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.
Gold is an interesting asset class right now. Everyone knows it has been in the doldrums for many years, but with recession fears brewing, and rates falling, the outlook is an interesting one. Goldman Sachs thinks gold is headed higher. Their thesis is that late cycle worries and falling rates will combine to push up the shiny metal. Falling rates will weaken the Dollar, further helping overseas buyers purchase gold.
FINSUM: In general, we like this thesis. However, we think gold would do better if there was more worry about a huge downturn/crisis, which there doesn’t seem to be. Fears right now are about a standard recession, which would help gold, but maybe not be ultra bullish.
All precious metals have been in a tough bear market for several years. Rising rates and a strengthening Dollar have effectively blocked any recovery. The question then is when do they get cheap enough that it is a no-brainer buy? Perhaps right now. Gold’s ratio to silver just hit its highest point since 2008, making silver a buy. Silver has fallen 16% this year, almost double gold’s fall, making it the cheapest in a decade. Gold currently trades at over 80x silver, compared to a ratio of just above 30x in 2011.
FINSUM: The big question here is a catalyst. What would spark a rally? We are not specialists in precious metals, so we won’t comment, but we are sure it will take something significant to break a 6-year slump like this one.
Sometimes looking at raw materials is a great way to get a signal on the economy, especially as they are frequently leading indicators for what is coming. Well, one metal is screaming of bad times to come—silver. Gold is priced at 82x silver, the highest level in two years, which is a seen as a poor indicator. “Money managers tend to favor gold when they think markets might turn rocky and discard silver when they are worried about slower global growth crimping consumption”, says the Wall Street Journal. 55% of demand for silver is for industrial purposes, which links it more with fundamental metals like copper.
FINSUM: So this is an interesting insight, but because silver is not a pure industrial commodity (it is also somewhat of a value store), this comparison does not seem quite as pertinent. Gold to copper would be more interesting.
Sometimes we just have to run a story for fun that has no relevance to markets or investing. This is one of them. Evidently, last week a plane flowing over Siberia (Yakutia to be exact) had its cargo hatch break open. When it did, $368m worth of gold bars, silver, and diamonds fell from the sky down onto the frozen landscape. The “drop” happened right near the airport and the company who owned the goods had to get trusted staff to recover the bounty, but not before going through metal detectors before they went home. Now locals think that not all the gold has been recovered and flights to the area are sold out all over Russia as treasure seekers come to the frozen region.
FINSUM: Sorry for the irrelevance of the story, but treasure falling from the sky and oversold flights full of treasure hunters was too much not to share.