‘Ottawa’ Gold or Silver? The Right Answer Might be Both After Their Recent Rally
Gold and silver have been on a hot streak in the past month and analysts say there could be more price gains for the precious metals on the back of a weaker U.S. dollar and declining mine supplies.
Silver has been the hotter performer of the two, gaining 15 per cent in April, compared to the 4.4 per cent return bullion posted. Last month’s rally means that silver is now up roughly 27 per cent for the year while gold is up 20 per cent.
The gains mean that analysts are now raising their forecasts for precious metal prices, after spending much of the past two years cutting their outlooks.
“Despite the increase in the gold price year-to-date, we believe that the rally has more room to run,” said TD Securities analysts led by Greg Barnes in a note to clients. “Since the FOMC raised rates in December 2015, market expectations for future rate hikes have diminished on increasing concerns over a slowing U.S. economy.”
Gold prices in particular have been hard hit in the past few years as many investors fled the precious metal on expectations that the U.S. Federal Reserve would begin normalizing its interest rate policy. Bullion had rallied strongly in the early years following the financial crisis, boosted by fears that rock bottom interest rates could spur runaway inflation. It also found popularity as a safe haven investment as market volatility increased in the post-crisis years.
But the end of the Fed’s quantitative easing program and the move in December to raise interest rates led prices to fall to six-year lows and concerns that it could fall below the US$1,000 an ounce mark — a key psychological level for investors.
Prices have rebounded since then, with future prices now near the US$1,300 an ounce level. The rebound mirrors the declining expectations of further interest rate hikes this year. While the market expected the Fed to hike four times this year as of December, those expectations have now diminished to just two hikes this year. Prices have also gained a boost from concerns over declining production of gold — Credit Suisse predicts that mine supply will contract 2.1 per cent a year from 2015 to 2019, resulting in eight per cent less production in 2019.
Analysts note that silver has rallied even more sharply than gold because of how oversold the precious metal had become relative to gold prices earlier this year. The silver-to-gold ratio, which represents how many ounces of silver are needed to match the price of one ounce of gold, topped more than 80 in January, the first time it had moved above that mark in 13 years.
While silver tends to play catch up to gold during precious metal rallies, analysts note that gold prices currently have stronger fundamentals to support further prices increases.
“We believe the gold:silver ratio will retest highs above +1 standard deviation given stronger fundamentals in gold, lack of major drivers in silver fundamentals, international capital flows and a heightened geopolitical risk premium, factors which we believe favour gold over silver,” said Anita Soni and Robert Reynolds, analysts at Credit Suisse, in a note earlier this month.
While this is the strongest rally in some time for both metals, there are risks that it could fizzle. Much of the gain has depended on curbed expectations of interest rate hikes this year and the resulting weakness of the U.S. dollar. A potential reversal of the that trend could send gold and silver prices back to their 2016 lows.
Still, analysts at TD Securities note that even if the Fed is more aggressive this year, the other large central banks around the world continue to loosen their monetary policies. As a result, TD raised its forecast for gold prices to US$1,350 an ounce next year (from US$1,300 an ounce) and for silver prices to US$18 an ounce (from US$16).