Will Precious Metal Prices Repeat 2018 Pattern?

For the year 2018, the price of gold fell 2.1 percent, silver was down 9.3 percent and platinum dropped 15.0 percent. Palladium, buoyed by higher automotive demand, rose 16.6 percent.

That is not the whole context or story, however.

In 2018, the Federal Open Market Committee raised the federal funds interest rate four times. When the Fed raises this benchmark interest rate, pretty much every other interest rate also increases in lockstep. For example, at the end of 2018, the U.S. Treasury 10 Year Note interest rate was 2.684 percent, up 11.4 percent from the 2.409 percent at the end of 2017. Normally, you will also see interest rates rising around the world as well.

As businesses have to pay a higher interest rate to borrow money, their profits usually fall. As profits decline, investors generally are not willing to pay as high prices to own stocks as they previously did.

So, what happened in 2018 to U.S. and world stock indices? Here is what occurred for the ones that I track:

Sao Paulo Bovespa: +15.0%

NASDAQ: -3.9%

Dow Jones Industrial Avg: -5.6%

Standard & Poors 500: -6.2%

Australia S&P/ASX 200: -6.9%

Tokyo 225: -12.1%

London FT 100: -12.5%

Russell 2000: -12.5%

Dow Jones World (ex-US): -16.4%

Frankfurt Xetra DAX: -18.3%

Shanghai Composite: -24.6%

U.S. stock prices fell in 2018 despite the boost from the corporate income tax cuts enacted in 2017.

The apparent anomaly of a strong stock index performance in Brazil in 2018 is not really accurate. The value of the Brazil real currency fell by 17.2 percent over the course of 2018. So, as measured in U.S. dollars, the Sao Paulo Bovespa Index actually declined in 2018.

Stock market indices and precious metals prices were generally not impacted early in 2018. It wasn’t until the cumulative effect of several interest rate increases that markets became more volatile.

Here’s how precious metals and these indices performed for the final 111 days of 2018, from Sept. 11 through Dec. 31:

Palladium: +27.8%

Sao Paulo Bovespa: +17.7%

Silver: +10.1%

Gold: +6.9%

Platinum: +0.8%

Shanghai Composite: -6.4%

London FT 100: -7.5%

Australia S&P/ASX 200: -8.6%

Dow Jones World (ex-US): -9.2%

Dow Jones Industrial Average: -10.2%

Tokyo 225: -11.7%

Frankfurt Xetra DAX: -11.8%

Standard & Poors 500: -13.2%

NASDAQ: -16.8%

Russell 2000: -21.8%

With the Federal Open Market Committee announcement Jan. 26, 2022, at the end of their latest meeting that it is looking to raise the federal funds interest rate multiple times in 2022, could the 2018 pattern of falling stock indices and eventually rising precious metals prices repeat?

Patrick A. Heller was honored as a 2019 FUN Numismatic Ambassador. He is also the recipient of the American Numismatic Association 2018 Glenn Smedley Memorial Service Award, 2017 Exemplary Service Award, 2012 Harry Forman National Dealer of the Year Award and 2008 Presidential Award. Over the years, he has also been honored by the Numismatic Literary Guild (including in 2021 for Best Investment Newsletter), Professional Numismatists Guild, Industry Council for Tangible Assets and the Michigan State Numismatic Society. He is the communications officer of Liberty Coin Service in Lansing, Mich., and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at www.libertycoinservice.com. Some of his radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio archives posted at www.1320wils.com).