Monday Morning Wrap Up – August 10, 2020

That didn’t take long.

As the historic precious metals rally in 2020 continues, gold hit a major milestone last week at the $2,000 per ounce level – and kept on going!

Spot gold traded as high as $2,059.90 last week as the coronavirus pandemic created the perfect playbook for gold and silver to perform strongly.

Global central banks and governments continue to flood the economy with stimulus and cash which has lifted demand for tangible assets like bullion. With official Fed interest rates at zero – holding gold and silver is more appealing than ever. After all, there are really no interest-bearing assets for gold to compete with in today’s environment.

Interest Rates Plunge, Is Negative Next?

In fact, U.S. 30-year fixed mortgage rates plunged to an all-time record low at 2.88% last week.

That marked the eighth time since the coronavirus recession began that mortgage rates sank to a new low. This has sparked a flood of refinancing for existing home owners – if they have a job and can qualify under the financial industry’s tighter underwriting procedures in the midst of the pandemic. Banks are not eager to extend credit to consumers in the midst of the high unemployment rate and uncertain economic outlook.

The 10-year Treasury yield flirted with all-time record lows at 0.514% last week. Buy a 10-year note – and earn 0.514% interest?  Not very appealing indeed.

Negative interest rates have never existed in the U.S.

There are some experts who warn this could still happen here.

Negative interest rates in the US “are still possible,” according to a research note published last week by DataTrek co-founder Nicholas Colas. Indeed, earlier in 2020, President Trump called on the Fed to implement negative interest rates in the United States, so that the government can take advantage of low borrowing rates.

Wondering how that would work – and what it would mean for you?

If interest rates go negative – that means that banks charge you – the account holder – a fee to hold and store your money in their bank. It’s no wonder investments in gold are soaring this year.

U.S. – China Tensions Continue to Escalate

Last week, the Trump Administration struck back against Chinese technology companies.

The president implemented an executive order that would effectively ban TikTok and WeChat in the U.S. In China, WeChat is the primary chat app for consumers and also a major tool for payments, shopping and business transactions – with an estimated 1 billion users there.

It is similar to platforms like Venmo, Apple Pay or PayPal, here in the United States.

However, the parent company of WeChat includes a massive array of companies including video games studios, music companies and social media apps.

The rising U.S. – China tensions have fueled massive gold buying in Asia.

Precious metals sales surged 70% this year at Emperio Group, a retail store for precious metals in Hong Kong. Customers there are buying buying gold bars and coins because of low interest rates on bank deposits, while others are worried about U.S.-China tensions, the Wall Street Journal reported.

U.S. Starts Trade War with Canada

It’s not just China that the U.S. is wrestling with. Last week, President Trump said he will impose a 10% tariff on “non-alloyed unwrought aluminum” imports from Canada starting this month.  Canada stated that it would retaliate fully and that the government intends to impose countermeasures on U.S. products that will total CAD 3.6 billion.

Jobs Data Shows Progress – But a Drop in the Bucket Really

Last week, the U.S. Labor Department reported that 1.8 million new jobs were added to the economy in July. Sounds positive right? Remember, the U.S. economy is still down 13 million jobs since the pandemic began, with the overall unemployment rate still in double digits at 10.2%. Bottom line? The labor market remains in a recession and on shaky ground.

Precious Metals – Top Performing Asset Classes in 2020

The global rush into precious metals is monumental. Even as the stock market edges higher, investors remain skittish about the economy, geopolitical tensions, the upcoming U.S. presidential election and the long-term damage to the U.S. dollar from the Fed’s massive money printing scheme.

In the midst of the Covid crisis, gold and silver are the second and third top performing asset class this year.

What’s first? Surprisingly, lumber with a 60% gain in 2020. Chalk that up to scarcity and supply issues in a thinly traded market during the pandemic.

Behind lumber, silver is the second best performing asset class with a 52% gain year-to-date. Gold is turning in a remarkable 30% gain year-to-date.

The big question on everyone’s mind is will gold prices keep rising?

Here’s what Edmund Moy, previous director of the U.S. Mint said last week: It took three years after the start of the previous financial crisis for gold prices to peak. This crisis is far from over!

Goldman Sachs and Wells Fargo Investment Institute see gold gains to $2,300. In April, Bank of America Corp. raised its 18-month gold-price target to $3,000 an ounce – in its well named “The Fed Can’t Print Gold” research report.

Will Silver Outperform Gold Ahead?

While gold has been in the spotlight, silver is on a record run too this year.

In fact, July represented one of the best months for silver on record, and its highest monthly gain since 1979.

Silver bullion coin demand is robust in 2020, up over 60 percent to-date this year.

Notably, the gold: silver ratio — the quantity of silver ounces needed to buy an ounce of gold –peaked at 127:1 on March 18 and now stands at 72:1, a decrease of 43 percent.

Over the medium term, Bank of America sees potential for silver to rally to the $50 an ounce level.

Given the strong rally in gold – to a major milestone at $2,000 an ounce – a breather wouldn’t be a surprise. Markets don’t go straight up or down forever. Markets need time to consolidate and catch their breath.

Gold has hit a new all-time high – many think silver will be next.

Silver still trades well below its all-time high – at nearly $50.00 an ounce in late 1979.

The gold-silver ratio still reveals that silver is historically undervalued to gold – Readings above 65 signal that silver is severely undervalued and is a strong buy signal for the metal.

Look for silver to move into a leadership role in the next few months – as the next wave of this historic precious metals rally continues to unfold.

Just as you buy gold to diversify your stock portfolio, it is wise to diversify your tangible assets allocation. How much silver do you own? There’s a lot of runway between current prices and the all-time high in silver. Check out the historical price chart of silver here.

Until next week!

Best,

David