Is political risk a true driving force of precious metals?

“Precious metals prices, especially gold, silver, and platinum did an about-turn in October, after falling during the second half of September and into the first few days of October.

This increase in prices was not entirely surprising given the underlying fundamental strength of these markets, which was the key premise of the October edition of this report titled ‘Medium And Long-Term Expectations Still Intact’. This quote from that report summarizes CPM Group’s thinking about the precious metal’s market, “While precious metals prices are struggling at the time of writing this report, fundamentally these markets, particularly gold and silver, remain strong. And, while market sentiments have shifted toward a more sanguine economic outlook, underlying economic and political trends could turn more hostile in the next few months, and financial market sentiments could swing back toward greater interest in risk protection in precious metals. There still are various reasons to continue adding the metals to one’s investment portfolio as a diversifier. The current weakness in prices provides a good buying opportunity.”

One of CPM Group’s prime basis for strength in the precious metals markets has been political risk. This risk came to fruition following Hamas’ attack on Israel, which drove investors toward precious metals as a safe haven. Another politically linked risk that is lurking in the background is a U.S. government shutdown risk on 17 November 2023. While the market is likely to be less sensitive to this issue in the run up to the deadline, if there is a shutdown, even a brief one, it could cause another spike in prices.

There are numerous other ongoing, unresolved, and potentially serious political risks within the U.S. and around the world that are and could be more supportive of precious metals prices as a safe haven. The Russia-Ukraine war has been ongoing since the first quarter of 2022, having lasted a lot longer than was initially expected, and has most negatively impacted European growth, but also dragged growth in other countries and regions. There is a risk of the Israel-Hamas war worsening and drawing more neighboring countries into the conflict. Domestically within the U.S. there is the ongoing risk from the debate about government debt and possible turbulence in the market ahead of the 2024 presidential election. And one of the most meaningful political threats comes from the fragility of relations between the U.S. and China which range from a variety of issues which include trade, intellectual property, or China’s increased military presence in the South China sea.”