The Key Drivers of Demand and Volatility in the Precious Metals Space

Nasdaq Trade Talks interviews Steve Schoffstall, Director of ETF Product Management at Sprott Asset Management, and Joe Cavatoni, market strategist for North America at the World Gold Council. They provide an in-depth analysis of the structural forces reshaping precious metals markets, from central bank reserve strategies to industrial demand and tariff policy. Schoffstall and Cavatoni explore the long-term drivers of gold, silver and critical materials, highlighting their role in portfolio diversification.

Video Transcript

Jill Malandrino: Welcome to Nasdaq Trade Talks, where we meet with the top thought leaders and strategists in emerging technologies, digital assets, the regulatory landscape, and capital markets. This segment is presented by Charles Schwab. I'm your host, Jill Malandrino.

Joining me on the desk at the Nasdaq market site are Joe Cavatoni, market strategist for North America at the World Gold Council, and Steven Schoffstall, Director of ETF Product Management at Sprott Asset Management. We're here to discuss the key drivers of demand and volatility in the precious metals space. It's great to have both of you with us. Welcome to Trade Talks.

Joe, I feel we start the conversation the same way the past couple of times you've been on, where investment demand just continues to surge.

Joe Cavatoni: It does. It continues to surge. You're right. Now we've had a few things happen over the last 24 or 48, call it 72 hours, that have rocked the market a little bit. But the good news is we think we've seen clarity. I'm specifically referring to whether gold in certain formats, 100-ounce bars or kilo bars, is subject to a tariff or not. We have an announcement from the president on his social feed saying it is not subject to tariffs after we had a letter formatted by the Customs Bureau stating that gold might be subject to the tariff.

I think we're going to get clarity on that. Leaving all that noise and that turbulence over the last 72 hours aside, fundamentally, what's still driving every amount of interest in gold is that the economic outlook continues to be in question, challenged by the politics mixing into the independence of the Fed, etc. Data that will come out today, we saw CPI information signaling more likely a Fed cut in September, and we will have more of these announcements over the next month. It's really at the heart of what's going on.

Jill Malandrino: Steven, it's not just gold that's being affected by an uncertain economic outlook. I mean, it's precious metals in general where you're seeing the impact.

Steven Schoffstall: We also see it flow through to the silver markets. That's an area that we've been following closely. If you look at where the investor interest is, you will see that investors are leaning into physical gold exposure through an ETF form. About $24 billion or so in assets have come in so far this year.

On the miners, though, investors are generally hesitant to take on that equity risk, even though we've seen miners perform; they're up about 75% to 80% year to date, far outpacing the 27% that we see from gold.

Silver, though, has been a bright spot. It has both precious and industrial metal elements. The industrial metal side of things is really starting to spur the growth that we see coming to silver. About 60% of all uses now are for industrial purposes, 10,000 uses or more in general across all aspects of the economy, whether artificial intelligence, solar panels, semiconductors, or medical uses. We're seeing a lot of interest in the silver space now.

Jill Malandrino: I just learned yesterday that there are over 10,000 applications. That blew my mind. Coming into this conversation around emerging technologies and the demand they command, I see it's a prime investment case for silver.

Steven Schoffstall: It is. When you look at that demand, it's starting to mesh with some supply headwinds we're seeing. If you were to go back and look over the last six years, you would see silver has been in a supply deficit. Over the last few years, the new supply coming into the market has decreased by about 4%. It's struggling to keep up with these new applications.

All indications are that in 2025, we expect to see another deficit — that will make seven years in a row. At the same time, we need more silver, but we're getting less silver to meet that demand. One of the main issues we see is that over 70% of silver is mined as the secondary metal. That means things like copper and zinc are the primary metals. Silver comes along as a byproduct.

Whenever silver prices start to improve, that does not necessarily affect the underlying economics for the miners. We could see instances where silver output is decreasing despite increasing prices.

Jill Malandrino: I'm going back to tariffs for a moment here. What would be the point of adding a tariff on gold? What's the rationale?

Joe Cavatoni: Well, I think you have to unpack the motivation of tariffs in general. It's a revenue growth item for the U.S. government. Looking at Switzerland, which is the subject of this whole exercise around tariffs, and you look at the trade flows, gold is a material element of what's been moved in and out of the U.S. and Switzerland. That's why it was hitting the radar regarding being taxed at a potential 39%.

But again, the messaging we had before the election, the messaging we've had since the election, and through to date on gold is that it's not the subject of tariffs. Subject to tariffs are critical minerals or other minerals are used in industrial applications or defense applications, and gold doesn't fit that mold. We've had that all the way through. That's been the sentiment. That's what we're getting confirmation on. We're just waiting for that formal communiqué to say, "Correct. What Trump has said in his social feed is exactly how to understand the tariffs."

At the end of the day, what's driving gold right now isn't concern or confusion around tariffs. Even with clarification or concerns, we didn't see the bottom fall out of gold. As you pointed out, it's still holding very comfortably in its range investment. That's what's driving it: risk assets and offsetting risk assets with a hedge like gold in the U.S. and China, driving the flows big time in ETFs and the physical sense.

Then don't forget the central banks continue to be record-setting in their flows. The second quarter was a little slower than we've seen, but still a substantial number at 160+ tons from global central banks. Looking at the dollar, the future of the dollar, and the U.S. assets they hold and figuring out how to best balance their reserves.

Jill Malandrino: How do you explain it when you have gold where it's trading? Then you also have major indexes at all-time highs. We just hit a new all-time high in the S&P and Nasdaq.

Joe Cavatoni: We were just talking about how the appetite for risk remains high. I'm comforted by the understanding that a cost-effective hedge like gold can be added to your portfolio, because it will protect you as it has during the shocks or the drawdowns, or risk moments that wobble your portfolio. I'm struggling to understand the risk appetite, but it's there. But I love seeing the 2 to 5% allocations we're hearing about going into gold.

Jill Malandrino: What other areas in metals are you taking a look at? The industrial applications, in addition to what we discussed with silver.

Steven Schoffstall: Copper has been a big one ever since there was the presumption that we were going to see 50% across-the-board tariffs on copper. What that did was cause a dislocation in the market where we had copper. Prices in the U.S. were trading about 30% premium versus what we saw in London, the primary copper trading benchmark.

Fortunately, once those tariffs were announced, the cathodes and the primary material traded internationally weren't impacted by those tariffs. We saw that the premium of 30+% collapse to about 1%. From that standpoint, there was some expectation that we would see copper start to leave the U.S. and go back to London and other global trading hubs. We haven't seen that happen as of yet. The copper that came in ahead of those expected tariffs is, for the most part, still staying here. Copper is one we're watching.

Another one that's in the news as of yesterday is lithium. It's a metal where we've seen that China traditionally has been oversupplying the market to keep prices lower, and it helps keep competition out of the market. There was an announcement that a mine that produces about 6% of global lithium in China was not going to have its license renewed. We saw in response that lithium miners popped about 14% yesterday. The price of physical lithium went up about 3%. It's up another 2 or 3% today. Those are a couple of developing areas that we're watching that are very much tied to electrification and technological advancements.

Jill Malandrino: Right. That's what makes you question whether it is necessary to put the level of tariffs in place when there's only so much that can be mined in the U.S. It's almost like a codependent relationship with some of the metals and rare earth materials from China.

Steven Schoffstall: It is right. There are about a dozen and a half different rare earths, right? They all have different uses. While we may have access to some here, we don't have plentiful access to all of those. I think that's some of what these back-and-forth tariff announcements are about, as they have a chance to discuss what that means for the U.S. That's what we're seeing.

Joe Cavatoni: I think it's probably one of the most interesting messages we're getting from Washington: the understanding and the actual shift in the political sentiment that critical minerals matter, maybe not with the goal of outperforming China, but in leveling the field and ultimately putting many of those critical mineral criteria into the negotiations.

To your point earlier, not one thing comes out of the hole in the ground. You have to understand how mining works. It's a really interesting industry, and there are lots of interesting opportunities right now, because what's getting mined and how it's getting mined and the changes that are potentially going to take place with the administration signaling that it wants to grow the space, it wants to grow refining, it wants to grow industry. It's all very interesting to keep a close watch on, because again, it's about not necessarily beating someone. It's about leveling the field.

Steven Schoffstall: The mining industry is impacted so much by these tariffs, because if you look at how long it takes to get a mine up and running for copper mines in the U.S., it can take close to three decades from when you find a mine and develop it and get it producing. That's you can't just turn the switch and flip production on. I think that's one of the reasons why we see this back and forth in some of the tariff announcements.

Joe Cavatoni: But you need the glide path to be clear that it's an okay industry to continue to move forward. I think that's the signal that's coming right now. Find the balance. Find the opportunity. Move more quickly to get these things online.

In the gold market, we might benefit from seeing more supply coming online or even the production online. Now we're talking with firms that have refining capabilities. You'll hear people say there's not a lot of that in the U.S. There's not as much as there could be, or maybe there was in the past, but it's on the minds of a lot of organizations around the country to say, "Let's bring more capacity to getting this done." The appetite is there for it. It's looking good that this will continue to develop.

Jill Malandrino: I think the administration has shown its foresight in wanting to be the leaders in innovation and recognizing that this is also a national security issue. They're telegraphing that quite clearly. I mean, we need to be cybersecurity leaders. These components are part of that. For example, we want to be leaders in all these emerging technologies, such as AI.

We're going to need to think about policy and framework to ensure that a grid does not take 30 years or 10 years to come online because it's the only way we're going to be able to execute on those priorities. Joe.

Joe Cavatoni: Absolutely. One additional element of national security that we've been seeing, and we have a body of work that we're undertaking around artisanal and small scale gold mining is the fact that that's being a source of funding for the wrong types of organizations, the wrong kinds of groups, whether it's the Wagner Group or a drug organization that's based in South America.

These are bad things happening in the space, and that is on the mind of the U.S. It's on the mind of national security, border control, and understanding how critical minerals fit into that. This goes beyond just our borders and our national security. It goes global, north, south, east, west. It's a topical discussion right now in Washington.

Jill Malandrino: It certainly is. I mean, Steven, I see you nodding in agreement when you read between the lines about the tariff strategy. It's a bigger picture than what will happen with the consumer. It's going to be a tax on the consumer and so forth. This is to advance some heavy strategy and priorities ahead.

Steven Schoffstall: That's exactly right. Just yesterday, Goldman Sachs said that about two-thirds of the tariffs aren't being borne by U.S. consumers. The expectation is that down the road, later this year, we'll see that start to filter through the economy. I guess we'll have to wait and see how that pans out. But back to what you said about artisanal mining and different parts of the world.

Jill Malandrino: What is artisanal mining?

Steven Schoffstall: That would be this very small-scale mining, where it could be illegal or just not the same protections you would see with tier 1 mining jurisdictions. When we develop indexes that we've developed a whole series with Nasdaq, one of the things we do is not get exposure to Congo, and we stay away from mainland China. That's part of the reason for that.

Another reason for that is that we believe much of the growth will shift back to the U.S. and other Western countries, and we believe that these U.S.-based companies will benefit from that in the future.

That seems to align with the administration and Congress's support of nuclear energy, copper, rare earths, and other critical materials. From our standpoint as investors, it's an exciting time to get involved in critical materials.

Jill Malandrino: It certainly is. Joe, it looks like you have something to follow up on.

Joe Cavatoni: I think in terms of artisanal and small-scale gold mining, this is really what it used to be, about 4% of gold mine production, about 20 years ago. It was done by people who needed to find a way of living. Now, what has happened is it's been mechanized, whether it's by a large country that's funding it, sending in equipment to get it done, or, like I mentioned, some nefarious types of organizations that are standing behind it, using it to launder money, fund bad practices, whatever the case may be.

The World Bank estimates artisanal mining has grown about 20%. Now you're also talking a price difference of $400 an ounce to $3400 an ounce. You're talking about a significant amount of production coming from this end of the market. That's why we're focused on saying we need to tackle this issue and drive out the bad players. All this work is being done under our programming around Gold Bar Integrity, tracking and tracing, and finding trusted borrowers like central banks that will put their left hand looking for gold in their reserve portfolio out to serve the hand of the right to buy it from home.

They're looking at markets like the Philippines, where they buy gold from the home front, provided certain criteria are met regarding the production quality, the humanitarian efforts with the staff, etc. They're doing it all above board. It's a really interesting topic.

Jill Malandrino: I wonder if consumers are fully aware of that. We know about blood diamonds and how they have transformed the way they are purchased. Recyclable gold and the sustainability movement, and so forth, are important. But you said artisanal mining grew by almost 20%?

Joe Cavatoni: Production is estimated at that level. Getting a complete number on it is tough, but that's our best estimate.

Jill Malandrino: Speaking of the consumer, what about the demand for jewelry? How is that doing relative to this?

Joe Cavatoni: As expected. We're at prices that are at record highs. We keep touching these record highs. As a consumable good, it's typical that you would expect it to slow down quite dramatically. The biggest markets, China and India, showed a big slowdown in the second quarter data, the same in the U.S. and Europe. We're not seeing that market turn until we either have a big price correction, which we don't expect, or the jewelry market evolves to get smaller and more affordable pieces back into the consumer, or the consumer feels good.

Jill Malandrino: But that's a smaller piece of the investment case for gold.

Joe Cavatoni: It's a big component of demand for gold annually, and it continues to be a big component. But what's driving the price of gold right now is investment and central bank demand. Interestingly, when you look at the big jewelry markets, China and India, the investment growth in those two markets is record-setting, with ETFs, physical forms of gold, and other product offerings. They understand how gold fits into an investment portfolio.

Steven Schoffstall: I was going to say that if you look at the last three years of central bank buying, this is one difference between gold and silver. Silver doesn't have that central bank buying that we see with gold. Over the last three years, over 1000 tons per annum were bought by central banks. It's about double what we were seeing throughout the 2010s.

A lot of that comes around this whole geopolitical upheaval that we see in the tensions going on, whether it's trade-related or military, companies or countries realize that their assets can be sanctioned in one way to take hold of their assets is to store in gold. They can repatriate that back and get it outside of the U.S. or the European Union's reach regarding sanctions.

Jill Malandrino: Speaking of central banks, if there is a shift in Fed policy, will that impact demand, or is 25 basis points, 50 basis points going to move the needle?

Steven Schoffstall: Silver is a great example of what happens when we start to see rate cuts. If you look at the last three regimes of rate cuts, starting with the dot-com burst and the Global Financial Crisis and then back in 2019, you will see that silver rallied about 143% after the dot-com bubble and the Global Financial Crisis and in excess of 400% in 2019.

Silver, in particular, tends to do very well during these periods of debasement. Given their monetary aspects, gold and silver do well anytime you see high geopolitical tensions, decreasing interest rates, higher inflation or currency debasement.

Jill Malandrino: Joe, you would expect the same for gold.

Joe Cavatoni: We're looking to see two things develop for gold. With rate cuts, we will see increased interest in adding gold to their portfolio, particularly by the U.S. investment community. The cost of owning gold becomes much more affordable in terms of adding it to your portfolio. It also continues to be fueled by that need for risk offset, which will start to get a little bit more interesting when we start to see the Fed taking action to deal with the economic landing that we're expecting as it relates to the central banks ' geopolitical risks and others.

But when you dig into the survey report we've put out, this is our eighth year with about 72 central banks. You'll find that they're looking for a liquid instrument that holds its value, that they can use to protect themselves from homegrown inflation and concerns, as well as diversification away from fiat currencies, which are losing their value. That's what's happening when you're looking at what's going on, not only with the U.S. dollar, but also with the Euro. Gold is now well publicized as a larger holding in reserve portfolios than the euro at this stage.

Steven Schoffstall: I think a lot goes into it, particularly for retail investors and smaller-scale investors in the U.S. When you look at how gold's performed, some people tend to say it doesn't have a yield. They tend to think that it underperforms the market. Returning to the turn of the century, gold's up about 10% per annum. S&P is up less than 8%. It does quite well over longer periods.

To your point, adding that durable position to your portfolio, whether it's 3% or 5%, what can you do to help improve investor outcomes while providing diversification? It has a low to moderate correlation with many asset classes and a negative correlation with the U.S. dollar. If a declining dollar concerns investors, gold can help offset that somewhat.

Jill Malandrino: I appreciate both of your insights. Thanks for joining us on trade talks. I'm Jill Malandrino, Global Markets Reporter at Nasdaq.