Precious metals: are they an option when investing?

The first half of 2022 saw a strong rebound in economic growth along with rising inflation. An expansion that has been slightly reduced in recent times as a result of the crisis in the supply chain gold ira company. That post-Covid health crisis bonanza is already showing signs of slowing as fiscal and monetary stimulus fades.

Meanwhile, inflation remains elevated due to supply chain disruptions and rising energy costs. “Overall, there are fears that a stagflation environment, that is, low growth and high inflation, is taking place,” warns Sean Markowicz, head of strategy, studies and analysis at Schroders.

Price rebound scenarios are always favorable for precious metals like gold and silver. Is it worth it, then, to invest in them now? According to Nitesh Shah, director of research at WisdomTree, historically, commodities have served as an excellent hedge against inflation.

“The correlation may not have been as strong with gold as it has been for most periods in the series with commodity baskets, although, in the 1970s, when inflation became particularly high, gold did a great job of acting as a hedge against rising price pressure,” says the expert.

Analyzing the results, commodities have more momentum in times of inflation than any other asset class, including gold. “However, the gold metal has had a very strong inflationary beta, which is several multiples higher than equities,” Shah notes.

This translates into the fact that, despite the fact that the baskets of raw materials follow the upward trend of inflation, they also do so when it falls. Gold, on the other hand, tends to follow the course of inflation only when it rises, which translates into a smaller beta overall.

Various asset classes respond to “expected inflation”, which is generally shaped by monetary conditions and how the strength of demand in the economy is perceived.

These expectations generally focus on the demand side. However, inflation can also be generated on the side of supply shocks. For example, the cyber-attack on Colonial Pipeline last month increased the price of gasoline for consumers. Another example is that of the ongoing drought in Brazil, which is pushing up the price of food products.

“Although most asset classes tend to react much less to this type of inflation, commodity prices have a direct connection to many supply-side shocks, making them a superior hedging instrument against inflation materialized inflation ”, relates the WisdomTree analyst indicating the favorable winds for the yellow metal.

The scenario means that gold may be all heads up. And even more so thinking in the long term. “From a technical point of view, the future of gold with expiration in the month of December is trading above the psychological level of 1,850 dollars, after rising more than 1.30%, once the inflation data for United States”, explains Diego Morín, an IG analyst.

According to the expert, then, if gold manages to sustain this level, we could be facing a new upward momentum in the precious metal, after remaining within a lateral range in the last four months. "Thus, the situation of gold will continue to attract the attention of investors as inflationary tensions continue, with the greatest challenge of breaking the barrier of 1,900.0 dollars, levels tested during the month of June", he relates.

 

Silver projections are positive

On the other hand, more than 50% of the use of silver corresponds to industrial applications (in contrast to gold, where less than 10% comes from that sector), so the improvement in manufacturing activity positively affects this metal.

“To this we must add the growth in silver inventories; the increase in inventories indicates a greater availability of the metal and, therefore, has an impact on its price”, specifies Shah.

The expert believes that the profitability of silver will be even higher than that of gold, appreciating 37.5% a year from now. “For the second quarter of 2022, we expect an ounce of silver to trade around 38.81, benefiting from the positive effect that the rebound in industrial activity would have on its demand ”, He forecasts.

“Furthermore, the contraction in mining capital spending and the reduction in inventories of silver on the exchange point to a tightening of supply,” he adds.

And not only that. The value of silver may also be boosted by an environmental economic recovery. A renewed focus on meeting climate goals will intensify the electrification of transport and increase the demand for photovoltaics. Both trends are expected to have a positive impact on silver demand.