Iran conflict unlikely to alter the course of precious metals – a recession, however, could – with silver and PGMs expected to be hit hardest – Heraeus

Impact of Oil Price Surges on Precious Metals

Analysis of past conflicts that triggered oil price increases suggests that these events alone do not significantly alter the trajectory of precious metals prices. However, if such disruptions lead to economic downturns, precious metals—especially those with industrial applications—tend to decline sharply. Heraeus precious metals analysts caution that a recession could be on the horizon, which may weigh heavily on the sector.

Historical Performance During Oil Shocks

Heraeus analysts recently reviewed how precious metals performed during previous periods of conflict-induced oil price shocks. They observed that, in most cases, the prevailing trend in precious metals prices persisted despite the oil shock. For instance, during the 1970s, oil shocks occurred amid a precious metals bull market, and prices continued to climb until the U.S. economy slipped into recession, at which point metals prices reversed. The Gulf War in 1990 coincided with falling precious metals prices and a recession, reinforcing the downward trend. In contrast, the oil price spikes during the Russian invasion of Ukraine in 2022 and the Iraq War in 2003 happened after recessions, while the global economy was strengthening, so no subsequent recession followed the oil shocks.

Recession Risks and Precious Metals

The analysts note that a potential recession would likely have a more pronounced negative effect on platinum group metals and silver, given their significant industrial demand, compared to gold. Despite the economic volatility over the past year, U.S. GDP growth has remained resilient, but the labor market has shown signs of weakness, even as unemployment rates have held steady. Rising energy costs are expected to further strain both businesses and consumers already grappling with high living expenses.

“It has now been six years since the last recession,” the analysts point out. “Business cycles typically last five to six years, which increases the likelihood of an economic downturn that could pressure precious metals prices.”

Interest Rate Expectations Shift

Oil price volatility has also influenced expectations for U.S. interest rate cuts. Following the recent spike in oil prices, markets have adjusted their outlook, now anticipating a single rate cut as the most probable outcome at the December Federal Reserve meeting, while the chances of multiple cuts have diminished significantly.

Labor Market and Rate Cuts

Recent employment data has supported the case for further rate reductions. The non-farm payroll report revealed a loss of 92,000 jobs in February, with previous months’ figures revised downward and unemployment ticking up to 4.4%.

Regulatory Changes in India Boost Gold and Silver Investment

Outside the U.S., Heraeus highlights a regulatory shift in India that broadens opportunities for gold and silver investment. The Securities and Exchange Board of India now permits equity funds to allocate up to 35% of their assets to gold and silver. This change allows funds to hold gold instead of cash, offering protection against currency depreciation. India remains the world’s second-largest gold market and leads in silver jewelry and silverware consumption. While physical metal investment is traditional, Indian ETFs have grown in popularity, with holdings exceeding 110 tonnes as of January.

Gold and Silver Market Updates

Gold traded near the $5,000 per ounce level on Monday morning, after dipping to $4,967.77 earlier in the session.

Spot gold was last quoted at $5,029.27 per ounce, reflecting a 0.17% increase for the session.

Silver Market Trends

Heraeus analysts also noted that as silver prices have stabilized, ETF investors have continued to reduce their holdings. Global silver ETF reserves declined by 6 million ounces last week, reaching 817 million ounces—down from 863 million at the start of the year.

January is typically a strong month for U.S. silver coin sales, and this year was no exception, with the U.S. Mint selling over 4.8 million ounces. Sales usually decrease in February, but this year’s 1.7 million ounces marked the highest February total in five years.

Speculative long positions in silver futures have increased as prices rebounded from recent lows. The net long position for non-commercial futures rose to 116.7 million ounces in early March, up from 111.3 million. The CME also reduced margin requirements for precious metals futures on March 6, lowering silver margins from 18% to 14% and gold margins from 9% to 7%. Silver prices have returned to a support zone around $80 per ounce; if this level fails, prices could revisit previous lows at $72 and $64 per ounce.

Silver reached new session highs above $81 per ounce on Monday morning, after trading as low as $77 earlier in the day.

Spot silver was last reported at $81.570 per ounce, up 1.18% for the day.