With stocks struggling to build on record gains, gold and silver reclaimed some lost ground Wednesday and remain close to two-year highs. Concerns over Brexit contagion are keeping the metals supported, but several other factors have surfaced this week that bode will for bullion prices this year.
Silver continues to attract plenty of spotlight thanks to its roughly 50% increase in 2016, which has outperformed golds almost 30% run. And the bulk of silvers current increase has occurred between June 1 and July 4, during which time the metal rose by 32% to top the psychologically important $21 level. Since the Brexit referendum on June 23, silver is up 17% versus golds 8% gain.
The gold-silver ratio has now fallen to about 66-to-1, down from the 83-to-1 difference hit in February. Should gold recover yet again and head for the $1,400 level as a number of analysts are now suggesting, then a falling [ratio] to 60 would suggest silver might be heading for the $23 level and up, wrote metals analyst Lawrie Williams.
Some see triple-digit silver: But even at 66-to-1, silver remains arguably undervalued compared with gold. We are mining today 9 ounces of silver for every ounce of gold, noted First Majestic CEO Keith Neumeyer, who sees the potential for triple-digit silver. Silver is way more rare than people actually think it is and the market is slowly waking up to that fact. I think the ratio should be trading at more of its natural ratio closer to 9 or 10.
Whether or not we eventually see triple-digit silver is unknown, but some other analysts and investment firms remain bullish. The real star of the show has been silver, Capital Economics wrote on July 1. We continue to expect silver to outperform gold over the next couple of years.
So does Michael Purves of Weeden & Co., who sees bullish potential in the gold-silver ratio as well. The extremes in this ratio reached during the gold and silver lows earlier this year have set the table for a substantial decline in the gold/silver ratio, which should result in disproportionate gains in silver, he wrote.
Regardless of which metal ultimately takes the prize this year, some new developments this past week could keep the bull run in both going. Chinas sagging economy and Brexit aftershocks are obvious bullish drivers for gold and silver, but here are four more:
Helicopter money is the new central-bank meme
Ex-Federal Reserve chief Ben Bernanke a proponent of helicopter money, which is just another name for massive deficit spending by governments in the form of infrastructure outlays and direct handouts to households visited Japan this week to discuss potential stimulus plans. Now current Cleveland Fed President Loretta Mester gave the tactic her blessing in an interview.
Were always assessing tools that we could use, she said. In the U.S. weve done quantitative easing and I think thats proven to be useful. So its my view that [helicopter money] would be sort of the next step if we ever found ourselves in a situation where we wanted to be more accommodative.
With central banks in the United Kingdom, Europe, Japan, and China all easing and devaluing their currencies, the U.S. Fed also is in no position to lift rates amid continuing post-Brexit uncertainty and historically weak U.S. growth levels.
U.S. presidential election heating up
The big political news of the past couple of weeks signals that the U.S. presidential election is now getting under way in earnest. Presumptive Democratic nominee Hillary Clinton will not be prosecuted for her email mismanagement, and her rival Bernie Sanders has now officially endorsed her, to the dismay of his rabid supporters. Meanwhile, Republican contender Donald Trump is surging in the polls, at least in key swing states, making the race too close to call.
And unfortunately, in a nation already harshly divided by controversial police shootings and the mass killings of five Dallas officers, the looming party conventions in Cleveland and Philadelphia could ratchet up those tensions even further. The FAA, for example, has already declared 34.5-mile no-fly zones over both convention sites. An already very hot summer could get even hotter if activists ranging from Black Lives Matter to disenchanted Sanders supporters disrupt either of the conventions.
Major investment banks are now warning that uncertainty from the elections is threatening to spill over into markets. UBS, for example, found that wealthy U.S. investors are holding record amounts of cash out of fear for their retirement accounts ahead of the Nov. 8 election. As campaign vitriol heats up even further, the volatility quotient is expected to rise. And as a result, the Fed is even more unlikely to raise interest rates ahead of the outcome.
South Sea China becoming geopolitical powder keg
Chinas military buildup in the South China Seas disputed Spratly Islands archipelago was dealt a blow by The Hague, which overruled Beijings claims to the contested waters. Nonetheless, China has vowed to continue flexing its muscles there with an air-defense zone, which puts it at odds with the Philippines and other nations with dibs on the area. The area increasingly is threatening to become a new military flashpoint between China and the U.S.
Renewed tensions there come on the heels of a NATO summit in Warsaw, Poland, and new warnings from Russian President Vladimir Putin that the world is on the brink of a new war.
Worlds biggest gold buyers to keep buying
And in a long-term strategy to undercut the U.S. dollars dominance, both China and Russia remain key buyers of gold via their central banks. And most other central banks around the world are buying to diversify their currency holdings amid global devaluations. Central banks around the world have increased their gold reserves by 2.7% from a year earlier to about 32,800 tons, the Nikkei Asian Review reported, citing a World Gold Council study.
And because of zero and negative interest rates proliferating around the world, these mega-buyers of bullion will have all the more impetus to keep loading up. With rates having turned negative in most of Europe and Japan and likely to remain so for some time on Brexit woes, the opportunity cost of holding gold has all but disappeared, wrote Simona Gambarini of Capital Economics. In particular, we expect central banks from developing economies to be the main source of demand from the official sector in the future.