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A Look Into Precious Metals

Michael Brown
Senior Research Strategist
24 Aug 2023
Precious metals, as a whole, are an asset class that investors tend to look particularly favourably upon during a couple of distinct economic circumstances – times of global strife, where their safe-haven status attracts demand, or times of high inflation, where PMs are commonly thought of as a hedge.

The value attached to precious metals stems not from their utility, as in the case of base metals, but from their rarity, as well as their historical record of being a relatively good store of value. While there are numerous precious metals, gold, silver, and platinum are those which are most frequently traded and invested, owing to the high levels of liquidity commonly associated with these assets.

Interest in precious metals has increased of late, as the complex finds an increasing number of use cases in electronics, and as general concern persists over the high level of inflation that continues to be experienced worldwide.


Perhaps the precious metal most thought of as an inflation hedge is gold, even though empirical evidence points to that status being rather more anecdotal than anything else, with the yellow metal’s ability to store value somewhat questionable.

Nevertheless, it is possible to break gold down into a number of distinct factors which tend to drive price action. Namely, these are – investor risk appetite, real/nominal yields, and the direction of the dollar. The most significant driver at a given time can and does shift, depending on the prevailing market narrative.


Taking each in turn, it is simplest to begin with risk appetite. Simply, this is a rather vague concept to define how much risk investors are comfortable taking on at a certain time. Various factors contribute to shifting risk appetite, including incoming economic data, monetary/fiscal policy stances, the geopolitical landscape, breaking news, and much else besides. When the landscape is relatively calm, and monetary policy loose, risk appetite is typically positive; obviously, the opposite is true in times of strife.

In said times, gold tends to find demand, due to its much-vaunted status as a ‘safe haven’. This status stems from how resilient gold has proven in past volatile times, thereby having become something of a self-fulfilling prophecy. Gold also benefits here as the relative attractiveness of a non-yielding asset increases as bonds also rally on haven demand, in turn dragging yields lower.

This brings us nicely on to the second main driver of gold – yields. As alluded to, and in common with other precious metals, gold yields nothing, and has no intrinsic value. Consequently, when bonds rally, and yields decline, the attractiveness of an asset with no yield increases. The opposite is true when bonds sell-off, and yields rise. Investors also consider the opportunity cost of holding each asset in this scenario, with the opportunity cost of owning gold significantly lower in a low-yield environment.

It is, on this note, important to recognise that gold typically has a tighter correlation with real yields than their nominal counterpart, and has done for the last few decades.


The final primary driver of gold is the value of the dollar. In keeping with most other commodities, and reflecting the buck’s status as the global reserve currency, gold (both in terms of spot and futures contracts) is typically priced in USD.

As a result, the yellow metal trades in a similar way to FX pairs, with the value of gold at any one time not only a function solely of whatever thoughts the market has about the metal, but also a function of the current value of the greenback. If the USD were to strengthen, gold will soften, and vice versa; this impact can, and often is, exaggerated when the drivers of USD strength stem from the Treasury market.


There is, however, a way to remove the impact of the USD from the equation, with Pepperstone offering the ability to trade gold against the euro (EUR), Japanese yen (JPY), Australian dollar (AUD), and Swiss franc (CHF). Furthermore, as part of a recent enhancement, Pepperstone also permit trading gold against the offshore Chinese yuan (CNH), Singapore dollar (SGD), and Thai baht (THB).

This range of options provides traders with additional flexibility, which can be particularly useful in a few different instances. Firstly, rather than trading in USD, traders may prefer to trade in their domestic currency, which these gold crosses permit.

More broadly, the optionality that these crosses provide mean that traders need not have a strong view on the USD in order to take on exposure to the yellow metal, as the crosses help to remove the impact of the USD from the equation. On the other hand, this range of crosses allows traders who have, for instance, a strong bearish view on the AUD, to gain exposure to this theme in another way, outside of the traditional G10 FX space.


The second most commonly traded precious metal is silver, which is not only much more abundant than gold, but also considerably more volatile. Another key difference compared to gold is silver’s use in a range of industrial applications, including in batteries and semiconductors.

This is why, although to a degree trading in line with gold as a perceived store of value and place of safety, the price of silver is also significantly influenced by industrial developments, technological breakthroughs, and the more general supply and demand factors which influence all commodities.


Nevertheless, and in keeping with gold as well as other commodities, silver maintains a close correlation with yields, and with the value of the dollar. Once again, Pepperstone provides traders with flexibility here, offering the ability to trade XAG not only against the USD, but also against the EUR, AUD, and having recently also provided the ability to trade against the SGD as well.


While gold and silver may be the immediate assets that spring to mind when one mentions precious metals, there are others that should also be mentioned. Platinum is one of these, in fact being significantly rarer than gold, being mined in much smaller quantities than the yellow metal.

While also being used in jewellery, platinum also has numerous applications in industry, being used as a catalyst in many automotive applications in an effort to reduce emissions.

Platinum prices tend to be significantly influenced by geopolitics, owing to the largest mining operations for the metal being concentrated in South Africa and Russia. This contributes to platinum often being substantially more volatile than gold, and often being considered as the most volatile of the entire precious metals complex. While the yellow metal is often viewed as a safe-haven, platinum is anything but.



Rounding out the PM complex is palladium, a precious metal that also has numerous uses in industry, particularly in the manufacturing of electronics, while also having applications in dentistry and medicine. It is, however, perhaps best known for its use in catalytic converters, being more durable than platinum, thus proving better for this application.

Due to its industrial applications, the price of palladium is more impacted by supply and demand factors than other precious metals, making its trading dynamics more in line with those in the base metals complex, and not at all representing those of a safe-haven.


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