Has gold lost its glitter?

After a jump in prices in the wake of the pandemic, many precious metals have been in the dumps or gone nowhere.

Gold prices alone have retraced over 60% of their post-pandemic gain. Silver prices have traded in the same eight-dollar range since August last year.

That’s because several external factors have converged and kept a lid on precious metal prices.

But those forces are about to reverse. And we’re about to see the emergence of a critical X-factor that will create huge supply deficits and drive higher prices for many precious metals.

Let me show you why.

Rates & Inflation

Gold prices were one of the first dominoes to fall after interest rates have moved higher. I wrote about that last week.

Rising yields sap demand for metals. That’s because investors can park their cash in bonds and collect a coupon payment.

But it’s not just the level of interest rates that matter. Rates adjusted for inflation, or real yields, are the most important for precious metals. These metals are well known for their role as an inflation hedge, and inflation has certainly arrived.

The most recent Consumer Price Index reading showed the largest jump in inflation in over two years. And the trend of higher inflation is expected over at least the next couple months, which will cap real yields and support demand for metals.

Dollar Seasonality

Many commodities, including precious metals, are priced and traded around the world using the dollar. When the dollar weakens, commodities become cheaper. That tends to boost commodity prices. And vice versa when the dollar is rising.

So far in 2021, the dollar has taken everyone by surprise. Broad calls for dollar weakness in the wake of fiscal and monetary stimulus have gone unheeded, and the buck has jumped to kick off the year.

But that shouldn’t be a surprise at all. The dollar is closely following its historical seasonal pattern, where it tends to strengthen over the first three months of the year. Then a weak patch follows until the fourth quarter. You can see that below, with the line indicating the current date.

U.S. dollar seasonality chart

The dollar has already been weakening since the start of April, which is giving a boost to precious metals and should keep doing so.

The X-Factor

The X-factor is the emergence of new industrial sources of demand for precious metals. From solar panels to batteries, they will play an important role in the renewable energy economy … one that is expected to become a $1.5 trillion global industry just in the next four years.

One way to profit from these converging catalysts is to buy the Aberdeen Standard Physical Precious Metals Basket Shares ETF (NYSE: GLTR).

But for even bigger profits, there is one critical element that is already projected to be in a supply deficit just as demand from electric vehicle batteries and green hydrogen ramps higher.

That means surging prices for this particular scarce precious metal, and windfall profits for the select few mining companies able to extract it.

It’s why we pinpointed the perfect miner to tap this potential in the most recent issue of The Bauman Letter. Just click here to learn how you can subscribe.

Best regards,

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Clint Lee
Research Analyst, The Bauman Letter