The current global health crisis has prompted a slew of dovish monetary policies by the central banks in most emerged markets, like the unleash of unprecedented amounts of stimulus, and a low rate environment for the foreseeable future through forward guidance.
This has caused investors to flock towards the safe haven of assets like gold and silver. As a result, prices in the precious metals have experienced impressive rallies and are now approaching all-time highs. Despite a 30% rally for gold and 70% rally in silver from the March lows, Union Bancaire Privée (UBP) remains confident that the precious metals are likely still in the early stages of a long-cycle bull market.
UBP cites changes in real interest rates and money printing as having long been catalysts for gold, and which characterizes the current economic environment. In this current cycle, money printing by the US central bank has taken place at a pace not seen since at least 1960, and with the virus showing no signs of slowing down, the money printing is likely to last.
As a result, an extended US dollar bear market, a growing scramble for physical rather than financial gold and silver, as well as coordinated, growth-focused fiscal and monetary policy should provide the next catalyst for both gold and silver. This leads UBP to believe that gold still remains below their fair value estimate, while silver prices still remain historically cheap when compared to gold.
Rising demand leading to increased competition
UBP believes the mismatch between the availability of physical metal and the proliferation of financial claims on the metal that have been developed in recent years have led to increased competition in the aftermath of the COVID-19 outbreak.
The proliferation and interest in gold-backed exchange traded funds (ETFs) has grown from virtually zero in the mid-2000s to a situation where these financial vehicles hold nearly 3,000 tonnes of gold as of mid-2020, highlighting the spread of these gold-linked financial products.
As a result of this increased competition, investors in the futures markets who historically, rarely took delivery on their gold and silver futures contracts are increasingly demanding actual delivery on the underlying contracts putting pressure on physical metal stocks held by the COMEX.