A hopeful prospect for Silver

The Gold price has shown little substantive reaction to the important announcements from Fed Chair Jerome Powell this last week. We were always looking for a clearer indication of when the much-anticipated Fed tapering (reduction is bond purchases) would begin. The assumption was always that if there was a clearer direction from the Fed, this would assume that the US economy was in recovery mode and that the end of tapering could herald higher interest rates. This would – in the main – be relatively negative for the price of Gold.

What we saw this last week was a clear indication – without exact timelines – that the tapering would begin this year – possibly as early as November. We also did not get further clarity on the issue of the tapering versus whether US interest rates would also rise. What we have seen is a rise of US Treasury Yields and another rise in the US Dollar which usually keeps the Gold price from moving northwards. As a result, we saw the Gold price softer – but not dramatically so. There would seem to be some support for the price at around $1750 and the price has largely hovered around this resistance level.

However, we are increasingly seeing major investment houses be a little more bearish on the Gold price for 2022. This is in line with an overall view that the return to a more normal economy with some rises in inflation are not drivers for major price increases.

In recent days, CitiGroup have been predicting a Gold price for 2022 averaging $1600 per ounce. This is hardly positive for investors but it must be remembered that selling Gold coins should not really be based on this more uninspiring prediction.

Although one should perhaps moderate any expectation that the price of Gold is likely to really rise substantially, it remains a diversifier of asset classes, it is a hedge against inflation and against the possible depreciation of the South African Rand. It is also a very portable asset that can be handed down from generation to generation.

In other words, the prevailing economic trends point to a Gold price that is unlikely (at this stage) to show great growth potential. But, the underlying reasons to hold Gold remain as sound as ever.

While much of the analysis of commodities and investment centers around Gold, there has been more of a focus on Silver in recent weeks. Morgan Stanley have expressed a view that under current circumstances, Silver might be a better investment in the medium-term. It is noteworthy also that Silver will increasingly be used for electric cars and solar panels. There is therefore potential for substantial demand for these products in coming years and combined with the depletion of Silver resources, price rises of the metal could be sustained.

Since Silver has a cheaper entry point now and the forecasts refer to the positive impact of the industrial use of the metal, an added focus on silver investment products may be worthwhile.

Morgan Stanley offered 5 broad reasons for an era of the outperformance of Silver over Gold.

  • 1) Silver may be more tied to the global economy
    “Half of all Silver is used in heavy industry and high technology. As a result, Silver is more sensitive to economic changes than Gold, which has limited uses beyond Jewellery and investment purposes. When economies take off, demand tends to grow for Silver.”
  • 2) Silver may be a better inflation hedge
    “Historically, both Gold and Silver have made solid gains when US inflation is rising. Both metals are valued in US dollars, so when the dollar falls in value, Gold and Silver typically rise because they become less expensive to buy using other currencies. Given greater industrial demand, Silver tends to rise more than Gold with rising inflation and a falling dollar.”
  • 3) Silver is more volatile than Gold
    “The volatility in Silver prices can be two to three times greater than that of Gold on a given day. While traders may benefit, such volatility can be challenging when managing portfolio risk.”
  • 4) Gold has been a more powerful diversifier than Silver
    “Silver can be considered a good portfolio diversifier with moderately weak positive correlation to stocks, bonds and commodities. However, Gold is considered a more powerful diversifier. It has been consistently uncorrelated to stocks and has had very low correlations with other major asset classes – and with good reason: Unlike Silver and industrial base metals, Gold is less affected by economic declines because its industrial uses are fairly limited.”
  • 5) Silver is currently cheaper than Gold
    “Silver is much cheaper than Gold, making it more accessible to small retail investors. For those who are just starting to build their portfolios, the cost of Silver may make it a better investment choice.”