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Precious Metals Outlook Solid after Strong 2nd Quarter

Posted By Isaac Nuriani |

The second quarter of 2020 turned out to be just what metals mavens were expecting – gold and silver soared. Prices flew upward against the backdrop of a mounting deficit, unlimited quantitative easing (QE) and a boatload of social and geopolitical distress.

By the last day of June, gold had settled at just under 1,800 dollars per ounce. That translates to an increase of nearly 13% on the quarter. Not only did gold register its 7th consecutive quarterly gain, the size of the gain was the biggest since Q1 2016. Also, by powering up to the 1,800-dollars-per-ounce level, gold reached its highest price level in nearly eight years.

Silver also enjoyed an exceptional quarter, although it is known to lag its yellow counterpart during precious metals bull markets. Silver prices have grown just 6% against gold’s 19% jump year to date. However, discerning savers should pay close attention to silver’s more recent price movement. It has played its famous “possum” routine as gold demonstrated steady improvement in 2020, but it unquestionably came to life from April to June. Silver surged a jaw-dropping 32% in the second quarter, dwarfing gold’s still-impressive 13% rise.

Those numbers are strong, to be sure. And with silver’s “cooperation” now, they seem to confirm that a precious metals bull market is in full effect. The numbers also suggest something else: predictions could indeed be accurate that both gold and silver will mimic their performances during the Great Recession.

Analyst: “Similar Pattern” to 2008–2011 Epic Metals Market

On that note, let’s revisit just what gold and silver did during the years of the 2008 financial crisis, a.k.a. the Great Recession. Note that I said the “years” of the 2008 financial crisis. The onset of the crisis generally is attributed to 2008. However, the downturn that ravaged retirement portfolios, households and even entire nations lasted for many years. And during much of that time, from 2008 to 2011, gold and silver enjoyed great success. Spurred by two rounds of QE in 2008 and 2010, gold surged roughly 160% from ’08 to ’11. Impressive, to be sure, but silver did even better, skyrocketing nearly 400% during the same period.

According to Jeffrey Currie of Goldman Sachs, gold is positioned to follow a path similar to the one it took in 2008. Currie specifically referenced gold’s initial weakness at the outset of the 2008 crisis when ultra-panicked savers instinctively moved everything to cash. He points out that the behavior repeated itself this year when the coronavirus outbreak morphed into a pandemic and fears grew of a second Great Depression.

However, it was in 2008 that the Federal Reserve first introduced a drastically accommodative monetary policy tool called quantitative easing. When the Fed began QE in December 2008, it marked the beginning of gold’s epic multiyear run through 2011. Citing that historical pattern, Currie suggested gold was positioned for a repeat performance in 2020.

Currie conveyed his expectations in an analyst note he wrote in late March. He penned the note on the day of the Federal Reserve’s announcement that the central bank was all-in on QE. Gold jumped that same day. “We are beginning to see a similar pattern emerge as gold prices stabilized over the past week and rallied today as the Fed introduced new liquidity injection facilities with this morning’s announcement,” Currie said. Shortly thereafter, 2020’s second quarter kicked off, which saw gold’s aforementioned near-13% rise.

Currie’s March note did not address silver, but perhaps it should have. Silver often is viewed as precious metals afterthought, and that perception can be held even by professional metals analysts. I’m not saying that’s how Currie feels. But if one wants to be excited about a metals price pattern repeating what it did from 2008 to 2011, perhaps silver should be your focus. After all, silver outperformed gold by more than double during those years. And now we have silver’s 32% jump in the recently completed quarter. This move indicates the possibility that silver could be at the outset of another historic rise of its own.

Both Gold and Silver Staying On-Script in Reaction to QE

How should the performance of precious metals during the financial crisis and their performance (so far) during the COVID-19 crisis inform your thinking?

Ultimately, that will be up to you. As for me, I’m always gratified when metals act predictably based on their historically established economic influences.

For example, gold clearly has demonstrated the tendency to rise in the wake of explicit easy-money policy by the Federal Reserve. It’s not a shock when it moves upward following the initiation of particularly extreme dovish policy measures such as QE. Frankly, it’s expected, and it’s good to see those expectations fulfilled. But even in the case of less drastic moves, it’s good to see gold stayed on-script in its reaction. Take last summer’s Fed decision to drop interest rates. Following the June 19 announcement, gold immediately surged above what had been a stubborn resistance level of 1,350 dollars per ounce. From the beginning of 2019 through June 19, gold had appreciated a modest 4%. From June 19 to the end of last year, it climbed 13.5%.

As for silver, the mechanics behind its surges are sometimes more complex, but no less predictable, in my opinion. My belief is that QE yields two benefits to silver. One is that QE’s dollar debasement provides energy to silver as it does to gold. But also, when QE helps stabilize markets and reopen the economy, silver benefits from resurgence in industrial demand. The latter development tends to occur a little later in the cycle. That’s why we don’t see that benefit accrue to silver until further on in the precious metals bull market.

So both gold and silver are doing good things right now. They also appear to be doing those good things at the behest of the same forces that propelled them skyward a decade ago. On that note, the third quarter is picking up where the second quarter left off. In just a little over a week since Q3 began, gold is up another 2% and has fully breached 1,800 dollars per ounce. Silver is continuing its tear, as well, jumping 6.5% higher in the new quarter. Of course, there are no assurances the metals actually will achieve new milestones or even keep climbing. But given the backdrop against which they’re moving right now, it’s reasonable to think gold and silver will strengthen at least through the near term.

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