Gold bugs cheer new record, with silver hot on its heels

The gold price has finally surpassed its 2011 peak of $1,923.70 an ounce. And, after climbing 36% in the last month alone, the silver price has hit a seven-year high. Where next for precious metals?

That “sound you hear is thousands of gold bugs cheering”, says Tracy Alloway on Bloomberg. On Monday the precious metal finally surpassed its 2011 peak of $1,923.70 an ounce to set a new all-time high in dollar terms. In sterling, the yellow metal has long eclipsed its 2011 levels and was trading above £1,500/oz this week, marking a gain of 29% in 2020.

Falling real interest rates

Gold arouses strong emotions, says Russ Mould of AJ Bell. Bulls love the protection it offers against “unforeseeable disasters”; critics deride it as a “barbarous relic”. The bugs are in the ascendant now, and there is no shortage of things to worry about. 

Global instability; a possible descent into a deep recession and deflation; and the prospect of more quantitative easing and a surge in inflation have been keeping people awake at night for years now. 

The proximate cause of the latest rally, however, has been tumbling real (inflation-adjusted) interest rates. For example, the nominal interest rate on a ten-year US Treasury bond is currently about 0.6%, but take away expected inflation over the period and the “real rate” is closer to minus 0.9%. 

Low real rates are due to two key factors: first, low headline interest rates. Global central banks slashed rates in the face of the pandemic earlier this year. In many countries they are near or below zero. 

Second, rising inflation expectations. Market expectations of US inflation over the next decade plunged in March but have ticked up recently and currently sit at around 1.5%. This is likely to be “intentional”, as Sam Goldfarb points out in The Wall Street Journal. With little room left to cut interest rates, central bankers are now stoking inflation expectations in order to drive down real rates. That also helps reduce our huge post-pandemic debt load. Gold’s biggest drawback is that it pays no interest, but negative real rates mean that other safe assets (especially bonds) offer an even worse deal. Investors are thus flooding into gold. 

Plenty more to come

Some will wonder whether it is too late to buy in, says Adrian Lowcock of Willis Owen. Sadly, the current crisis is “far from over”. Even more monetary and fiscal stimulus is likely, weakening fiat currencies and risking an eventual inflationary spike. As gold is priced in dollars, the falling greenback is also helping (it makes gold cheaper in other currencies). 

The Pure Gold Company reports a 1,104% surge in demand over the last two weeks, including a 687% increase from financial professionals. Fear of a second virus wave in Britain, coupled with Brexit jitters and rising US-China tension, make for an unstable backdrop, says CEO Josh Saul. Gold is insurance; “the higher the risk the more expensive the insurance”. 

“Almost every box” is ticked off for gold to go higher, says Edward Moya of Oanda. Fears of a second wave and more stimulus? Tick. The dollar in “freefall”? Real rates tumbling? Geopolitics worsening? Tick. Tick. Tick. The rally might “take a break”, but all eyes are now on the $2,000/oz level.

Silver starts moving

If gold is the “money of kings” then silver is “that of gentlemen”, says Ned Naylor-Leyland of Jupiter Asset Management. The two precious metals are “siblings”. 

While the gold rally has grabbed the headlines, silver has gained 36% in the last month alone. It reached $24 an ounce this week and was close to £19/oz in sterling terms, a seven-year high. The pace of recent gains has been frenetic, with silver jumping by 15% last week. 

The rally has been driven by similar forces to those pushing gold higher: falling real yields and a growing desire for a safe haven. Yet the recent price action is a reminder that silver is a much more volatile commodity than gold. Silver tends to follow gold, but at a “lag”, says a recent Goldman Sachs note quoted by Krystal Chia and Ranjeetha Pakiam on Bloomberg. Typically, a gold rally gets underway first, then gold bulls, looking for a way to diversify their bets, turn to silver. The metal has been trading at “close to a record discount” to the yellow metal this year but is now stepping “out of gold’s shadow”. The gold/silver ratio certainly suggests further upside, says Naylor-Leyland. In 2011, when silver hit a record $49.50, you needed 32 ounces of silver to buy one ounce of gold, yet that ratio has expanded to approximately 80. 

In addition to being a precious metal, silver is also used in industry, including fast-growing areas such as solar panels, 5G networks and 3D-printing. Around half of silver demand stems from industry. Supply constraints are proving another tailwind, says Clara Ferreira Marques on Bloomberg. Latin America is the world’s biggest silver miner, but virus-linked closures in Peru and Mexico should see production fall by 7% this year according to figures from The Silver Institute. There is “room for silver to keep shining”.

Recommended

What tightening Covid rules mean for your money
Investment strategy

What tightening Covid rules mean for your money

The government has introduced new rules to slow the spread of Covid. John Stepek looks at what they could mean for the markets, interest rates, and yo…
9 Dec 2021
NFTs: what are they and why are they so popular?
Bitcoin & crypto

NFTs: what are they and why are they so popular?

The NFT market has been on a rollercoaster ride in 2021 starting with the $69m sale of a digital artwork backed by a cryptographic token known as an “…
8 Dec 2021
We’re at another turning point in the 100-year cycle of money – here’s what to do
Currencies

We’re at another turning point in the 100-year cycle of money – here’s what to do

Money has always moved in 100-year cycles. And we’re at another turning point now, says Dominic Frisby – money has gone from gold to government-backed…
8 Dec 2021
I wish I knew what a bond was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what a bond was, but I’m too embarrassed to ask

When thinking of investing many people automatically think of the stockmarket. But there is another market – the bond market. So what exactly is a bon…
7 Dec 2021

Most Popular

Three safe bets on the growing online gambling sector
Share tips

Three safe bets on the growing online gambling sector

Professional investor Aaron Fischer, creator of the Fischer Sports Betting and iGaming ETF, picks three of his favourite online gambling stocks.
29 Nov 2021
Making sense of the new minimum pension age rules
Pensions

Making sense of the new minimum pension age rules

The rules surrounding the minimum age at which you can start tapping into your retirement savings have been tweaked, but are still confusing. David Pr…
23 Nov 2021
Bubbles grow in global property markets as house prices continue to rise
Property

Bubbles grow in global property markets as house prices continue to rise

House prices grew by 6% in the year to mid-2021 in 25 global cities, with the German property market in particular showing signs of overheating.
3 Dec 2021