Are precious metals buffeted by higher interest rates, deficits and geopolitics

“After staging a spectacular rally in 2025 and early 2026, precious metal prices have fallen sharply from their end-of-January peak. Between late January and mid-October, gold prices fell by more than 20% while silver, platinum and palladium tumbled by more than 40% (Figure 1). Perhaps the largest contributing factor to the decline in precious metals prices was the shift in expectations from rate cuts to rate increases.

It’s almost certainly not a coincidence that precious metal prices peaked and began slipping the moment Kevin Warsh’s nomination to lead the Federal Reserve (Fed) filtered into the press. Warsh’s reputation as a monetary hawk and a quantitative easing/zero rates sceptic spooked investors in precious metals who were positioned for the possibility of a Fed Chair who might lower rates as desired by the White House. 

Since his taking the helm, the Warsh Fed first ended the central bank’s easing bias in June and then actually raised rates in September while signaling a likelihood of further rate hikes to come. And, there has been a sea change in expectations regarding the Fed.  For the first time since 2022, traders in Fed Fund futures and SOFR markets are pricing multiple rate hikes over the coming 12 to 24 months.

 The U.S. hasn’t been alone, or even the leader, in terms of hiking rates. Many other central banks including the European Central Bank (ECB), the Bank of Japan (BoJ), the Reserve Bank of Australia (RBA), the central bank of Norway, Norges Bank, and the Bank of Korea were already well into their hiking cycles by the time the Fed acted. Higher short-term interest rates increase the appeal of holding government-issued fiat currencies. 

What is astonishing, given the magnitude of the decline in precious metal prices and the expectations for further monetary tightening, is that they are still 24% to 100% higher than they were at the beginning of 2025, depending on the metal. Indeed, there appear to be four demand-side forces keeping a bid in precious metal prices, preventing an even deeper decline while supporting a potential rebound.  These forces are:

1. Budget deficits:  large and seemingly intractable deficits in major economies are  proving to be inflationary and rattling confidence in bond markets.
2. Inflation: core measures of consumer prices continue to rise at levels above central bank targets in most nations/currency areas. 
3. Geopolitics: war in the Middle East could cause budget deficits and inflation rates to move higher globally. 
4. Central-bank buying: central banks have been accumulating gold since 2008.”