A sharp selloff in gold and silver last Friday was followed by a modest rebound, yet October still delivered the worst comparable performance since 2008.
Recently, as global central banks maintain expectations of tight policy to curb inflation, the opportunity cost of holding non-yielding precious metals has risen; the liquidity crunch triggered by last week's broad global equity selloff also spilled over into gold and silver.
However, Bawden Capital founder and CEO Jen Bawden believes last week's plunge, and any further adjustments that may follow, could instead present a rare long-term buying opportunity. In her latest market commentary, she noted that silver is down about 60% from its all-time high of $121.64, while gold has touched a one-year low. Although market commentary has described this move as a severe blow to the precious metals market, in her view this is not a fundamental crisis but a temporary price dislocation caused by cross-asset selling and a liquidity shock.
Bawden acknowledged that gold and silver broke below key technical support levels last week, and the price action was disappointing, but not surprising. The Federal Reserve kept rates unchanged last week, and the market still expects a possible rate hike in December; rising rate risk raises the carrying cost of non-yielding assets such as gold and silver. At the same time, rate pressure is also hitting the stock market. The S&P 500 fell 2% before last Friday's close, its largest single-day drop since early June. Bawden believes geopolitical uncertainty and the global energy supply crisis caused by the Middle East war are also amplifying short-term market volatility.
Dollar demand and the liquidity shock are intensifying selling pressure on precious metals. Bawden pointed out that there is a misunderstanding about the precious metals trend: given persistent tensions in the Middle East, why have gold and silver fallen instead? She explained that disruptions to energy supply are driving up global demand for US dollars. Blocked shipping through the Strait of Hormuz and surging energy prices are pressuring major energy importers such as Japan, South Korea, Germany, and India with worsening terms of trade. Because international crude oil is priced and settled in US dollars, once oil tops $100 per barrel, energy importers need to sell their local currencies in the foreign exchange market and buy large amounts of US dollars to pay for energy imports. The resulting dollar demand supports the dollar exchange rate, while higher energy prices intensify inflation pressure, increasing the likelihood of further monetary tightening and rising bond yields.
Bawden argues that higher interest rates and bond yields not only lower the present value of future corporate earnings but also raise corporate financing costs. When already richly valued tech stocks and the broader stock market correct, the shock can quickly spread to other asset markets. Under selling pressure, large funds often do not prioritize selling the assets they most want to offload; instead, they sell the most liquid and easily monetized assets, and gold and silver fall into that category. She compared the current precious metals decline to the liquidity shocks of October 2008 and March 2020. At those times, both gold and silver fell sharply alongside the stock market: after the collapse of Lehman Brothers in 2008, gold fell about 29% from its March high that year, while silver dropped more than 50%; in March 2020, gold fell about 10% within days, while silver fell about 35%. But after forced selling ended, both precious metals rebounded strongly. After 2008, gold rose cumulatively by about 170% through August 2011, while silver climbed to nearly $50 per ounce; after March 2020, gold rose about 39% through August of the same year to a new high, while silver rose about 150% over the same period.
Bullish on the long-term outlook, but does not rule out further price declines. Although she views the current adjustment as a potential buying opportunity, Bawden still warned that precious metals prices could fall further before forming a sustainable bottom. She has already placed limit buy orders, preparing to buy if some mining stocks decline another 20% to 30%. Asian physical demand may provide some support for silver. Bawden specifically mentioned that during last Friday's market selloff, silver prices in Shanghai and Western markets diverged. She expects Chinese demand for precious metals to remain an important factor supporting the market over the long term. Bawden said recent volatility has not changed her long-term view. As global sovereign debt continues to balloon, investors will increasingly need to protect purchasing power through physical assets such as gold and silver, so hard assets are still likely to be favored over the next decade. She believes that governments, companies, and consumers are broadly burdened with huge debts, and maintaining high interest rates for a long time will keep increasing debt servicing costs, eventually pressuring the banking system and the real economy. The scale of sovereign debt is so large that it is difficult to sustain under a high-yield environment for long without systemic effects. In her view, as debt pressure accumulates, central banks may eventually be forced to shift toward easing policy. By then, the support the dollar has gained from war and energy shocks may weaken, and global capital may flow back into physical assets such as gold and silver.
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