Do Traders Turn to Precious Metals Amid Economic Uncertainty?

Do Traders Turn to Precious Metals Amid Economic Uncertainty?

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Gold (XAU), Silver (XAG), Platinum (XPT), and Palladium (XPD) are four of the most widely followed precious metals in the commodity market today, which are natural metallic elements that possess high economic value. Precious metals are also often referred to as ‘noble metals’ due to their resistance to corrosion. Key characteristics of precious metals include rarity, durability, versatility, and ability to serve as a store of value. 

As many know, Gold has played an important role in society and across the monetary system for centuries. It is the most well-known and widely traded precious metal globally today. Gold is also still used in various industrial applications, given its corrosion resistance and ability to serve as a good conductor of heat. It is also used in jewellery due to its rare beauty and malleability.

Gold versus the US dollar – TradingView

Why Choose Precious Metals?

Precious metals have a long history of serving as a reliable store of value, can perform well as a hedge against inflation, and trade with ample volatility and liquidity.

With the global economy continuing to face several challenges, including elevated and stubborn (often referred to as ‘sticky’) inflation, geopolitical tensions – particularly in the Middle East and between Ukraine and Russia – and possible recessions, this can intensify the allure of precious metals as a safe-haven investment option. The job of a safe-haven asset is to help mitigate unfavourable risks to an investor's portfolio. For example, amid a market downturn, safe-haven investments tend to retain or appreciate in value. 

Precious metals and other commodities are also commonly employed to help diversify an investment portfolio. Investors use commodities to reduce overall risk exposure and improve returns – their ‘risk-adjusted return’. This is because precious metals often exhibit a low correlation with other asset classes, acting independently of other traditional markets, like stocks. As a result, many investors already have a percentage of their portfolio invested in precious metals for diversification purposes.

Some traders/investors may also prefer to invest in precious metals due to their intrinsic value, as unlike fiat currencies, precious metals cannot be inflated. Currencies can be inflated due to excessive money supply – for instance, consider quantitative easing, demand-pull and cost-pull inflation, and ‘imported inflation’. Precious metals are also frequently used as an inflation hedge. However, the relationship between inflation and Gold prices is mixed, with many analysts noting that its use as an inflation hedge is weak in the short term and only works in the long term. 

However, there is no one-size-fits-all approach to trading and investing. Traders and investors navigate and trade the financial markets differently and invest in precious metals for different reasons. Another consideration is that while some choose to trade in precious metals in times of economic uncertainty, others may favour bonds, currencies, or even defensive stocks (healthcare and consumer staples, etc) as their go-to safe haven.

Factors to Consider 

Whether a trader invests in precious metals will depend on several factors. It is also important to highlight that trading and investing styles generally entail different approaches, with the former being short-term, like scalping or day trading, and the latter directed to more medium- and longer-term positions (for example, swing trading or position trading). So, while breaking news may hit the wires, which could have geopolitical implications, investors may not react, while traders could buy into safe-haven assets with the expectation of a short-term price rise. You would expect the price of precious metals to usually rally, along with other safe-haven investments, such as the Swiss franc (CHF), the Japanese yen (JPY) and the US dollar (USD). 

Other factors to consider before investing in precious metals are central bank monetary policy (such as the US Federal Reserve), the current state of the global economy, and market sentiment (which helps assess whether traders are generally more bullish or bearish about precious metals). By way of an example, if the economy is performing well – for instance, economic activity is gradually rising, unemployment is low, and prices are stable – and central bank policy is neutral (neither too hawkish nor too dovish), this can lead both traders and investors to seek opportunities into riskier assets like stocks. 

Another aspect to consider is that precious metals are not interest-bearing financial instruments; therefore, if central banks begin raising rates or are expected to, this can weigh on the prices of precious metals as higher returns could be found elsewhere. This is why you generally see Gold and bond yields as inversely correlated. 

FAQs:

1. What are precious metals? 

Precious metals are naturally occurring metallic elements that possess considerable economic value. The four most widely recognised precious metals are Gold, Silver, Platinum, and Palladium, each of which plays a significant role in various industries and investment strategies.

2. Why do traders opt for precious metals during economic uncertainty?

While some traders buy precious metals in times of economic uncertainty, it is not a one-size-fits-all approach. The article underscores that some traders may opt for other safe-haven assets, like bonds or currencies, over precious metals. Additionally, investors will generally be exposed to commodities and precious metals in their investment portfolio.

3. What other factors should I consider before trading precious metals?

Deciding to trade precious metals is not only dependent on economic uncertainty. Traders will consider things like the current economic performance and outlook, central bank policies, and market sentiment.

4. Where can I trade precious metals?

With FP Markets, you can trade global markets via Contracts for Differences (CFDs). Register for a live trading account, download your preferred trading platform, and start trading the precious metals market today.