logo-loader

Silver for today, gold for tomorrow, says Stifel GMP as US interest rates peak 

Published: 11:15 10 Jan 2023 EST

MAG Silver Corp -
As the focus moves to a recession, Stifel said it would look more to gold names as a defensive play

Stifel GMP has said it is bullish on silver in the short term, with the broker highlighting MAG Silver Corp (TSX:MAG), SilverCrest Metals and Aya Gold & Silver Inc (TSX:AYA, OTCQX:AYASF) as its top picks in the sector. 

However, as the focus moves to a recession, analysts at Stifel said they would look more to gold names as a defensive play. 

The analysts noted that gold miners outperformed the S&P 500 by 14.9% in November and 4.6% in December, with January historically the strongest month of the year for price performance for gold equities relative to the stock market. With less hawkish commentary from the US Federal Reserve and recent yield curve shifts, they have looked at the differing reactions of gold and silver through monetary policy shifts and economic downturns.

"Their prices diverged in all four recessions and on average, the gold/silver price ratio increased 17.7%,” said the analysts. “The price divergence is not as consistent during the seven periods of decreasing US benchmark rates. However, the data still show a strong trend with the gold/silver ratio increasing 18.4% on average.”

READ: Seasonal dynamics, trading trends and Fed's policy stance sets scene for gold investors, reckons broker Stifel GMP

As the Fed’s moves become a ‘given’ in the market, the analysts said the yield curve is becoming more reactive to economic data rather than interest rate data - meaning the 10-year US bond becomes more volatile than the two-year bond. 

“We contend the volatility on this end of the yield curve and rise in the 10-year rate speaks to the market pricing in an increasing chance of a recession,” they added. “That being said, simple averages do not fully capture variations in the economic cycle. We looked at how the white and yellow metals react during periods of pivoting Fed policies and economic recessions.”

The analysts noted the that gold/silver price ratio currently sits at 78 times - roughly in line with the 10-year average of 76.2 times but well below the five-year average of 82.3 times. 

Silver closed at $23.60 an ounce (oz) on January 9, within its highest two-week range since April 2022. At that time, gold was trading at a little over $1,920/oz vs its current price of $1,870/oz. 

“If we were to apply the five-year average gold/silver ratio using the current silver price as a gauge, it implies a gold price of $1,940/oz,” the analyst said.

While silver is likely to be the play for now given its higher torque as rates peak, the analysts believe investors should look towards undervalued/fundamentally solid gold companies such as B2Gold Corp. (TSX:BTO), K92 Mining Inc (TSX-V:KNT), Alamos Gold Inc and Torex Gold Resources Inc (TSX:TXG) as recession becomes a reality.

Contact the author at stephen.gunnion@proactiveinvestors.com

Australian Strategic Materials signs US$600 million LoI

Rowena Smith, CEO and managing director of Australian Strategic Materials Ltd (ASX:ASM, OTC:ASMMF), joins Jonathan Jackson in the Proactive studio to discuss the company’ s Dubbo Project, in Central West New South Wales. This project aims to extract and process critical minerals and rare earth...

5 hours, 23 minutes ago