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SWOT Analysis: Silver Seeks to Catch Up With Gold

Commentaries & Views

Strengths

  • The best performing metal this week was silver, up 6.40 percent on perhaps a paradigm shift as the investors poured $133 million into silver bullion ETFs on Wednesday, the single biggest inflow in six and a half years. The weekly Bloomberg survey of gold traders and analysts shows that most are bullish on the yellow metal as prices broke through a five-year high and touched $1,453 per ounce on Friday morning. Traders seem to be set on an interest rate cut from the Federal Reserve this month, which is helping gold, even as some better-than-expected economic data was released on Tuesday. Turkey, which often sells its gold, saw its reserves rise by $71 million this week compared to last.

  • The Perth Mint left a $45 million gold coin on display in Manhattan on Tuesday. The coin, which measures 32 inches in diameter and is almost five inches thick, weighs 2,200 pounds. Perth Mint CEO Richard Hayes says that the rise in U.S. sovereign debt has been a big and largely overlooked factor in surging gold prices, reports the Financial Review.

  • After a long spat, Acacia Mining and Barrick Gold have reached a deal for Barrick to buy the roughly 36 percent stake in Acacia that it didn’t already own, reports Bloomberg. The offer is a 24 percent premium to the company’s closing price on Thursday. Now that this dispute has been resolved, hopefully Acacia and the Tanzanian government can mend their relationship.

Weaknesses

  • The worst performing metal this week was palladium, down 2.49 percent as hedge funds cut their net bullish position, perhaps rolling some of the proceeds to silver. Gold exports from Europe’s major refining hub, Switzerland, fell a whopping 55 percent in June to the lowest since at least 2011. This is due to smaller shipments to China and India, the world’s two largest consumers of gold, on the back of higher gold prices.

  • Venezuela is defying sanctions once again and selling off its gold reserves. The troubled South American nation sold $40 million in reserves last week, nearly one ton, lowering its dollar reserves to a near three-decade low of $8.1 billion. President Maduro has sold approximately 24 tons of gold to places such as the United Arab Emirates and Turkey since April, according to Bloomberg.

  • Even as gold is soaring to multi-year highs, investments into gold-backed ETFs don’t seem to be going anywhere. Looking at the SPDR Gold Shares ETF, cumulative demand since the start of 2018 doesn’t show a big rush to own bullion yet. Additionally, investors are selling out of gold miner ETFs which have underperformed their rivals; mutual fund asset managers in the precious metal miners sector have significantly outperformed the ETF products.

Opportunities

  • In an essay posted on LinkedIn this week, billionaire investor Ray Dalio writes that he believes “it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.” Dalio adds that he sees a “paradigm shift” coming in the next few years as a huge amount of debt and non-debt liabilities come due and can’t be funded with assets. SkyBridge Capital said it is considering investing in gold for the first time since exiting in 2011 due to Fed interest rate cuts. Bloomberg published a piece this week saying that sub-zero real yields are boosting the rush into gold – since gold’s lack of yield doesn’t matter when the pile of negative-yielding bonds continues to grow. Lastly, Deutsche Bank says that should U.S. foreign exchange policy start a currency conflict, the best option is to hold gold.

  • According to a survey of central banks conducted by the World Gold Council (WGC) and YouGov, 54 percent of respondents expect global holdings of gold to climb in the next 12 months due to concerns about risks in other reserve assets. WGC said that “this year’s survey signals another healthy year of central bank gold demand” after central banks bought the most gold in 2018 since 1971.

  • Silver finally got some attention from investors this week. Bloomberg’s Eddie van der Walt writes that silver has been in gold’s shadow for eight years now and that the price ratio between the two rose above 93 this month – a level not seen since 1992. National Bank Financial analysts Don DeMarco said that when the ratio falls below 90, which it did on Tuesday, the average one-year return for silver is 22 percent and 10 percent for gold. The silver spot rose about 6.40 percent this week.  Exploration stocks and silver miners also saw exceptionally strong price performance throughout the week.

Threats

  • Venezuela continues to attempt to evade U.S. sanctions. According to sources familiar with the matter, Venezuela is mulling over using a Russian-operated international payments messaging systems as an alternative to SWIFT.

  • De Beers, the world’s largest diamond producer, continues to see demand fall and is cutting production. Bloomberg reports that the company plans to mine 31 million carats in 2019 – at the bottom end of a previous forecast range. Diamond sales from January to June have fallen for four consecutive years.

  • President Trump said this week that his administration will “take a look” at Peter Thiel’s allegations that Google’s work with China is “seemingly treasonous,” writes Bloomberg’s Terrance Dopp. Thiel is a board member of Facebook. More investigations into the big tech companies could spell trouble for the markets overall.

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