Author: Evie Soemardi

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Opportunity Costs and Asset Class Investment

On the back of the US Federal Reserve holding rates steady and the announcement of the post-Brexit US-UK Accord gold has experienced a drop in value of 1.87%, while silver has decreased 0.64%.  Notably, gold has still gained upwards of 45% over the last twelve months with silver also gaining more than 18%.  With gold currently trading at $5,198.31, silver at $51.07, and platinum at $1,538.49, in addition to the significant volatility seen so far this year, it is timely to explore the concept of Opportunity Costs in the context of asset class performance.  A foundational understanding can be integral in developing wealth-building strategies when it comes to timing exits from one asset class and entering another and more.

 

What is Opportunity Cost?

Simply put an opportunity cost is the potential benefit of one option an investor may forfeit when choosing to invest in another.  It is the loss of the opportunity that was left on the table in favour of a different one.

When working out opportunity costs a simple formula can be applied:

Clearly, when choosing which option to invest in there is no absolute certainty because forecasting relies on estimates and assumptions.  However, factoring in opportunity costs can generally make for more informed decisions.

So how does this play out in the context of current events and asset classes? Let us compare technology stocks via the NASDAQ top 100 companies and gold over the past twelve months.  The chart below illustrates that in this time the NASDAQ has gained 10.84%.  On the other hand, gold has gained 45.04%.  Let us assume $10,000 was invested in tech stocks during this period. The investor would have made $1,184 in gains.  This presents well until the opportunity cost of investing in gold is considered.  If the investor had chosen gold instead of a tech stock they would have made $4,504.  Therefore the opportunity cost of choosing a tech stock over gold is $3,320 (the profit they forfeited). Said in terms of percentages, the opportunity cost was 34.2% (45.04 – 10.84 = 34.2%).  Playing this out as part of the decision-making process could have redirected the investor to make more profits by diverting the capital to gold instead of tech stocks.

Asset shifting and net purchasing power

The benefits of working out opportunity costs is now evident.  Let us extend this further and consider what happens during a stock market crash and the inevitable asset shifting that occurs.  Ultimately, all asset classes such as real estate, stocks and precious metals, compete for the same capital in every investor’s pocket.  Before a crash there are usually one or more asset classes that are overvalued; currently this would be the stock market (tech stocks in particular) and the real estate market.  When these markets crash, generally all asset classes plummet due to the extreme volatility.  In the markets that are overvalued, investors wish to preserve their gains and usually sell their assets as fast as possible, hence exacerbating the crash.  If they reinvest in a different asset class it is called asset shifting.  At this point many investors have exited the overvalued asset and now hold cash, looking for the next place to invest their wealth.  Because it is a safe haven asset, gold has historically been the asset to invest in for such circumstances. This is why gold bounces back and experiences a a quicker recovery after a crash.

Consider, now, cost opportunities during these times when all markets pull back.  While it is still an exercise in forecasting, assumptions and estimates, it suddenly became a little more complicated.

As a hypothetical example, gold may drop 10% at the beginning of a crash before it recovers.  At first glance it appears as if value has been lost.  But if stocks drop 20% in the same time then the purchasing power of gold is twice that of before the crash.  From the perspective of purchasing power gold is the better investment even though it has lost value.  When the value of gold starts increasing due to inflow of capital previously invested in an overvalued market the difference in net purchasing power becomes increasingly pronounced.  The below graph illustrates how net purchasing power is more important than the value of an asset.

Conclusion

In summary there are various factors that investors need to consider when developing an effective wealth creation and preservation strategy. Potential cost opportunities and net purchasing power are two that forms a well-constructed plan.  Knowing some history on the asset classes and how they perform in economic cycles is also essential.  Review our previous articles to learn more about economic cycles and how asset classes respond to the current market conditions.

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When Will the Silver Squeeze Begin?

There has been an acute focus on gold as it continues its winning streak of over 18% gains since the start of the year.  Even the recent pullback in the last few days is not enough to alter most investor’s bullish outlook for gold this year.  With the price currently trading at $5,077, silver at $51.04, and platinum at $1,530, this sentiment is understandable.  Even the World Bank has asserted that gold will be the standout asset in the commodity space for the next two years.

So where does this leave silver?  While the World Bank anticipates a 16.7% increase in the average price for silver this year compared to last, it is not quite the 36% increase they have assigned to gold.  In publishing these figures the World Bank has pivoted 180 degrees in saying that gold will now outperform silver.  This article will address a singular question that we hear almost daily from clients, “Why isn’t silver keeping pace with gold?”  The short answer is simply that, historically, it is not the right time yet.

 

Exposure to global economies

One of the most significant appeals regarding silver is its dual application of having industrial demand as well as being a store of wealth.  Over 55% of silver demand derives from the industrial sector, unlike gold which currently has demand of only 10%.  While such a high industrial demand builds in a natural price support that will likely increase in time it also exposes the it much more to the ebbs and flows of global economies and growth.  Therefore it is natural for the price of silver to remain more sluggish during times of global economic slowdown- consumer demand softens which in turn decreases the demand for silver thus affecting price to a degree. For example, the largest demand for silver is for use in solar panels; if global consumer demand for these soften so does the demand for silver.  On the other hand, one of the reasons that gold is a true safe haven asset is precisely because its exposure to industrial demand is limited.  The point is that it is acceptable for silver prices to lag behind gold at this stage of the economic cycle.

Gold generally runs first.  Will silver always lag behind gold?  No.  As retail investors are priced out of gold expect them to start investing in silver in a big way.  This is one reason why, on a percentage basis, gains in silver could sling shot up to overtake gold.  Add increased industrial demand and silver has two independent reasons as to why it will not flatline forever.

 

Timing the market

Let us consider silver’s plight in the context of financial cycles and other asset class performances.  The 18.6 Year Economic Cycle is a well-established pattern that has been observed for over 200 years.  The timing is generally reliable but the factors that allow it to play out can be as varied as any black swan event imaginable.  In essence the cycle comprises of fourteen years of economic growth which is followed by four years of contraction.  The fourteen years of growth can further be divided into two sets of seven-year growth periods that feature a mid-cycle slowdown between them.  The first is a recovery phase after the contraction of the last cycle and the second being more expansive and aggressive.  Below is how the cycle presents in principle.

This financial cycle is due to end soon with the last four years of contraction that usually leads to recession almost upon us.  If we study the last twenty-five years, we can see that the dot-com boom and bust of the year 2000 fits neatly into a mid-cycle peak and slowdown.  After the dot-com bubble the Global Financial Crisis (GFC), being largely a real estate bubble, was the next major financial shakedown- this crash marks the same cycle’s main peak and following four years of correction.  Moving to more recent times, the Covid 19 Pandemic Era aligns with the current cycle’s mid-cycle slowdown when we did experience a short recession.  And we are currently in what is known as the Winner’s Curse, the last two years of the final expansionary phase and a dangerous time to be purchasing property (and some stocks) as an investment asset.

As mentioned in our article, Stocks, Real Estate and Precious Metals, the current cycle’s peak is manifesting in a combined real estate and stock market bubble (think dot-com and GFC together), and the current overvaluation of inventory in both sectors is nothing short of scary and stunning, somewhat resembling a house of cards in a slight breeze.  The only factor overshadowing this is that, according to the 18.6 year economic cycle, we are on the verge of that slight breeze turning into gale-force winds as the house of cards tumbles and the correction begins.

So how does this affect silver?  The metal has developed a pattern of behaviour that works in with the above economic cycle.  During the last two major global financial events (GFC and to a lesser degree Covid), silver experienced an extremely swift rise to glory over approximately six months each time.  In both cases, as has been the case for the last six bull runs, silver outperformed gold significantly; however, it is important to also observe the swift descent that followed.  Hence accurate timing of an exit from silver is imperative if the goal is to capitalise for investment purposes.  Study the graph below to appreciate how important this is.

 

Conclusion

Experienced silver bulls understand that the gold to silver ratio will be integral in timing an exit.  The gold to silver ratio for last century averaged between 50 and 60.  This century it has averaged around 80.  The highest it rose during the real estate bubble that preceded the GFC was 104.  This April saw a ratio of 106.  After the GFC stock market crash in 2011 it dropped down to 31.6 before it started moving back up.  The gold to silver ratio is inversely related to the price of silver meaning the higher the price of silver compared to gold, the lower the ratio drops.  If these historical cyclic patterns hold and the ratio drops to the same level again it could possibly signal the top of the market for silver.  If you have invested in silver, it is imperative to develop an exit strategy in advance to avoid emotional and reactive snap decisions when the tide turns for the grey metal.  The gains to be made in silver compared to gold can outweigh the risk for the vigilant investor.  As long as you are prepared, keep accruing while it remains discounted.

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Trump Reverses Course and Assets Whipsaw

As American President Trump dramatically reverses course regarding his reciprocal tariffs, markets experienced volatility similar to what happened during the 2008 Global Financial Crisis (GFC).  The President reduced country-specific tariffs down to a universal 10% for 90 days to facilitate negotiations and this applies to all trade partners except China.  Instead, tariffs for China have further increased to a massive 125%, effective immediately, as per the Amendment to Executive Order 14257.  The White House has advised that this reversal was part of a strategy implemented to encourage trading partners to enter negotiations.  With gold trading locally at $5,159, silver at $50.05, and platinum at $1,494 at the time of writing, the volatility can be felt even amongst safe-haven assets such as precious metals.

Market responses:

In response to the tariff changes, the American stock market has whipsawed up and down with significant volatility.  As can be expected the S&P 500 (bell-weather index for largest-capitalised companies), NASDAQ 100 (largest tech stocks), and Bitcoin experienced initial gains that have subdued overnight.  During this time the S&P marked its biggest one-day gain since the GFC and offers an indication of how close we are to repeating the financial cycle.  Naturally gold softened as stocks rose but it still benefited from the tariff amendments.  As at 9:20 this morning, the Bitcoin is the biggest winner gaining 7.19%, the S&P 500 bounced 4.52%, and the NASDAQ is up 5.39%.

Gold experienced a modest gain of 2.36%; however, it also experienced the smallest loss, thus proving itself again to be one of the least volatile asset classes in times of trouble.  Silver benefited least with a 1.85% gain.  Precious metals fared worse in Australian markets finishing down 0.39% for gold and 1.81% for silver.

Below is a graph representing these gains.

Keep in mind that short-lived and sometimes steep recoveries accompany every bear market that often fool retail investors into believing that the worst is over.  This can be referred to as a “dead cat bounce” amongst traders.  This is exactly what happened with the announcement of the tariff amendments- markets went up and have come down in a matter of days.  This is also evident in the GFC, the 2000 to 2001 dot-com bust and in every crash in history.  As such it is a fundamental mechanism of the market and those investing during a bear market need to be aware of it to avoid investment decisions based on heightened emotional reactions.  We recommend to always keep in mind the long-term trends and individual goals when considering how to invest in any market.  Below is an example of how the NASDAQ experienced small rallies during the dot-com crash while it continued to wipe out all gains.  Each time there was a rally, investors breathed a sigh of relief only to be punished again.  It pays to follow long term trends.

Bitcoin in trouble?

Regarding Bitcoin, MicroStrategy Executive Chairman, Michael Saylor, has flagged that the company may need to sell Bitcoin amid extreme predictions of the value crashing to USD $10,000.  The company anticipates a USD $6 billion loss for the first quarter alone. With vast wealth held in Bitcoin and a business model that relies on accruing more at ever higher prices, Saylor said that selling Bitcoin was an option being considered should the company fail to secure funding to cover debt obligations.  As the largest publicly traded corporate holder of Bitcoin, a significant sell-off could spark panic in the market or copy-cat selling from other investors.  It could potentially affect the price and start a downward trend that may be hard to recover from.  In Australian markets the value of Bitcoin mimicked its American counterpart, finishing slightly worse off at 0.26% to the downside since the amended tariffs were announced.

Summary

2025 is shaping up to be as volatile as any trader can imagine.  Regardless, gold has still made gains over 20% in Australian markets, year to date, and hit another all-time high today.  And despite losing traction in April, silver is still up over 7% in the same time.  Moving forward expect the uncertainty to continue.  President Trump can affect the markets with a single comment which is exactly what he wants.  His moves are calculated yet erratic and markets respond not just to his policy, but also to rumours of policy.  As safe haven assets, gold and silver are the obvious investments in turbulent times and stand to benefit the most.  Protection requires preparation.

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Trump Tariffs: Gold Currently the Only Winner

Liberation Day has been declared by President Trump in America and the global fallout has been swift and significant.China has met America and imposed their own 34% retaliatory tariff on all US imports, a move that some analyst fear could lead to a fully-fledged international trade war.With gold trading at $4,957, silver at $50.00, and platinum at $1,519, it is clear what asset class has benefited the most from the confusion and turmoil.

Stock market fallout: statistics to date

Since the Liberation Day executive order was announced, American markets experienced a downward trajectory, however this morning has seen the first signs of recovery across various sectors.  This afternoon the S&P 500 (the broadest benchmark of largest-capitalised companies) experienced an 10% decrease.  Bitcoin is down 6.8%, the NASDAQ (tech stocks) has slumped 8.7%, and silver has been hit the hardest sliding backward by 10.8%.  Gold held its value the best dropping only 4.3%, hence providing the best purchasing power of all asset classes affected by the harsher-than-anticipated tariffs.

Precious metals fared much better in Australian markets due to the USD to AUD exchange rate with the Australian dollar losing value during this time.  Silver dropped 7.1% and gold is down only 0.1%.  Again, those holding precious metals locally will have maintained better purchasing power than their American counterparts.

Below is a graph illustrating how each asset has performed since the Liberation Day speech.

 

Historical precedent: 1987

Many analysts are comparing current events to the crash in late 1987.  This is because graphs from the 1987 Black Monday event are eerily similar to now.  Black Monday is an important historical marker because it highlighted how globalisation, a new concept at the time, impacted the international markets and illustrated how interconnected financial sectors had become.  The events preceding the Black Monday crash included a massively over-valued stock market, persistent US trade and budget deficits, and rising interest rates.  Today America matches the same description except the Federal Reserve interest rate is only 4.33%, whereas it was 6.5% in 1987.  While it appears that the interest rate is lower today, keep in mind that it exists in the context of quantitative easing where the share market is hooked on easy money- hence, 4.33% could be seen as larger burden to bear for the current institutional investors than 6.5% back in the 1980s.  Below is a graph of the S&P 500 at the time of the Black Monday event versus today.

What is important to note about the 1987 Black Monday crash is that the aftermath did not include a recession.  The stock market continued its strong upward trend until the dot-com crash in 2000.  Alternatively, the Great Depression of 1930 saw a severe global economic downturn with a stock market crash that continued through the 1930s that was marked by high unemployment, poverty and business failures at large.  So what is the likelihood of recession in 2025?  Goldman Sachs has raised the odds to 45%. Polymarket, an American betting platform for investors, has the odds at 62%.  If the Federal Reserve does enter a rate cutting cycle as is now anticipated, the probability could grow.  They will not, however, have an early decision with inflation remaining first priority for the Fed.

How does gold and silver behave in a crash?

Gold and silver are subject to macro-economic influences and competes for capital against other asset classes in volatile trading periods as well as in times of economic growth.  The current decline in value is to be expected in all markets, including the precious metals.  This is due to the extreme uncertainty in how things can unfold in relation to trade, investor debt obligations and their ability to close short positions in a falling market, political implications, and on it goes.  Like other assets, precious metals historically decline in value at the beginning of a crash; however, as investors look for safety gold (followed by silver) will decouple and start a new upward trajectory as capital flows into safe-haven assets.  Seasoned investors will see this decline as an opportunity to dollar cost average prior to the value moving back up.

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Trump’s Liberation Day Executive Order Spells Volatility for Precious Metals

President Trump has finally revealed his latest Executive Order branded as part of his “Make America Wealthy Again” campaign.  Chart in hand, he spoke in the White House Rose Garden of a baseline 10% tariff plus any additional reciprocal tariffs applicable to multiple countries.  Both gold and silver whipsawed up and down as he spoke, with both up about half a percent by the end of the speech. With gold trading at $4927, silver at $50.71, and platinum at $1512, the last twenty-four hours has seen volatility in each market.

Tariff turmoil

President Trump did not stop at an additional 10% tariff on every nation in his bid to make America wealthy again.  He also announced reciprocal tariffs that would be imposed in addition to current tariffs that are in place.  For example, China already has a 20% tariff imposed on its exports to the United States.  They now have an additional 34% of reciprocal tariffs assigned to them making the total rate a massive 54%.  Below is a table outlining reciprocal tariffs for countries of interest.

 

Keep in mind that tariffs will also affect the competitive edge for certain items exported to America.  In the instance of Australian wine, the price just increased by 10% for American consumers; however, the price of European wine has increased by 20%.  So while demand may soften in American markets due to higher prices in general, certain products could maintain a competitive edge according to country of origin and the associated tariffs.

Financial fallout

The financial fallout concerning the tariffs will play out over months.  Expect retaliatory tariffs, supply lines to be disrupted and redirected, and a softening in consumer demand to eventuate in response to the “Liberation Day” trade policies.  What is evident now, though, is that it will affect central bank decision making regarding interest rates.  Local analysts are certain that the Reserve Bank of Australia (RBA) will now facilitate up to four rate cuts this year in total (as opposed to two or three prior to Trump’s new executive order).  Indeed the RBA governor, Michele Bullock, has confirmed the board is open to rate cuts as a response to the consequences of tariffs if needed.  Similarly, traders also expect the US Federal Reserve to make three quarter-point reductions by October.  This is significant because of what it implies regarding recession. We have covered this topic in a previous article but to recap, successive rate cutting cycles are often seen as an indicator of a recession to come.  Indeed some analysts have indicated that the likelihood this year is as high as 50% according to institutional banks including Goldman Sachs, JP Morgan and Deutsche Bank, and betting agents alike.

 

The implications for gold and silver in Australian markets

This kind of financial turmoil is always good for safe haven assets such as the US dollar, gold and silver.  For as long as the tariffs are implemented the slowdown in consumer spending world-wide is an obvious outcome while the market adjusts.  A slowdown in China could possibly mean a reduction in the Australian dollar (known as the Commodities Currency).  As the AUD devalues the price of gold and silver increases in the Australian market.  When you combine the impact of a potentially weaker local currency with the global market conditions of financial uncertainty, the likelihood of geopolitical conflict somewhere in the world (take your pick), multiple asset bubbles, and the various debt burdens among institutional bodies and consumers alike, it paints a picture of troubling times and stormy clouds.  The only lining to these clouds is in the form of gold and silver. Protection of assets and wealth, no matter how large or small, requires preparation. Those holding gold and silver will outperform during these times.

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West Gears Up for World Wide War

In an effort to “give EU citizens peace of mind” the European Union (EU) has just asked 450 million people to stockpile seventy-two hours’ worth of emergency stockpiles that are being referred to as “war supplies.”  This is the European backdrop that sees gold and silver hit all-time highs in the Australian market.  Gold currently trades at $4,856, silver at $54.91, and platinum at $1,571, and it seems the global geopolitical climate just increased the possibility of another run on gold and silver, albeit the timing is still in question.

According to the press release issued by the European Union, the reasons cited for such action include growing geopolitical tensions and conflicts, hybrid and cybersecurity threats, foreign information manipulation and interference, climate change, and natural disasters.  Naturally Russia did not escape mention with the EU referring to the full-scale war in Ukraine as one of the reasons.  In making the announcement, representatives of the EU mentioned that luckily they are not starting from scratch and that the Covid 19 Pandemic era was an experience that has already proven the value of “working together in solidarity and coordination within a EU framework [that] makes us more efficient.”  Interpret the EU’s messaging and potential social engineering efforts as you will.

Meanwhile in America, from his International Golf Club in Florida, President Donald Trump announced a series of attacks on Houthi rebels in Yemen.  The airstrikes killed fifty-three people as the President promised to use “overwhelming lethal force” until the Iran-backed rebels cease their attacks on shipping along a vital maritime corridor.  The attacks came a few days after the Houthis said they would resume retaliations on Israeli vessels sailing from Yemen. The Houthis justify their actions based on Israel’s blockade in Gaza.  Moreover, Washington has confirmed that every shot fired by the Houthis will be seen as a shot fired by Iran.  Is Washington preparing its citizens for further, more significant attacks on Iranian infrastructure through this antagonistic rhetoric?

In just days it appears the West has ramped up for a potential global conflict. This is not the first time and history has valuable lessons for those who look.  If we refer to the Iran-Iraq War which started in 1980, there was a sharp spike in the price of gold to the tune of 48.7% in a matter of months as it rose to USD $677.97.  In US Dollars, gold then experienced massive volatility over the next decade and eventually went sideways until the early 2000s.  In this time America conducted two operations against Iran (Operations Ernest Will and Praying Mantis) and experienced high inflation.  Below is a graph illustrating how global conflict is a factor that directly correlates with spikes in gold value.

Conflict in the Middle East, high inflation, and volatile markets- anyone would think we were describing current events, not events from the 1980s.  This time the difference is that a potential war in Europe is also on the cards. Just as the current stock market reflects a bubble in both real estate and tech stocks (read more about this here), multiple regions are shaping up to be the catalyst that could spark global conflict.  The result is a perfect environment to facilitate a major shakedown in the financial world with dire repercussions, one that we may not have seen the likes of for one hundred years.

As the likelihood of geopolitical conflict ramps up, investors are looking to store wealth in safe haven assets such as the American Dollar, gold and silver.  This may be why gold has not yet tested its new support at USD $3,000.  While investors may not be able to affect the probability of war or a financial crash, they can prepare in order to place themselves and their loved ones in the best possible position to deal with such circumstances should they arise.  Investing in gold and silver prior to conflict or financial instability is the best time to ensure wealth protection and even prosperity in a future full of uncertainty.