Precious metals are heating up, much to the joy of the investors that have stuck with the shiny laggards. Gold has been enjoying a good rally, and that should help pull up silver, which has been in a slump. “It is difficult to be pessimistic about silver at these levels”, says one portfolio manager. Silver is down more than 9% this year, even as gold has rallied. However, eventually gold will start pulling investors into silver. “Silver has lacked retail investment demand, so a sustained rally in gold will lead to the speculators coming and buying silver”, says the portfolio manager.
FINSUM: Precious metals have not been getting much attention for years, but gold is off on the right foot this year. Importantly for silver, a recession doesn’t hurt demand because it isn’t an industrial commodity.
Tell us an investment that does well when inflation is rising AND when rates are falling? Most investments are sensitive to one or the other, but gold can benefit from both. Rising inflation (and rates) can lead to gold-buying as a hedge, helping prices, while falling rates make the metal’s zero yield look more attractive (and make it easier for overseas buyers). Yet, conditions in the middle of those two extremes—which have prevailed since the Crisis—are usually bearish for the metal, as it does not have a natural place in the portfolio in such conditions. That said, gold’s outlook is now the best it has been in years, as the economy is weakening and rates look likely to fall, weakening the Dollar and clearing the path for appreciation.
FINSUM: Gold is in the most interesting position we have seen for some time and we are inclined to think it might start to rise out the doldrums.
Al the stars are aligning for gold. The metal has been in an epic slump for years. The great post-Crisis recovery has not been so for gold, with the asset falling in value considerably from its Euro crisis-era peak. However, yields are coming down and the threat of recession is rising, both factors which make gold likely to do well. Not only would both factors help gold because of its relationship to interest rates (i.e. the lower the better), but a weaker Dollar also helps overseas buyers of the metal.
FINSUM: The other interesting non-macro factor that may help gold is the recent huge merger of Barrick Gold and Randgold, which consolidates the market and offers a more compelling mining stock to own. It may also put a lid on supply, which could boost prices.
Gold has been in an extraordinary multi-year slump. From its peak of around $1,900 a few years ago, the shiny metal has sunk into a multi-year bear market, recently settling at around $1,200 an ounce. However, a couple of factors are coming together that may mean the bad times are over. The first is that there has been consolidation in the mining sector, but secondly, because the pending trade wars have meant that central banks have been buying more gold as a safe haven. This type of demand rose 8% since last year, and gold buying by central banks is off to its best start since 2015.
FINSUM: Unfortunately, we have to disagree with this article. Buying gold as we move into a higher-rate and stronger Dollar period contradicts all the fundamentals of the market. Furthermore, we think if gold was going to benefit from trade war fears, it would have already started.
The oil market is continuing to thrive and the near-term outlook is strong. WTI oil, the US benchmark is currently trading at over $72 per barrel, while Brent, the world’s benchmark is at $80. The commodity is moving higher as markets are worried it will not be easy for producers to easily offset the losses of production in Venezuela and Iran, meaning supply may be constrained. OPEC generally agrees that when oil gets to $80 or above, it crimps demand.
FINSUM: The near term outlook for oil looks strong because of renewed US sanctions on Iran. However, in the longer term, the trade war seems likely to take a toll on emerging market economies, which will send oil demand and prices sagging.
Gold has been in the doldrums for a long time (and we mean long). The shiny metal is still down over 35% from its peak in 2011, and it has lost 8% this year. However, Barron’s is arguing that it is time for gold to shine. They argue that since gold is currently very cheap relative to other asset classes and inflation is increasing, the metal is poised to make a comeback. Gold has historically been a good hedge against inflation, which may drive its renewed appeal as inflation rises. The metal is currently trading around $1,200 per ounce.
FINSUM: The problem with this argument is that gold also tends to weaken as rates rise (because it has zero yield). So, how much will that offset any gains?