Gold and Silver Continue to Show Promise

With precious metals enjoying solid performances in 2019, Institutional Investor's Gregor Spilker outlines why he believes the future continues to be bright.

As Institutional Investor's Gregor Spilker points out, 2019 has been a good year for the precious metalsmarket. All four precious metals have enjoyed sizeable gains since the start of the year, as investors' appetite for risk-off assets has intensified amid various geopolitical escalations. Yet, as Spilker notes, gold has managed to stand out from its fellow metals by a considerable margin as the market continues its best run in years.

Gold first breached the $1,400 level in June, its highest mark in six years, on the back of a dovish turn by the Federal Reserve. Gold's performance was all the more impressive given that the outbreak happened during what is generally regarded as the metal's weakest quarter. Having managed to avoid the usual summer doldrums, gold climbed as high as $1,553 at one point, with private banks across the board upping their price forecasts for 2019 and 2020. Year-to-date, the yellow metal is up nearly 20%.

Gold's stellar run further highlighted the strange valuations in the silver market. Although the two metals generally move together and silver also saw its share of gains this year, the gold/silver ratio is currently just shy of 87, which is not too far off from September's all-time record of 92. With an average of 64 over the past two decades, silver's price is roughly 33% lower in contrast to gold than it has been in recent years. Analysts and pundits have pointed out that instances such as these have resulted in a massive price catch-up in the silver market, and Spilker notes that some investors are bracing for a normalization of the gold/silver ratio.

Platinum is experiencing similar price issues, with an unprecedented $600 premium on gold over platinum. This is especially conspicuous, as the metal was priced higher than gold before 2010. Spilker believes that a reduction in demand from the automotive industry is partly to blame, adding that both investors and jewelers may want to capitalize on historically low prices.

Yet palladium, whose demand is twice as dependent on the automotive sector, has managed to move above $1,600 for the first time ever this year. In doing so, it has nearly doubled in price compared to the lows of July 2018. According to Spilker, this could be a result of tighter emission standards, a move away from diesel engines and the relatively few mining options available.

Nonetheless, for most investors, gold's breakthrough across multiple long-held resistance levels over the span of just a few months has been the tale of the tape this year. With numerous forecasters calling for gold to hit $1,600 and above in 2020 and the silver market potentially facing a major price explosion, there appears to be plenty more action in store for precious metals as we move into next year.

Analysts Predict That Gold Has Enough Force To Move Above $2,000 An Ounce

Gold has seen colossal momentum so far this year, enabling the metal to pick up generally 20% since January

Gold has enjoyed tremendous momentum so far this year, allowing the metal to gain roughly 20% since January. The strength of its drivers became especially prominent this summer, when gold climbed above six-year highs during what is normally its weakest quarter.

Although gold continues to make moves above $1,530 an ounce and many analysts have upgraded their near-term forecast to $1,600 an ounce, a MarketWatch article reports others are seeing $2,000 as a more realistic level in gold's immediate future.

In a recent publication, Brien Lundin, editor of Gold Newsletter, drew a line between what he sees as short- and long-term factors powering gold's remarkable run. The former category includes the now-infamous U.S.-China trade war, whose ongoing escalation has sparked fears that the dispute will bear a heavy toll on the global economy, sending investors flocking towards safe-havens.

According to MarketWatch, other short-term boosters include renewed threats of a recession occurring in the U.S., which were present throughout the Federal Reserve's hiking schedule but came to special prominence due to the recent inversion of the yield curve in both the 2-year and 10-year Treasuries. The likelihood of successive rate cuts by the Fed and persistent weakness in global economic data reports have also played their role as gold's near-term tailwinds. Deric Scott, vice president and senior analyst at precious-metals retailer Metals.com, has also pointed to conflict in Hong Kong and Iran as two events that have been pushing investors towards safety.

Yet both Lundin and Stan Bharti, chief executive officer of private merchant bank Forbes & Manhattan, believe that there is a much stronger force driving gold's prices, which will ultimately result in gold surpassing its all-time highs. In the MarketWatch article, Bharti notes the last 8-10 years have seen investors jump onto the bullish bandwagon in the stock market in a low-interest environment. Yet Bharti thinks that this era is drawing to a close, and that inflationary concerns will once again drive investors back to hard assets.

Lundin also sees the likeliness of heightened inflation as a key element to higher gold prices, as gold has historically acted as the premier hedge against depreciating currencies. The analyst thinks that any indication of quantitative easing (QE) in the U.S. would send gold soaring. Recently, both the Fed and the European Central Bank have hinted towards looser monetary policies in the near future, including a possible return to QE programs.

Over the short-term, Bharti sees gold jumping from its current levels to reach $1,600 in the next quarter. By the end of next year, the CEO expects gold prices to climb above $2,000 an ounce. Lundin echoed Bharti's sentiment, stating that gold's climb to $1,800 or $2,000 is a near-certainty over a longer stretch of time.

Gold/Silver Ratio Suggests Silver's Day is Coming

Lobo Tiggre says silver recovery coming, with the possibility of gaining a minimum of 25%.

Like many analysts before him, Kitco's Lobo Tiggre recently took note of just how disproportionate the gold/silver ratio is. According to the Kitco article, the ratio remains at historic highs of around 85, meaning that roughly 85 ounces of silver are needed to buy one ounce of gold.

Tiggre thinks this perfectly illustrates the harshness of silver's price lag behind gold. Over the past few decades, the ratio has stood firmly between 50-60, which should put silver prices above $21 an ounce based on gold's current standing. Going back further, the gold/silver ratio was usually tied closer to the metals' natural supply. U.S. law initially set the ratio in coinage at 15:1, while Ancient Rome had it at 12:1. According to the article, a ratio of even 18 would translate to silver prices of roughly $70 an ounce.

All this is happening during a time when demand for silver is flourishing, both among investors and manufacturers. While there isn't a clear explanation as to what's causing diminished silver prices, Tiggre places the blame on excessive above-ground supply due to silver mostly being mined as a byproduct of other industrial metals. Because these metals have been doing very well lately, a surplus of silver ore has been dug up that should become depleted in the near future. In reality, true silver mine production has been falling behind demand for years, reports Kitco.

Tiggre believes we can take cues from past occurrences where the gold/silver ratio was so out of proportion. In each of the three instances over the last two decades, an excessively-high ratio quickly made way for a major rebound in silver prices. Tiggre notes, however, that there are several technical differences this time around.

Silver was always more volatile than gold, meaning that spikes in gold prices such as those in 1980 and 2010 led to even greater spikes for silver, states the articles. Exacerbating this point is the fact that silver prices have been moving further away from gold since 2011. If previous charts are any indicator, this means that the next instance of silver playing catch-up will be momentous.

There are other factors that could expedite or intensify silver's comeback. A potential strengthening of China's economy could offset the global growth deceleration and provide silver with even more tailwind. Jewelry demand is already expected to intensify in the Asian nation this year, and an economic boom would deplete silver's available supply even faster. The latter will happen largely due to solar panel production, explains Tiggre, as manufacturers will no longer be able to cut production costs through silver once panel demand ramps up.

To Tiggre, the question of silver's recovery has long become a matter of when, not if. Instead, the analyst is now searching for optimal entry points before a price leap that should, according to historical precedent, see silver gain a minimum of 25%.