We have been holding Gold (and Gold miners) in client portfolios for some time. We believe there are a number of contributors that have led to Gold’s recent strong performance and that this will continue in the near to medium term. This includes the following;
- High Levels of Government Debt, particularly in the US, are leaving investors concerned about “money printing” and the effect of inflation on currency.
- Following the sanctions of Russia, USD holdings in the world (those not so friendly with the West) have been looking to store their wealth in different assets, making them less at risk to US policy.
- China is looking to join the US as the most powerful country in the world and has started trading with numerous countries in Yuan. A good example is Russia, following the above point, where it sells its energy, buys goods from China and then stores its surplus in Gold. This is particularly becoming prevalent in the BRICS countries.
Gold has traditionally been a monetary metal, which is why we have taken that position.
Silver, whilst being used predominantly as an industrial metal these days, was once a monetary metal. We believe that the demand for silver as an industrial metal in things like electronics will continue, but it will also recapture a bid for its monetary characteristics.
There is an interesting dynamic in the silver market where paper buying and selling were traditionally used to suppress the price, according to many market watchers. However, now with the East physically buying the metal, we believe this game has radically changed, and we are starting to see disruption in these markets. This is an opportunity, and those who hold silver will benefit.
Important, the price charts of silver are indicating a break above a long-term high price for silver at about USD$50 late last year. There has been extreme volatility in the underlying price, but we believe that it will continue to push higher over the next 6-12 months, although the path it takes is highly uncertain.
Importantly, the price of silver adjusted in inflation terms is still very cheap, and the chart below indicates that it may be breaking out (the same way gold has).
If you take the view that the silver price will be stronger than the silver miners also provides a compelling opportunity. Interestingly, silver is mostly mined as a byproduct, so the rise in price won’t necessarily see more production targeting silver as it is not their core business. Generally, when there are higher prices for the underlying, this encourages more supply, which ultimately leads to lower prices as a result if there is no increase in demand.
Written by Rob Coyte
CEO, Shartru Wealth
