Gold and silver break records: what is behind the price increaseTVC:GOLD TVC:SILVER
Gold recently broke historical records, exceeding $3,850 per ounce, and silver later followed suit, reaching a maximum of $47 per troy ounce.
At first glance, it may seem that this is a signal for investors to urgently increase the share of precious metals in their portfolios in order to profit from the growth. But let's take a closer look at what is behind this increase and what risks this story entails.
Reasons for the gold rush
First and foremost, this rise in gold prices is linked to geopolitical tensions, particularly the situation where the world is beginning to divide into “risk zones” and “stability zones”. Amid such instability, it is not surprising that central banks and investors are looking for reliable assets, and gold is still a classic “safe haven.”
Another reason for the rise in gold is the decline in interest rates, which the market is actually underestimating. The history of the last hundred years shows that gold rises steadily when interest rates fall. And given that Trump continues to put pressure on the Fed, it is quite likely that they may be lowered again, thereby creating even more favorable conditions for the metal. Add to this rising inflation, and it is safe to say that this will only push gold prices higher. As a result, the forecast of $3,900 per ounce in the third quarter may well become a reality.
The current trade wars, which are worsening the economic situation around the world, are adding fuel to the fire. Because of these conflicts, fiat currencies such as the dollar are constantly losing position. And as soon as the US currency begins to decline in value, gold begins to rise in price — not so much in itself, but relative to the depreciating currency.
As for production, this factor is not currently key to the growth of gold. It is clear that a serious redistribution of spheres of influence is taking place in Africa, and it seems that this will only get worse. Therefore, while we are seeing geopolitical divisions in Europe, Africa is gradually transforming from a problem region into a zone of high instability, which makes owning assets there riskier and gold even more expensive.
Silver – betting on production
Silver, in turn, is becoming more expensive for completely different reasons. If gold is considered a barometer of crises, silver is more tied to progress in industry. Electric cars, batteries, solar panels, electronics – silver is needed everywhere.
However, it is important to maintain a sober view here, as the potential for a sharp increase in the price of silver is very limited. The market for electric cars and batteries is already largely saturated, and new technological breakthroughs are still only on the horizon. Silver is also strongly linked to the state of the global economy, which, in turn, leaves much to be desired. As a result, the volatility of silver prices can be 2-3 times higher than the gold prices. In addition, the influence of the US on global supply chains makes any forecasts for silver highly unreliable.
How to invest in these metals?
When it comes to buying physical gold, it is more suitable for collectors or people from countries where gold has special significance, such as India, China, or Arabic countries. But buying it to store at home or elsewhere does not make much sense due to the high cost of storage. The same applies to silver: it can be purchased in physical form, but silver coins are often more expensive than the spot price of the metal due to production and distribution markups. And again, storage and even insurance costs should be taken into account.
Therefore, it is more rational to consider both gold and silver through the exchange. There are three main ways to invest. The first one is gold and silver ETFs. This is the most convenient and accessible option, suitable even for beginners, as there are many large and reliable securities with different terms and conditions. The only downside is that investing in ETFs does not give investors direct access to these metals.
Shares in gold mining companies are also suitable for investing in the yellow metal. With silver, this option can be even more risky and volatile than buying ETFs. Therefore, investors are better off paying attention to gold mining companies such as Newmont NYSE:NEM (USA), Barrick Gold TSX:ABX (Canada), Freeport McMoRan NYSE:FCX (USA), and others. We have already discussed some of them in more detail here. However, to invest in their shares, you need to have a very deep understanding of the market. Despite being linked to gold, the shares are still traded on a stock exchange, whose index can either rise or fall.
The last option is to buy gold and silver futures, for example, on the Chicago Stock Exchange. But this method is even more complicated and is suitable for even more experienced investors.
As a result, whichever investment method investors choose, they need to be careful in any case. Gold, of course, looks attractive and can strengthen a portfolio amid falling interest rates and a weakening dollar. But it is worth increasing your share gradually, as record prices are usually followed by a correction. Silver has the potential to grow a little more, but we shouldn’t expect too much from it.
