Gold and silver have exhibited more volatility than usual this year. Gold started the year at $1,521 and rallied 12% into March to $1,700. However, these gains quickly evaporated as the coronavirus induced sell-off turned into a liquidation event that resulted in weakness for safe assets like gold and bonds.
In hindsight, this decline was an ideal entry point as gold went on to rally 42% over the next five months and made new, all-time highs. Gold ended up topping at $2,089 in early-August. Silver also had an impressive 150% rally off its March lows to a high of $29. Notably, silver remained well-below its 2011 peak of $49.
Gold’s and silver’s post-March gains were driven by the poor economic outlook, rate cuts, central bank asset purchases, dovish forward guidance, trillions in deficit spending, and a weaker dollar. However, in the past few months, both metals have endured significant pullbacks from their August highs.
The major factor in this recent correction was the better-than-expected economic recovery. As the economy reopened, metrics like employment, industrial activity, and consumer spending bounced back at a faster pace than expected. This caused longer-term interest rates to perk up which resulted in profit-taking in precious metals.
In recent weeks, gold and silver have been moving higher. From November 30th, gold is up 7%, while silver is up 20%. Naturally, investors are wondering if this is simply an oversold bounce or is it a resumption of the bull market which started in the Spring?
I believe that precious metals are in a bull market and expect gold to make new all-time highs in 2021. Relative to the August highs, silver is down about 11%, while gold is off 9% from its peak.
Precious metals’ fundamentals continue to improve. There is increasing inflationary pressure in the economy which is evident from the strength in commodities like copper, iron ore, and lumber. Demand for these items should continue to strengthen due to the bull market in housing and growth in industrial activity.
Another reason to expect more inflation is that countries all over the world are aggressively deploying fiscal stimulus to boost their economies. On top of this, there’s going to be significant pent-up demand unleashed next year as the world gets vaccinated.
Usually, the counterweight to increasing inflation is that the Fed tightens policy. However, this time is different.
The Fed has revised its inflation framework to hike only when rates are “symmetrically” above its 2% target. Therefore, monetary policy will get “looser” as the economy improves. At the depths of the recession in March, the difference between the 10-year and the Fed Funds rate was 0.55%. Today, it’s at 0.92%. As economic activity continues improving, and the pandemic nears an end, the curve will only get steeper which means that real interest rates will move lower.
All of these developments are positive for precious metals. During precious metal bull markets, the mining stocks are usually the best performers. These companies’ equity prices can see big gains as rising prices mean increased earnings in addition to the value of their assets increasing. Four gold and silver miners that investors should consider buying are New Gold (NGD), Fortuna Silver Mines (FSM), Newmont Gold (NEM), and Endeavour Silver (EXK).