2019 was a banner year for precious metals with the big standouts being gold and palladium. A variety of factors help shape the spot prices of precious metals such as supply and demand and other fundamentals of each metal. However, the most important ones today are the long-term interest rates set by the Federal Reserve and the yield on U.S. government Treasury bonds, as well as certain other key economic factors.
2019 was a banner year for precious metals with the big standouts being gold and palladium. Gold reached the highest point since 2010, up 18.4% for the year, while palladium hit one all-time high after another, up 50.69% for the year (with silver and platinum also doing well).
A variety of factors help shape the spot prices of metals such as supply and demand and other fundamentals of each metal. However, the most important ones today are the long-term interest rates set by the Federal Reserve and the yield on U.S. government Treasury bonds, as well as certain other key economic factors.
In particular, the yield on those bonds after factoring in anticipated inflation has been “the most significant force acting on the price of gold,” according to a January 8 Wall Street Journal article. As that article explains, since the financial crisis of 2008, every major move up or down in gold has correlated with changes in bond yields, i.e., when the yields increased, gold usually decreased and vice versa. The reason is that if yields are rising, investors often believe they can earn a good return by leaving their money in the safe asset of government bonds, whereas if yields are declining, there is less incentive to buy bonds and not the usual opportunity cost of buying gold that pays no yield.
As far as interest rates in 2019, the Federal Reserve cut them three times during the year as concerns increased about the state of the U.S. economy, mainly due to the uncertainty surrounding the U.S.-China trade deal and the tariffs both sides imposed. This was a big change after raising rates four times in 2018, including in December of that year when most observers did not expect the Federal Reserve to act again. During the last meeting of the year in December 2019, the Federal Reserve opted to leave rates unchanged while keeping an eye on economic trends, because by this point in the year economic indicators had improved substantially from what they had been earlier in the year.
Other key factors are the overall health of the U.S. economy and where it is headed; the stock market, the U.S.-China trade deal, certain key international events and issues, such as Brexit and the current tensions between the U.S. and Iran, and factors specific to individual metals.
In 2019 the U.S. economy showed many signs of strong performance such as strong monthly jobs numbers and the lowest unemployment rate in more than 50 years. In July the economic expansion that began in 2009 became the longest in U.S. history. At the same time, inflation remained low as measured by the government, although most Americans experienced rising prices in areas like health care and housing, as well as in goods impacted by the tariffs the U.S. placed on Chinese imports.
Over the course of the year, as both the prospects for the trade deal with China ebbed and flowed and as certain economic indicators suggested the economy was weakening, many analysts became concerned that the expansion might end, and that the economy was headed for at least a slowdown and possibly a recession in 2020. These are some of the main reasons why the Federal Reserve continued to lower interest rates during the year. However, by year’s end, most economic indicators had improved, and the prospects for a recession anytime soon appeared remote.
In 2019 the stock market continued to set record new highs throughout the year. For the year ending December 30, the S&P 500 (the broadest market indicator) was up an impressive 28.5%, which is the best performance since 2013. In the past that kind of stock market might have been a drag on precious metal prices. This was not the case in 2019, when the Federal Reserve kept rates low all year in addition to bond yields also remaining low, so investors had good reasons to pursue assets that in a higher interest rate and higher inflation environment would be riskier.
As for the trade deal with China, there was uncertainty throughout the year from multiple rounds of tariffs from the U.S. and China, threats of additional rounds of tariffs and the slowdown in certain industries like farming and steel as a result. The year ended with the U.S. administration saying it had reached a deal with China that will be presented by the heads of state of the two countries soon, but whether a final deal of real consequence will ever be reached remained unclear.
Brexit – the United Kingdom’s plan to leave the European Union – was another source of economic uncertainty with potential to spill over into precious metals. In June 2016 when the UK voted to leave the EU, there was a considerable spike in precious metals due to concerns about the British economy and British pound suffering from the country leaving the economic bloc. The December 12, 2019 UK election gave a resounding victory to the Conservative party and a strong mandate to Prime Minister Boris Johnson to continue with Brexit. Markets appreciated the clarity that the UK would leave at the end of January 2020 with an agreement to work out the details of the country’s future relationship with the EU over the coming year or years rather than “crashing out” with no deal, which would be more likely to cause economic uncertainty.
Tensions in the Middle East, especially the ongoing conflict between the U.S. and Iran, were another source of uncertainty that led to some short-term increases in precious metal prices in 2019. For example, in June gold went up in the aftermath of a series of Iranian attacks on oil tankers in the Persian Gulf and their downing of a U.S. drone, but those proved to be short-term increases. Similarly, in early January as the prospects for direct conflict between the two countries appeared heightened after the U.S. killed the top Iranian general, gold briefly reached $1600 before retreating as tensions subsided.
In general, geopolitical risks of this kind “aren’t a logical reason to own gold since only those people in a specific troubled region might find the events a reason to actually own the precious metal,” according to Brien Lunden, editor of the Gold Newsletter. Geopolitical issues are important to gold mainly if they last long enough to have a direct impact on the economic situation, especially of the U.S., or to impact the supply or price of oil. Over time as China continues to grow and its currency gains more importance and acceptance, the role of the U.S. economy in shaping gold should decrease, but that is not likely to happen for years.
From a day to day perspective, factors specific to individual metals such as for palladium in 2019 the combination of rising demand and limited supply, or trends such as the huge increase in flows into gold ETF’s (Exchange Traded Funds) in 2019 to recent all-time highs, play significant roles in shaping metal prices. However, the best way to understand the broader outlook for where precious metals may be headed is to follow the key issues shaping the U.S. and world economies, especially the interest rate environment.
Mike Bird, “What Really Matters for the Surging Price of Gold” Wall Street Journal, Jan. 8, 2020
Myra Saefong, “Why events tied to U.S.-Iran tensions are not a good reason to buy gold,” www.marketwatch.com, Jan. 6, 2020
Eddie van der Walt and Ranjeetha Pakiam, “Why Palladium Is Suddenly the Most Precious Metal.” www.bloomberg.com, October 28, 2019
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Author Name: Louis Golino
Louis is an award-winning numismatic journalist and writer specializing on modern coins. He has been writing a weekly column for CoinWeek since May 2011 called “The Coin Analyst,” which focuses primarily on modern U.S. and world coins and developments at major world mints. In August 2015 he received the Numismatic Literary Guild’s award for Best Website Column for “The Coin Analyst,” and in August 2021 the column received the NLG award for best column on modern U.S. coins. He has also received other awards for his writing. He is also a contributor to several magazines, including Coin World, where he writes a bimonthly feature;The Numismatist, the American Numismatic Association’s monthly publication, where he writes a monthly column on modern world coins; and and other publications. He began writing about coins in 2009. He is a founding member of the Modern Coin Forum hosted by ModernCoinMart and has written articles for MCM since 2014. He has collected classic and modern U.S. and world coins since he was about 10 and first joined the ANA in the 1970’s. He has been writing professionally since the early 1980s.