Gold’s frenzy pauses after record as volatility roils silver

Gold bars.
Gold bars.
Getty
  • While prices wavered on Tuesday, most market watchers are predicting more gains ahead for both gold and silver.
  • Unrelenting investor demand has helped fuel gains for the precious metals.
  • “Silver has a volatility relative to gold of about double gold’s volatility, so from a hedging, safe-haven perspective, we still prefer gold,"  says the UBS Group's Wayne Gordon.


Gold’s record-breaking rally showed signs of losing steam after futures touched $2 000 an ounce for the first time, and silver was briefly whipsawed, as investors assess whether prices rose too high, too fast.

Bullion futures pared a climb of more than 2% to a record as traders looked to lock in profits and the dollar recouped some of its earlier losses. While there’s no end in sight to the economic turmoil unleashed by the coronavirus pandemic and expectations are that more stimulus will be needed to boost growth, investors may seek out more bullish signals before pushing prices higher.

“This is the highest high and in every time zone the traders have been trying to push it higher and higher,” said Brian Lan, managing director of Singapore-based dealer GoldSilver Central Pte., noting that spot gold’s gains petered out once it reached $1 981 an ounce. “You see the strength wasn’t there. They were trying to try a few more times and a correction is due. So probably you might see some profit-taking already.”

Gold futures traded 0.2% higher at $1 960 by 7:47 am in London. Spot gold was 0.1% lower at $1 939.64, and its 14-day relative strength index has been above 70 for six days, a signal to some traders that it’s overbought and due for a pullback.

Spot silver climbed more than 6% to the highest since April 2013 before dropping 2%, and was trading 0.2% lower at $24.5400 an ounce. The Bloomberg Dollar Spot Index was little changed, though still near the lowest in almost two years.

While prices wavered on Tuesday, most market watchers are predicting more gains ahead for both gold and silver. There’s a long line of bullish factors buoying markets: the dollar remains weak, geopolitical tensions are rising, real rates have tumbled, and governments and central banks worldwide have unleashed vast stimulus measures to try and boost economies.

“Debasement of the US dollar, the more negative real rates, and you’ve still got lingering uncertainties around geopolitics and the US-China relationship,” said Wayne Gordon, executive director for commodities and foreign exchange at UBS Group's wealth-management unit. “That combination of things is what’s pushing gold harder.”

Fed meets

This week’s Federal Reserve meeting on July 28-29 may provide more direction for traders. There are some expectations that setbacks in the global fight against the pandemic will push Chairman Jerome Powell to signal that rates will stay near zero for longer.

“The message from the Fed meeting is expected to be dovish, reiterating the need for more fiscal measures, which is likely to be supportive of gold,” said Nicholas Frappell, global general manager at Sydney-based ABC Bullion. “With real interest rates deep in negative territory and the coronavirus resurgence hitting the dollar index hard, that’s good for gold.”

Unrelenting investor demand has helped fuel gains for the precious metals, with inflows into gold-backed exchange traded funds this year already topping the record set in 2009 and silver holdings near an all-time high.

For silver, there’s an added boost from concerns about supply, with the Silver Institute earlier this month forecasting a 7% decline in mine production in 2020. Signs of nascent economic recovery in some countries may also aid demand for the metal used in solar panels and electronics.

Silver tends to perform very strongly when the desire for wealth protection, or fears of inflation-induced wealth destruction, are high and when global economic activity is improving, according to Citigroup. Both these factors are expected to boost prices over the next six-to-12 months, driving prices up to $30 by mid-2021 if the bullish momentum continues, said analysts including Aakash Doshi.

“Those people who probably missed out on the gold rally jumped on the silver idea as a similar idea to hedging against the depreciation of the dollar and real interest rates going deeper into negative territory,” said UBS’s Gordon. “Silver has a volatility relative to gold of about double gold’s volatility, so from a hedging, safe-haven perspective, we still prefer gold.”

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