On Thursday of last week, gold hit an all-time high of $5,575 an ounce during early trading. But the milestone didn’t hold up and Friday the yellow relic went through a gut-wrenching downdraft trading as low as $4,460, a 20% one-day meltdown. The moves in silver were even more stunning, as it more than tripled in four months, hitting a high of $108 an ounce on Thursday before plummeting to $71 on Friday. Both gold and silver have somewhat stabilized with today’s trading, but even with the recent volatility, over the last 12 months silver is up over 165% and gold is up 73%.
What is driving this demand for precious metals?
To be sure, much of the trading of late seems like a speculative pile on. However, we have long argued for including alternatives, including commodities, real estate and others as part of a diversified portfolio in response to changes in the economy and geopolitics. These changes continue to exert outsize influence, and they may persist for some time.
First, is the level of government debt, not only here in the USA but across the developed world. The US dollar, as the world’s reserve currency, is truly the driver of this trend. The chart below shows the market value of privately held gross federal debt. You can see the unrelenting trajectory even when we strip out the debt the government owes to itself and the reserve bank holdings.
And as the US has continuously taken on more debt, so have other governments around the world. Japan, England, Germany, etc. all have taken on increasingly more debt, with many holding their own bonds but also holding US treasuries. Although the percentage of US debt held by foreigners has been as high as 46%, it currently sits at just above 30%. And this is part of the trend that we believe argues for holding precious metals, particularly gold.
After the Russian invasion of Ukraine and the sanctions that followed in 2022, many central banks seem to have become less willing to hold US treasuries. This chart, with the green line representing foreign holdings of treasuries and the yellow line central bank gold reserves, is courtesy of Torsten Slok at Apollo Global Management:
A second reason we believe a healthy allocation to alternative assets could be beneficial has more to do with the clear fracturing of long-standing global trade relationships and supply lines. Even before Trump 1.0 and Trump 2.0 tariff regimes came into play, it was clear that the US and China, as the top two economies in the world, had entered into a more competitive and less collaborative relationship. As such, dependable supply lines began to falter, China’s Belt and Road initiative was launched to try to tie up more global trade within the Chinese sphere of influence. Then the Covid-19 pandemic hit and trade has not really been the same since.
These breaks in what were once considered normal trade and supply chain arrangements meant producers and manufacturers, suppliers and importers and, finally, consumers had to make changes in their routines, and they continue to have to adjust as new tariff and trade deals are announced almost daily. This creates a situation where higher inflation and interest rates are a given.
We believe alternative assets, including precious metals, can provide needed diversification in this type of environment, despite having higher volatility independently. If you have questions about your portfolio, please do not hesitate to reach out to us.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Precious metal investing involves greater fluctuation and potential for losses. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.