Gold and Silver Prices Plunge, Raising Liquidity Concerns... Long-Term Outlook Remains Positive

As both gold and silver prices, which had been experiencing a strong rally, plummeted simultaneously, concerns have been raised that this could signal a weakening of the liquidity rally. However, experts still assess the long-term outlook for gold and silver as positive.

Yonhap News Agency

Park Sanghyun, a researcher at iM Securities, stated in his report “Simultaneous Plunge in Gold and Silver Prices and Liquidity” on October 22, “Although it is not yet time to seriously worry about a contraction in the liquidity rally, it is necessary to remain cautious as profit-taking is occurring, particularly in assets that have surged sharply.”

First, Park cited several factors behind the sharp correction in gold prices, which had reached all-time highs: short-term profit-taking, the prolonged U.S. federal government shutdown, Indian festivals, and the strengthening of the U.S. dollar. On October 21, the price of gold fell by 5.5% compared to the previous day, marking the largest single-day drop since August 2020 during the pandemic. Silver prices also plunged by 7.6% on the same day.

Park pointed out, “The primary background is the desire for short-term profit-taking. Since the beginning of this year, gold prices have surged by nearly 60%, recording the largest increase among major assets.” Citing major foreign media, he added, “In addition, investment uncertainty has increased due to delayed economic data releases caused by the U.S. federal government shutdown, and the closure of Indian markets for the country’s largest Hindu festival, Diwali, also contributed to the liquidity shortage and subsequent price drop.”

Nevertheless, Park emphasized that the long-term outlook for gold and silver remains positive. He assessed, “A decline in real interest rates following rate cuts by the U.S. Federal Reserve, various uncertainty risks, the so-called ‘debasement trade’ strategy to hedge against currency depreciation, and increased gold demand from central banks led by China will all support a long-term rally in gold prices.”

He also noted the need for caution regarding whether the correction in gold prices, following that of Bitcoin, could be a signal for the liquidity rally. Park said, “Recently, after the prices of major cryptocurrencies such as Bitcoin and Ethereum hit all-time highs and then underwent significant corrections, gold and silver prices are now also experiencing corrections. Of course, we need to watch whether gold and silver prices will undergo further corrections, but considering the rising credit risk due to the deteriorating financial health of U.S. regional banks, it is difficult to rule out the possibility that this could be interpreted as a signal of tightening liquidity.”

Park stated, “We still expect liquidity flows to remain robust,” but added, “Nevertheless, if the risks of defaults in auto loans and private credit unexpectedly intensify amid concerns about overvaluation of certain asset prices, the liquidity rally could be undermined.” He explained that recent remarks by Jamie Dimon, Chairman of JPMorgan Chase, who compared bad loans to cockroaches-saying, “If you see one cockroach, there are probably more”-are not unrelated to these concerns.

He continued, “Warnings about the risks in the private credit market are growing. Due to low levels of regulation and a lack of transparency, investor funds seeking high returns continue to flow into private credit, which is being lent to low-credit companies. This has sparked controversy within and outside the financial sector that private credit could become a trigger for a future credit crisis.”

Accordingly, Park concluded that while it is not yet time to worry about a contraction in the liquidity rally, it is necessary to remain vigilant for profit-taking, especially in assets that have surged sharply. However, he added, “A further decline in Treasury yields following additional rate cuts by the Federal Reserve and a strong investment cycle centered on artificial intelligence (AI) will continue to support the liquidity rally.”