In a stunning reversal for precious metals, more than $12.95 trillion in market value has been wiped out from gold and silver in just 132 days, in an environment that is typically one of safe-haven assets.
Gold, which reached its peak in January, has fallen by 26.50%, or $9.75 trillion in market capitalization. Silver actually took a hit even worse, down 47.69% and wiped out $3.2 trillion of value. The extent of the decline has shocked investors, especially now that there is high inflation, oil prices are around $90 a barrel and there is a war in Iran, which historically has been good for gold and silver.
Analysts are still unable to explain why. In the past, geopolitical tensions and inflationary pressures drive investors to precious metals as a hedge. But in this cycle, higher U.S. bond yields and a stronger dollar have taken away the safe-haven appeal. With yields rising, gold and other non-yielding assets such as gold are not as attractive and the dollar’s strength makes commodities priced in dollars more expensive for global buyers and so prices are lower and demand is down.
Technical reasons for the sell-off are compounded by technical factors. Once the key support levels broke down, algorithmic trading and leveraged positions increased the fall and the fall in stocks and financial markets were set off into a wave of losses across the world markets.
The latter one, especially in silver, is even more powerful considering silver is a particularly volatile metal because it is an industrial and precious metal and hence the demand in manufacturing sectors has been poor and because of the weak product demand, adding to its volatility.
Investor sentiment has turned cautious, with some doubting the long-standing faith in gold and silver as reliable hedges in a macroeconomic context. Some say the metals are simply going through a cyclical correction, others warn that structural changes like the rise of alternative assets like cryptocurrencies may be eroding their traditional role.
Even after the carnage, long-term bulls are optimistic. The longer-term inflationary pressures, geopolitical risks and central bank buying are still things which can eventually stabilize prices. But in the short term, there will be high volatility and traders are bracing for more turbulence.
The collapse of gold and silver prices which is a loss of almost $13 trillion in value underscores the fragility of market assumptions. Even under a context seemingly tailor-made for precious metals to shine, higher yields and a stronger dollar have changed the story. The episode serves as a reminder that no asset is immune to global finance.
