As the market expects the Federal Reserve to increasingly cut interest rates by 50 basis points this week, gold has become the asset class that benefits the most. Michael Hartnett of Bank of America also recently stated that gold is the best tool to hedge against another surge in inflation in 2025.
But the surge in gold prices reflects not only the impact of the Federal Reserve's rate cuts, a significantly weaker dollar and rising inflation on gold prices, but also the continued purchases of gold by the Chinese central bank and the Chinese people. They have been buying gold sprees since the end of 2022. But now, in addition to China, gold players have a new hero: India, writes Bloomberg's Abhishek Gupta.
India's gold imports have surged after the Indian government slashed tariffs. In Gujarat, a major hub for gem and jewelry exports, gold imports in August reportedly rose 429% year-on-year. Then, of course, there's the recent inflation in gold ETFs, which have finally ended the past two years of selling and are buying aggressively.
In fact, the future of gold is very bright, with more and more people expecting the price to hit $3,000.
But could the future be brighter for silver, which has a relatively low value and has largely failed to keep pace with gold in recent years?
Bloomberg's Ven Ram says that while gold is certainly benefiting from the Fed's dovish turn, silver will be the bigger winner if the Fed eases policy in 2025 as the market expects. A month ago, Ram calculated that if slowing U.S. inflation and a cooling labor market allowed the Fed to cut its benchmark rate by 225 basis points by May 2025 (which the market has already priced in), gold could reach $3,229.
This forecast is based on an empirical analysis of the Federal Reserve's easing cycles since the early 2000s: the analysis found that, in general, gold prices tend to rise by about 6.3% for every 25 basis point reduction in the funds rate (it can be inferred that if the Fed's easing policy is milder than expected, the peak price of gold will be lower than the above forecast).
However, extending this model to silver implies that the coming aggressive easing cycle would be equivalent to a rise in the silver price to over $37 per ounce – a whopping 23% return on the spot price.
The gold to silver ratio will drop to 81 from 85 now.
As Goldman Sachs’ derivatives sales trading desk wrote in its latest weekly report, the reason silver could be about to break out is that “interest in silver and miners ETFs surged last week,” and the bank’s desk believes “betting on the silver ETF – SLV upside is one of the best trades” for four reasons:
Silver is a key component in building artificial intelligence;
a boost from a more dovish Federal Reserve;
Silver positions are lower than gold;
SLV is on the verge of a multi-month breakout.
Goldman Sachs' advice is to buy call option spreads with more than 2 months, and it's better to act quickly: The chart below shows that more than 940,000 SLV call option transactions occurred last Friday, the second highest in the past 3 years!
The article is forwarded from: Jinshi Data
