Investors could be forgiven for thinking precious metals have been trading flat this past year or so, with prices more or less at the same level as they were before the COVID pandemic. However, what many forget to factor in is that the last 12 months have also been characterised by historic strength for the US dollar. Even leaving aside the mid-summer highs, when the greenback was well above parity for some time, the USD is still worth almost 15% more in euro terms than it was pre-pandemic. This effectively means that gold has not only held its value over this turbulent time, but it has also actually recorded double-digit "real world" gains.
Now, starting from Q3 2022, gold and silver have practically exploded, rising between 10-15% in the space of a few months. It might not sound like much, but — by precious metals standards — that is quite a pronounced trend. Is this a sign of an incipient bull cycle, and what are the driving forces behind this strong movement from an otherwise reserved asset class? In this article, we will hopefully be able to answer these questions and more, shedding some light on the long-term outlook for gold and silver into 2024 and beyond.
Position 1: Dollar weakness works up metals
As we touched upon above, the USD had one of its strongest years in over two decades in 2022. But as any investor will tell you, what goes up fast must come down equally as fast — and this is precisely what we're seeing play out now with the greenback. From a high of 1.04 in late September of last year, the EUR/USD cross rate is now down more than 10% to 0.93. The upshot of this is that gold's "real world" gains, which were previously only visible when compared against the euro, have now become apparent in dollar terms, too.
Add to this some natural increase in precious metals demand on account of ongoing geopolitical instability and above-target inflation, and gold and silver's seemingly rapid appreciation makes logical sense. Amid softer 10-year US Treasury yields of 3.61%, the risk-off sentiment is fading, and we can confidently expect the yellow metal to keep going above $1,880.00. Furthermore, the Federal Reserve is tipped to complete its tightening cycle by year-end, and with these subsequent hikes largely priced in already, the path is clear for gold to rise further without the headwinds of a strong dollar.
Position 2: All about inflation
After a truly torrid couple of years for the global economy, it might feel as though the worst is behind us. This might well be true, but we're definitely not out of the woods just yet. Geopolitical uncertainty in Europe and the Pacific and ongoing inflationary uncertainty mean that risk-off assets like gold and silver remain attractive hedges to diversification-seeking investors of all stripes. In fact, while the Federal Reserve and other major world central banks are expected to reach their terminal rates with total additional hikes of under 100 basis points, this is by no means set in stone.
If inflation doesn't drop below 4%, global regulators will be required to keep tightening, which will only increase demand for precious metals. The Canadian bank CIBC sees gold and silver prices averaging around $1,800 and $23.50 an ounce over 2023, which is roughly 5% below current prices. Meanwhile, April gold futures were trading around $1,887.30 per ounce at last week's end (10/02), while March silver futures stood at $22.35. However, once again, these prices are predicated on only 1-2 additional rate hikes in 2023. If we see more, all bets are off.
Position 3: What about stocks?
Aside from metals ETFs, investors can also gain exposure to gold, silver, and other precious metals by purchasing stocks in mining companies. Obviously, this is not a strategy for everyone, but the increased volatility of mining and royalties equities can mean better gains while also providing a greater degree of diversification across all the commodities that the company in question trades in. Another undeniable advantage of such stocks is that they typically benefit from some pretty solid dividends. Vale, Barrick and Rio Tinto are all stable and well-established players in the precious metals mining sector and remain at very attractive valuations despite average gains well above that of gold and silver over the past six months. Barrick is up over 20%, while Vale has managed around 30% over the same period. But the sector leader is Rio Tinto, with gains of nearly 50% since September.
Meanwhile, these mining giants offer very generous dividends of 2.93%, 8.86% and 7.84%, respectively. Despite these market-beating price gains and relatively high dividend yield, Vale is still rated a Buy by a majority of Wall Street analysts, and its 18.64 average price target represents a potential upside of 10%. If, however, inflation remains high and investors' risk appetite is reduced once more, we could well see even bigger returns.
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