Gold and Silver Breakout – What Next?

I have been asked these three questions many times: 1) What is my target price for gold?; 2) Do I think silver will follow gold and break out of its declining trend?; and 3) What are my thoughts on the gold-to-silver ratio?

Until a few months ago, all I had was an underlying faith and conviction that, at some point, gold would finally break through resistance to above $1,350/ounce after attempting this feat multiple times since 2016. It did just that after the June 18-19 FOMC (Federal Open Market Committee) meeting. Until a few days ago, I wasn’t sure what the catalyst would be, or the timing, for silver to have its day in the sun. I knew that investor attention would, one day, return to silver, which has been largely shunned in recent years in favor of cryptocurrencies and cannabis. On July 16, silver bullion finally broke its downtrend, sending the gold-to-silver ratio lower and sparking a rally in silver equities.  YTD, through the Friday, July 19 close, gold bullion is up 11.14% and silver bullion has gained 4.58%. 

Figure 1. Gold and Silver Breakout Ignites in May

A comparison of the XAU, XAG, DXY and SPX Indices from April 1, 2019, to July 17, 2019, normalized. 

Gold and Silver Breakout

Source: Bloomberg.

Where to From Here?

To sum up my current views, I am borrowing a quote from a technical analyst who has called for a gold breakout for a long time:

“I have no real price objective for gold or silver, other than "higher". Which is to say, the bet is that we’re witnessing a structural change taking place for the first time in years, in which precious metals outperform (general) equities… and trade much higher than where they are trading at present. May it be so!” — Carter Worth, Cornerstone Macro

2019: We Predicted a Year of Change

We at Sprott have been gold and silver bulls for years and have written about the various economic and political imbalances building up in the global financial system. This past January, we held a webcast for our clients in which we discussed 2019 as a year of change and argued that a number of factors presented a positive environment for gold, silver and the underlying equities.

We predicted that 2019 could surprise to the upside because of:

(1) A deteriorating global macro-economic environment;

(2) Trade tensions between the U.S. and the rest of the world; and

(3) Global geopolitical tensions.

All three reasons to be bullish still stand and are even more pronounced right now.

Most importantly, the macro outlook has softened further, with signs of economic slowdown in the U.S., Europe and China. 64% of the world has PMIs (purchasing manager indices)1 that are negative or <50, including the Eurozone, China, Japan, Korea, Malaysia, Taiwan, Mexico and Canada. U.S. PMIs have been declining as well. The Fed is widely expected to begin lowering its target interest rate at its July 30-31 FOMC meeting, while the ECB (European Central Bank) is planning to roll out its own monetary easing measures. As the ECB rate is already <0%, the Bank will likely restart QE (quantitative easing), which it phased out in December. These central bank U-turns have happened rather rapidly and are the main driver behind the precious metals rally.

Trade tensions also appear to be intensifying. While we read about a supposed truce between China and the U.S. at the G20 summit in Japan, there was no real resolution at the meeting last month, and it seems that the talks are not progressing. There are also signs of growing tensions with Europe: The Office of the U.S. Trade Representative said on July 1 that it is considering tariffs on an additional 89 items against the European Union. This would bring the trade value of items under consideration for tariffs to $21 billion a year.2 There are also U.S. threats of tariffs against Mexico if it does not hold up its end of the recently signed immigration agreement.

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Silver 17.11 1.46%
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