Gold and Silver Under Pressure - But for How Long?
The price of gold and silver has been under pressure over the past year and especially for the past few weeks. Â As you can see in the 10-year charts below, both gold and silver have more or less been trading in a narrow range during this time frame and recently, both metals have hit a downtrend due to recent dollar strength. Â This has resulted in 52-week lows for both metals. Â Buying opportunity? Â Perhaps. Â Let's look a little deeper.
The chart below tracks the US dollar index (DXY) and you can see the large spike recently, which has brought a lot of pressure on the prices of gold and silver since both are denominated in dollars.
You may ask yourself, why is that, since the dollar has been on a virtually nonstop downward spiral since the 1980's as shown below:
The answer is quite simple: Â in an uncertain world, the United States provides the greatest degree of certainty for investment capital, so foreign money flows to the United States in the form of stock market investments, real estate investments and US Treasuries, thereby driving the demand for dollars up in the short run. Â In the long run, however, US monetary policy continues to drive inflation which constantly erodes the value of the dollar over time, even at very low rates of inflation. Â As shown in the chart above, the dollar now buys about half of what it did in the mid-1980's. Â If you were holding gold or silver for the past 10 years, your investment would have grown significantly.
Now let's look at another chart that I like to review from time to time, that shows the relationship between gold and silver. Â For this, I charted two exchange traded funds (GLD and SLV) to demonstrate the relationship over time. Â As you can see, the "spread" between gold and silver is very wide compared to the past 10 year history, which suggests to me that now might be an excellent time to buy some silver, since that spread will tighten when it returns to the historical average. Â Also, both metals will benefit when the short term effects of the "dollar pop" wear off and investors begin to focus on what's really happening. Â As soon as there is any indication of significant inflation in the United States, the value of gold and silver will increase quickly.
The Fed is rarely quick enough to tame inflation once it gets started and it stands to reason that this time will be no different. Â Unemployment in the United States has continued to be a problem in the current "recovery" which has delayed the Fed from raising interest rates. Â Similarly, as Europe faces deflation, the European Central Bank has initiated their own version of "quantitative easing," which by it's very nature is designed to create inflation.
It seems like only a matter of time before gold and silver resume their upward path. Â