Why has Gold and Silver Dropped in Price?

Author: Corey McDowell - Economics Editor

Published: 13 Mar 2020

Last Updated: 2 Feb 2023

Contents: Gold and Silver's Current Situation

Contents: Physical Gold vs Paper Gold

Contents: Compensating for Losses Elsewhere

Contents: Remember Why Precious Metals are Bought

Synopsis

Some markets analysts and investors have been taken aback by the weakening of precious metals against fiat currencies over the last fortnight.

Sypnosis

Some markets analysts and investors have been taken aback by the weakening of precious metals against fiat currencies over the last couple of weeks. Markets are in turmoil and policymakers failing to provide reassurances through their words and actions, so surely gold and silver should be skyrocketing now? But as of today, all precious metals have made substantial losses. But when one looks at the bigger picture, we can see there could be plausible explanations.

Gold and Silver's Current Situation

Gold price in GBP over the last week

Silver price in GBP over the last week

Precious metals have not escaped from the general collapse in asset prices, although losses in gold are nowhere near as bad compared to other assets, such as sovereign bonds or shares in airline companies. Over the last week, gold has dropped 7.3% to leave it valued at £1,186.44 per tory ounce. Silver has dropped by an astonishing 22.65%, leaving it valued at £9.97 per troy ounce.

Physical Gold vs Paper Gold

Gold and Silver markets are distorted by the fact that paper contracts, such as Exchange Traded Funds (ETFs), are available to “purchase” and “own” gold and silver bullion, which affects the general price level of both precious metals. This is not the same as purchasing physical gold and silver. With an ETF, you essentially own a piece of paper. If you ask for physical delivery, you’re very likely to be refused. Perhaps investors in these ETFs have realised this, and are flocking away from them? There seems to be a situation now where physical bullion and 'paper bullion' are now priced significantly different from each other.

Compensating for Losses Elsewhere

As is plain to see, global markets and asset prices have taken a pounding. Some market analysts have stated that investors have been selling ETFs in gold and silver to make up for losses elsewhere. Dumping the market with these paper contracts would depress the value of precious metals, but sooner or later demand would probably pick up for physical bullion as investors realise the effects of rock-bottom interest rates and more rounds of money creation (quantitative easing).

From our experience here at Chards, we have had very little customers coming to us to sell bullion over the last fortnight. But we have seen unprecedented demand from customers looking to buy gold and silver. We are well-informed that our competitors are also experiencing extremely high levels of demand too.

GoldMoney Head of Research Alastair Macleod

Alastair Macleod - GoldMoney Head of Research

Remember Why Precious Metals are Bought

In light of all the hysteria and panic currently going on, take a step back and remember why precious metals are bought, in particular gold. Gold is a safe haven asset, used to protect wealth over time, not a speculative asset to take advantage of. Silver has similar properties, but is subject to more volatility due to the more industrials uses it has. This is not the time for knee-jerk reactions as some in the gold/silver ETF market have done – have faith in physical gold securing wealth through financial chaos, as already witnessed through 4,000 years of history.