Precious metals are protective assets that provide financial well-being to their owners against the background of unfavorable conditions in the stock markets and depreciation of paper currencies. On average, the "useful life" of paper currency is 25-40 years. Then, as a rule, it is depreciated if governments increase budget spending.
In 2021, central banks do not seek to maintain fiscal stability. Stocks and bonds become more attractive assets due to the large-scale issue of paper currencies. It would seem that gold and silver quotes should have grown since the beginning of the year amid the ongoing coronavirus pandemic around the world and rising inflation. However, changing the behavior of precious metals does not always accompany crisis phenomena.
In 2021, several events occurred that will contribute to an increase in gold and silver prices. In mid-summer, new recommendations for regulating Basel III banking activities came into force. They significantly affected the decline in paper gold trading by banks that did not hold physical metals to cover their liabilities. At the end of September, China's largest developer, the Evergrande Group, was on the verge of default. She was supposed to make payments on her obligations totaling $300 billion. The Chinese authorities banned her access to overseas loans. This led to the loss of capital in the world stock markets in the amount of hundreds of billions of dollars. If you analyze the transactions with the sale of precious metals over the past six months, you can see that only a small part of them is provided by the supply of physical gold and silver. More than 95% of the world trade in precious metals is in the form of paper contracts. For example, on September 16, out of 10.83 thousand gold futures contracts (COMEX exchange in New York), only 500 contracts (for 50 thousand ounces of gold) were repaid by supplying physical precious metal. Thus, 10.33 thousand contracts (for 1.033 million ounces) were repaid by paying money. This is the most expensive way to redeem contracts on the COMEX exchange. The large repayment ratio of gold and silver contracts through money indicates that there is a catastrophic lack of physical precious metals in the market. Precious metal quotes are also influenced by trade in derivative financial instruments. By the end of this year, the rate of precious metals may not reach the level of 2020, but this lull will ensure an increase in the quotes of precious metals in 2022.
What could be the catalyst for the growth of the gold exchange rate?
The upward trend in the exchange rate may be due to a decrease in public confidence in the authorities. Yellow metal is a protective asset. It is acquired not from a good life, but for insurance against political risks. Thus, the less confidence in the stability of the financial and political system, the greater the demand for precious metal.
Another factor in the growth of gold quotes is inflation. Currently, the world economy is suffering from stagflation, that is, economic growth is declining and prices are rising. Keeping capital in the form of paper currencies under such conditions is extremely dangerous. Moreover, it does not matter where paper currencies are saved - on deposits or settlement accounts, "under the mattress" or "in the stockade." Paper currencies are at risk of depreciation. This process is uneven. At the beginning, prices can rise for essential goods, and then the "relay" passes to other categories of goods and services. For example, now food, energy and building materials prices are rising rapidly, and precious metal quotes are decreasing. However, sooner or later, gold and silver will take the baton in the context of rising prices.
Large-scale issuance of paper currencies in many countries of the world can lead to depreciation of capital. States finance budget expenditures with a "printing press," which does not add credibility to the financial system, encouraging investors to look for tools to protect capital from depreciation. Gold will do best with this task.
The silver exchange rate can go up
Gray precious metal has been growing steadily in price since April 2020. For 4 months, his quotes increased by $14.7 - from $14.3 in March to $29 per ounce in August. The silver exchange rate has been consolidating since the end of summer 2020 and throughout this year, fluctuating in a wide range of 22.5-28.5 dollars per ounce. In recent months, the exchange rate has been approaching the lower end of the range, showing the worst dynamics relative to the yellow collector. The ratio of quotes of two precious metals at the end of August approached the level of 77.34. This is the maximum value since December 2020, with its average level of about 68.8.
Silver now follows the dynamics of the gold exchange rate. However, talking about total dependence would be incorrect. The silver course has specific bases that will cause its growth.
According to the Silver Institute, in the coming years gray metal will be popular in various industries. This is primarily due to the fact that the transition to renewable energy sources in leading countries is underway. The production of materials required in the field of green technologies will require a large amount of silver, which will entail an increase in its cost.
What prevents the rise in silver prices?
Currently, the stability of the gray metal exchange rate is due to increased inflationary expectations and the dynamics of the yellow metal. The Fed's soft monetary policy has an additional impact. Recently, the demand for precious metal from industry is not too high: about 50% of its total volume. The reason is the stagnation of the world economy due to the spread of a new strain of coronavirus called Delta. Silver prices are not rising either because supply has declined.
India is the largest silver consuming country. Now the volume of imports of precious metal into this country is at the level of a historical minimum. The indicator began to decline from the second half of 2020. From August 2020 to August 2021, the average monthly volume of silver imports into the country was about 17 tons. In 2019, India bought an average of 500 tons of silver per month abroad. The reason for the decrease in gray metal imports to India is the decrease in demand for it from industrialists and jewelers. The country engaged in the secondary processing of metal from its own reserves (about 19 thousand tons) after the silver exchange rate jumped sharply by the end of 2019. Therefore, the demand for gray metal in India has significantly decreased and put pressure on the world exchange rate.
Since February 2021, China has become a net exporter of silver to the world market. The country has accumulated significant reserves of precious metal. For 7 months of 2021, China sold 778 tons of silver, and for the same period in 2020 - 807 tons. The increase in the supply of precious metal from China to the world market was facilitated by a high rate - almost $30 per ounce. China's export activity knocked down prices to an acceptable current level.
Silver and industry
In 2020, gray metal production declined due to quarantine restrictions in producing countries. However, reserves and current production are sufficient to meet demand. Now investors like the low rate of silver, and they are increasing their reserves on the stock exchange and in stores. In addition, the demand for gray metal from industry is gradually increasing. According to the estimates of the leading consulting company Metals Focus, the volume of silver consumption in this area of the economy will grow by 8% year on year. The production of photovoltaic systems (solar panels) will contribute to the increase in industrial consumption. Moreover, gray metal prices will rise in the long term, given the emerging trend for electrification of transport, the deployment of 5G network infrastructure and an increase in the share of solar energy consumption as a whole. The transition of countries to renewable energy sources will support the demand for precious metal in the long term.
A significant drop in silver prices is not expected in the medium term. In the near future, its rate will be in the range of 23-30 dollars per ounce amid the gradual stabilization of the situation with supply and demand. A fall in the exchange rate below $23 per ounce is unlikely to take place. This can only happen if central banks drastically reduce the volume of stimulus measures, which is unlikely. It should be borne in mind that gray metal is more in demand in industry than in jewelry. In this regard, demand for it depends more on the state of the world economy, which currently depends on the dynamics of the spread of coronavirus and the situation with economic incentives in the United States. The medium-term prospects for gray metal look positive. The initial resistance level is $26-27 per ounce. If the rate passes this line, then the next level of resistance is about $28-29.