Historically, Gold and silver tend to be highly correlated, but that positive correlation weakened in the first quarter of this year, leading investors to suspect that the decoupling could continue into the next few years. FXStreet analyst Christina Parthenidou says silver may overtake gold as a better investment target in the post-Epidemic period.
Gold and silver correlation wanes
Precious metals have been a store of value for centuries, especially as Inflation has eroded the purchasing power of money. Of these, gold is the most popular because it is not only rare and in abundant supply, but its physical properties make it more durable than other metals. As a result, the sudden shock of the epidemic has led to fears of a recession in 2020, with investors moving away from riskier assets and towards allocating to safer assets. In this context, gold prices reached a record high of $2,079 per ounce last August.
Silver is a substitute for gold, but since its supply is more plentiful relative to gold, the price will also be lower. Like gold, silver prices climbed to an eight-year high of 29.83 at the same Time last year.
Both precious metals stabilized for some time after topping out in 2020, but this time silver seems to be moving a little less differently, breaking to some extent the highly positive correlation with gold that has been in place for years. Especially while gold was still falling, silver became unstable, and after bottoming in March, it saw a wave of gains. Driven by retail investors on Reddit, silver prices reached $30.03 earlier this year, an eight-year high. Conversely, gold has been moving lower over the same period.
It remains to be seen whether this decoupling of gold and silver is temporary or long-term.
Despite the recent sell-off, silver prices remain technically bullish
From a technical point of view, Parthenidou believes that as long as silver prices stay above the $22.50-$21.87 support range, its uptrend will not be broken. If it breaks above the 28.30 handle, it could look further towards the $30 mark. A break above that level would see resistance between $31.80 and $32.40, which is the highest level since 2013. A further move higher could trigger a more dramatic move to the upside, even approaching the $34.60 mark.
In contrast, the trend in gold is less optimistic. Gold faces greater downside risk following the formation of a dead cross in the 20-week and 50-week simple moving averages. Gold has recently given back its gains since last April and is likely to bottom further in the coming weeks after the price fell below $1,700. Of course, gold may also reverse the downtrend, but only if it rises back to $1950, which seems somewhat difficult from the current situation.
Silver fundamentals look positive
The fundamentals are also favorable for the rise in silver prices. Silver will be more attractive than gold in the coming years. The reasons are as follows.
Most importantly, as the global economy shifts money to green investments, silver demand could soar due to its multiple uses in solar panels, cell phones, automotive electrical systems and 5G cellular networks.
And, the passage of Biden‘s $1.9 trillion stimulus bill in the U.S. earlier this March, as well as a potential larger infrastructure plan from the Democrats (which could cost more than $3 trillion), makes the outlook for silver even brighter for at least the next 10 years.
In addition, industrial development in China is a major positive factor if the epidemic is completely over.
On the supply side, the U.S. Geological Survey (USGS) disclosed last month that silver reserves and production in several countries have declined since 2019, but the impact on silver prices has been minimal as miners try to refine silver from copper, lead and zinc mines. The mining of these minerals are large projects and the process may not be quick, keeping the outlook for silver prices positive for now.
Fear of inflation fails to boost safe-haven assets
In theory, precious metals such as gold and silver tend to rise when investors worry that inflation will cut the purchasing power of the dollar. But surprisingly, with the U.S. government speeding up vaccinations and passing a massive stimulus bill, as well as the Federal Reserve’s plans to raise inflation worrying markets, these precious metals are falling instead of rising. But there’s a reason for that.
First, gold and other precious metals do not pay dividends or any other income to their holders, unlike bonds, whose yields spike rapidly as a result of inflationary reflationary trades. Thus the opportunity cost of holding precious metals increases, making risk-free bonds more attractive.
Second, increased confidence in the U.S. economic recovery and earlier expectations of a Fed rate hike have led to a higher dollar, making it more expensive for foreign investors to buy gold.
Of course, with the Fed’s commitment to keep interest rates near zero, traders are not going to exclude these safe-haven assets from their portfolios for years to come, especially now that the epidemic still has a lot of uncertainty.
Gold-Silver Ratio Hasn’t Hit Bottom Yet
As to who will get more attention in the coming years, it is easy to look at the gold to silver ratio. In the last two major global recessions, the gold-silver ratio bottomed out before the upward trend in silver prices reversed.
The current gold-silver ratio is well below the all-time high of 128.31 set last March, and there is a risk of further declines if the ratio falls below the 65-60 support range.
It is worth noting that the 20-week and 50-week averages have diverged and the Fast Stochastic is nearing the overbought level of 80, increasing the risk of the ratio continuing to the downside.
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