Make Kitco Your Homepage

Gold prices to target all-time highs but don't expect silver to follow - Refinitiv

Kitco News

Editor's Note: With so much market volatility, stay on top of daily news! Get caught up in minutes with our speedy summary of today's must-read news and expert opinions. Sign up here!

(Kitco News) - Despite gold’s lackluster performance in March, prices will resume an upwards trajectory, in line with expectations for a safe-haven asset during a recession. However, the road to higher prices will not be a straight one, this according to Refinitiv.

“With increased uncertainty and expectations of the economic downturn, unprecedented levels of stimulus from central banks, and interest rates remaining at historic low levels and negative territories, we believe that gold’s safe-haven appeal will be restored and we expect gold to move beyond $1,850 an ounce later in the year,” said Saida Litosh, manager of precious metals analysis at Refinitiv during a webcast Thursday.

Contrary to what many might believe, silver is not always a leveraged play on gold, especially not during a recession, the analysts at Refinitiv added.

The analysts noted that over the past seven U.S. recessions, since 1969, gold has seen average gains of around 23%.

Silver, however, has historically performed as an industrial metal during these periods, having sustained losses during most of these recessionary periods and averaging only a 1% gain overall.

“Interestingly, silver doesn’t actually trade in a similar fashion [to gold], I think it behaves much more like a base metal and has seen predominantly negative price movement,” said Bernd Sischka, global head of metals and iron ore at Refinitiv. “Very often with QE happening, gold’s going up, and silver, to a lot of people, is a leveraged position, but it’s just important to bear in mind that in those periods of recessions silver actually performed not that well.”

The analysts said that the global economy is already in a recession, with the Federal Reserve responding with plans of unlimited quantitative easing.

“The narrative is always that with QE, gold is going to outperform, and you need to hold it and nothing else. That might work, but also you have to bear in mind that these assets tend to trade not always in a straight line,” Sischka said.

During economic downturns, asset classes across markets tend to exhibit cross-correlation with one another, which is what we saw in March, said the analysts.

The converging of correlation between gold, equities, currencies, and other commodities is partly what contributed to gold’s selloff in March, they said.

“With gold being described as a safety asset, it was quite counterintuitive why gold would get crash as well,” Sischka said.

In addition, margin requirements for gold “were hiked up in March as a consequence of this volatility which meant people got margin calls and had to liquidate longs,” he said.

As asset classes sustained losses in tandem, many investment funds were forced to liquidate so-called risk parity funds, which have assets in equities, bonds, and commodities, including precious metals, Refinitiv said.

The same type of cash-raising could be expected as we enter a recession and experience a stock market meltdown, making gold vulnerable in the short-term, they said.

“We believe that in the short-term, gold remains vulnerable to further losses, particularly if the COVID-19 situation continues to deteriorate in the U.S. and some parts of Europe, and if we see another meltdown in stock markets, which would inevitably lead to gold liquidation,” Litosh said.

The Players

Gold saw an increase of 2.6% in terms of trade automation in 2020; currently, 67.7% of trades were generated by algorithms, Refinitiv noted.

“Over 50% of all trades in gold were algos trading against algos. Only 11% were manual traders interacting with manual traders,” Sischka said.

As automation of trading becomes more predominant, technical indicators must be carefully observed in order to determine gold’s direction, he said.

“Currently, we need to extend beyond $1,789 to see continued price momentum. Equally on the downside, if $1,455 is broken, then we can expect downside momentum to develop,” Sischka said.

Impact of COVID-19 on Mining

Currently, around 120 mines worldwide are affected by the virus, 95 of which are precious metal mines, with gold being the most impacted precious metal, according to Refinitiv.

The most impacted countries are South Africa, Canada, Mexico and Peru, with most mines being suspended, the analysts said.

Importantly, cash costs and all-in sustaining costs are expected to rise, they said.
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.