Money Talks

December 6th,2019

LAWRIE WILLIAMS: Gold: Silver ratio elevated again

After falling to a little below 79, the Gold:Silver Ratio (GSR), which effectively measures the amount of silver needed to buy one ounce of gold, has now bounced back again to around 87-88, still comfortably below the peak of well over 90 reached earlier this year, but perhaps offering yet another buying opportunity for gold’s more volatile sibling. A number of precious metals analysts and investors had predicted falls in the GSR to the low 70s or below thus favouring silver investment over gold, but this has not been the case so far with the white metal mostly underperforming the yellow metal.

We were among those tipping the more volatile silver over gold as the better investment option given silver’s historic relationship with gold which tends to see it outperforming when gold is rising, but underperforming in a falling, or static, gold market. The latter certainly seems to be the case over the past few weeks when the gold price has turned weaker and has given up some of its earlier gains with the silver price suffering accordingly. Silver is perhaps not helped by the fact that its demand is largely industrial in nature nowadays, but its past perception as a monetary metal means that it still tends to move pari passu with the gold price.

We still rate silver as having the potential to outperform gold in the medium to long term, but this is happening far slower than we anticipated earlier. Given its underperformance over the past few years when gold, too, was in the doldrums, silver had largely fallen out of favour with investors who have been mainly seduced away by the seemingly ever-rising equities markets, generally ignoring how vulnerable the latter appear to be if looked at from a historic perspective. The parallels with the 1929 equities mega crash do seem to be worrying. This was pointed out very succinctly in a recent ‘Things that make you go hmm..’ newsletter (www.ttmygh.com) newsletter from Grant Williams as it has been by several other analysts who look at these historic trends too! History does tend to repeat itself as many have found to their cost in the past. The investment public does seem to have a collective short term memory.

What should be worrying for the equities investor who eschews precious metals as a safety net is that a number of extremely high profile mega-investors have been openly sinking their wealth into precious metals – and gold in particular. They may be a little ahead of the game, but better being early than too late as markets can crash extremely quickly. They see the downside risk of investment in precious metals as limited, while at the same time being much more nervous about the potential trajectory of the equities markets.

As long as the Fed keeps interest rates low to negative and continues to support market liquidity, all well and good for the equities markets, but there are indications that the Fed is looking at changing course, if only marginally. If it does so, and gets its calculations just a hair wrong, as has been its tendency in the past in its easing and tightening measures, this could precipitate a massive market turndown and more than justify those mega-investors’ faith in the wealth protection attributes of the principal precious metals.

The ongoing U.S./China trade dispute also has the potential to disrupt markets as we have seen over the past few days when a seemingly aggressive comment from President Trump suggested that any deal with China may be further into the future than many had been anticipating. This, which may turn out to have been a negotiating tactic, boosted precious metals prices and hit equities, although the latter made something of a recovery the following day, Trump may also be aiming to escalate his trade war singling out other countries where the decline in the value of the domestic currency against the dollar is making American goods more competitive. He has also threatened France with significant tariffs on some key exports in response to the latter attempting to clamp down on U.S. –based tech company earnings there. Trade wars seldom do anyone any good and the latest developments provide yet another potential hiccup for equities markets.

Gold settles lower as report indicates progress in U.S.-China talks

Gold futures finished lower Wednesday, pulling back from a near one-month settlement high a day earlier, after a report that trade talks between Beijing and Washington are progressing dulled some haven demand for the metal.

Just a day earlier, President Donald Trump suggested that he could delay a partial resolution until after the 2020 presidential elections.

“Gold prices continue to trade off of every trade headline,” said Edward Moya, senior market analyst, at Oanda.

Bloomberg News reported early Wednesday that a Sino-American trade pact was close to coming to fruition and that details on a partial roll back of import duties was being discussed, despite recent rhetoric that suggested that the tensions between the parties was becoming inflamed.

Gold for February delivery GCG20, -0.36% on Comex lost $4.20, or 0.3%, to settle at $1,480.20 an ounce, after jumping 1% Tuesday to the highest settlement for a most-active contract since Nov. 6, according to FactSet data. March silver SIH20, -0.70%, meanwhile, dropped 33.2 cents, or 1.9%, to end at $16.916 an ounce, following a 1.7% surge in the previous session.

The fresh reports come after Trump on Tuesday said it might be preferable to hold off on completing a long-awaited U.S.-China trade deal until after the November 2020 presidential race.

The developments around trade come ahead of a Dec. 15 deadline for the imposition of fresh import tariffs on China.

Gold has benefited from lower yields in government debt recently, like the 10-year Treasury note TMUBMUSD10Y, -0.09% which suffered its biggest one-day drop since Aug. 1 on Tuesday, and softness in the U.S. dollar, as measured by the ICE U.S. Dollar Index DXY, -0.02%. Lower rates can reduce the opportunity cost of owning gold versus the perceived safety of government paper and a weaker buck can make dollar-pegged bullion more attractive to buyers using other currencies.

Gold continued its decline despite some disappointing U.S. data, with U.S. private sector employment up by 67,000 jobs in November, according to payroll processor ADP—the smallest increase since May. The ISM services survey dropped to 53.9 in November from 54.7.

Still, the uncertainty surrounding a trade deal, even in the face of Wednesday’s optimism, has tempered the enthusiasm for gold bears.

“Appetite towards the precious metal is likely to receive a boost if Washington moves ahead with the tariff hikes on December 15,” wrote the research team at FXTM in a daily research note. “Brexit and global growth concerns are also seen as other risks which may push the precious metal higher in December.”

“Gold still offers up the cheapest hedge against a significant drop in equity markets, and it makes sense given the Fed’s responsive nature to toggle the rate cut lever,” wrote Stephen Innes, chief Asia market strategist at AxiTrader, in a Wednesday report.

Among other metals Wednesday, March copper HGH20, +0.39% added 1.4% to $2.659 a pound, to recoup its 1% loss from a day earlier. January platinum PLF20, -0.22% fell by 1.1% to $901.80 an ounce, while March palladium PAH20, -0.22% settled at $1,845.40 an ounce, up 1.2%.