If you advise clients to maintain an allocation to precious metals, you probably monitor economic events that can impact these positions.
But while the relationships between macroeconomic trends and the prices of precious metals often makes sense, sometimes relatively obscure, counterintuitive events can move these prices unpredictably.
To help clients (and advisors) best appreciate the tricky situation, Mike McGlone, director of U.S. research for ETF Securities in New York, breaks down four factors that are most likely to make the metals move.
More Bang for Your Buck
The primary mover for all metal prices is the value of the U.S. dollar, McGlone explains, because they’re all priced in U.S. dollars.
It’s an inverse relationship: If the dollar decreases in value, the price goes up for all commodities priced in U.S. dollars, most notably metals.
But, if the price value of the dollar increases (as it’s been doing lately), then it can have a bearish impact on the individual metal prices. The dollar’s recent increase has provided “a little bit of a headway lately,” McGlone says.
Investors often view precious metals as a store of value against the loss of purchasing power from inflation and currency devaluation.
But holding metals involves the opportunity cost of giving up returns from other assets.
If that anticipated opportunity cost is low, investors are more likely to consider precious metals, which are a pure price play, says McGlone.
Earlier this year, the U.S. 10-year Treasury note’s yield was about 3%; by early September, the yield was below 2.5%. Two-year rates on German notes had gone negative a year ago, before recovering to essentially a zero rate by September.
These low rates reduce the opportunity cost to hold metals, he says.
“When your money, your paper money in a vault or anything, is earning very little, you have a lot more incentive to hold a storage of value asset like gold or silver, which technically are considered currencies,” the metals expert explained.