Why Precious Metals Have Become More Appealing
Low yields give safety-seeking investors an attractive alternative to bonds
Unlike stocks and bonds, precious metals don’t give investors any income simply for holding them. So why are they the market’s best performers in the third quarter?
The reason: In a world of falling—or outright negative—yields, nervous investors seeking havens are less likely to miss out on returns from bonds if they put money into gold or silver. That eliminates the major trade-off that typically confronts those interested in owning gold: It offers no yield at all.
That declining opportunity cost is why trillions of dollars of negative-yielding debt around the world and sharp declines in Treasury yields in the U.S. have sparked a rally in precious metals. The price of silver has soared 15% so far in the third quarter, while platinum has rallied 11%. Gold is up 6.3% with one trading day remaining in the quarter and is now up 17% for the year, headed toward its biggest annual gain since 2010.
The sudden allure of precious metals highlights the turbulence of this year’s third quarter, in which stocks, bonds and other assets have swung wildly as investors weigh the latest developments in the U.S.-China trade war. Stocks have recovered from a turbulent August to creep back toward records in September, while bond yields, which move inversely to prices, have stabilized after approaching record lows earlier in the month.
The surge in metals prices has spilled over to exchange-traded funds that track the sector such as the SPDR Gold Trust and iShares Silver Trust and lifted shares of producers, many of which have logged double-digit percentage gains for the quarter. The VanEck Vectors Gold Miners ETF has advanced 7.4% for the quarter to bring its advance for the past year to 50%, while Barrick Gold Corp. has logged a 12% quarterly gain and First Majestic Silver Corp. has rallied 23%.
ETFs and shares of producers are the main ways many investors can gain exposure to the sector, since they are less complex than trading commodity futures.
They have become even more popular as investors have piled into bonds to protect against a much weaker economic environment and a drop in stocks. Bond yields fall as prices rise.
Although the surge in bonds and precious metals has paused in September as recession fears waned and stocks stabilized, some analysts expect further gains ahead as the trade war rages on.
“There’s potentially a little more fuel to the upside if we do get a sudden, dramatic escalation in the trade war,” said Tai Wong, head of base and precious metals derivatives trading at Bank of Montreal .
Front-month gold futures finished Friday at $1,499.10 a troy ounce, 3.3% below their six-year high from early September. Silver is at $17.552, also below its recent multiyear peak, while platinum trades at $931.
The gains have come as manufacturing data around the globe signal a sharp slowdown in factory activity. Organizations such as the International Monetary Fund and the Organization for Economic Cooperation and Development recently cut their projections for global growth in 2019.
Many analysts expect moves in the bond market to continue dictating momentum in precious metals. Some expect steady buying around coming trade talks and are skeptical the recent recovery in bond yields and risky assets will last.
“It’s still a very recent shift in sentiment,” said Anwiti Bahuguna, senior portfolio manager and head of multiasset strategy at Columbia Threadneedle Investments, which has maintained its investments in gold recently. “It’s promising, so we’re watching it, but there is no reason to take off hedges at this point.”
At the same time, some analysts are hopeful that steady U.S. consumer spending and a U.S.-China cease-fire on tariffs will power stocks to new records, threatening the metals rally. Lower interest rates around the world also could spur a pickup in economic activity, potentially limiting further gains in haven metals.
Another reason some analysts think the rally could stall is that the dollar has remained steady as growth in the U.S. has outpaced the rest of the world. A stronger dollar can hurt commodities denominated in the U.S. currency by making them more expensive for overseas buyers.
But for now, some investors are maintaining their bets on gold and silver as geopolitical uncertainty lingers.
“We’re big fans of both as havens and more of a fan of silver than gold” because of its many industrial applications, said Ed Cofrancesco, president and CEO of International Assets Advisory.