After staging a spectacular rally in 2025 and early 2026, precious metal prices have fallen sharply from their end-of-January peak. Between late January and mid-October, gold prices fell by more than 20% while silver, platinum and palladium tumbled by more than 40% (Figure 1). Perhaps the largest contributing factor to the decline in precious metals prices was the shift in expectations from rate cuts to rate increases.
Figure 1: Precious metals prices are still 25% to 100% above early 2025 levels
It’s almost certainly not a coincidence that precious metal prices peaked and began slipping the moment Kevin Warsh’s nomination to lead the Federal Reserve (Fed) filtered into the press. Warsh’s reputation as a monetary hawk and a quantitative easing/zero rates sceptic spooked investors in precious metals who were positioned for the possibility of a Fed Chair who might lower rates as desired by the White House.
Since his taking the helm, the Warsh Fed first ended the central bank’s easing bias in June and then actually raised rates in September while signaling a likelihood of further rate hikes to come. And, there has been a sea change in expectations regarding the Fed. For the first time since 2022, traders in Fed Fund futures and SOFR markets are pricing multiple rate hikes over the coming 12 to 24 months (Figure 2).
Figure 2: Short-term rate expectations have adjusted sharply higher
The U.S. hasn’t been alone, or even the leader, in terms of hiking rates. Many other central banks including the European Central Bank (ECB), the Bank of Japan (BoJ), the Reserve Bank of Australia (RBA), the central bank of Norway, Norges Bank, and the Bank of Korea were already well into their hiking cycles by the time the Fed acted. Higher short-term interest rates increase the appeal of holding government-issued fiat currencies.
What is astonishing, given the magnitude of the decline in precious metal prices and the expectations for further monetary tightening, is that they are still 24% to 100% higher than they were at the beginning of 2025, depending on the metal. Indeed, there appear to be four demand-side forces keeping a bid in precious metal prices, preventing an even deeper decline while supporting a potential rebound. These forces are:
Budget deficits: large and seemingly intractable deficits in major economies are proving to be inflationary and rattling confidence in bond markets.
Inflation: core measures of consumer prices continue to rise at levels above central bank targets in most nations/currency areas.
Geopolitics: war in the Middle East could cause budget deficits and inflation rates to move higher globally.
Central-bank buying: central banks have been accumulating gold since 2008.
Budget Deficits
For the fiscal year ending September 2027, the Congressional Budget Office estimates that the U.S. will run a budget deficit of 6.6% of GDP. This estimate does not account for any additional spending that might be required to restock the Pentagon’s munitions after seven months of on-and-off fighting in the Middle East.
What is striking about the U.S. fiscal situation isn’t just that the U.S. government is running a large deficit, but rather that it’s doing so at a time when unemployment is historically low at just 4.2%. Over the past decade, the inexorable growth of mandatory spending on entitlements alongside a sharp increase in the cost of funding the Federal debt has expanded the U.S. budget deficit by roughly 4% of GDP for any given level of unemployment (Figures 3 and 4). A decade ago, with 4% unemployment, one might have imagined running a deficit of around 2.5% of GDP instead of 6.6%.
Figure 3: The U.S. is running a 6% of GDP budget deficit with 4% unemployment
Figure 4: The cost of servicing the U.S. Federal debt has surged from 1.2% to 3.4% of GDP
What’s more is that the U.S. is hardly alone in this predicament. As interest rates have risen globally, nearly every government outside of China, where inflation and interest rates remain low, has seen its cost of debt servicing soar. Moreover, populations in Europe, China, South Korea and Japan are aging even more rapidly than in the U.S., putting upward pressure on pension and health care systems. As such, it’s not a surprise to see deficits of 8.5% of GDP in Brazil and China, or 4% to 6% of GDP in places like France, Japan and the U.K. One outcome is that these deficits are fueling inflation worldwide.
Inflation: Above Target Nearly Everywhere
Fueled in part by loose fiscal policy, inflation is running above target nearly everywhere outside of China (Figure 5). This is a mixed blessing for investors in precious metals: on the one hand, fear of inflation is the main argument for holding precious metals, while on the other, higher inflation can and is currently translating into tighter monetary policy, which tends to depress precious metal prices. That said, if central-bank tightening fails to bring inflation under control, precious metals prices could regain their footing.
If the primary driver of inflation is loose fiscal policy, higher short-term rates could exacerbate deficits by increasing debt service ratios and potentially slowing economic growth, reducing tax revenues and increasing expenditures on offsets such as unemployment benefits. In this sense, rising deficits could spur more inflation even as central banks attempt to counteract it. And this process could be exacerbated if governments shift debt issuance to short-term maturities.
Figure 5: Core inflation remains above target in most nations
Another perspective on inflation is that it’s primarily being caused by supply-chain problems, whether related to the wars in the Middle East and between Russia and Ukraine or the result of protectionist efforts to onshore and nearshore supply chains. Either way, monetary policy is ill suited to deal with the situation although raising rates could slow the growth of the AI industry, housing and other sectors, which could reduce some price pressures.
Geopolitics
Over the past century, an investment in gold would nearly have kept pace with the price performance of the S&P 500 (Figure 6). But gold and the S&P 500 tend to perform well under very different circumstances. If one looks at the S&P 500-to-gold ratio over the past century, it shows incredibly strong trends. There have been periods, often lasting one to two decades, where stocks have outperformed gold by anywhere from 1,800% to 2,400%. There have been other periods in which stocks underperformed gold by as much as 80% to 95%. What these periods have in common is economic stability and geopolitics.
Figure 6: Gold has nearly kept pace with the S&P 500 over the past century
During periods of economic and geopolitical volatility (the 1930s and early 1940s, the late 1960s and 1970s, 2001 to 2011 and since 2021) equities tend to fall versus gold. During periods of strong U.S. hegemony (1940s to mid-1960s, 1980s and 1990s and, to a lesser extent, from 2011 to 2021) equities tend to soar (Figure 7). The S&P 500 to silver ratio follows a similar pattern (Figure 8).
Figure 7: The S&P 500/gold ratio is subject to strong trends connected to geopolitics
Figure 8: The S&P 500/silver ratio is also subject to strong geopolitically connected trends
Since the fall of 2021, even as equity prices soared to new record highs, gold and silver prices have outperformed even after accounting for their recent setbacks. The geopolitical shocks of the U.S. pulling out of Afghanistan in 2021, the Russian invasion of Ukraine in 2022, Hamas’s October 7, 2023, attack on Israel and the ramp up to the conflict between the U.S., Israel and Iran appeared to support precious metals prices more than U.S. equities.
Since February 28, precious metals prices have mostly fallen because of the sharp upswing in expectations for central bank rates in the U.S. and elsewhere. However, history suggests that periods of rising geopolitical risk and perceived geopolitical risk usually benefit precious metals at least relative to equity markets.
Central-Bank Buying
From 1982 to 2007, central banks were net sellers of gold almost every year. Since 2008, however, central banks have been net buyers (Figure 9). During the 2010s, zero interest rates policies (ZIRP) and quantitative easing (QE) led them to buy gold as an alternative to fiat currencies. Since 2021, ZIRP and QE are not much of a concern. However, those concerns have now been replaced by geopolitical instability, persistently higher than target inflation and large, persistent budget deficits. When gold prices spiked above $5,000 per ounce, central banks may have slowed their purchases. Now that gold is back down to around $4,200, it may spark renewed interest among central banks worried about the fiscal situation of their peers as well as intensifying geopolitical conflict.
Figure 9: Central banks have been net buyers of gold since 2008
Central banks only buy gold and almost never purchase the other precious metals in meaningful quantities. This, along with the fact that silver, platinum and palladium have substantial industrial uses, may explain why gold prices haven’t corrected as deeply as the other precious metals.
Bottom Line
Higher short-term rate expectations have produced a significant bear market in precious metals prices.
Large budget deficits may be pulling in the other direction, preventing a deeper bear market in precious metals prices.
Rising geopolitical uncertainty may also keep investors interested in gold especially if concern grows that conflicts will lead to additional supply chain disruptions, higher inflation and larger budget deficits.
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