Precious Metals H1 Performance: 

Gold:

Gold was the only precious metal to finish higher in H1, where a 5.36% gain was experienced. It outperformed all other precious metals significantly, solidifying the reputation that it has as the primary precious metal for investment purposes. Below is a graph that compares the performance of gold against the other three precious metals that Merrion Gold deals with: Silver, Platinum, and Palladium.

Precious Metals Performance H1 2023:

The yellow metal’s 6 month low was hit late February, when the price fell to $1,811. However, this preceded a historic run to the upside, where gold hit an all time high of $2,050 at the beginning of May. Below is a graph of golds performance for H1: 

Banking Crisis: 

A significant factor in the historic run up in price from March-May was the instability within the banking sector during that time. Over the course of 5 days, 3 banks failed in the U.S. namely: Silicon Valley Bank, Silvergate, and Signature Bank. At the time, SVB and Signature bank were the second and third largest bank failures in U.S. history. With such volatility and uncertainty surrounding the banking sector, investors flocked to gold, due to the metal’s safe-haven nature. This pushed the price in an upward trajectory, with gold realising higher highs and higher lows up to mid–April.

The price began to stabilise and consolidate around the $2,000 level before another bank failure caused gold to break and hit a new all-time high on the 4th of May. Days prior, news broke that First Republic Bank had lost $102 billion out of the  $176 billion it held in deposits. This led to a huge selloff of First Republic Bank shares, with the price falling to $5.69. The steep selloff was a $150 decline from a year earlier. The bank was taken over by the FDIC and immediately sold to J.P. Morgan, making it the largest bank failure of 2023 and the second largest in U.S. history.

Central Bank Purchasing:

Another factor in gold’s performance in the first half of the year was the increase in demand from Central Banks. According to the World Gold Council, Central Banks accumulated gold at the fastest pace on record at the beginning of 2023. Within the first 2 months of the year, Central Banks obtained 125 tonnes of the yellow metal. Below is a graph showcasing Central Bank gold purchasing over the last 10 years: 

Although Central Bank purchases are expected to have cooled off in Q2 2023, historically high levels have been experienced during the first half of the year. Multiple factors are in play for this ramp up in purchasing from Central Banks.

The Russia-Ukraine war has increased demand for gold due to the asset’s safe-haven properties. With heightened tension worldwide, investors flocked to gold in a bid to protect their wealth. The expansion of B.R.I.C.S. can be seen as a result of the ongoing war, with nations politically opposed to the West forming their own alliance. As part of this alliance, there have been steps made in dampening the dollar’s reputation as a safe-haven and the primary foreign reserve currency. A falling dollar is typically good news for gold prices, and with B.R.I.C.S nations attempting to lower the influence the dollar has in the world, it has increased the demand for gold. This is primarily because, as these nations reduce their dollar reserves, they need to replace them with an alternative store of value i.e. gold. With gold’s long-standing history and reputation, it is the favoured asset for nations to hold in their reserves.

After hitting an ATH of $2,050, gold embarked on a gradual decline. Price traded within a narrow range for much of June, before retracing to hit a new 3 month low. Although the price was in a steady decline from May 5th to June 30th, gold still finished H1 higher. Below is an illustration of gold’s performance when compared to other major asset classes. 

Major Asset Classes H1 Performance: 

As can be seen, gold had a respectable H1 performance when compared to other major asset classes, only being outperformed by the S&P 500 and the FTSE All-World Ex. U.S. Index.

Inflation & Interest Rates: 

Inflation rates were seen to gradually decline during H1 2023. The FED hiked quickly to help lower inflation levels. For the first time in nearly 2 years, the inflation rate dropped below the Federal Funds Effective Rate. This is visually represented in the graph below: 

All 4 precious metals that Merrion Gold deals with  (i.e. Gold, silver, palladium and platinum) have inflation-hedging properties. This means that in a highly inflationary environment, these asset classes tend to do well. However, high interest rates have an inverse relationship with precious metal prices. When rates began to increase to a level where it no longer made sense to not hold fixed income securities, then money began to flow out of equity and commodity markets and into debt capital markets. This is because investors began to take advantage of the yield that fixed-income securities bring in, which increases in line with the rising interest rates.

In an environment where inflation is beginning to cool, it is rational to believe that interest rates will begin to fall. As interest rates fall, investor capital will begin to move out of debt capital markets and back into equity and commodity markets due to the favourable returns that those markets can offer. After the FED announced 3% inflation for June, the terminal rate for interest rates has been updated which is promising to precious metals investors. 

Silver: 

Silver experienced a 4.4% contraction in H1. Similarly to gold, the price went on a run to the upside in the aftermath of the banking crisis in March. A yearly high of $26.03 was hit at the start of May, following the collapse of First Republic Bank. Due to the relationship between financial instability and precious metals, the banking crisis had a big impact on the price of gold, while having a smaller effect on the silver price. The effect on silver can clearly be seen on the graph below from March-May, where price significantly ran to the upside.

Silver posted a loss in Q1 2023, mainly due to the metal’s role in industrial applications. Slowdowns or potential slowdowns in economic activity typically contribute to a fall in the price of silver. The potential for a recession at this time was highly probable as inflation levels were high and the ceiling on the terminal interest rate was uncertain. The major Central Banks had been clear in the fact that the main aim was to reduce inflation. This would be achieved by taking a rigorous approach to quantitative tightening by raising rates quickly.

Central Bank’s also stated that taking these measures would potentially trigger a recessionary period. In a slowing economic environment, demand for silver decreases due to industry usage of the metal falling. This is why silver experiences more severe price declines than gold during times of economic slowdown. It is also the reason that silver moves less to the upside than gold during times of economic uncertainty as this uncertainty dampens industrial demand. A visual representation of this can difference in price movement between these two precious metals can be seen below: 

Palladium: 

Palladium experienced the most dramatic decline out of the 4 precious metals in review, falling 31.24% in H1 2023. After a record breaking 2022, prices soared to all-time highs, breezing past $3,000 an ounce before reverting back to near the $1,000 level in 2023. With Russia producing 25-30% of the global supply, the outbreak of the Russia-Ukraine war was a huge factor in the record-breaking rally.

After a steady gradual decline from January-March, price experienced brief rallies in mid-March and May in line with other precious metals affected by the instability within the banking sector. Price then embarked on another steady decline to close out H1.  Below is a graph highlighting the drop in price experienced this year so far. 

Platinum: 

Platinum was the second to worst performing precious metal in H1 2023, with a 15.49% decline in price. Platinum, common to the other precious metals, exhibits the inflation-hedging properties that allow the metal to perform well during times of economic and financial uncertainty. This led to the price experiencing a rally after multiple bank failures in March, and May. Below is a graph showing Platinum’s H1 performance. 

The primary demand for platinum comes from the auto-industry. As was previously mentioned, more automobile makers are moving away from palladium and back into platinum due to the precious metals lower pricing. It offers the same use as palladium, that being as catalytic converters in car manufacturing. 

Conclusion: 

Gold was the only precious metal to produce a respectable return in H1 2023. Forecasts for the yellow metal see price hitting new all time highs by 2024.

To learn more about precious metals, or to begin your investment journey with Merrion Gold, then contact our trading team at: 01 254 7901 or email us at: info@merriongold.ie.