Low Interest Rates Create Precious Metals Trading Opportunities

July 16, 2020 06:28 AM
Low fixed income yields and cheap money support precious metals prices
Silver prices relative to gold are very undervalued
Higher prices actually create demand for metals, not curb it
Precious metals trading

Precious metals trading

Why is now a good time to be trading precious metals? The short answer is the Federal Reserve and its commitment to hold benchmark interest rates near zero through 2020. All time low fixed income yields and cheap money will continue to support gold prices and therefore precious metals.

In the current market, Gold futures have been the leader thus far. However, it’s entirely possible that Silver futures will assume the leadership role. Silver prices relative to gold are very undervalued. The silver-to-gold ratio has recently been fluctuating between extreme levels of roughly 90:1 to over 100:1. Over the past 20 years, the ratio has been closer to 60:1 and 70:1.

Silver has so much catching up to do that I would expect silver to begin to move in leaps and bounds as we have just seen the 50-day moving average cross over the 200-day moving average on the December Silver futures daily chart. This “Golden Cross” is a powerful buy signal as silver prices approach a key $20.00 an ounce level. In my mind silver prices moving back towards $30.00 isn’t a stretch.

Platinum versus gold is also severely underpriced. For example, October Platinum futures have traded $960 under October Gold. That’s $866 versus $1,826! prior to the pandemic, the spread between gold and platinum was under $500.

So, while I expect that gold futures will make new all-time high prices, there’s more value or room to move in silver and platinum. Metals are the type of commodities where higher prices actually create demand, not curb it. There will be some very good long-term momentum trades in the metals.

In addition to the Fed’s accommodative policy, there are some additional  reasons why I think that gold won’t collapse. Global central bank demand, especially from China, will continue. If China is serious about being recognized as a global financial superpower, then they will have to build their gold reserves. China’s current gold reserves are only about 1/3 of what the U.S. holds.

With gold futures we always have the risk off safe-haven trade. The currency trade and one day the most important metals trade will be the inflation trade. It’ll happen. Not in the near or intermediate term, but inflation is going to return in perhaps a year or two. The Fed will be afraid to raise rates and inflation will take off. Gold and other medals will necessarily rally in response to inflation.

If you are interested in discussing the potential opportunities in the metals futures, contact me directly fcholly@rjofutures.com

The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that R.J. O’Brien believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.

About the Author

Frank Cholly has 35 years of commodity industry experience. He spent 20 years on the CBOT trading floor.