Gold And Silver Consolidating

(April 26th, 2021 - Lawrie Williams)

The past week has unfolded vis a vis the precious metals markets much as we had anticipated.  Despite minor forays upwards and downwards, the gold price has seemed to be consolidating in the $1,770s and silver seems to be sitting at around the $26 mark with the Gold:Silver ratio staying firmly in the 68 to 69 level.  There seems to be strong psychological resistance at the present time for gold to break back up through $1,800 the ounce, but we consider that it is only a matter of time before it does so.  How much time this will take is, as always, the overriding question.  It could even be this week.

Silver is always an interesting case, though.  While it does tend overall to follow gold’s lead, as a much smaller market it is prone to occasional wild fluctuations, as we saw with the putative silver squeeze attempt a few weeks back.  There also appears to be a Sprott-generated attempt to try another form of squeeze in seeking to persuade investors to take physical silver delivery in  order to emphasise what is seen to be a tightness in supply.  Indeed supplies are a little tight at the moment as can be seen in sky-high premiums in both small one ounce units (coins and small bars) as well as in larger bars.

The supply problems here are not necessarily due to the lack of availability of silver bullion itself which, by all accounts, is probably more than adequate, but in the refining and minting sector which has been temporarily overloaded.  We expect the elevated premiums may be dampening demand a little – and in our view so they should be – but activity of this nature, to which silver seems to be particularly prone, is in part responsible for the metal’s reputation for volatility.  Such attempts have been tried before, but have invariably ended in failure.

The above comments are not say that we are in any way bearish on the price prospects for silver or gold.  Indeed the opposite is the case.  The U.S. Fed has consistently re-iterated that it is not going to raise interest rates from their current extremely low levels, although the reported resumption of higher inflation levels has served to cast some doubt on the Fed’s approach.  But the U.S. central bank’s avowed priority is to bring unemployment down to around the ‘official’ 3.5% level prevailing pre-pandemic.  A rise in interest rates is probably not conducive to achieving that aim so one suspects the Fed will hold off implementing any raises for as long as possible.  It has been consistently undershooting its inflation targets, so a higher level will just help redress some of the average level.

Overall though, gold tends to thrive on low to negative interest rates, given it is a non-interest bearing asset itself, and real rates are decidedly negative at the moment, and could be becoming even more so if inflation is on the up.  That would enhance the yellow metal’s appeal as a wealth protector, and this should thus be an important element in driving the gold price up through the current $1,800 ceiling.  Where gold goes silver tends to follow – often in an enhanced manner and one might expect the GSR to come back to the 20-year average of around 66 which would mean silver would do slightly better than gold in percentage terms.