Gold has a win-win setup – but not for long – while silver is ‘the squeeze you can buy’

NEW YORK (February 25) Gold prices are uniquely positioned to gain regardless of what the U.S. dollar does in the coming weeks, while silver’s physical flows and structural deficit could make it the long-term winner, according to TD Securities’ senior commodity strategist Daniel Ghali.

In a Feb. 21 interview, Ghali said that even as Washington considers depreciating the U.S. dollar to make exports more competitive, the strength of the greenback is actually helping to boost gold prices.

“What's curious about this current stage of gold's rally is I actually think that a strong U.S. dollar is contributing to the strength in gold prices,” he said. “One of my core beliefs is that we can learn a lot more from anomalies in markets than we can from what markets are actually supposed to do.”

Ghali said that gold's epic performance over the last year has been quite anomalous. “Gold has rallied despite U.S. dollar strength, and periods when U.S. rates were rising as well,” he noted. “Gold has actually only ever had this good of a performance alongside a strong performance in the S&P 500. twice in history. The first time would have been 1933 when the U.S. government decided to revalue gold. The second time would have been 2009 during the largest round of quantitative easing at the time.”

He pointed out that gold has also never had a run this strong absent a U.S. dollar bear market. “So clearly the strength in gold prices is a market anomaly, and I think it's telling something for those who are willing to listen.”

Ghali believes the yellow metal has taken on a new role. “The strength in the U.S. dollar is acute enough to catalyze buying activity in gold as a currency depreciation hedge, particularly out of Asia,” he said. “This is a trend that we've seen develop over the last two years, and has come back to the fore as of January of this year.”

Tariffs are another area that remains top-of-mind for precious metals traders, and Ghali addressed the latest developments he’s seeing in physical flows. 

“It's an epic distortion in commodities markets that is currently hiding behind the rising gold prices,” he said. “It's not necessarily all that relevant to gold prices per se, but under the hood, the return that you can earn from moving physical gold from London into the U.S. has been abnormally large over the last months.”

“That's now showing some signs of easing for gold in particular, but not necessarily so for silver and other precious metals,” he added.

Ghali characterized the current ‘melt up’ in gold as a very special but likely short-term phenomenon.

“I think the set up in gold we can summarize as ‘Heads I win, tails you lose,’” he said. “In moments of time when the U.S. dollar is appreciating, when U.S. rates are rising, the appetite for gold is coming from Asia as a currency depreciation hedge. And in moments of time when U.S. rates are declining, the U.S. dollar is declining, macro funds - these are overwhelmingly Western - look at gold in the traditional sense of the lower U.S. dollar should be good for gold, and that is the cohort that buys gold conversely. So it's a pretty extraordinary setup in gold.”

“It's quite rare, it doesn't last for necessarily very long,” he warned. “But for as long as this setup persists, it's a very strong context for gold.”

Turning to silver, Ghali said the gray metal is no longer the poor cousin to gold. 

“Silver has a really unique story,” he said. “We're heading into its fifth consecutive year of a structural deficit. That deficit is really unprecedented in terms of the magnitude of the supply-demand imbalance that's been created by the demand boom, which has ultimately been associated with increased solar capacity around the world.”

“Now the setup in silver is different because we're actually transitioning away from a demand boom and into a liquidity crisis,” Ghali said. “The pull of metal from London into the U.S. has been so dramatic that it's draining the world's largest bullion vaulting system to such an extent that it's actually disturbing day-to-day trading activity in physical markets.”

“London is trading extremely tight,” he added. “We think it can get even tighter, and ultimately flat prices in silver need to rise in order to incentivize metal to come back into London from unconventional sources.”

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