Should Investors Change Their Strategy After Gold and Silver Plunge?

As gold and silver prices, which had previously soared to record highs, plunged sharply, related exchange-traded funds (ETFs) also swung on February 2. Experts analyzed the crash in gold and silver prices as a temporary correction and projected that their investment value will remain solid going forward.

According to the Korea Exchange on the 3rd, many gold- and silver-related ETFs ranked among the top products in terms of decline the previous day. KODEX Silver Futures (H) fell 30.00% from the previous session, marking the steepest drop. ACE Gold Futures Leverage (Synthetic H) fell 21.72% (2nd), TIGER Gold & Silver Futures (H) fell 13.46% (6th), and TIGER KRX Gold Spot fell 12.59% (7th). According to the Korea Exchange, the domestic gold price (99.99 purity, 1g) on the previous day was 227,700 won, down 10% from the day before.

In contrast, inverse ETNs that move in the opposite direction of gold and silver prices recorded sharp gains. According to ETF Check on the previous day, the top three ETNs by daily return were all silver futures ETNs. Mirae Asset Inverse 2X Silver Futures ETN B posted a return of 59.68%, Shinhan Inverse 2X Silver Futures ETN (H) 57.14%, and Samsung Inverse 2X Silver Futures ETN (H) 56.25%.

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Earlier, on January 30, gold and silver prices plunged amid dollar strength after Kevin Warsh, known to be relatively hawkish, was nominated as Chair of the US Federal Reserve. The drop marked the steepest decline in more than 10 years, and as the downtrend continued for a second day, demand-cooled ETFs that had been attracting inflows also turned lower. The sharp crash in gold and silver prices during the night of February 2 has since entered a stabilizing phase. On the New York Mercantile Exchange, the international gold price fell 11.39% to 4,745.10 dollars per ounce on January 30, but on February 2 the decline narrowed to 1.95%, closing at 4,652.60 dollars. Silver likewise plunged 35.90% to 78.53 dollars per ounce on January 30, but finished trading the previous day at 77.01 dollars, reducing the drop to 1.52%.

The fall in silver prices was further affected by margin hikes at the Chicago Mercantile Exchange (CME). CME has been successively raising margin requirements in response to the steep surge in silver prices. From January 28, it raised the margin on silver futures from 9% to 11%, and decided to increase it further to 15% from the close of trading on the previous day. Ok Jihee, a researcher at Samsung Securities, said, "On January 29, silver futures hit an all-time high, but profit-taking was triggered, and prices immediately fell 12% to 106 dollars. A drop of this magnitude reflects volatility sparked by the burden of higher margin requirements," adding, "With the shift in margin methodology compounded by margin hikes, silver futures ultimately became vulnerable even to a relatively small negative factor like 'Kevin Warsh,' which led to a 30% plunge."

Even so, experts maintained their investment stance on gold, citing its solid fundamentals. They forecast that gold's value will remain robust due to geopolitical uncertainty and weakening confidence in dollar-denominated assets. Yoon Jaehong, a researcher at Mirae Asset Securities, said, "Despite the temporary spike in volatility, gold is still likely to function as a hedge against global geopolitical risks and economic policy," and emphasized, "In addition to retail demand, global central banks are steadily increasing their gold holdings, and the proportion of central banks planning to increase their gold reserves is also rising."

According to the World Gold Council (WGC), central banks continued solid gold purchases last year despite record-high prices. WGC estimated that in the fourth quarter of last year, central banks bought 230 tons of gold, up 6% from the previous quarter. The National Bank of Poland was the largest buyer, purchasing 102 tons last year, followed by the National Bank of Kazakhstan, which bought 57 tons over the year. The People's Bank of China is also known to be increasing its gold holdings. In its report, WGC stated, "Central bank gold purchases last year remained at an impressive level, demonstrating gold's enduring strategic appeal," and assessed, "This trend is expected to continue this year, and demand for gold as a reserve asset is likely to remain firm amid ongoing economic and geopolitical uncertainty."

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Nam Yongsoo, Head of ETF Management at Korea Investment Management, said, "Performance and risk for gold ETFs differ depending on their structure, such as spot-based, international gold, or futures-based, and in a gold market with high volatility going forward, spot-based gold ETFs are relatively more likely to attract attention." He added, "While futures-based ETFs may face a drag on long-term performance from rollover costs and other factors, spot-based ETFs directly track spot gold prices and therefore have the advantages of a simple and intuitive structure," and suggested, "When market volatility is high, bonds can help reduce downside risk, so bond-mix ETFs such as the 'ACE US Nasdaq 100 & US Treasury 50 ETF' can also be good alternative investments."

Kim Yonggu, a researcher at Yuanta Securities, likewise said, "A change in the Chair alone cannot fundamentally alter the basis of the Fed's monetary policy," and explained, "Rather than approaching this speculatively, investment in gold assets through installment-type funds or ETFs will remain a valid strategy." However, regarding silver prices, he noted, "Gold clearly has uses as a precious metal, and its supply is controlled, so there is clear demand for it as a safe-haven asset. Silver does not fall into that category, so I am skeptical about the investment validity of silver products."

Meanwhile, some analysts argue that a period similar to past long-term downturns in gold prices could arrive. In 1974, gold prices surged more than fivefold, then fell for 20 consecutive months. As the oil shock eased and expectations grew for the end of the Vietnam War, gold's appeal diminished, leading to a prolonged downtrend. In 2013, gold prices also soared amid the European fiscal crisis, but then fell for two years as concerns emerged over weak economic indicators in China and the possibility of gold purchases by emerging-market central banks.

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