May 27, 2023
- Business Insider: Undervalued gold strengthens as dedollarization expands
- Morningstar: Silver prices hit a yearly high
Image: Business Insider
Gold becomes more valued as dedollarization expands
Filip De Mott, Business Insider, May 11, 2023
Gold is undervalued and its value may continue to rise with dedollarization, says Bridgewater Associates Karen Karniol-Tambour. “Geopolitical turmoil is not going away. This is a slowly advancing support for gold. Inflation also maintains interest in gold.According to her, gold may be at the beginning of a sustainable growth period as the global dedollarization trend continues.
Dedollarization occurs when certain countries seek to reduce their dependence on the U.S. dollar, which holds a dominant position in international trade. The dollar is traditionally regarded as the primary reserve currency for central banks. Since Russia's invasion of Ukraine, more and more countries have turned to the Chinese yuan or other currencies besides the dollar in their trade agreements. The sanctions imposed by Western countries on Russia, which froze its currency reserves, highlighted the risks associated with the use of the dollar.
As inflation remains relatively high across global markets, gold continues to attract investors looking to protect themselves from a decline in purchasing power. Consumer price inflation in the United States has sharply slowed from last June's peak of 9 percent. However, according to the latest consumer price index data for April, inflation was still at 4.9 percent, which is still well above the Federal Reserve's 2 percent target.
The price of silver reached a yearly high
Myra P. Saefong, Morningstar, May 3, 2023
Gold is not the only precious metal that benefits from economic uncertainty and the banking crisis. The price of silver rose last month to its highest level in a year, and there is room for it to move even higher, as the global silver market is expected to experience the second-largest production deficit in 20 years this year.
“The demand for physical silver and gold reflects investors' general concerns about the state of the economy, geopolitical unrest, and potentially ongoing inflation,” says Stephen Gardner, the head of ETF Managers Group.
“Risks increase the willingness to invest in safe havens,” he said. He refers to the rescue of deposits at Silicon Valley Bank and Signature Bank and notes that no one can be sure of similar rescue operations in the future. Will McDonough, founder and CEO of EMG Advisors, says:
During times of increased risk, people buy gold and silver to avoid credit risk.
The ICE U.S. Dollar Index, which measures the strength of the dollar against a basket of major currencies, is about 2% lower than last year. Investors continue to flee from unstable assets like the dollar and seek solid investment options such as silver, says Will McDonough. The current gold-to-silver ratio is about 79:1, meaning that it would take approximately 79 ounces of silver to purchase one ounce of gold. This is relatively high compared to historical levels, but the ratio has fluctuated quite a bit over the past couple of years.
Keith Weiner, the founder and CEO of Monetary Metals, says about the price relationship that in the short term, the markets are “reasonably well balanced” and that in the long term, silver is likely to perform better than gold. The record demand for silver last year contributed to a global supply deficit of 237.7 million ounces in 2022, marking the second consecutive annual deficit and possibly the most significant deficit of all time according to the Silver Institute's April report.
Global total demand for silver increased by 18 percent last year to 1.242 billion ounces, with demand in the industrial segment reaching a record 556.5 million ounces according to the study. In contrast, global supply did not change much, as Peru's mining production suffered partly due to social unrest, while production in Mexico, Argentina, and Russia increased. Total stocks last year were 1.0047 billion ounces, compared to 1.0045 billion ounces in 2021, the study showed.
