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Trading at 17-year-old price, this PSU is a play on India bid to draw China factories
6 May, 2020
After a stellar end to April, domestic markets again took a turn for the worse and erased nearly half of last month’s gains in just two trading days of May. Despite the market selloff, here are a few stocks that top market experts say can offer good returns over 2-3 weeks.
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Latest gold and silver news: which metal should you trade in May 2020?
The ratio between spot gold and silver prices has spiked to an all-time high this year, with prices for the two metals diverging amid heightened volatility in the precious metals markets. Investors have flocked to the safe haven of gold in recent months while silver’s gains have been limited by the sharp drop in industrial demand prompted by the Covid-19 pandemic.
Gold reached its highest level since 2013 in April, driven by unprecedented turmoil as economies around the world have ground to a halt, with governments ordering businesses to close to slow the spread of the deadly virus. Silver was also trading at its highest point since 2016 earlier this year, but subsequently slipped back when manufacturing plants shut down under the orders.
With gold having gained 12 per cent so far this year while silver has fallen by 16 per cent, investors are wondering which metal offers the potential for the largest gains in 2020.
In this article, we cover some of the latest news on gold and silver this spring and review what price analysis indicates for the direction of the metals in the coming months. In addition, you will find two video updates from David Jones, chief market strategist at Capital.com, where he summarises what has happened to both precious commodities in recent weeks and how to set up a trade to profit from the swings in the market.
The gold-silver ratio – the amount of silver it would take to buy an ounce of gold – rocketed to 123 ounces in March. That was up from 85 at the start of the year, when gold was trading around $1,500 per ounce and silver was just under $18 per ounce. The ratio held above the psychological barrier of 100 into the start of May, leaving silver undervalued in relation to gold at $15 per ounce compared with $1,700 per ounce for gold.
Silver approached $19 in late February, carried along with the rising gold price, but as the effect of the coronavirus pandemic on industrial activity became apparent, the white metal failed to keep pace with the gains its yellow peer, slipping back below $14 per ounce.
Gold and silver price news in March was dominated by a sharp decline in a broad-based sell-off of all asset classes as investors unwound positions, but the metals quickly resumed their rise into April as buyers returned in a flight to safe-haven assets.
Unprecedented government stimulus has driven investors towards gold as they seek a vehicle to offset the effect of negative real interest rates and soaring central bank balance sheets around the world. US GDP contracted by 4.8 per cent in the first quarter, the largest decline since the financial crisis in 2009, pointing to the start of a global recession. Gold dipped towards $1,450 per ounce in March but rebounded above $1,700 in April, reaching an eight-year high. It has been trading sideways around that level so far in May.
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Volumes of gold and silver cleared through the London Bullion Market Association (LBMA) have jumped to record highs. According to the World Gold Council, inflows into gold-backed ETFs saw a seven-fold year-on-year increase in the first quarter in response to the global uncertainty and financial market volatility. Gold supply fell by 4 per cent during the quarter as the lockdowns disrupted mine production and gold recycling.
Supply of silver has dropped as a government lockdown in Mexico, which accounts for around a quarter of global production, has disrupted output. But at the same time, silver demand has plummeted with manufacturing facilities closed around the world.
The JP Morgan (JPM) global manufacturing purchasing managers’ index (PMI) sank from 47.3 in March to 39.8 in April, its lowest level since March 2009. Unlike gold, which is largely a financial instrument, around 60 per cent of silver demand comes from industrial applications including electronic semiconductors, batteries and solar panels, prompting the divergence in the prices for the two metals.
Watch David Jones, chief market strategist at Capital.com, explain how the supply and demand fundamentals play into the technical picture, and give you a suggested trade to capitalise on the current silver market volatility.
What does gold and silver analysis based on technical indicators suggest for which metal to invest in going forward?
In the video below, David Jones discusses the technical reasons for the price moves in gold so far in May. He gives you a suggested trading range for the month to profit from the coming price fluctuations.
Analysts at TD Securities expect gold and silver to remain divergent in the current environment. “Gold benefits from a positive and strengthening breadth of technical signals pointing long, which contrasts with the firming downtrend in silver and platinum,” they said in a research report. “Investment demand will continue to flow towards gold as capital seeks to shelter itself from negative real rates,” they added in a separate note.
Meanwhile, UK-based consultancy Metals Focus expects physical investment in silver to extend its gains in 2020, rising by 16 per cent to a five-year high as investors rotate out of equities. It notes that near-term supply remains curtailed by mine closures and predicts silver to outperform gold later in 2020, which could see silver test the $19 level before the end of the year.
Scotiabank analysts note that silver has fallen through its aggregated price floor of $16.20 per ounce, supporting the argument that it is an underpriced liquidity asset/hedge or gold proxy. It should “receive tailwinds from (expected) gold outperformance with fundamentals firming up in the medium term.
“We have argued tariffs and Covid-19 are cousins (of protectionism), thus gold – usually a decent macro leader – is maintaining some Covid-19 premium, as markets begin to price in what trade wars failed to do (an escalating US-China blame game, real bordering up of nations and economies where friends / supplies chains are carefully chosen),” the Scotiabank’s analysts said.
Other experts are more cautious about the outlook for gold for the rest of 2020. Gold and silver news is likely to shift towards demand seasonality as countries begin to ease their lockdown restrictions.
“Gold faces serious demand headwinds from a lack of consumer spending in China and India,” analysts at Heraeus Precious Metals said on Tuesday. “Gold’s rally is showing signs of stalling. Technical indicators, such as the RSI, are showing divergences from the price, and the speculative net long gold futures position reached a record high in February but has since declined… Typical seasonality in the gold price indicates the price could move lower, or at least sideways, over the summer… It seems a great deal of uncertainty surrounding the state of the economy is already priced in and, with lockdowns beginning to be brought to an end, the price could pull back.”
The last time the speculative net long position in gold climbed to record highs, the price fell by 18 per cent over the following five months, the Heraeus analysts noted.
“While a surge in ETF inflows offset weak physical demand in Q1, we don’t expect this to be repeated over the coming quarters,” Capital Economics analyst Kieran Clancy said last week.
“After all, many of the factors that have boosted the investment appeal of gold are likely to fade, and central bank purchases are set to decline in the months ahead. As a result, we expect the gold price to ease back by year-end.”
Before making an investment decision, make sure to stay on top of the latest gold and silver price news and market developments by following Capital.com to spot the best trading opportunities
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Author: Nicole Willing
Market News & Analysis | Financial Market Updates
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