Holders of gold in Australian dollars in the last five years have enjoyed one of the benefits of the “undollar” and that is as a hedge against currency depreciation. Its still around $1700AUD per ounce, while the Australian dollar in the same time has dropped from $1.10 to 78 cents – a 30% decline!
We don’t hear much about silver, golds more useful brother in the industrial space at least, which has had a resurgence recently. Usually silver tracks gold, albeit with higher volatility, but the gold/silver ratio has fallen dramatically recently from its trend highs:
Silver is up over 25% from its recent lows, surging more than 4% last night to nearly $17USD per ounce:
Angus Nicholson from IG has a note out explaining why it is so:
There are two major factors driving the rally in silver: Chinese stimulus and negative interest rates. Silver, unlike gold, has far more industrial uses, and the significant uptick in Chinese stimulus evident in its large increase in credit growth and investment spending in its 1Q data has been immensely beneficial to a whole range of industrial commodities.
Silver and gold also arguably function a lot like zero-yielding bonds, making them less desirable as global interest rates increase and more desirable as global interest rates decrease. Currently, more than a third of government bonds globally have negative yields making zero yielding assets comparatively quite attractive.
Of the four major global central banks, three of them are still currently in easing cycles. In such a scenario, even if the Fed does manage to raise rates once or twice this year, it is unlikely to make a major dent on the uptrend in silver and gold.
And it is Chinese buyers driving the trade, according from Reuters, which said “that there is heavy buying in silver in Shanghai, and that has triggered buying in gold as well,” said Ronald Leung, chief dealer at Lee Cheong Gold Dealers in Hong Kong.
A silver lining for Australian buyers? Unlike gold, silver priced in AUD plumetted 50% from a $40AUD per ounce high five years and remains stuck around $20AUD per ounce the last two years. If Chinese demand increases from here and the easing cycle remains in place, there is a potential medium to longer term opportunity to ride the silver bullet.