For those of you who listened to us earlier in the year when we suggested taking profits from equities and converting those gains to high quality gold and silver, we have some very good news for you: Silver and gold futures rallied to their highest levels since 2014 in a run fueled by global demand for the safety of liquid hard assets.
Silver’s outpacing gold a bit as those who shorted silver got hammered when prices topped $20 an ounce, up nearly ten percent in just over a week. This was a holiday weekend in the U.S., so precious metals markets had fewer traders, making markets more volatile than usual. Combine thin trading with high demand for safe haven assets and you have a formula to crush those betting against precious metals. Gold started trading this morning at $1,369.00 an ounce, after trading at just $1050.00 an ounce in December, 2015, barely seven months ago.
The Sudden Focus on Silver
You know you’re in the right market sector when the hedge fund traders show up. In late June the net long position in silver stood at a record 78,057 contracts. There are two major reasons behind this sudden surge in interest. One has to do with the dual nature of silver as both a precious metal and industrial metal. Other than jewelry, solar sails on spacecraft, and eye-popping iPhones, gold has limited industrial uses. On the other hand, silver’s many applications include electronics, solar panels, electronics and technology, and its antibacterial properties mean silver has a large and ever-expanding role in medicine.
China Goes Silver Crazy
Since China is the electronics and solar panel manufacturer for the world, it’s probably little surprise then that investors there are driving prices to new highs. Silver was running roughly a dollar higher on the Shanghai Exchange than in other markets. This surge could mean traders in that country see their manufacturing sector in a slow recovery or, more likely, like everyone else in the world, they’re hedging against the economic trouble in Europe. The Chinese have another reason to invest in liquid hard assets and that’s to escape the inevitable devaluation of the yuan as foreign capital flees China’s limping economy.
Hedging the Euro
The biggest factor behind gold and silver at the moment was the vote for Britain to leave the EU. Even if the UK doesn’t end up actually leaving, the vote signals widespread unhappiness within the Union. The big fear is not the UK leaving the EU, but that the EU itself is unraveling. As Europeans start questioning all things EU, it casts a shadow on their common currency, the increasingly fragile euro.
Gold, Silver to the Rescue
The euro is one of the world’s reserve currencies, which means many nations and wealthy individuals hold a lot of that currency and it is readily accepted around the world. Many Europeans are still dependent on it and it’s the uncertainty around the future of the euro, more than the EU itself, that’s driving investors to traditional safe haven investments like bonds, gold and silver.
Hedging Your Paper Currency
Central banks constantly play games that dilute the value of currency and leave the world, and your bank account, awash in a sea of thinly backed paper. Gold is still the standard for liquid hard assets but it’s wise for investors to split a portion of their regular gold buys with high quality silver. After all, diversification, with the aim of protection, is the name of the game.