Why are gold and silver going up?

Gold has been the best performing assets in 2020 up till silver posted a sudden jump in its prices. Gold is up by almost 30 per cent on a YTD basis while silver is 31 per cent even as Sensex is down by nearly 7.5 per cent on a similar timeframe.

It is not only gold and silver but also copper and aluminium, which has posted gains of 15.7 per cent and 4.8 per cent, respectively, on a YTD basis, thereby, outperforming Sensex. Nickle, lead, and zinc has also marginally outperformed Sensex in 2020.

While gold has neared almost $2,000 per ounce, investors and traders are wondering if the rally has been too much fast and whether the prices will continue its upwards journey. The answer to whether the rally will continue is easy to find out if we know why the rally took place in the first place.

The gold prices started rallying in mid-2019 amid the rising tensions between the US and China. The prices gained momentum with the COVID-19 crisis hitting global economies in January-February 2020. The prices then were fanned further with matters escalating between the US and China, which led the former ban China’s consulate in Houston.

There are a number of factors, which led to higher gold prices. Some of them are:

1. The rise in geopolitical tensions (especially US-China).

2. Stimulus announced by various countries to bring growth back in beleaguered economies.

3. Lower interest rates with near-zero interest rates in the developed worlds.

4. Central banks’ rising interest in gold

5. The increasing appetite for gold exchange-traded funds (ETFs) amongst investors as risk aversion increases due to global uncertainty.

6. Finally, the dollar getting weaker (year low).

As each of these is variable reverses or showing signs of reversing, gold prices may start cooling off. As of now, there are no signs of reversal as more stimuli are expected to be announced to spur economic growth.

There are a number of factors that suggest that gold prices are likely to remain firm and inch higher after witnessing some consolidation. Some of them include:

1. US dollar, which is traditionally countercyclical, tends to go up in crisis-like conditions and weakens whenever there is a recovery in the economy.

2. According to a survey done by Invesco, central banks will be buying more gold in 2020 even as the sovereign funds increase their appetite for gold as a hedge against inflation and interest rates may remain low for a foreseeable future.

According to Invesco survey, some 18 per cent of the central banks plan to increase their gold holdings in the coming year, while 23 per cent of sovereign funds intend to boost their exposure. The survey further hints that the sovereign funds view gold as an inflation hedge while central banks view metal more as an alternative to the $14 trillion of global debt with negative yields and as a way of reducing their reserves exposure to the dollar.

Silver prices are steady as silver holdings are near an all-time high. For silver, the additional factor affecting the prices is the concern of over supply. It is forecasted that there will be a 7 per cent decline in the mine production in 2020.

As the economy recovers, the demand for silver will improve as it is used in solar panels and electronics. History suggests that silver performs very strongly when the global economic activity is improving and the fears of inflation co-exist.

However, silver is way more volatile in nature and hence, gold is preferred by most of the investors. The volatility in silver is almost double that of gold. Gold thus rules when it comes to safe haven!