Precious Metals Review
Never Miss Investing News from Monex
Week of August 7, 2020
Quotes of the Week
“Gold reached a record high of more than $2,000 an ounce on Tuesday, as investors, spooked by a weakening dollar, volatility triggered by coronavirus and ever rising U.S. cases, continue to look for a safe haven to move their money into.
Gold hit a high of $2,041.33 an ounce on Wednesday, after exceeding $2,000 for the first time on Tuesday.
The precious metal has gained more than 34% this year, making it one of 2020’s best-performing assets, Reuters reports.
Gold isn’t the only precious metal to have gained significantly, with the price of silver jumping to its highest level since 2013, and rising 50% overall this year.
The dollar weakened to two-year lows last week as lawmakers in Washington worked to agree to another stimulus deal.
Governments and central banks across the world are unleashing stimulus packages worth some $20 trillion into the global economy, according to the Bank of America, in a bid to boost output after the pandemic continues to halt major industries and force people to stay home. U.S. lawmakers are currently working to secure a further package of economic relief, and investors are concerned that stimulus packages will trigger inflation and devalue other assets. Meanwhile, escalating tensions between the world’s two largest economies, the U.S. and China, is likely to keep pushing gold upwards.
Gold’s impressive rally could well continue, analysts predict, as the pandemic shows little sign of slowing down, allowing battered industries to reopen and letting global economies recover. More than 18 million people have been infected so far, while the death toll topped 700,000 this week.”
“That dismissive characterization of gold was made by the economist John Maynard Keynes. The metal has had many skeptics, including Warren Buffett, who once said that gold produces nothing and merely “looks back at you.”
But gold’s surge is refuting its critics. The metal gained 4% in the past week, to a record $1,971 an ounce—topping the 2011 peak of $1,900. Gold’s rally reflects the dollar’s weakness, ultralow interest rates globally, and record demand from exchange-traded funds like the SPDR Gold Shares (ticker: GLD), the leading gold ETF. Gold is now up 30% this year, making it one of the strongest major asset classes.
There could be more room for gold—and gold-mining stocks—to advance, with inflation-adjusted U.S. rates negative and the U.S. government running enormous deficits.
One of gold’s major attractions is that it’s hard to make more of it, unlike the dollar and other paper currencies. Newly mined metal adds less than 2% each year to the roughly six billion ounces currently in the world.
“Gold is in a secular bull market and still has a long way to run,” says Joe Foster, a manager of the Van Eck International Investors Gold fund (INIVX). “Sooner or later, gold will break above $2,000 an ounce and move to higher levels.”
Foster views gold as a financial asset that acts as an alternative to the dollar, which fell 4% in July, as measured by the U.S. Dollar Index.
“We have long maintained that gold is the currency of last resort, particularly in an environment like the current one, where governments are debasing their fiat currencies and pushing real interest rates to all-time lows,” write Goldman Sachs commodity analyst Jeffrey Currie and his colleagues. The firm has lifted its 12-month gold price target to $2,300 an ounce and warns about the durability of the dollar as the world’s reserve currency.
Gold yields nothing, but tends to do well when inflation-adjusted rates are low or negative, as they are now. Long a haven, it also offers portfolio diversification, although many investors have little or no exposure. A UBS survey of family offices last year found an average gold and precious metal exposure of just 3%.
Barron’s has been bullish on gold, including a cover story in 2018, when the metal traded around $1,200.”
“Investors have focused on a rise in record prices for gold, but silver’s up nearly 25% in July—the metal’s second-biggest monthly gain on record—and it’s still undervalued compared with the yellow metal.
“Silver is often called the ‘poor man’s gold’ because some of the same factors that cause gold prices to rise do the same thing to silver prices,” says Ed Moy, chief market strategist at gold retailer Valaurum. “And what is driving gold prices now are mainly the fear of inflation due to the magnitude of the monetary and fiscal stimulus worldwide, and the flight to safety due to the uncertainty around how and when the global economy will recover.”
Silver, however, is “cheaper per ounce” than gold, and its prices are much more volatile, he says. It has also been “lagging behind gold’s rise” and the ratio of the number of ounces of silver to buy one ounce of gold is historically high, implying that either “gold is overpriced or silver is underpriced.”
If silver is underpriced, “there is a lot of money to be made,” says Moy, who was director of the U.S. Mint from 2006 to 2011.
Silver futures settled at $24.501 an ounce on July 27, the highest for a most-active contract since August 2013. Intraday on July 30, they traded about 25% higher this month, but stand nowhere near the record-high $48.599 from April 2011. In comparison, gold futures climbed to a record settlement at $1,953.40 on July 29, up around 8.5% this month.
“Silver is not even halfway to its all-time high,” says Ryan Giannotto, director of research at exchange-traded-fund-issuer GraniteShares. While it’s unlikely silver would more than double in the immediate future, it’s “unwise to rule out extreme scenarios.”
It takes more than 80 ounces of silver to buy one ounce of gold. Though the ratio has seen a significant decline in recent months, it’s still well above the typical gold-to-silver ratio, which Moy pegs at one ounce of gold to 60 ounces of silver.
Ross Norman, CEO of precious-metals news and information provider Metals Daily, says the ratio between the metals rose to a 4,000-year high at 126 on March 18. “It has been clear for some time that silver was excessively cheap compared to gold,” he says. The ratio is still historically high, “suggesting there is scope for greater gains in silver still.”
He says gold “often looks to silver to ‘authenticate’ its rally,” and if the differential between the two metals becomes too wide, as it has recently, then gold “stalls.” For now, gold, at an all-time high, is largely “untethered from technical resistance levels.” “