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- XAUUSD – Spot Gold
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- XAUXAG – Gold-silver ratio
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- ISLN: xlon – iShares Physical Silver
Gold traded quietly around $ 1800 / oz when I began my annual summer vacation in mid-July. Three weeks ahead and the market has grown by more than $ 250 before so far giving a quarter of that back in an over-correction. Silver meanwhile jumped by 50% to reach a value in price in gold close to the ten-year average.
Gold and silver are two of the best-performing assets this year, overshadowing the much-hyped technology heavy Nasdaq.
Why now?
Why did these two metals come to life in such a dramatic way at a time when risk appetite for equities was strong and economic data began to stabilize. There are several reasons, one is of course the time of year when liquidity tends to decrease as traders leave their offices for the beach. But overall, the renewed weakness in real US yields and the sudden drop in the dollar were the two main catalysts that helped trigger the rally.
Since gold broke above $ 1400 / oz last June to start its rally, we have highlighted the importance of real returns. Some of the major movements in gold in recent decades often began with developments in the bond market. The real return is the return that an investor receives on holding a bond position if the nominal return is reduced by the expected inflation over the life of the bond. Current inflation expectations would normally increase nominal returns, as investors want to compensate for the lower real return
Yield curve control, cited as the potential next step by the US Federal Reserve, closes the nominal yield on a particular maturity date at a certain level above where the central bank enters and buys what bonds there are to prevent growth any further. Such a development would render investment in fixed income useless as an asset for safe haven, especially in a period where inflation is expected to make a comeback. Not only because of the massive amount of liquidity that central banks have provided, but also because of unusual government stimulus that creates the political need for higher inflation to support rising debt levels.
The U.S. bond market has behaved since April as a yield curve control already in place. While the yield on U.S. Ten-Year Notes (chart above) is anchored within a relatively tight range, real yields and breakeven have moved in opposite directions. A development that supports the fundamental investment business for keeping precious metals in a balanced portfolio.
Falling real yields help support another gold-friendly development, as it helped drive the dollar lower. The Bloomberg Dollar index fell to a two-year low, while the euro reached € 1.19 before gains appeared again on Friday, when real yields turned higher to a stronger-than-expected US job report.
What’s going on now?
The weakness seen since Friday’s stronger-than-expected U.S. job report has begun a battle between short-term tech traders looking to sell, as the steep uptrend has broken and long-term buyers moving above $ 2000 / o miste. Gold’s ability to frustrate will be seen in the coming days as the market consolidates. We see support at $ 1980 / oz followed by the very important level of $ 1920 / oz, the previous peak of 2011.
Overall, we maintain a Bullish Outlook for gold and silver with loose monetary and fiscal policies around the world that support not only gold and silver, but potentially other mined commodities as well. Real tariffs – as noted earlier – remain by far the biggest driver for gold and the potential introduction of yield-curve control combined with the risk of rising inflation – as US authorities try to overstimulate the economy – should see these tariffs on record remain low levels, thus supporting the demand for metals.
An increasingly volatile US election season combined with current US-China tensions is likely to add another layer of support through demand for safe haven. The potential for even lower real rates would also have to support a continued weakening of the dollar, creating the trifecta of executives having to support investments in precious metals.
Silver roller coaster of year from $ 18.5 / oz in February to $ 12 / oz in March and now $ 28 / oz marks the often extreme volatility that this semi-precious metal can produce. The strong rise of Silver has, apart from the strong momentum attracting new investors, been driven by a combination of its relative cheapness to gold – now removed – and the tailwind that comes from growing industrial demand.
Not least from a continuous pickup of solar panel manufacturers as the movement toward de-coalition continues to gather momentum. The potential additions to demand could push silver into a persistent shortage in the coming years, similar to the period 2006-2011, which ended in silver reaching almost $ 50 / oz.
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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd., part of Saxo Bank Group via RSS feeds on FX Empire
