What Is El Niño and How Does It Affect Bullion Investments?

What Happens During El Niño?

Under normal conditions, trade winds blow across the Pacific Ocean from East in the Americas, to the West, towards Asia and Oceania.

These steady easterly winds push warm surface water toward the western Pacific, making sea levels higher and ocean temperatures warmer around Indonesia and Australia.

Then comes a process known as Upwelling, where cold, nutrient- rich water rises to replace the now vacating warm water.

During El Niño everything changes. Trade winds weaken, instead moving warm water eastward across the Pacific region.

This warm water changes ocean temperatures and atmospheric circulation patterns, which in turn alters rainfall, temperatures and weather systems reaching thousands of miles from its origin.

As El Niño is irregular, there are no patterns to the changes, but the disruption can be significant.

The risk of drought and bushfires in Australia increases, whilst increased rainfall and therefore flooding may occur across parts of South American and Asia.

How Does El Niño Affect Agriculture and Fishing Industries?

Under typical conditions the fishing industries of Peru and Chile thrive, as the nutrient-rich waters are pulled from deep beneath the Pacific Ocean and moved towards the South American coast.

During El Niño, the warmer water contains fewer nutrients, leading to reductions in fish populations and weakened hauls.

These changes in rainfall and temperature can lead to drought conditions or extreme rainfall, which in turn can reduce production and yields of essential crops such as wheat and rice.

What Is El Niño's Affect On Food and Other Commodities?

When agricultural and fishing yield declines, global supply becomes tighter whilst demand likely stays the same or even rises.

Due to a lack of supply, the price of food and other commodities increases, something which has historically affected coffee, sugar, and some grains.

These rising commodity prices can contribute to broader inflationary pressures within the global economy, leading to a domino effect within the markets.

Will El Niño Affect Gold and Silver Prices?

El Niño does not directly determine precious metal prices in the same way it can influence agricultural commodities.

If the event leads to higher food prices, supply shortages or inflation concerns, investors may begin looking at gold and silver as long term stores of value.

Gold is often considered a long-term hedge against inflation and currency weakness, with silver closely tied to the yellow metal, albeit more heavily influenced by industrial demand from sectors such as renewable energy, electronics and healthcare.

Precious metal price fluctuations during or after an El Niño event depends on the response to said event, including its affect on interest rates, central bank policy, currency strength and investor sentiment.

What Is El Niño's Bigger Picture?

A strong El Niño can:

• Disrupt agriculture and fisheries.
• Reduce supplies of key commodities.
• Increase food and commodity prices.
• Contribute to inflationary pressures.
• Increase economic uncertainty.
• Encourage some investors to seek defensive assets such as gold.

These effects are not guaranteed however, as climate change accelerates, the severity of El Nino has been seen to grow with it.

El Niño may have no direct effect on the likes of gold and silver, but the phenomenon's impact on global inflation, commodity supply and greater economic uncertainty mean that all markets, not just precious metals, will feel its influence.

For this reason, investors should view El Niño as one piece of a much larger economic puzzle rather than a standalone driver of bullion prices.