In the past few months, gold has been showing some signs of ‘fatigue’ with market participants starting to price in a smooth ‘Covid-19 exit’ with the vaccination campaign. However, major drivers of the precious metal such real interest rates or the total amount of negative-yielding debt are still sending bullish signals; we think that market participants are underestimating the impact of social distancing and travel restrictions in the medium term.
With another 3tr USD of liquidity expected to reach market this year, it looks like the downside risk on gold remains limited as we think that most economies will rely on debt (therefore more liquidity) in the coming two years, which implies strong demand for the ‘currency of the last resort’.
Main risks in the near term: rising optimism over the vaccine campaign, warmer days and USD strength.
Even though price volatility has eased significantly across all asset classes amid the massive liquidity injections from central banks, the market could experience another little selloff in the near term due to the rising uncertainty coming forward. In addition, we know that most of the risky assets tend to perform poorly in the ‘summer’ period that runs from May to October.
Although some investors may define silver as a risk off asset, we recently saw that the precious metal has performed very poorly during periods of market stress. We think that silver could experience some weakness in the short run, especially now that we are approaching the month of June. In figure 1, we compute the average performance of silver for every month of the year since 1982; interestingly, June has historically been the worst month with silver falling by nearly 2% on average. Time to sell and go away?
Source: Eikon Reuters, RR calculations
One particularity of a safe-haven asset is that it is negatively correlated with the performance of equities during periods of panic and selloffs. For instance, we saw that gold performed strongly in the past two equity selloffs, up 7% in Q4 2018 and 3.5% in Q1 2020 while equities were down by 14% and 20%, respectively. Figure 2 shows that silver did not act as a zero-beta asset and co-moved strongly with equities during the February / March panic. We strongly believe that investors have this chart in mind for the coming months and that a little 10%-15% drawdown in stocks in the near term will certainly lead to a little (bear) consolidation in silver.
Source: Eikon Reuters
Even though some analysts are currently saying that silver looks extremely undervalued relative to gold (gold-silver ratio is still elevated relative to its long-term average), we do not think that the ratio will matter in the near future and we could have another divergence between the two precious metals. Figure 3 (right frame) shows that prior the Covid19 crisis, a surge in gold prices had historically been followed by a surge in silver 3 weeks later since the start of 2015. However, we can notice that the two assets have strongly diverged in the past few months.