It was a good month for precious metals…
Gold prices jumped more than $100 to hit new six-year highs above $1,500 per ounce.
Meanwhile, another precious metal has played catch-up with gold. And while I expect the gold boom to continue, we could see more outperformance from here.
I’ll explain all the details today. But first, I’ll shed some light on how a few key trends are fueling today’s rally… and why precious metals should continue to soar.
As expected, after several years of tightening monetary policy, the Federal Reserve reversed course and started cutting rates at its July Federal Open Market Committee (“FOMC”) meeting. We’re also seeing foreign central banks around the globe cut interest rates.
But that’s not all…
Trade war tensions with China continue to intensify.
On August 5, China officially allowed its fixed currency exchange rate to move beyond the psychologically significant seven-to-one rate against the U.S. dollar for the first time since 2008.
Later that day, the U.S. Treasury officially labeled China as a “currency manipulator.” The news put pressure on already tense U.S.-China trade negotiations and helped spark a 3% rout in the S&P 500 Index. Gold prices gained $25 on the day as investors fled to precious metals as a safe haven against volatility.
Then, last Friday, China slapped $75 billion in retaliatory tariffs on U.S. goods. Not to be outdone, President Trump fired back by increasing planned tariffs from 25% to 30%. It appears that both sides are prepared for a long fight.
Meanwhile, with nearly $17 trillion in government bonds trading with a negative yield, many investors no longer view gold’s zero yield as a penalty. As trade tensions and volatility rise, it’s no surprise that investors are flocking to gold in today’s environment.
And with central banks around the world competing in a monetary race to the bottom, all signs point toward more upside for precious metals going forward…
As I said, the Fed cut interest rates from 2.5% to 2.25% last month. This marked the central bank’s first rate cut since it took interest rates to effectively zero in December 2008.
Central banks in Europe, Japan, England, China, and Canada kept rates unchanged in August. However, several less widely followed central banks also cut rates in recent weeks, including those in New Zealand, Thailand, and India.
Not only that, but the five-year government bonds from 12 of the 20 countries that we monitor in Stansberry Gold & Silver Investor currently trade with negative interest rates. That’s up from 11 countries in July.
And incredibly, for the first time since our letter launched in 2016, the average rate of these bonds has gone negative… falling from 0.22% in July to -0.03% today.
As global interest rates go negative, investors suffer less opportunity cost from gold’s zero yield. This only brightens the appeal of gold as a store of value.
We’re already starting to see this appeal in action. The next table shows the price of gold over the past year measured in terms of five major world currencies… Notice that gold has gained at least 20% against all major currencies.
It performed best against the British pound (35%), the Chinese yuan (31%), and the euro (30%). It’s also up 28% against the U.S. dollar and 21% against the Japanese yen.
Gold should continue its rally as these trends play out. However, don’t overlook silver today…
The gold-to-silver ratio started declining from extreme levels last month. After reaching a multidecade high above 93 in July, it dropped below 90 as we moved into August.
Today, the ratio sits at around 85. That means silver is starting to outperform gold…
In recent decades, you can see the ratio dropped significantly after hitting levels like we’re seeing today. Going forward, I expect silver to keep outperforming gold, bringing the ratio down further.
Now is a great time to own precious metals. If you owned gold or gold miners last month, those assets helped shield your portfolio against the roughly 3% loss in the broader U.S. stock market. Gold continues to be an excellent “chaos hedge.”
Meanwhile, silver is poised for impressive outperformance from here.
As always, take a patient and disciplined buying approach… Start with a partial position size, and use down days in the market to add to your positions. With today’s investing backdrop, you want to put some money in precious metals right now.
Good investing,
Bill Shaw
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Source: Daily Wealth