Shift in Precious Metals Investment Logic? Heraeus Analysts Warn of Impending Recession
The conflict between the U.S. and Iran may not rewrite the logic behind rising precious metals prices, but analysts warn that a conflict-induced recession has the power to do so.
Analysts at Heraeus Precious Metals pointed out that when geopolitics and oil price volatility trigger an economic downturn, precious metals prices tend to weaken significantly. Both oil shocks of the 1970s occurred during bull markets for precious metals; while prices initially continued to climb after the crises, the trend reversed as the U.S. economy slid into recession.
The direct impact of oil price shocks on precious metals is limited. For instance, during the 1990 Gulf War—which occurred during a precious metals bear market—the war-induced recession caused prices to continue their decline. Conversely, during the 2003 Iraq War and the 2022 Russia-Ukraine conflict, although oil prices surged, precious metals remained stable due to overall economic strength.
Analysts emphasized that it has now been six years since the last recession. With a typical business cycle lasting five to six years, the risk of the economy falling into a recession has increased, which could drag precious metals prices lower.
Diverging Trends
Heraeus noted that the surge in oil prices is expected to drive inflation higher, leading the market to recalibrate the probability of rate cuts. Current market pricing shows that a single Fed rate cut this year is the most likely outcome, while the probability of two or more cuts has plummeted.
Under these circumstances, investor enthusiasm for precious metals has dampened. However, logically, different metals are affected by recessionary shocks in different ways, which may lead to a clear divergence in their price trajectories.
Gold: Likely the best store of value. Analysts believe the long-term factors supporting gold remain intact, providing momentum for future gains. Historical precedents show that gold often acts as a safe haven during recessions, with returns frequently outperforming equities and other asset classes.
The Downside Risk: However, Sean Lusk, Co-Head of Commercial Hedging at Walsh Trading, noted that gold has largely moved in tandem with the stock market over the past three years. With the current stock market rout, gold is inevitably facing downward pressure. He expects gold to drop below $5,000 per ounce in the short term, with further declines following a brief recovery.
Silver and PGM: Because Platinum Group Metals (PGM) and silver have more extensive industrial applications, a recession would have a greater negative impact on them than on gold. Silver has retreated toward $80 per ounce; Heraeus analysts stated that if this support level fails, silver could test previous lows between $72 and $64 per ounce.