The ultimate safe haven asset - gold - is rightly recognised by investors as an asset that can retain, and indeed increase, its value during volatile times.
When real interest rates drop, cash, deposit accounts and most interest-bearing securities become less attractive. Gold and silver, by contrast, are a store of true value – protecting purchasing power over the long-term. So, naturally in volatile times, investors turn to monetary metals.
Nonetheless, after an almost unstoppable rally, gold has been adjusted downwards from the August highs of last year. The ongoing economic environment was the cause of last year’s rally – which saw gold hit a record high. Many investors were underweight in the asset class, with flows continuing to fluctuate over the short to medium term, as investors played catch up.
Despite the reduction of gold buying by central banks throughout 2020, the appetite for gold in the last quarter rallied considerably, with global official reserves growing by 44.8 tonnes, according to World Gold Council. Oil has become cheap relative to gold, mining services and equipment costs are deflating.
Too good to miss out
And due to fiscal and monetary looseness, we can expect spot gold and silver prices to continue to move sustainably higher. This is a rare set up, and we believe that over the next few years we will see an uptick in flows as the global investment community realises it cannot afford to ignore this opportunity.
On the retail side, demand for gold bars and coins grew by 10 per cent in the most recent quarter. Since the beginning of the new year, there has undoubtedly been a renaissance of retail investors racing to diversify their income and protect their assets as the pandemic continues to destabilise global markets.
Despite annual demand remaining at lows not witnessed since the fallout of the global financial crisis, gold still retains its allure as a safe haven asset.
Silver is currently enjoying much of the global spotlight, after the popular r/WallStreetBets community on Reddit highlighted the fundamental value in acquiring silver at current levels. The online post was the catalyst for increased retail flows and awareness.
On January 28, the popular silver ETF, SLV, saw increased volumes, trading at over 5 per cent premium to its underlying silver holdings. As a result, the SLV trust saw a record one day inflow of $943 million, or 34 million ounces (Moz). To us, this indicates a market which could move sharply higher as the already clear physical shortage gets worse.
Underlying investment demand for silver has been building since Q1-2020. Over the last nine months, exchange traded products (ETPs) have added over 500 Moz to global inventories. Put into perspective, net ETP inflows since March 2020 have equalled over two-thirds of the annual mining supply of silver. While we are likely to see increased volatility in the silver sector, it is still 80 per cent below its all-time inflation adjusted high of $50 from 1980.
When comparing the two monetary metals, silver currently trades 63:1 versus gold; that is, 63ozs of silver for each ounce of gold. In terms of abundance in the Earth’s crust the ratio is close to 8:1, while on a USD flow basis the ratio is roughly 10:1.
More to come
We see plenty of upside for both gold and silver – but we believe that silver will continue to outshine gold. As such we expect the gold/silver ratio (the gold price divided by the silver price) to contract further. In 2011, the ratio was 32; so its recent low of 69 (in August 2020) is, by historic levels, high.
Silver would have to more than double to regain its high of April 2011 and we believe the current environment sets silver up for an uncontrolled move to the upside at some point in the next few years.
- Ned Naylor-Leyland, Head of Strategy, Gold and Silver, Jupiter Asset Management.