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Gold and silver have further to run

Gold could be heading to a peak price of US$2,300 an ounce over the next six-to-12 months. Silver should tag along with a rise to $33/oz, according to the latest analysis by Citi.
Gold and silver have further to run Gold and silver have further to run Gold and silver have further to run Gold and silver have further to run Gold and silver have further to run

Morgan Stanley said a weakening U.S. dollar and low interest rates, were powerful drivers of an investor rush into precious metals

Tim Treadgold

Over the shorter term, however, the investment bank's targets are $2,100/oz for gold and between $25-and-$28/oz for silver, with both of those prices still substantially higher than the latest prices of $1,953/oz for gold and $23.54/oz for silver.

Other banks are less confident about the price trends, especially for silver. Morgan Stanley believes silver needs "stronger fundamentals" for the price to be sustained much above its current level which is close to double where it was in March.

Both Citi and Morgan Stanley see further contraction in the gold-to-silver ratio, a measure of how many ounces of silver it takes to buy an ounce of gold which peaked at 120 in March (120oz of silver per ounce of gold) before plunging to around 84 thanks to the silver price rising faster than gold in the recent rush by investors into both precious metals.

Multiple factors are said by the banks to be influencing gold and silver, ranging from central bank gold buying, negative interest rates and an exodus from the U.S. dollar as the COVID-19 pandemic worsens in that country and the Presidential election campaign heats up.

On silver, Morgan Stanley said the weakening US dollar and interest rates at record lows, or even negative some cases, were powerful drivers of an investor rush into precious metals.

The most bullish investors were watching closely for a further contraction in the gold/silver ratio because the long-term average was 68 while the silver price was much higher after the 2008 global financial crisis when it rose to $35/oz.

"The silver market is notoriously volatile," Morgan Stanley said, adding that its greater exposure to fabrication demand than gold (85% for silver v 50% for gold) makes it "worth keeping a close eye on market fundamentals" such as supply and demand.

Citi said while it was always risky to say that "this time is different" there were reasons to say that the gold market today is different to 2011 when the metal reached its previous peak price.

"That is why U.S. dollar denominated gold prices can reach new record above $2,000/oz and stay in a higher range for longer," Citi said.

Apart from the obvious gold-price drivers of negative real investment yields, quantitative easing (money printing), and bloated central bank balance sheets Citi said there were three other factors supporting its "stronger for longer" gold-price thesis.

Citi's three points to justify its optimistic gold view are:

  • Central banks are net buyers of gold, a stark contrast to 2008/09 and the preceding decade. While 2020 in isolation is likely to show tepid official sector gold buying versus 2018 and '19, the bias to buy gold is clear amid a longer-term trend of de-dollarisation and reserve diversification.
  • The stock of negative yielding debt has soared. It is not just the sheer level of private a public debt outstanding globally, but the growth of negative yielding debt, which was close to zero during the GFC and is now over $14 trillion, thereby reducing the opportunity cost of holding gold, and
  • The unwinding of the US dollar which has lifted the effectiveness of gold as a currency hedge, having already soared to fresh records in non-US dollar terms against every other currency this year. Now, in the second half of 2020 gold is benefitting from US dollar weakness which contrasts sharply with the US dollar rally in the second half of 2008.

On the gold/silver ratio, Citi believes that could soon be heading for a range of 70-to-75, firmly breaking below the key support of 80 that has mostly held since 2018.

In effect Citi has a different view of silver to Morgan Stanley's concern about the need for improved fundamentals for silver to keep rising.

A recovery in manufacturing activity could lead to increase silver demand while the metal would also be more sensitive than gold to falling real investment yields.

But the key point in the Morgan Stanley view of silver is perhaps the simplest of all: FOMO - fear of missing out by investors keen to jump aboard the precious metals rally and finding silver to be the cheapest entry point.

"FOMO has come into play with silver-catch-up trades reinforcing the latest rally," Morgan Stanley said.