Gold, Platinum, Silver rush as economic outlook is uncertain

Global stock markets rush amid historic unemployment and economic contraction is surreal. Half of the world has been locked down, with economies virtually shut, a second virus wave appears underway and yet the stock market is almost back to February’s all-time highs.

It seems that the keyword for the economic outlook is uncertainty. The economy cannot resume the pre-Covid-19 level after months of closures. Some sectors of the economy will do well, but others will be very slow to recover. Many small businesses, such as restaurants, will try to do the job with fewer people.

There is uncertainty about a second wave of the virus and potentially resumed restrictions on businesses. That uncertainty is transferred into precious metals.

Silver exploded 7% on 21 July, likely driven by positive news from promising COVID-19 vaccine candidates and the European Union’s $860 recovery package aimed at long-term investments.

The market (per S&P) had the fastest 30% drop in history, followed by the strongest 50-day move ever, back very close to all-time highs. The dichotomy between a contracting economy-with high unemployment and business closings-and the zooming stock markets around the world is stark. Why are stocks ignoring the economic damage?

With interest rates so low around the world, traditional places to put money for safety and income, such as bank CDs and bonds, do not look attractive; stocks benefit.

Some are looking ahead and see a recovering economy. They think the worst is behind us. Stocks are forward looking.

And most importantly, when central banks create excess liquidity that money must go somewhere. It has gone largely into equities.

With it, gold, silver, palladium and platinum surge as the ‘buy-everything’ sentiment in markets pushes the precious metals higher, gaining 85% in case of silver since March.

“The reopening trade is triggering strong industrial demand for silver and now that the $20 level has been cleared, bullish momentum might not see much resistance until its closer to the $22.50 level,” according to OANDA’s Edward Moya.

Safe-haven gold could ‘pretty soon’ top $1900. Adrian Zuercher of UBS Global Wealth Management says gold is still a preferred investment play which he expects to cross $1900 by year end, while providing a good hedge against inflation and any Covid-19 second wave.

“Silver may have been the beneficiary of a double whammy,” Jeffrey Halley, an Asia Pacific senior market analyst at OANDA said in a Wednesday email.

“Firstly, as the poor man’s precious metal, catching gold’s tailwind from negative real yields across the US yield curve. Secondly, it has industrial applications and will thus, benefit from the buy-everything global reflation trade prevalent in markets this week,” he wrote.

He noted that until silver has a severe setback, the momentum in stock markets, energy, and commodities driving it higher is unlikely to waver.

Copper, “the metal with a PhD in economics,” has not been as weak as one might have thought looking only at the economy. Prices did drop to their lowest level in three years, but for the year to date are down only 3%. The main reason has been the significant supply interruptions, particularly from Chile.

The European Union’s $860 recovery package may have lent a helping hand to the commodity’s boost as leaders announced long-term “green and digital investments” for the reconstruction of the bloc.