Prices for metals fell sharply across the board Thursday as investors worried about the impact rising oil prices due to the U.S.-Iran war will have on the global economy.

Gold fell nearly 6%, while silver was off 8%. The sell-off extended beyond just those two, as industrial metals like copper and palladium came under pressure, declining 2% and 5.5%, respectively. 

While the selling intensified on Thursday, gold and silver have been falling since the war in Iran began, despite the former being viewed as a safe-haven asset. Surging oil prices have created concerns that inflation will reignite and keep interest rates higher. Higher rates weaken the appeal of the bullion, which is non-yielding. 

A stronger dollar as a result of the higher rates has also weighed on gold, as it cheapens the metal.

“The risks to inflation taking away the Fed rate cuts that were priced in, and seeing interest rate increases across the world, and real rates rising, that has been the drag on gold,” said Peter Boockvar, CIO at One Point BFG Wealth Partners. The U.S. 10-year Treasury yield at one point on Thursday crossed 4.300%.

Meanwhile, copper and palladium, after declining at the onset of the war, stayed relatively stable.

But that has changed as growth concerns begin to weigh on these industrial metals. 

Wall Street consensus has generally been that the longer the war goes on, the greater is the risk that oil prices remain elevated for long enough that it alters the spending habits of consumers and businesses and leads to a recession. 

It’s the “demand destruction” phase of an energy shock that traders and investors are chattering about.

“On the industrial metal side… people are now really worried about the recession risks,” Boockvar said. 

And slower growth combined with higher inflation is a “stagflation” scenario. But while investors begin to make “stagflation” trades, others see the possibility as extremely unlikely.

Ed Yardeni, president of Yardeni Research, wrote in a Tuesday note that “oil shocks are less likely to trigger the kind of sustained stagflation seen in the past, particularly during the 1970s,” referencing the economic consequences of the 1973 OPEC embargo. He noted that Russia’s invasion of Ukraine in 2022, while it caused an oil shock and higher inflation, didn’t lead to a recession. 

It’s a belief that Fed Chair Jay Powell repeated in a press conference on Wednesday. “I would reserve the term stagflation for a much more serious set of circumstances.”

While Boockvar thinks the war needs to end for industrial metals’ prices to stabilize, he said gold can likely recover as focus returns to countries’ rising debts and deficits, which gold typically does well against as a “debasement trade” play. He added that those deficits might only worsen due to military spending on the war. 

And even if stagflation does arrive, head of asset allocation research at Goldman Sachs Christian Mueller-Glissmann wrote in a Thursday note gold is a play in that environment.

“In case of a continued stagflationary shock, especially if real yields are declining, we would expect more support for Gold prices due to investor demand for real assets and FX diversification,” he wrote.

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