Weak real returns on risk-free assets and the continuation of expensive monetary and fiscal policies should continue to fuel investor appetite for precious metals, the ultimate inflation hedge, Jupiter AM bets. And silver, gold’s restless little brother, has additional room to catch up.
With a peak of $2,075 per ounce in early August, the price of gold set new records this year as investors once again recognized the precious metal as an ultimate safe haven that can maintain or even increase its value in volatile times.
A perfect monetary storm had been brewing for a long time,” said Ned Naylor-Leyland, head of precious metals strategy at Jupiter Asset Management. Behind the rise in gold and silver was the U.S. Federal Reserve’s commitment to keep interest rates very low almost in perpetuity and an unlimited bond purchase program that blew up its balance sheet to $7 trillion and boosted government spending – all factors fuelling mistrust of the U.S. dollar.
Real yields – once inflation is deducted from bond yields – have become negative in the United States, meaning that many U.S. Treasury bondholders are suffering a loss in value on their investments. In contrast, gold and silver are asserting themselves as reserves of real value.
An “apolitical” currency
In a macro-economic environment increasingly conditioned by politics, the specialist also points out that gold is an “apolitical” currency, in the sense that it is not issued by a central bank or a government. On the other hand, the US dollar is highly politicized and its privileged role in the global financial system is increasingly questioned.
Not surprisingly, Ned Naylor-Leyland expects these trends to continue in 2021. In his view, the United States cannot inherently afford a new fiscal stimulus package, which means that it will only come about with the support of the Federal Reserve and a further decline in real interest rates. In this context, the price of gold should remain stable. If the Federal Reserve were to adopt an even more extreme monetary policy in 2021, as advocated by Modern Monetary Theory (MMT, a so-called heterodox monetary theory compared to the classical canons), or even “helicopter money”, to support the government’s spending plans, this would reinforce the rise in the price of gold as a tool to protect against inflation, he argues.
The best days ahead for Silver?
Meanwhile, a “Green New Deal” as envisioned by Joe Biden would have a bullish effect on silver, the little brother of gold – often described as more undisciplined and unstable. If 2020 were the year of gold, 2021 would likely be the year silver catches up, says Jupiter AM.
About half of silver production is used for industrial use (while it is a very small minority in gold consumption). The 47th element in the periodic table of elements is used in solar panels, batteries, various electronic devices, and as an antimicrobial element in the medical field. This means that silver is increasingly in demand and will only become more so in the context of an environmental New Deal. In 2021, the markets should therefore become aware of the dual importance of silver as a technological component and as a reserve of monetary value, bets Ned Naylor-Leyland.
Money is also very sensitive to capital flows and it should be remembered that in 2011, when the markets were in “whatever it costs” mode as they seem to be again today, money reached $50 per ounce. As a technical parenthesis, as with gold, the unit of measurement here is the “troy” ounce of about 31.1 grams, distinct from the “avoirdupois” ounce, an Anglo-Saxon mass measure equivalent to 28.35 grams.
During the monetary metal peak of 1980, which put the petrodollar system in real peril, silver also rose along with gold and briefly reached $50 per ounce. Adjusted for inflation and loss of purchasing power since 1980, the price of $50 per ounce is incomparably higher than the current price of about $25, suggesting that the best days for silver may be ahead of us,” extrapolates the specialist.
Ideally placed gold and silver miners
Finally, Jupiter Asset Management’s precious metals strategist expects to see an increase in mergers and acquisitions and new mine exploration activity over the next 12 months. The crisis of reserve depletion among large gold and silver miners has been apparent for decades, and it took a sharp rise in gold and silver prices to focus the market on the need for consolidation. Previously, excessively low gold and silver prices prevented miners from engaging in exploration and development sufficiently to increase reserves.
The gold mining sector has seen approximately $20 billion in mergers and acquisitions this year and this figure could well double in the next six months as the sector reaches a tipping point.
Could mining be the success story of 2021? The share prices of mining companies tend to fluctuate proportionately more than the prices of the metals themselves (in both directions). On the one hand, the costs of mining services and equipment are falling,” observes Naylor-Leyland, “while on the other hand, fiscal and monetary easing should continue to push up the prices of gold and silver, which continue to rise sustainably. This is potentially a powerful scissor effect for gold and silver mining stocks.
Source BFM Bourse
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