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​Silver Spikes 7% - Here’s Why

19 July 2019

Precious Metals Commentary


We talked last week of gold consolidating in a range with a break up through $1,440 as potential indication of the next leg higher. We saw this on Thursday night with gold benefiting from some further dovish commentary coming from NY Fed President John Williams.

Gold moved higher to USD$1,444 at time of writing which is the highest price since 2013 in USD terms. Silver too staged a very sharp rally, rising over 7% in five days to USD$16.32, a high for 2019 and the best week in 3 years.

With AUD/USD above 70c we are trading at AUD$2,040 for gold, $23.20 for silver, platinum $1,216 and palladium $2,164 per ounce, with silver being the most interesting at present.

On a long term weekly chart, it seems like gold has quite convincingly started a new bull market. The range as indicated below is now very much behind us, so precious metals investors can start getting excited again once more.
 
Gold Price USD

There were a few commentators noticing that the initial breakout of gold above USD$1,360 wasn’t really followed through on from the gold mining stocks, and many noticed this as probable indication that the rally was not fully believed by many participants. In the past month however, the gold mining equities have taken off and the GDX gold mining index has also broken out, giving the nod to the belief that this move has long-term legs.
 
GDX
Silver is finally starting to react as expected, and we covered why silver has been so sluggish in a recent update here. The gold:silver ratio peaked earlier this week above 90:1 before falling back to 88:1 as silver rallied a full dollar higher. The breakout and sharp rally can be seen in the chart below.
 
Silver price chart

From a long-term perspective we feel a lot more confident in our theory that USD$14.00 per ounce will be the bottom for silver, and we expect it to play some catch up in coming years. If investor demand does pickup on the back of a rising gold price, one can expect silver to move quicker than most expect, as it doesn’t take anywhere near as much new investor funds to move the dial being a much smaller market than gold. US investors love momentum so if silver can get up through USD$17.00 we could really see investors coming back into the market after a 3-year consolidation.
 
Silver Price Chart
 

Silver Surges


A couple of weeks ago we discussed the gold:silver ratio and said that “at 92, the current ratio is unusually high and this would indicate that the probabilities favour a weighting towards silver at this time.” As discussed above, silver’s move has pushed the ratio below 90.

Gold/Silver

Silver was around A$21.80 when we published our ratio article on 28 June and it has put on more than a dollar since then, a gain of approximately 6.0%. Over the same period Aussie gold has moved from $2,012 to $2,040, an increase of 1.4%. This shows the power of a correction in the ratio, as well as the importance of having a bit of both metals as part of your overall precious metal insurance allocation.

While it is nice to get a call right so quickly, this was more luck than skill as we did not see the ratio turning around so quickly. It’s still early days in this move and we are likely to see silver take a breather. In ABC Bullion’s monthly technical report released yesterday, Nick Frappell sees 87 as a short-term target with a substantial barrier at the 82.75/83.00 level. This would get the ratio back to where it has spent a lot of time from Q4 2018 to Q2 2019.

As to the reason for the move, we said last week the “longer this situation continues, however, the increasing likelihood that traders see silver as undervalued and will shift to silver”. It seems investors noticed that at over 93, the ratio rubber band was stretched a bit far.

Inflows into silver exchange traded funds have been strong, with nearly 28 million ounces being added to the 20 funds we follow in the past four weeks, an increase of 3.7%.

For a longer-term target we have previously mentioned Metals Focus’ forecast of the gold:silver ratio reaching the low 70s in late 2019.  For what that means for silver, consider the table below, which shows the silver price at various ratios should the Australian gold price go nowhere by year-end.
 
 Ratio   A$2,040 
 90  $22.66
 80  $25.50
 70  $29.14

A$2,040 for year-end is very conservative considering the Australian gold price scenarios we discussed back in May.

If gold holds above $1,400, the Australian dollar weakens to Westpac’s 66 cent call and the ratio gets to Metals Focus’ low 70s, then A$30 by year-end is not unreasonable for silver. That would make for a merry 2019 Christmas for those with a spot of silver in their sack.
 

Platinum Pessimistic


While we are talking about relative value within precious metals, those who like a bit of speculative spice in their portfolio may want to look at platinum. The long-term chart below shows that platinum may have bottomed.

Platinum

The area around $800 is a long-term support and platinum has been bouncing off that for most of this year. GraniteShares, which runs a platinum ETF, says that platinum has seen fairly consistent support below $800 an ounce, so “the downside potential for the metal may be limited”.

CPM Group has noted unprecedented investor demand for platinum “seeing some bargain purchases in the market. Investors see little downside to prices.” The chart below from the World Platinum Investment Council shows the surge in investment demand, with a 3% increase in ETFs holdings in the past four weeks.
 
Platinum Investment

Commodity trading firm INTL FCStone notes that at current prices, about half of South Africa’s platinum production is currently unprofitable. They expect platinum to get into the low to mid $900s, a rise of about 13%, over the next 12 months.

Platinum’s sister metal palladium has been on a rollercoaster this year, bottoming around $1,300 and peaking at $1,600 twice.

Palladium

While it might look like palladium is turning back down, Metals Focus was reported as saying that strong fundamentals plus relatively modest futures speculative positioning “underpins our bullish price expectations for palladium, which we believe will sustainably break through $1,600 later this year and then go on to set new highs.”

As we said back in March, palladium is a “proceed with caution” trade. Platinum in our opinion looks to have a better risk/return trade-off.

In either case, if you want to take a punt on either metal, we would suggest that it should come out of your speculative money budget and not from your core gold and silver insurance holding. Our Platinum Pool Allocated provides the best buy/sell spreads but for those who like the feel of physical in the hand, PAMP minted bars are the way to go.
 

Billionaire Says Buy Gold


American billionaire hedge fund manager Raymond Dalio has in the past recommended putting 5-10% of a portfolio into gold. This week, he posted about issues we have previously talked about, like debt monetisation, currency depreciations and borrowers vs savers, and ended it with saying gold was essential to reduce risk in your portfolio.

His post has received a lot of attention across mainstream media, which we see as an interesting sign of a reawakened awareness by investors of our economic frailties. With gold having broken out of a long-term resistance level, we also think that Dalio’s strong recommendation of gold is also behind the media interest.

Dalio main point is that he sees a shift coming in the current investment paradigm (what he calls the way markets and market relationships operate). He says that if you want to be a successful investor, you need to be aware of these shifts and set up your portfolio so that you don’t get caught out when the rules of the game change.

At the moment, he says because there is too much debt and non-debt liabilities (e.g. pension and healthcare liabilities) monetary policy has to favour borrowers rather than savers. The problem is that the use of lower interest rates and quantitative easing is having diminishing returns and is unsustainable.

He therefore sees “that monetizations of [government] debt and currency depreciations will eventually pick up, which will reduce the value of money and real returns for creditors” that is, savers, and additionally large tax increases.

All of these things will result in negative investment returns, which “will lead investors to increasingly prefer alternative forms of money (e.g., gold) or other storeholds of wealth”. He sees gold as crucial to reducing portfolio risk in such an environment.

John Abernethy (Clime Asset Management) sees a similar dynamic occurring in Australia, saying that the RBA will eventually move from cutting interest rates to “buy the bad loan books (using QE) from the banks and deal with them outside the financial system”. Once this happens it will be in place for a long time, as it is difficult to increase interest rates because “capital losses that would be felt across the financial system, particularly by banks, insurers and pension funds”, making QE a perpetual band-aid.

James Rickards, who is speaking at our Global Case for Gold night on 20th August, may not be a billionaire but he is probably more qualified to comment on the gold market.

He says in a recent piece from our friends at the Daily Reckoning that gold is now firmly in a new multi-year bull market.

He notes that turning points from bear to bull markets are not always recognised in real time but “looking back, it’s clear that the bear market ended in December 2015 at the US$1,050 per ounce level and a new bull market, now in its fourth year, is solidly intact”.
 

Until next time,
 
John Feeney and Bron Suchecki
ABC Bullion
 
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at [email protected], or call us during trading hours on 1300 361 261.

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Disclaimer
This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.