Precious metal prices have surged this year. Gold recently crossed $1,800 an ounce. Silver’s gains have been even stronger in the second quarter. Kim Parlee speaks with Bart Melek, Global Head of Commodity Strategy, TD Securities, about whether metal prices will continue to shine.
- Well, we still like gold longer term. We're looking at $2,000 plus next year. For now, however, I think we're going to consolidate around where we are, perhaps even lower. We're looking at a trading range of just below $1,800 to $1,810, $1,815. I think we'll be there for a bit of time until at least either Federal Reserve monetary policy gets even more dovish or until we start seeing some inflation or perhaps less risk appetite.
But for now, I think we're good where we are. We have our target on the futures at $1,900, and we're just waiting for that to execute, and we'll see. We wouldn't expect anything fabulous in the short run, though.
- Maybe you could just take me through. I understand what you're saying, consolidating at these levels. But when you look ahead to next year for higher levels and the Fed being more dovish, what's going to trigger that, in your opinion?
- Well, we ultimately think that there isn't going to be an awful lot of inflation in the near term, and that, we think, is going to keep gold where we are right now. But as we move into the recovery phase, as more and more of the economy starts to work, in essence, as monetary policy continues to be extremely dovish, we think you are likely going to have some inflationary pressures emerge. Nothing great, but as that inflation starts looking higher-- and let's not forget, we are eliminating a lot of international supply lines-- in essence, pharmaceuticals and other things, and no doubt that will be like a negative supply shock of sorts without accommodative monetary policy.
As that is all happening, it is very likely the US central bank and other central banks will do a lot of work to prevent the longer-term yields from moving higher, which could slow the economy. This, in our opinion, will drive real interest rates even lower. So as prices start to normalize and potentially move higher and rates are kept low artificially, that, to us, means that real rates, which are one of the key drivers for gold, should go lower, and that is a very good environment for gold. We also think the US dollar slows down.
- We know that in-- I'll say normal times, we often see gold and equities moving in opposite directions. Do you expect that to happen again?
- I think ultimately yes, but the curious thing over the last little while, last few weeks, there has been a positive correlation between the two. When equities have done well, so has gold. And that is very much, in our opinion, due to real interest rates because what we're seeing is when there is optimism on the risk side, the view is that the economy will do somewhat OK, and then our inflationary expectations with the break evens move higher, and that tends to be positive for gold. This is not how it usually works, but this is what we're seeing today.
- What about silver and copper? And let's start with silver. Silver I think has actually outperformed gold in the last quarter quite significantly. What's going on there?
- Yes, it has, and I have to say it is one of my very favorite metals. We like silver quite a lot. We think it goes over $20. In fact, it might happen sooner than we thought. It might happen even today. We're looking at over $22 and potentially even higher, and why? Because it lagged gold for a very long time.
Remember, silver is a little different than gold. It's not the perfect monetary metal. It is also very much an industrial metal. So until recently, we had a very, very poor outlook for the economy and therefore industrial activity.
Well, industrial activity is looking better. We're still not going to write great songs about how good it is, but it is recovering. And we're also seeing record level of ETF purchases by investors that are holding silver, and that is tightening up the fundamentals.
And let's not forget the other reason. We are seeing pretty significant shuttering of mines that no one expected due to COVID. We're looking at Latin America right now still, countries like Peru, Chile shutting down mines and keeping production of nickel, lead, copper, and gold lower.
You might ask yourself, why is that important for silver? Well, because most of silver is mined as a byproduct. When you mine copper, when you mine lead or zinc, you also mine silver. And as those supplies disappoint and investors keep buying and at the same time, you get a bit of a resurgence in industrial activity, well, that to us means potential deficits and tighter markets, and then hence a higher silver price.
- I think we're going to have to leave it there. Fascinating discussion, Bart. Will you join us again?
- I sure will. Thank you for having me.