By Myra P. Saefong, MarketWatch
Precious metals scored impressive gains in August, with gold logging a fourth consecutive monthly rise, though silver steadily outpaced the price climb of its sister metal. Both have plenty of reasons to move even higher in the weeks to come, analysts said.
“People are finally starting to believe that we are in a bull market in [precious] metals,” said James Hatzigiannis, senior strategist at Long Leaf Trading Group. “Silver is always known as a laggard to gold, and now you are seeing people getting into silver, and believing it’s a bull market.”
December gold settled at $1,529.40 an ounce on Friday, after hitting a more-than-six-year high earlier this week. Month to date, it has climbed by more than 6% and trades about 17% higher so far this year. Silver, by comparison, saw its December contract finished Friday at a more than two-year high of $18.342 an ounce. It’s up around 11% month to date, with its yearly gain at roughly 18%.
“Silver still has a lot of catch-up as the gold-silver ratio is still very high” at roughly 83 ounces of silver for one ounce of gold, said Drew Rathgeber, futures broker at Daniels Trading in Chicago.
“Silver still has a lot of upside potential,” he said. Back in January 2014, the ratio was at nearly 67, with gold at $1,283 and silver at $19.60 and if the ratio was at the same level today, silver would “be easily $20 plus per ounce.”
Silver is riding on the coattails of the gold rally. With a growing universe of negative interest rates, central banks debasing paper currencies, central banks accumulating gold, slowing global growth and trade war uncertainty, “gold has become [a] logical safe harbor for institutional investors,” said Michael Armbruster, managing partner at Altavest.
“In terms of upside potential, that is up to your imagination,” he said. “As long as the conditions described above persist, I would expect gold to continue to rise significantly from current levels.”
Gold futures settled at $1,551.80 on Tuesday, the highest for a most-active contract since April 11, 2013, according to FactSet data. Rathgeber believes that near term, gold is targeting $1,575 “overhead resistance,” and then should continue to $1,625 “if the current events stay in place.” If they don’t, gold could fall back to its support level at $1,275, he said.
Rathgeber also pointed out that negative yields have added an “additional ‘risk premium’ to gold as this would be an early indicator of a recession.”
The yield on the 10-year U.S. Treasury note has traded below the yield on the 2-year note this month, marking an inversion of the yield curve. Inversions can stir recession fears, which would also boost gold’s haven appeal.
“The power of negative yields means gold investors have little to no penalty for owning gold relative to certain foreign bonds,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. “To blunt gold’s gains, we would likely need to see some resolution to the current U.S.-China trade issues and some tariffs relief, which could spur economic activity.
For now, however, gold will continue to be influenced by the normal factors—interest rates, inflation, macroeconomic news, safe-haven interest,” said Jeff Wright, executive vice president of GoldMining Inc., but the U.S.-China tariff dispute is “certainly now a full on trade war with major catalysts each week and skirmish-sized news nuggets in between.”
The gold-backed SPDR Gold Shares exchange-traded fund /zigman2/quotes/200593176/composite GLD +0.58% offers a good way for investors to play gold, but there’s also the VanEck Vectors Gold Miners ETF /zigman2/quotes/206399889/composite GDX +1.95% , which tracks the performance of major and intermediate gold miners, he said.
As for silver, that “was under appreciated for most of 2019 as gold accelerated past $1,400 towards its current level, said Wright. As investors have begun “discussing gold getting ahead of economic news and maybe a reduced safe haven interest in gold, silver has begun to catch up.”
Some of the best ways to get exposure to silver right now include silver and gold producers such as Fortuna Silver Mines Inc. /zigman2/quotes/202122859/composite FSM +5.12% or McEwen Mining Inc. /zigman2/quotes/210257416/composite MUX +1.72% , said Wright, who holds positions in both stocks. The companies have significant silver production, as well as gold production in North and South America, he said.
Wright warned, however, that while silver is a precious metal, it is also an industrial metal, and “this aspect could hold silver back in an environment concerned about a global slowdown or recession.”