Underpriced silver begins to outperform gold

The gold surge and Covid-19 lockdowns are hurting Asian and other jewellers. Traditionally, India and China have been big buyers of the metal. But after the start of the latest bull phase in mid-2019, many more Western investors are buying,

London:- THE surge in gold prices and Covid-19 lockdowns are placing the Indian, Hong Kong and other Asian jewellery industries under acute pressure.

In contrast, leading gold companies that have managed to maintain production, are coining it. Their overall costs of around $1,000 an ounce are 45 per cent below the current market levels of $1,800 an ounce.

The big question is how jewellers will cope when each locality relaxes their respective lockdown regulations.

An extraordinary precious metals market

During previous gold booms, there was a switch to white metals such as platinum – currently priced at $833 an ounce – and silver, which is currently trading around $19.40 an ounce. Jewellery buyers, however, prefer gold as it contrasts with diamonds. But emeralds, rubies and other gems have become more popular and look good when designed with platinum and silver.

Ross Norman, founder of Metals Daily, a niche news service, contends that the current developments in the gold market are quite extraordinary. Mr Norman, a veteran in the precious metals community said that in normal times, the big buyers of gold have been India and China.

But after gold entered a bull phase in the middle of last year— when it decisively broke a key resistance level of $1,365— growing numbers of Western investors have been buying.

Such has been the move from east to West that gold inventories on Comex in New York have surged to 33 million ounces from 7.5 million ounces in 2019. This is almost a quarter of annual demand. The main reason for the inventory surge is that Covid-19 caused gold refiner production and delivery disruptions in March. Bullion banks could not deliver metal to US hedge funds, investors and other speculators. To cover themselves for the future and to meet a surge in demand, the bullion banks have built up Comex’s inventories to record levels.

There have also been soaring flows into gold exchange traded funds which rose by 778 tonnes worth US$42 billion to 3,665 tonnes (118 million ounces). The level now exceeds the 3,381 gold holdings of the Bundesbank, Germany’s central bank.

Mr Norman recalled that previous gold bull markets lasted seven to eight years.

The gold bull market of the 1970s ended when the price reached $850 an ounce early 1980. Gold then sagged falling to around $300 and the next bull market began after 9/11 rising to a peak of $1923 in 2011. Gold then fell back and bottomed five years ago. The serious lift off took place mid last year when it breached resistance of $1365 an ounce. In recent weeks it traded between $1650 and $1765. But it has broken decisively through that level and is again technically bullish.

Besides the multi-trillion- dollar rise in central bank fiat money reserves and the massive increase in US and global debt, the key driver of gold investors is the negative real return of US treasury bonds, Mr Norman said.

Gold is meeting some resistance around US$1,800 to $1820 an ounce. But it may well test the previous 2011 peak of US$1,923 in the coming months, Mr Ross predicted.

In 1980 before this chart begins, silver hit $50 an ounce. Gold then $850, was only 17 times more expensive. Silver then collapsed and for years traded between $4 and $5 an ounce because of massive stockpiles. It then began a new bull phase in 2004 and peaked just under $50 in 2011. The gold silver ratio was then 39. In March this year silver tumbled to $12, but more recently the very high gold silver ratio has dropped from 126 to 94. In other words gold is currently 94 times more expensive than silver. It is hardly surprising that in recent weeks silver, which is now in a bullish trend, is outperforming gold.

The coiled silver spring

The chart above illustrates the relative undervaluation of silver basically because it is perceived as mainly an industrial metal. True, but besides being a monetary metal, gold is also a commodity. In normal times jewellery is the main demand source and there are industrial uses for gold. Credit Suisse and some other investment banks are bullish, but the majority of hedge funds and other traders are bearish. Remarkably, considering that several Mexican and other silver mines have cut production, hedge funds and bullion banks are short. The Commodity Futures Trading Commission (CFTC) shows that net short, i.e. bear silver positions reached 77 million ounces on July 7. There was a similar CFTC situation for gold in 2018 when it was priced at $1150 an ounce.

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Growing numbers of bulls but precious metals are not immune to an overall market slide

As it happens in any bull run, investment banks such as Goldman Sachs are issuing optimistic predictions about gold’s future. A year ago, gold was off the radar of many investment advisors who are not commodity specialists. Now these people say its prospects are much brighter.

Georgette Boele, foreign exchange and precious metals analyst at ABN Amro, has upgraded her gold forecast to $1,900 by the end of the year and US$2,000 in 2021.

“We recognise that the stars are still aligned for gold prices and therefore the momentum is very positive. But we are also concerned about positioning,” Mrs Boele said.

“Speculative positions are substantial and positions in ETFs are at an all-time high. If investor sentiment deteriorates, some of these positions will likely be closed. This will cause higher volatility in gold prices.”

“We still expect a sizeable correction in gold prices in a risk off environment when the dollar is back in favour,” she added. “But it is likely that this correction will be short-lived and be a buy-on-dips for investors eagerly waiting to step in. After such a correction prices could rally again.”

Indian and Chinese investors are buying too

Gold is trading close to a record of 50,000 rupees (S$923.5) for 10 grams in India and prices are now trading at a premium over international quotes.

James Steele, a precious metals analyst at HSBC contended that the border tension between China and India could be driving demand there.

© Neil Behrmann— adapted after it was first published in The Business Times Singapore

Other selected articles of Neil are placed on neilbehrmann.net

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