- Gold’s third major bull run since 1971 took it to new highs in January
- Late-month meltdown leaves the precious metal down by a sixth from its peak
- Silver is down by one third from its January all-time high
- Both metals are trying to rally off the lows in early European trading and are still higher than they were at the turn of the year
- Both of gold’s first two bull runs witnessed several major pull backs
- Government debt, geopolitics, the dollar and inflation could all yet shape future price trends
“There are many different theories as to why gold and silver prices melted down on Friday and in early trading in Asia on Monday, but, for the moment, both precious metals are trying to rally from their intra-day lows,” says AJ Bell investment director Russ Mould.
“Sceptics will nod their head, say ‘I told you so,’ and assert that this is the latest in a series of bubbles to go pop, after meme stocks, cryptocurrencies, non-fungible tokens and more. Gold bugs will say that worries about geopolitics, inflation and Western government debts and currency debasement are yet to be assuaged, and argue the investment case holds firm, so the battle lines between bears and bulls remain clearly drawn.
“The meltdown in gold and silver brought dazzling runs in both to a halt. Whether this is the end of their bull runs remains to be seen, but there are many different theories as to why they have retreated quite so far, quite so fast.
Source: LSEG Refinitiv data
- The first is simply that they had gone too far, too fast and were ripe for a pull-back.
- The second is that losses in Microsoft, the world’s fourth-biggest company by stock market capitalisation, after its second-quarter results last week, forced selling of other positions to cover the damage. If this is true, then the foundations of the markets may be wobblier than we thought, especially given the degree of margin and leverage which are building up within the system.
- The third is that the trigger was the appointment of Kevin Warsh by President Trump as the new chair of the US Federal Reserve, pending congressional approval. Mr Warsh's previous public criticism of the expansion of the US Federal Reserve's balance sheet, through Quantitative Easing, meant that some investors felt he would be a monetary policy 'hawk' and keep monetary policy tighter than expected. That could, in turn, give support to the dollar and if that haven asset is strong then demand for other havens such as gold could go down (or so the argument goes).
- The fourth is that the trigger was the appointment of Kevin Warsh by President Trump as the new chair of the US Federal Reserve, pending congressional approval, but this time for a different reason. Mr Warsh’s previous calls for lower interest rates, and the fact that he got the job at all, persuaded some investors to feel that he would be a monetary policy ‘dove’ and aggressively loosen US monetary policy. That could, in turn, weaken the dollar, especially against the Japanese yen, or so the theory goes. If the Japanese currency goes up, that could force the closure of short yen positions, and cut off a source of cheap liquidity to global markets, which would potentially lead to liquidations across a range of asset classes, especially where leverage, or margin, is used to hold the positions.
- The last one is how the COMEX commodity exchange in the USA raised its margin requirements on metal-trading positions, and switched from a flat dollar fee to a fee based on the percentage value of the holding. This may have left some more speculative metals players short of cash and obliged them to liquidate to raise it or trim back their holdings. This is an echo of how the authorities tried to restore what they saw as order on Silver Thursday back in 1980, when silver prices were rocketing thanks to the efforts of Lamar Hunt and his brother, Nelson Bunker Hunt, to corner the market in the precious metal. It is also, however, prompting accusations that certain big banks may have benefited from the rout in precious metal prices, as they were rumoured to be short, and would have had to mark to market and report potentially hefty losses at the month end.
“Whatever the explanation, gold and silver are now trying to recover and both are no lower than they were in early January. Moreover, gold bugs may well be tempted to argue that both of the 1971-1980 and 2001-10 bull runs in the precious metal featured several retreats which did not ultimately nullify or prevent major gains.
“Gold’s first bull run began when President Richard M. Nixon withdrew the US dollar from the Gold Standard and killed off the Bretton Woods monetary system that had prevailed from the conclusion of the Second World War. As Nixon began to run up the US federal deficit, and inflation surged, not helped by two oil price shocks, gold motored from $35 an ounce in August 1971 and peaked at $835 in January 1980.
Source: LSEG Refinitiv data
“That helped to shelter investors from the ravages of inflation but there were still some lumps and bumps along the way. Even that gilded run in the 1970s featured no fewer than three mini bear markets, where gold fell by more than 20%, in 1973, 1974 and one that lasted more than eighteen months from January 1975 to summer 1976. To further test bulls’ mettle, gold also endured five corrections where its price fell by between 10% and 20%, in 1972, 1973, 1977, 1978 and 1979. The last two lasted barely a month, but they still challenged the resolve of gold bugs even as its price went almost vertical in the final blow-off phase of the bull run.
Source: LSEG Refinitiv data
“Gold then went into hibernation as the Paul Volcker-led US Federal Reserve, and the UK’s Thatcher administration, took it upon themselves to crush inflation, helped along the way by deregulatory policies on both sides of the Atlantic, a return to peace in the Middle East and lower oil prices. Double-digit interest rates also made the opportunity cost of owning gold simply too great to bear.
“However, the metal hit bottom just above $250 an ounce in 2001 and then won over a new generation of investors, who sought refuge from the ultra-loose monetary policies which followed the bursting of the technology, media and telecoms bubble in 2001-03 and then the Great Financial Crisis of 2007-09. In the face of zero-interest-rate policies (ZIRP), Quantitative Easing (QE) and balance sheet expansion the hunt was on for stores of value or haven assets, and some investors felt that gold was a good candidate.
Source: LSEG Refinitiv data
“Even during this second surge, gold did its best to test the resolve of believers with a pair of bear markets, one in 2006 and one in 2008, while there were also five corrections of more than 10%, one in each of 2003, 2004, 2006, 2009 and 2010.
Source: LSEG Refinitiv data
“Gold peaked at just shy of $1,900 an ounce in 2011 and then quietly slipped to barely $1,000 an ounce by 2015, as central banks and politicians did a good job of convincing the world they were back in control after the Great Financial Crisis. Mario Draghi’s 2012 promise to do whatever it took to preserve the Eurozone edifice was also seen as a warning shot and a period of low growth and low inflation persuaded many that calm had returned, and gold’s services were not required, especially as the EU debt crisis seemed to blow over.
“Yet the metal actually bottomed in 2015 and began to make stealthy gains, long before Covid-19, lockdowns, soaring government support payments came along, let alone tariffs and trade wars, fresh unrest in the Middle East and a war in Eastern Europe. Perhaps gold’s message was that central banks would find it hard, if not impossible, to extricate themselves from ZIRP and QE, and that their balance sheets would remain swollen – a view that the Fed’s halt to Quantitative Tightening (QT) last autumn and return to buying short-dated US Treasuries would suggest is still relevant to this day.
“This third multi-year advance in gold has certainly had its downs as well as its ups.
“A swoon of more than 20% caught some bulls off guard in 2022, as the world emerged from lockdowns and 10%-plus corrections in each of 2016, 2018, 2020, 2021 and 2023 warned that volatility was never far away.
Source: LSEG Refinitiv data. *Intra-day, not closing figures.
“Bulls of precious metals may therefore be tempted to argue that this sudden dip is a chance to buy more, since geopolitical uncertainty, sticky inflation and galloping government debts, form the bedrock of the investment case for gold in particular, and none of those issues are any different now from the end of last week.”
