Traditionally gold has been viewed as a safe-haven asset – on average, 40 per cent of new gold produced is used as an investment vehicle, 50 per cent to produce jewellery – which in part can also be considered a storage of wealth, and just 10 per cent for industrial purposes. The intention of this article is to provide the reader with an update of recent developments in the gold and silver markets.
When global markets go into risk-off mode, gold tends to appreciate in price. One such example was the threat of military intervention in Syria – gold rallied to $1,412/oz., only to retrace some of the gains with David Cameron’s surprise defeat in the House of Commons vis-à-vis the UK’s involvement.
There are other major factors which have an effect on the price of gold. Gold does not pay interest or dividends. Therefore one would expect that, when bond yields and central bank official rates start rising, the opportunity cost of holding gold increases and thus its price falls.
Another factor is its physical demand by central banks and households (main uses listed above). Thus, while over recent months Western investors shunned the metal, statistics from the World Gold Council have shown that demand in India has risen sharply.
India is the world’s largest source of gold fabrication and trade. I mention India specifically here due to the current rupee crisis. In an effort to address an ever-widening current account deficit, the Indian Finance Minister increased tax on the import of gold from eight per cent to 10 per cent – however this has not dampened the drain of the country’s US dollars (foreign exchange reserves).
Gold is down 17 per cent year-to-date
Gold is down 17 per cent year-to-date (YTD), currently trading just shy of $1,400/oz., up from the metal’s low of $1,216 early July.
The chart above depicts the price movement since the beginning of the year for the four main precious metals (gold, silver, platinum and palladium), normalised as at the beginning of the year.
The two bottom functions depict the tandem movement of gold and silver, while the green and white show the palladium and platinum prices respectively.
Palladium has seen increased demand since mid-June, helped by increased US car production (the metal is used particularly in catalytic converters).
The worst performing precious metal year-to-date was silver (down 20 per cent). Generally, the prices of silver and gold tend to move in tandem, with a correlation of circa 0.88 over the last 10 years (that is, 88 per cent of silver price movement can be explained by the price of gold).
Both metal prices had major downward corrections, in mid-April and then again in June after US Fed chairman Ben Bernanke’s speech, however silver seems to have overshot.
At its lowest towards the end of June, silver was trading at $18.76/oz., down 38 per cent YTD. However, the price has since recovered strongly – at the time of writing this article, silver is trading at $24.09/oz. One would also expect the price of silver to continue improving with improvements in the major global economies.
Silver is known to be one of the best conductors of electricity, which explains why around 50 per cent of silver consumption is driven by industrial use.
This article is the objective and independent opinion of the author. Any opinions that may be expressed here above should not be interpreted as investment advice, nor should they be considered as an offer to sell or buy an investment. Curmi and Partners Ltd is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.
Vincent Micallef is an executive director at Curmi and Partners Ltd.