Precious metals like gold and silver have rallied last week. This is because investors have been seeking safe-haven investments amid growing risks emanating from the banking crisis in the United States, a hawkish Fed, Chinese economic downturn, fear of prolonged global growth slowdown and the ongoing uncertainty surrounding U.S.-China relations as well as the Russia-Ukraine war.

Federal Reserve Chair Jerome Powell indicated Friday at the Jackson Hole Economic Symposium in Jackson Hole that “additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.” Powell also indicated that prices remain “too high” and the central bank has not warded off further tightening policy.

Currently, there is an 80.5% likelihood that the Federal Reserve will maintain its benchmark interest rate within the 5.25% to 5.50% range during the upcoming September meeting, according to the CME FedWatch Tool. Markets area pricing in a 55% chance of a Fed rate hike at its early-November policy meeting.

Due to expectations of higher-for-longer rates in the United States, the U.S. dollar ETF UUP gained 0.9% last week. But despite a stronger greenback, SPDR Gold Shares GLD was up 1% last week while iShares Silver Trust SLV added about 4.3%.

What to Buy Ahead? Gold or Silver

A low-interest-rate environment makes non-yielding bullion an intriguing bet. Since we are currently in a high-rate environment, chances of outperformance of precious metal bullion are less.  GLD added 5.1% in the past six months but SLV jumped 17.4% (as of Aug 25, 2023). Here’s why:

Though both silver and gold are regarded as safe havens, the operating backdrop is more favorable for silver as the metal has high usage in industrial activities. About 50% of the total demand for silver comes from industrial applications. With the U.S. economic growth on right track and rate hike worries creating a volatility in the market silver prices had every reason to surge.

Growth in the global solar PV industry and new sources of demand for sensors used in IoT are providing a boost to silver demand. The recent emergence and faster rollout of 5G globally is another positive for silver. The electronic components that enable 5G technology depend on silver greatly.

Silver’s excellent electrical conductivity and low resistance make it an ideal material for electrical contacts, connectors, and switches in various components of an EV, such as batteries, motor controllers, and charging systems. These components require efficient current flow, and silver helps minimize energy losses due to resistance.

In July, total U.S. industrial production increased 1% following declines in the previous two months. Manufacturing output rose 0.5% in July; the production of motor vehicles and parts jumped 5.2%, while factory output elsewhere edged up 0.1%. Though the Chinese economy is currently under pressure, the economy is at present seeing monetary policy easing which is going to boost the Asia’s largest economy’s manufacturing sector.

ETFs in Focus

Apart from the largest ETF SLV, investors can also bet on the likes of Aberdeen Standard Physical Silver Shares ETF SIVR, Invesco DB Silver Fund (DBS) and ProShares Ultra Silver AGQ to realize gains in silver.

Bottom Line

While silver is in high momentum and has good chances of outperforming gold, there are certain factors that could boost gold too. If the economic backdrop remains edgy, global growth slows down and inflation remains hot, gold will outshine the manufacturing metal silver.
SPDR Gold Shares (GLD): ETF Research Reports

Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports

iShares Silver Trust (SLV): ETF Research Reports

ProShares Ultra Silver (AGQ): ETF Research Reports

abrdn Physical Silver Shares ETF (SIVR): ETF Research Reports

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Zacks Investment Research

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