As we head into Q3, let’s take a moment to look back to see how gold and other assets have fared in the last quarter and YTD. Let’s also look at how Fed policy has impacted the price of gold, the direction of the gold/silver ratio, and what you can expect in the last two quarters of 2020.
A Synchronized Breakout in Gold and Silver
Gold and silver plunged along with almost all other assets during the ‘coronavirus crash’ in March. Gold fell to as low as $1450 an ounce, while silver fell to a low of $11.64. Yet both metals recovered in less than a week--gold rising 23% by mid-April to a high of $1,788, silver staging an astounding 62% rally to a high of $18.95 by the end of June.
Q2 Performance of Major Asset Classes
By the end of the second quarter:
- Silver rose 30.28%
- Gold rose 11.84%
- The S&P 500 rallied 26.12%
- The Dollar Index declined to -2.60%
- 30-Year Treasuries was down -1.66%
While the broader stock market rose on hopes of Fed stimulus and a speedy reopening post-lockdown, safe haven demand in silver and gold increased, while dollar and treasury demand began to wane.
Gold and Silver Performance Year-to-Date
With a strong Q2 coupled with a good start to the year, gold is actually in the best spot among all assets so far in 2020. It has outperformed almost all other assets.
- Gold’s YTD performance stands at 18.70%.
- 30-Year Treasuries hold second place at 14.77%
- Silver, despite its impressive rally, trails behind at 9.50%, making it an ideal safe haven asset to purchase at its relative bargain price.
- The dollar index is holding steady below zero at -0.50%
- The S&P 500, also having staged an astounding move up, sits near zero at -0.96%, the worst performer YTD.
How Fed Policy Has Fueled Gold Prices
Investors looking to hedge the potential inflationary effects of Fed stimulus largely flocked to gold and silver. The Federal Reserve’s established a special facility--the “Main Street Lending Facility”--to support small businesses, but it also took the unprecedented move of purchasing individual corporate bonds, even debt assets rated ’junk,’ to bolster confidence and liquidity in the financial markets. This last act extended the Fed’s operations beyond monetary policy and into the realm of fiscal policy. It also demonstrated the Fed’s willingness to do whatever it takes to prop up the economy.
Based on the June 9-10 meeting, all indications point to the likelihood that the Fed’s accommodative policies will continue for some time (no end point in sight, as the Fed is responding to a situation largely dictated by the spread of COVID-19). And this ‘no-end-in-sight’ scenario is a major driver for gold and silver demand, as it confirms what markets fear most: uncertainty. Though considering the current context, the uncertainty looks much deeper and darker than anything we’ve seen since, possibly, the Great Depression.
Adding to this uncertain scenario, a little dose of certainty: interest rates are near 0, with yields on the 10-year Treasury steadily falling. With bond rates at unattractive levels, gold seems the perfect alternative for a near-zero rate environment.
Silver Prices Still Epically Low
Despite silver’s rise, it’s still trading at inexpensive levels relative to gold. The gold/silver ratio, which provides a strong gauge for gold and silver prices, is still at historic levels. Even with the massive Q2 spike, the ratio between gold and silver prices still shows a huge chasm.
Q2 finished with the ratio at 99.00. The truth is that we don’t know if the ratio will be revalued at its original 15 to 1 (Gold Standard), its 20th century average of around 45 to 1, or it’s potential ‘new normal’ at 75 to 1. But what we do know is that the 90 range spells ‘opportunity’ for most precious metals investors, as there is still plenty of room for the ratio to narrow (and silver to rise).
What’s to Come for Gold and Silver?
While it may seem to some investors that gold and silver are due for a comeuppance, that will only happen if the risk factors that pushed gold to this level cease. Let’s take a glance at how those factors look going forward.
- Coronavirus – We are seeing new surges around the country--all of which may be an extension of the ‘first wave’ of infections. In other words, the official ‘second wave’ may not even be here yet.
- Unemployment – As coronavirus goes, so goes unemployment. As the numbers continue to grow--a record $100 Billion going to the jobless in June--no corporation, not even the biggest ones, are immune to the risks of having to reduce its workforce..
- Recession – COVID-19 was worse than expected economically and recovery is slower than expected. The IMF lowered its already-pessimistic forecast for global growth to -5%, mentioning that the original projections were not pessimistic enough. Some economists believe that we may approach Depression levels.
- Stimulus Packages – Central banks have pulled out all the stops but it hasn’t made much of a dent. The Fed is running out of options, prompting it to provide liquidity directly into corporate debt (a fiscal, and not monetary, policy move). In the meantime, real yield on US Treasuries have fallen to unattractive levels, making gold the most viable alternative.
- Debt – The public’s debt is (predictably) on the rise and has reached 120% of GDP which is not sustainable. The creation of new currency may be the only solution, but over time, you can’t keep inflating-away debt.
- Stock Markets – Equity markets have unpegged themselves from economic and medical reality, floating on sentiment which, over time, is unsustainable.
- Rates – Real interest rates are at or below zero which makes gold more attractive than bonds or cash.
- US-China Relations – There has been an uptick of rhetoric on both sides and tensions only seem to be escalating. Meanwhile, China is aggressively promoting the international use of its currency, a portion of which is backed by gold.
- Real Estate - Even with low interest rates, businesses closures (however temporary), office downsizing, and unemployed renters have plunged this sector into uncertainty.
- Politics – We’re only about 100 days out from the election and either more Trump or the uncertainty of Biden will most likely be good for gold. It’s a win/win scenario for the yellow metal.
- Demand for Physical Gold – The jump in demand for physical gold has eased since the beginning of the year and the supply has started to stabilize. That said, another slowdown in production and spike in demand still seems likely due to so many of the factors above.
The Bottom Line: Gold Keeps Looking Good
As you can see, the problems and challenges we face as a world economy are growing without a near-term end in sight. Gold has been doing extremely well. And until some of these political, economic, social, and health concerns abate, there is not much reason to think this will change any time soon.