Gold Silver Reports — Global economic and political instability (including geopolitical tension) has prompted investors to resort to safe haven assets in 2016, with bullion being the most preferred investment instrument this year.
Gold is back after a three-year bear market and has emerged as the best performing asset across classes. The yellow metal has risen close to 25% since 1 January, the best half-year performance since 1980, Skynet Trading Solutions data showed.
Is 2016 the year of gold and silver?
Silver, following gold, has appreciated 28% in the first six months, leaving other assets such as the US and German bonds, Japanese yen and the US dollar far behind.
The US 10-year bond yields are down close to 80 basis points (bps) since 1 January, while the Germany 10-year bond yields are down 73 bps. Japanese yen has risen 17%, while the dollar index is down 2.53%. One basis point is one-hundredth of a percentage point.
Analysts said the shock result of UK’s EU referendum vote last week further strengthens bullion’s appeal as a safe haven asset.
The past three sessions following the Brexit vote saw gold prices spike about 5%, while silver advanced about 3%.
Strength in the US dollar was the major contributor to weakness in gold and commodity prices for the past few years. However, increasing uncertainty about economic and political developments, low-to-negative interest rate environment as well as doubts over global economic recovery post the collapse of Lehman Bothers in 2008 have led to demand for precious metals, analysts said.
Ronald Peter Stoeferle, managing partner and fund manager, Incrementum AG in Liechtenstein, attributes the return of gold as an asset class to growing economic uncertainty.
“The already tense political situation in Europe has been complicated further with the Brexit, which had not been expected by the markets… We believe that the events of the past year are validating our views and are maintaining our gold price target of $2,300 per ounce by June 2018. Apart from gold, silver and mining stocks offer very interesting opportunities,” said Stoeferle, who released the 10th edition of “In Gold we Trust’ report on Tuesday.
Gold for immediate delivery on Comex was quoting at $1,320.60 an ounce at 9:03pm in New York, according to Skynet Trading Solutions.
The price surge in the yellow metal this year is visible in gold-backed exchange-traded funds (ETFs). Gold assets in ETFs have expanded 13.5 million ounces this year to over 60.3 million ounces. Holdings in SPDR Gold Trust, the world’s largest gold ETF, rose 1.40% to 30.45 million ounces (947.38 tonnes) on Monday, the highest since July 2013. Tuesday’s data was not available at the time of publication.
New bull market
Stoeferle said that a new bull market in gold was emerging. The jaw-dropping rally during the first few months of 2016 can be seen as a hint of what may lie ahead, he added.
A Skynet Trading Solutions report on Tuesday quoting gold industry veteran Jake Klein also said that gold may be at the start of a major bull market if the UK’s Brexit vote proved to be a forerunner of greater political and financial instability around the world. Moreover, investment bankers such as Morgan Stanley and Goldman Sachs Group Inc. also raised their forecasts for bullion, citing flight to safety sentiment, it said.
Analysts said that the revival in interest in gold investments is also positive for inflation-sensitive assets like silver and mining (gold and silver) stocks.
Sugandha Sachdeva, assistant vice-president and in-charge, Metals, Energy & Currency Research at Religare Commodities Ltd, said that the market will also see the beginning of a strong run in silver prices, after the white metal yielded negative returns for the past three years and was a forgotten asset class amid consolidation.
“Global uncertainty, concerns of slowdown in China and weakness in dollar earlier this year had prompted investments into safe haven assets like gold and silver. This gave stellar gains in the first quarter this year. The bullish theme seems to be continuing with shock results of UK’s EU referendum vote and the global turmoil which it has evoked, leading to risk off sentiment in the market. The market will take time to understand the implication of Brexit on the global economy where volatility and wild price swings will continue,” Sachdeva said, adding that gold may touch Rs.33,200 per 10 grams by year end, while silver may test Rs.48,000 per 1 kg.
Sachdeva also highlighted gold-to-silver ratio as another indication for the rally in bullion prices. The ratio, which compares the value of a single ounce of gold with that of silver, spiked to 83.28 levels in late February. This was close to the peak level of about 84-85 seen in the aftermath of the 2008 recession.
At the time of crises, gold had rallied to $1,923 an ounce in three years from $681 an ounce. Silver rallied to $51 an ounce in three years from $10 an ounce, data showed.
“With risk off sentiment and investors engaging in the safety of gold and silver, the prices will get an upward thrust, where silver is likely to outperform gold over the medium-term. Overall, silver has regained its charm in 2016 after three years of weakness and consolidation. The current economic backdrop validates the continuation of upward trajectory where we expect bullion prices to march towards further highs over medium-term period,” Sachdeva added.
Comex Silver prices were quoting at $17.93 an ounce at 9:03pm in New York, according to Skynet Trading Solutions.
Gold futures for August delivery on MCX closed at Rs.31,315 per 10 grams on Tuesday, down 0.74% from previous close.
Silver futures for July delivery ended at Rs.42,346 per 1 kg on Tuesday, up 0.13% from previous close.