Hot gold … and hotter silver … thanks to Fed, ECB

Gold is hot, and silver is hotter. And this upcoming week, they could both get hotter yet!

I’ve got some eye-popping charts I’ll share in a moment. First, here’s some news you need to know.

Last week, European Central Bank President Mario Draghi dropped big hints that the ECB is going to cut rates. The ECB said it sees rates at present or lower levels through mid-2020. That was a change from its previous outlook of keeping rates unchanged through next June.

That sent the euro (briefly) to a two-year low against the U.S. dollar. It also means that the negative-rate government bond bonanza in Europe is likely to continue.

There are over $13 trillion globally in negative-interest-rate bonds. That’s bullish for gold, because one of the complaints against gold is that it doesn’t pay interest.

When bonds yields are negative — as they are in Switzerland, Sweden, Denmark, Germany and Japan, gold looks pretty good.

The ECB is also pumping excess reserves into the banking system. But like trying to breathe life into a party once the booze has run out, there’s only so much you can do.

On this side of the Atlantic, second-quarter GDP came in at up 2.1% vs. expectations of up 2.0%, year-over-year. This misses the Trump administration’s target of 3% growth. And many market-watchers say that’s all the excuse the Fed is looking for to slash rates at its meeting next week.

The Federal Open Market Committee meets next week, and is expected to ease monetary policy with an interest-rate cut on Wednesday, July 31.

According to the CME’s FedWatch tool, there is a 100% probability there will be a rate cut announced.

The tool indicates there is a 76.5% probability that the rate cut will be 25 basis points (1/2%), and a 23.5% probability that the rate cut announced will be 50 basis points (1/4%).

Holy Money-Bags, Batman!

You would think this would weigh on the U.S. dollar. Initially it did. But now that most of the other major central banks are slashing rates like Jack the Ripper, the dollar actually looks good. The greenback hit a two-month high on Friday.

Normally, that would weigh on gold and silver. But these are not normal times. Investors around the world notice problems piling up like an elephant load of manure, and the world’s central banks keep plugging in fans. Metaphorically speaking.

So, investors are piling into both gold and silver. Look at what’s happening to holdings in physical gold and silver ETFs …

The blue line on the chart is holdings in gold ETFs, which is noted on the left axis. The black line is holdings in silver ETFs, marked on the right axis.

On Monday, BlackRock’s iShares Gold Trust (IAU), the world’s second-largest gold-backed ETF, attracted the biggest inflow in over a year, while its smaller, silver-oriented cousin, iShares Silver Trust (SLV), pulled in the most since 2013. Other funds are seeing similar inflows. In fat, silver held by ETFs just hit a new record!

And the money — and metal — keeps pouring in.

You know who else is buying? Central banks.

Central banks likely bought gold in the first half of this year at a rate more than 50% higher than a year earlier. That’s according to a report from Standard Chartered. Analysts there wrote: “We estimate that H1-2019 buying rose at least 56% y/y (year-over-year), implying that buying for the full year could be close to 500t (metric tons) at the current run-rate.”

So, you should buy gold, right? While I like gold, I think you’ll get more bang for your buck from silver.

On July 18, I laid out my case for a continued rally in silver. And just this past Thursday, July 25, I showed you that the gold-silver ratio has peaked. This often signals a big bull rally in gold — and an even bigger rally in silver.

Silver’s run-up has been furious — a 7.2% gain this month through Thursday. That way outpaces gold’s 0.4% advance.

Now let me show you two charts as to why it could continue.

First, the gold-silver ratio has hit an important level at the 200-day moving average.

It might bounce there. But if so, that’s a great time to buy silver. Because the gold-silver ratio is at 86 — that’s way, way above its historical level of around 60-65.

A Golden Cross in Silver

One more chart. This one is a chart of silver. And on it, I’ve put the 50- and 200-day moving averages.

You can see that the 50-day moving average (blue) is crossing above the 200-day moving average (red). In other words, shorter-term action is becoming more bullish. When this happened in 2016, silver rallied by about 35%.

That’s pretty good. But remember, miners are leveraged to the underlying metal. When this happened in 2016, the Global X Silver Miners ETF (NYSE: SIL) rallied by 110%!

This set-up seems solid to me. The opportunity is waiting for smart investors to grab it. You can buy SIL or drill down to individual stocks. Select miners, developers and explorers are primed for blast-off.

All the best,

Sean

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One comment on “Hot gold … and hotter silver … thanks to Fed, ECB

  1. Leon Ber July 27, 2019

    commercial short gold 463K,, commercial short silver 147K, compare to July 2016, almost identical

    commercials have never been wrong, always make money with their short position, why don’t you mention that

    Reply