Gold, silver and defence: reasons to be bullish and bearish

Until the end of last week, gold and silver were on a tear. But then investors were caught off guard as a huge sell-off erupted, with the price of silver falling more than 25% and gold giving up 10%.

• Invest with ii: Open an ISA | Top ISA Funds | Transfer an ISA to ii

Nitesh Shah, head of commodities and macroeconomic research at WisdomTree, notes that “30 January 2026 will likely go down in history as the most volatile day for both gold and silver.”

Shah points out the price swings “would typically be expected over the course of a year - not within a single trading day”.

The reasons for the steep declines in gold and silver especially are not immediately obvious. However, Richard Hunter, head of markets at interactive investor, points to “forced selling on major margin calls likely to be a factor” – with some brokerages increasing their margin requirements, which led to investors needing to commit more money to maintain leveraged positions.

He adds: “The recovery of the US dollar will also have had an impact, given its inverse price relationship to gold, while there is also speculation of a heavy unwinding of long positions, which has left traders rushing for the exit at the same time.”

The sell-off did follow the nomination of Kevin Warsh as the next chair of the Federal Reserve. Some specialists have argued that Warsh could keep tighter control of inflation and more generally resist the debasement of the US dollar, something that would lessen the relative attraction of real assets such as gold.

Shah notes that following such a strong run for gold and silver, elevated levels of buying, including from retail investors, “may have amplified volatility”.

• Investment outlook: expert opinion, analysis and ideas
• Top 10 most-popular investment funds: January 2026

At the time of writing, it’s anyone’s guess whether there will be further declines or a recovery in the short term, but the structural drivers for both precious metals remain the same as they were before the end of last week.

In this feature, we ask a range of professional investors for their views on prospects for gold and silver, as well as another investment area that has produced red-hot performance over the past year or so – defence shares.

Gold and silver still significantly higher than a year ago

Investors don’t generally like geopolitical uncertainty and conflict. But the tensions of recent weeks and months – from the US’ claims on Greenland to war in Ukraine and the Middle East – have driven strong gains in certain assets.

The price of gold had surged past $5,000 since the beginning of the year, reaching its highest peak in history (surpassing $5,500 at one point), while the silver price rose 50% during January alone (peaking at $118).

• Geopolitical risk: what to focus on when picking stocks
• 10 shares to give you a £10,000 annual income in 2026

At the time of publication (the morning of 3 February 2026), the gold price was around $4,930 and silver was trading at $86.50.

However, to put this all in content, at the start of 2025 the gold price stood at $2,650 and the silver price was just over $30. Those who bought then and held on will have made handsome returns, despite the turmoil that played out at the end of last week.

Shares in defence companies have also soared – the Stoxx Europe Aerospace and Defense index rose 15% over the first three weeks of January, having posted a 57% increase in 2025.

Reasons for the rallies

These rallies aren’t difficult to explain. Investors have always turned to gold during periods of uncertainty and anxiety; the precious metal is seen as a tangible physical asset that provides a safe store of value. Silver benefits from similar perceptions and, until recently, has not registered the level of gains seen in gold, so appears to offer more value; it is also widely used in industrial manufacturing.

As for defence shares, why wouldn’t investors put money into the companies that stand to benefit as governments around the world ramp up purchases of military equipment? Members of Nato have pledged to increase their spending on defence and security by a factor of two and a half times over the next decade.

Gold and silver: the outlook

The question, of course, is where we go from here.

Looking at gold first, a growing number of investment professionals are concerned. Ahead of last week’s sell-off, in Bank of America’s most recent survey of global fund managers, 51% warned that gold was overvalued, the joint highest percentage ever seen in this data.

Moreover, even following the recent pullback the risk-reward appears less favourable as both metals have delivered strong gains since the start of 2025.

However, gold’s supporters argue that the fundamental supports for the precious metal remain in place. Demand looks set to remain strong, particularly as governments show little sign of reducing borrowing or debt. And miners find it difficult to increase supply.

• DIY Investor Diary: ‘quant’ approach goes big on gold and bonds
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Robert Minter, director of ETF investment strategy at Aberdeen Investments, points out that investor anxiety is not the only factor currently driving up prices. “We see the gold rally as likely to continue, based on central bank demand that is buying close to a third of the supply from global miners,” he explains.

“In addition, investor demand is rising in a visceral attempt to fight back against their loss of purchasing power over the last five years as sovereign debt issuance has exploded around the world, contributing to inflation.”

As for silver, many of the same arguments apply. A large part of the recent rally has been driven by the same flight to safety that has boosted gold.

Dzmitry Lipski, head of funds research at interactive investor, says: “Structural drivers such as geopolitical risk, central bank purchases and economic uncertainty may already be well reflected in prices. As a result, any future returns could be more volatile and less predictable than in recent years.”

The counterargument is that silver’s importance to manufacturers provides an additional source of demand – and one that miners are struggling to meet. “The silver market has been in supply deficit since 2019,” points out Minter.

“Silver is mainly an industrial metal, with more than 10,000 end uses in the electronics, medical and petrochemical industries; even if investors reduce their silver allocations, we are left with an industrial market in deficit.”

Direct equity defence plays in the UK include Rolls-Royce, helmed by Tufan Erginbilgic. Source: Rolls-Royce via Flickr.

A case for defence?

On defence, opinions also differ. Some of the best-known defence companies may be ready to take a breather following stellar share price performances. Babcock International Group (LSE:BAB)’s value has almost tripled over the past 12 months, while BAE Systems (LSE:BA.) has almost doubled. International companies such as Germany’s Rheinmetall AG (XETRA:RHM), and Lockheed Martin Corp (NYSE:LMT) and Northrop Grumman Corp (NYSE:NOC) in the US have matched these gains.

In that context, Laura Foll, co-manager of the Lowland Ord (LSE:LWI) and Law Debenture Corporation Ord (LSE:LWDB) investment trusts, is cautious. “My view is that the period of extraordinary returns has likely passed,” she says. “Single-source regulations mean margin upside for some defence contractors is limited, so even in a period of higher defence spending and therefore higher sales for these companies, the drop through to profits may be more limited than it would be elsewhere in the industrials sector.”

• Sector Screener: why Rolls-Royce shares still appeal
• Stockwatch: an exciting share off the radar of most investors

Against that, many defence companies are investing heavily in new technologies to modernise how wars are fought – for example, artificial intelligence (AI) to improve targeting and logistics, drones for surveillance and strike missions, and hypersonic weapons that can travel at several times the speed of sound. Space also represents a new frontier for defence businesses.

These investments have the potential to expand the range of products and services that defence companies offer, just as politicians are committing to spending more. “If governments stick to their commitments, then defence spending will only continue to rise,” says Ben Yearsley, a director of Fairview Investing. “In the short term, defence looks stretched, but the medium-term outlook looks good.”

Jacob de Tusch-Lec, manager of the Artemis Global Income I Acc fund, agrees with that analysis. “We’ve taken some profits,” he says. “But in this fast-changing world we continue to like defence as a long-term theme.”

How to invest in precious metals and defence stocks

For investors convinced that the rallies in precious metals and defence can endure, there are several different ways to invest.

First, with gold and silver, there’s always a debate about whether to invest in the metals themselves or in the mining companies that benefit when prices rise. The problem for retail investors with the former approach is that the fees charged by gold and silver dealers – both upfront and for storage – can be costly. Equally, however, buying shares in a miner, rather than the metal, means you’re making a stock market investment rather than getting the benefits of physical gold and silver.

Exchange-traded funds (ETFs) may be an option, suggests Aberdeen Investments’ Robert Minter. “They avoid physical dealer fees, which can eat up returns when trading small amounts at your local metals dealer,” he explains. “ETFs own the physical metal, in a vault that is audited.”

Funds including iShares Physical Gold ETC GBP (LSE:SGLN) and Invesco Physical Gold ETC GBP (LSE:SGLP) come with low charges – around 0.12% a year. Both managers also offer physical silver ETFs, which are only a little more expensive. WisdomTree Core Physical Silver GBP (LSE:WSIL) is another low-cost option.

• Gold investing: what, why and how to invest
• Stockwatch: time to by Relx shares after fresh plunge?

However, one issue to consider in today’s market is whether mining shares might offer better value than the physical assets. “Equities look cheaper even though miners are making super-normal profits and they also pay a dividend,” says Fairview Investing’s Ben Yearsley. “Fund options include Jupiter Gold & Silver I GBP Acc, WS Amati Strategic Metals B Acc, and BlackRock World Mining Trust Ord (LSE:BRWM).”

As for defence, direct equity plays in the UK include Babcock, BAE, Rolls-Royce Holdings (LSE:RR.) and QinetiQ Group (LSE:QQ.), with European and US contractors providing further opportunities. But many investors will prefer a fund offering diversification.

Lipski likes the VanEck Defense ETF A USD Acc GBP (LSE:DFNG), which “provides global exposure across aerospace, defence contractors, cyber defence and related technologies, tracking a broad global defence industry index of at least 25 companies”.

Another option is HanETF’s Future of Defence ETF Acc GBP (LSE:NATP), which splits its portfolio between industrial defence stocks and companies focused on cyber defence, and is focused largely on Nato countries and their allies.

European specialists include WisdomTree Europe Defence ETF EUR Acc GBP (LSE:WDEP) and HanETF’s Future of European Defence Scrn ETF Acc GBP (LSE:NAVY), while the Global X Defence Tech ETF USD Acc GBP (LSE:ARMG) has a global portfolio.