Most investors were probably surprised to see the sudden surge in gold and silver buying amid the COVID-19 crisis.
Now that economies are attempting to reopen, it's likely that many investors are wondering whether safe haven buying was just a mere blip in the bull run, or whether it’s an opening volley toward a much deeper and longer-term crisis.
Although “smart money” can’t predict what may be found on the far end of the horizon, we can at least take a look back to see how gold and silver has fared in relation to stocks in 2020.
Did precious metals provide an effective hedge? And which market presents us with a better investment opportunity?
Let’s take a look at a series of big-picture snapshots.
Gold and Silver Performance Year-to-Date
First, let’s take a look at the S&P 500, what most investors call “the broader market.”
We see a steep plunge, a sharp recovery, and now, another decline. Typically, when investors get spooked, they go to cash. So, let’s take a look at that next.
As you can see, the dollar rose and remained steady before dipping slightly as risk-off sentiment reversed and Fed stimulus indicated potential weakness in the months to come (money printing debases the purchasing power of cash).
A handful of investors and financial institutions sought safety not just in cash but also in gold and silver. Adding both metals to the mix, we get the next picture (using COMEX gold and silver as a proxy)
Gold outperforms all assets at 14.39%. The dollar comes in second at -0.47%. Silver saw a dramatic surge but is currently at third place with a -0.89% return. The S&P 500 falls again, currently at -6.51%.
Let’s take a look at gold’s and silver’s performance versus the S&P 500, Dow Jones Industrial Index, and the Nasdaq Composite.
As you can see, gold and silver are currently outperforming the S&P 500 and the Dow. The Nasdaq is the only stock index above silver and rivalling gold. In light of the coronavirus lockdown, cloud and virtualization services were critical to maintaining a working economy, so the Nasdaq performance sort of makes sense.
Gold is Outperforming US Treasurys, US Dollar, and Real Estate
When most investors think “safe haven,” they tend to think in terms of long-term US Treasuries. Gold is slightly outperforming 30-Year T-Bonds. The dollar, while in the negative, is holding steady (relatively speaking). Real estate, another popular investment, is the worst performing. Silver remains somewhere in the middle, near zero percent but slightly negative.
While gold has risen higher than most asset classes year to date, silver has remained largely undervalued.
Next on the list is a comparison not commonly made. Everyone knows of the legendary Warren Buffett. A brilliant investor, perhaps one of the best investors of our time, he’s also prone to making erroneous calls, just like any human being. Fortunately, his bad calls don’t impact him as much as those in which he’s right on.
Buffett isn’t a gold investor, so it might not impact him in the long run. But his opinion shouldn’t count for those who seek investment in gold. Why not? Because his view of gold--as an asset for appreciation--doesn’t have much in common with your seasonal gold investor, who sees in gold “sound money.”
Has gold appreciated well above the purchasing power of the dollar? Yes, absolutely. But to Buffett, gold has, as he famously said, “no utility.”
With that said, it’s hard to avoid not making a comparison between gold’s (and silver’s) performance and that of Berkshire Hathaway’s Class A shares.
Gold and SIlver vs Warren Buffet’s Berkshire Hathaway
Year to date, Berkshire shares are down -21.18%. Gold far outperforms it at 14.40%, while silver outperforms BRK.A by not losing as much, currently at -2.08%. Of course, this comparison is and isn’t like apples and oranges. But it comes to show that one domain value (capital appreciation) isn’t always applicable to another value (purchasing power preservation).
What’s the Best Buying Opportunity Now?
Just last month, the gold/silver ratio hit a 5,000-year high. That didn’t last very long and precious metals investors took advantage of that anomaly.
With the gold/silver ratio hovering right under 100, is it too late to invest in silver (or gold, for that matter)?
The ratio is a technical indicator. It doesn’t reflect fundamentals as accurately as economic data might. With infinite QE, a projected $10 Trillion Fed balance sheet by the end of the year, and no rate hikes through 2022, who can claim that gold’s value isn’t going to rise against the dollar’s debasement?
Gold has further to go...and given the astronomical Fed balance sheet projections, there’s no way to forecast just how high gold will rise.
Despite the promising prospects in gold, silver still remains undervalued.
Now, the “industrial” aspect of silver sees it rising during periods of economic recovery, but the “sound money” aspect will eventually see silver prices rise well before its second boost in industrial demand.
Looking at the current gold/silver ratio, the 10-year moving average sees the ratio at 70, not 100. So if that’s any indication, the gold/silver ratio is still way too high.
The better buy? Both are good, but silver wins out by sheer undervaluation.
Both markets have been advancing over the last few months. At this point, any decline in price, any correction, or even any “plunge” signals a strong buying opportunity.
Amdi all of the uncertainties in the world, from COVID-19 to questionable central bank actions to social turmoil (particularly in the US), there’s no better time to benefit from safety and sound money than now.