The Case for Gold and Silver in Late 2016

It’s no secret precious metals such as gold and silver are amongst the least favorite commodities for many investors, especially those on Wall Street. Unlike in other sectors where there are standard performance and governance reports which serve as strong indicators to financial analysts, gold reports no quarterly earnings and pays no dividends. This makes these commodities a little more problematic to analyze and handicap.

Over the years, this has left more than a few investors out of luck and out of cash when erroneously predicting a huge boom in gold or silver. And yet despite this, gold and silver remain a popular and often profitable investment in every corner of the world.

And while one would have a better chance of finding Sasquatch or the Yeti before you can find five investment analysts who all agree on the same thing, there are strong indicators that point to the last quarter of 2016 as being a good time to put money into gold and silver.

Similar But Not The Same

If you were to step back and take a long-term view of gold and silver prices, you would see a fairly close correlation in peaks and valleys. While they are miles apart in terms of value, their performance usually mirrors the other relatively closely.

Still, there are important differences which need to be kept in mind when analyzing both precious metals. Silver demand, for example, is driven largely by industrial forces as upwards of 40% of silver is used for this purpose. This means silver prices are more sensitive to economic variables such as production and manufacturing demands.

Gold, on the other hand, sees its demand driven more by investment and jewellery demand. This makes its prices more sensitive to monetary issues. In fact, gold performance is tied very closely to the US dollar and the FED interest rates.

Gold and Silver YTD in 2016

Gold started off the year (as of January 4th) at $1,078.40 per ounce and sits at $1,257.90 as of October 17. This represents a 16.6% increase over the first three quarters of the year. It actually reached a high of $1382.30 on July 7. The sharpest increase occurred early in the year between January and March. After hitting a more than a year low in December 2015, prices rebounded after the second quarter of 2016. The softer first quarter is largely attributed to slower growth in China which resulted in weaker global demand.

When we take a look at silver’s performance over the first 10 months of the year, we start to see how it differentiates itself from gold. Silver opened at $13.94 per ounce and as of October 17, sits at $17.51. Silver’s sudden spike happened later in the year jumping more than four dollars per ounce from $16 to $20.40 between June 1 and July 4.

The Case For Gold

One of the biggest factors that could have pushed gold lower occurred, or rather didn’t occur, just weeks ago. For months, analysts have been closely watching what Fed Chair Janet Yellen would do regarding interest rates when the powers-that-be gathered in September. The crucial connection between the FED’s interest rates and gold prices is best articulated on the website where they discussed the outlook for gold in the second half of 2016.

“Gold prices are closely linked to interest rate moves. A rate hike makes the US dollar more attractive at the expense of gold, which offers no interest. Conversely, a rate drop is bullish for gold. The first half of 2016 has been marked by ongoing speculation as to whether the Federal Reserve will raise rates. Statements from Fed chair Janet Yellen and other Fed policymakers are closely monitored by the markets. Statements which are hawkish and hint at a rate hike often push gold lower, while dovish messages from the Fed often boost gold prices.”

After rampant speculation that Yellen would raise interest rates, the FED backed off and decided against an increase when they met in September. Without the looming threat of this rate hike, there is an excellent chance the price of gold will continue to climb through the rest of this calendar year.

Another key factor is the current status of the US dollar. James Fraser, co-uthor of the book Mining Stocks Guide, explained the inversely symbiotic relationship between the dollar and gold prices on in 2013.

“The value of the gold remains stable in comparison to currencies, but its price in any given currency can fluctuate as the perceived value of that currency changes. The fluctuations in its price in US dollars reflects confidence in the currency, as the dollar revalues itself in relation to gold. Thus, the price of gold tends to move in opposite directions to the value of the US dollar,” Fraser said.

On October 17, 2016 the US dollar dipped from a seven month high amid speculation the FED will allow inflation to run above targets. If the dollar continues to decline in this current economic condition, this too spells good news for the prospect of soaring gold prices.

The Case for Silver

As with the case of gold, there are several economic and industrial factors which have caught the attention of industry experts. Hubert Moolman is a gold and silver analyst who manages his own CA firm and writes about the precious metal markets. He points to a long economic pattern that bodes well for the future price of silver.

“The two most significant nominal peaks of the Dow were in 1929 and 1973. Silver made a significant peak in 1935, about six years after the Dow’s major peak in 1929. Again, in 1980, silver made a significant peak, about seven years after the Dow’s major peak in 1973,” Moolman wrote in September of this year. “If the Dow Index is currently forming a very significant top, then we could possibly expect a major peak in silver, towards the end of this decade, to early next decade. This means we are likely to have rising silver prices for many years to come.”

Another strong factor for silver is as simple as good old-fashioned supply and demand. Andrew Chanin, chief executive officer of PureFunds, told the website in July that he sees tremendous upside for silver in the coming months and years.

Chanin points out that the Silver supply has been relatively flat for the last several years and any increase in investment demand has the ability to put silver “in risk of a shortage.” he said.

This is significant when you note that silver mining production is down 2% this year and sales of U.S mint bullion has increased significantly. A rise in demand coupled with the decrease in silver supply could have a tremendous impact on silver prices through 2016 and into early 2017.

No Guarantees

Of course with all investments, there is no crystal ball and no guarantees for what will happen in the future. A FED rate increase or climbing US dollar can send gold prices downward in a hurry. Similarly, a spike in silver production or other industrial variables can cause a decline in silver prices. That said, current economic, monetary and industrial factors all point to this being a good time for gold and silver investments.