Powell, conceding that inflation levels can no longer be considered as ‘transient’.  He sees these as likely to be higher, and last for longer, than the Fed had previously envisaged.  Gold’s performance, therefore, may depend on whether the Fed sees inflation levels serious enough to take a more aggressive stance on raising interest rates – a policy which tends to be gold negative – or continue with its so far cautious approach for fear of torpedoing such economic growth and falls in unemployment we are currently seeing.

Low interest rates coupled with high inflation make real rates distinctly negative which, as we have said before, is a situation that tends to be decidedly gold positive.  The fact that gold is a non interest generating asset tends to be a negative factor for the yellow metal when alternative investments look to be more profitable.  But when real rates are negative, this constraint totally falls away, and gold’s reputation as a wealth protector comes to the forefront.

So far the period of high inflation, at least according to official figures, has perhaps not persisted for long enough to be termed as being in a truly sustainable period.  But with more and more economists seeing current inflation levels persisting, or possibly even increasing, for the foreseeable future, there does seem to be the distinct possibility that this likely positive influence on the gold price may remain with us for some time yet.

04 Jan 2022 | Categories: Gold, Silver, Dollar, US, Platinum, Palladium, Bitcoin, FOMC

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