The Softening Dollar Continues to Drive Gains in Precious Metals

The decline in the value of the US dollar has helped buoy the prices of gold and silver. While gold is trading at an all-time high in mid-August of 2020, Silver prices are 50% off the highs seen in 2008. Precious metals have been recently viewed as an alternative to the dollar which is the world's reserve currency. With the Federal Reserve continuing to print money via its bond purchase program the combination of US’s rising debt and constant increases in liquidity, is allowing gold and silver to push higher.

The Fed’s Monetary Policy and How it Impacts Precious Metals

The Federal Reserve is helping to undermine the value of the US dollar with an unlimited bond purchase program. Not only is the Fed purchasing treasury and agency bonds, but the central bank is also now purchasing corporate bonds. The process is helping to undermine the value of the US dollar. After hitting a higher of 103 on the dollar index in March of 2020, the dollar has declined nearly 10% and continues to trend lower. With US real yields in negative territory (the US yields minus year over year inflation), investors are looking for alternative assets that will hold up in value as the dollar continues to decline. Most commodity trading is experiencing a lift due to the decline in the US dollar. Since most commodities are quoted in dollars, a decline in the value of the dollar reduces the value of a commodity in other currencies. To offset this decline in value, a commodity will generally rise.

Implied Volatility Remains Elevated

Implied volatility on gold and silver is elevated as concerns of higher prices continue to lift option premiums. Implied volatility is the variable that is used to determine how many options traders believe the price of an asset will move in the future. The implied volatility on gold, which is designated by the gold VIX (GVZ) quoted on the Chicago Board of Options Exchange is hovering near 26, which is well off the 55 highs seen in March, but above the highs seen in 2019 near 12. An implied volatility reading of 26, means that options traders see gold prices change by at least 1.6% per day.

Silver is Playing Catch Up

While gold has hit all-time highs, silver remains well off the highs experienced during 2008, the last time the Fed introduced a significant bond purchase program. During August of 2020, silver prices nearly touched $30 per ounce. This compares to a high near $50 per ounce during the European debt crisis in 2011. Silver prices are now in the process of playing catch up and are attempting to reign in gold. The ratio between gold and silver reached a high of 115 in 2020, but silver is now making a come back. The 20-year moving average of gold to silver is approximately 66 (multiply silver prices by 66 and you get the gold price). Currently, the ratio is 75, but silver appears to be attempting to push the ratio lower. For silver to reach its all-time high near $50 per ounce, it will need to gain capital flows from gold and need the dollar to continue to trend lower.

The Bottom Line

Gold and silver prices continue to remain buoyed as the dollar trends lower. With the Federal Reserve continuing to purchase several different types of bonds, its unlikely that the dollar will gain traction. Silver prices are in the process of catching up to gold, which has reached an all-time high, but for this to occur and silver to reach $50 per ounce, it will need the dollar to continue to trend lower.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes