Gold touched a new all-time high this week amid geopolitical fallout from Russia’s ongoing invasion of Ukraine and resulting economic risks around the globe. At the same time, demand for silver is projected to reach a record high in 2022 and the metal is showing early signs of becoming undervalued relative to rapidly-rising gold prices.
The biggest question in precious metals markets, however, is just how liquid will Russia’s massive stockpile of gold reserves be with the international community bearing down on them? Some institutions and governments are already taking action to blunt Russian gold’s ability to subvert financial sanctions on the nation and its assets, serving as a stress test for just how well gold’s monetary quality can hold up under political pressure.
Related ETFs: SPDR Gold Shares (GLD), iShares Silver Trust (SLV)
Precious Metals Buoyed by Russia-Ukraine Conflict, Possible Fed Paralysis
The spot price of gold touched an all-time high above $2050 per oz this week, rising in the wake of an ongoing escalation of the Russia-Ukraine conflict and an ensuing flight to safety.
As we noted in our February viewpoint, Cutting Off the Punch Bowl, the outbreak of this war and resulting financial sanctions on the Russian economy will undoubtedly ripple through the global economy and create a downward risk to growth. Already, CME’s FedWatch tool indicates traders have effectively priced out the possibility of a 50bps rate hike at this month’s FOMC meeting (which previously saw a probability above 90%) as an aggressive tightening cycle in the US looks increasingly unlikely.
A standard 25bps rate hike still seems overwhelmingly likely, but it remains questionable how much of an effect that will have on inflation-adjusted “real rates” (the difference between the Fed Funds rate and YoY inflation) and the monetary policy outlook going forward. All of that is bullish news for gold, which usually thrives in high inflation, low interest rate environments like we have experienced over the past couple of years.
The silver market should not be overlooked in the current environment.
Back in 2019, MRP recognized a relative weakness in the price of silver when compared to gold, represented by the gold to silver ratio. By March 2020, the ratio had become so extended that it broke a 5,000-year old record, peaking around 125. As we noted at the time, an extended gold to silver ratio can sometimes indicate that the early stage of a precious metals bull run is underway. In the 2019-2021 period, that is exactly what happened as silver prices jumped from less than $15 to around $28 per oz, nearly cutting the ratio in half all the way down to 65 in 2021.
The ratio has started widening again recently, currently closing in on a reading of 77. That’s nowhere near the historic levels we observed in recent years, but it’s worth noting that…
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