For thousands of years, precious metals—silver and gold—have been coveted for their monetary value and symbols of power. As you can guess, not much has changed; however, the “why” and “how” we might acquire these assets today have changed a bit. Precious metals can be a particularly desirable financial asset in times of economic uncertainty for their ability to help hedge against inflation and combat the weakening of the US dollar.
Certain macroeconomic factors and fiscal policy adjustments are typically what trigger investors to move some of their investments into precious metals. These factors can include geopolitical events, such as the uncertainty over the Brexit vote and trade wars with China, the threat of war or terrorism, or oil price fluctuations.
Today’s Perfect Storm Climate
Today, the rise in the value of precious metals is being catalyzed by somewhat of a “perfect storm” economic situation. The week ending in July 16th, 30 year mortgage interest rates hit an all-time record low for the 50 years that Freddie Mac has been tracking the data, breaking the 3% threshold to sit at 2.98%. A significant spending increase and sharp falloff in revenue have caused the US deficit to breach $864 billion as of last month. This sharp rise is largely a result of the government’s $2 trillion economic relief effort approved by Congress in March as the federal deficit in June of 2019 was only at $8 billion. The delayed tax filing deadline certainly didn’t help to counteract that number, either. To top it off, moves by the Fed have suggested they intend to relax their 2% inflation mandate that is generally maintained to stabilize long-term interest rates and promote maximum employment.
What has happened in response to this “perfect storm”? Uncertainty and the price of precious metals have been steadily increasing (Figure 1). As of Friday August 7th, gold and silver were both on the rise with silver trading over $28.32 an ounce and gold hitting over $2,034.80. Precious metal miners have also been outperforming, with extremely high numbers reported in Q1 with the Q2 numbers yet to be released.
Source: Bloomberg
Why Precious Metals?
Investors may flock to precious metals in turbulent times because their values tend to rise inversely to the market. When the stock market tanks or the value of the US dollar is in jeopardy, the value of metals tends to increase. This converse relationship creates a unique way for investors to diversify their portfolio and help hedge against inflation when the market’s outlook is particularly volatile.
In fact, this is the main reason that central banks covet the metals, as well. Because metals are a physical commodity and provide value not attached to the dollar, they are a way to hedge against a weakening national currency. Currently, the largest shareholder of gold in the world is the United States government, holding about 5% of the world’s resource.
While precious metals are often seen as a safe haven, they are subject to market risk and significant value fluctuations as seen during the week of August 10th. Understanding your risk tolerance and investing time horizon will help in evaluating if an allocation to precious metals make sense for you. Unsure if adding precious metals to your portfolio is the right financial choice for you? Speak with your trusted financial advisor, or contact our URS Advisory office to schedule a complimentary initial conversation today to discuss your options.
Disclaimer: Advisory services are offered through URS Advisory LLC, a Registered Investment Advisor in the State of Florida. Insurance products and services are offered through URS Insurance, an affiliated company. URS Advisory LLC and URS Insurance are not affiliated with or endorsed by the Social Security Administration or any government agency. Investing involves risk including the potential for loss, and past performance is no indication of future results. Opinions expressed herein are solely those of URS Advisory. All written content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your financial adviser or qualified professional before making any financial decisions.[i] https://www.forbes.com/sites/amydobson/2020/07/17/mortgage-interest-rates-fall-to-their-lowest-rate-ever-recorded/#387148486c07 6 August 2020
[ii] https://www.washingtonpost.com/business/2020/07/13/june-2020-budget-deficit-coronavirus/ 6 August 2020
[iii] Ibid.
[iv]https://www.federalreserve.gov/newsevents/pressreleases/monetary20200610a.htm 6 August 2020
[v] https://voxeu.org/article/economic-uncertainty-wake-covid-19-pandemic
[vi] https://www.kitco.com/news/2020-08-10/Gold-price-up-as-bulls-remain-very-strong.html
[vii] Ibid.
[viii] https://www.wsj.com/articles/tumbling-dollar-unleashes-precious-metals-rally-11595426974 10 August 2020
[ix] http://www.perthmintbullion.com/us/blog/blog/19-08-30/Why_central_banks_are_buying_more_gold.aspx 10 August 2020
[x] https://www.usmoneyreserve.com/blog/why-central-banks-buy-gold/ 6 August 2020