A rally in metals has grabbed headlines recently, but as gold, silver, and copper reach fresh highs, traders may need to weigh the potential for limits to further upside for prices, and reassess what the moves suggest about the global economy.
"A confluence of these circumstances has led to copper, gold, and silver all notching fresh highs for the year," said Taylor Krystkowiak, vice president and investment strategist at Themes ETFs.
Gold and copper settled Monday at record highs, while silver finished the session at its highest price since early 2013.
The rally in precious and industrial metals has been "underpinned both by broader developments in the global macroeconomic environment, as well increased idiosyncratic demands for individual metals," said Krystkowiak. His company is the issuer of the Themes Gold Miners ETF AUMI and Silver Miners ETF AGMI.
"Investors have flocked to precious metals as inflation remains relatively stubborn and the prospect of rate cuts are pushed further out," Krystkowiak said. Additionally, "demand for gold by global central banks, demand for silver as an industrial input for solar panel production, and demand for copper in renewable energy generation and electric vehicles remain significantly elevated."
On Monday, silver's July contract (SI00) (SIN24) rose by $1.17, or 3.7%, to end at $32.43 an ounce after touching a high at $32.75, the highest settlement and intraday levels for a most-active contract since late January 2013, according to Dow Jones Market Data.
Copper prices, meanwhile, climbed to their highest levels on record Monday, with the most-active July contract (HG00) (HGN24) touching an intraday high at $5.199 a pound and settling up by 3 cents, or 0.6%, at $5.08 on Comex. Copper posted record settlement and intraday highs.
Gold for June delivery (GC00) (GCM24) has also reached record highs, finishing Monday's session up $21.10, or 0.9%, to settle at $2,438.50 an ounce.
On one hand, "bulls who see improving economic prospects may look to copper as a traditional means to play a rebound in emerging markets and the global economy as a whole," said Krystkowiak.
On the other hand, "bears who see worsening economic prospects and the possibility for central bank missteps may look to gold as a means to hedge a potential stagflationary environment," he said. Stagflation describes a situation of slow economic growth, high unemployment, and rising prices.
'The rally in all three metals cannot necessarily be construed as either good or bad news for the global economy.'Taylor Krystkowiak, Themes ETFs
"Metals offer investors a means to play both sides of the coin depending on their individual outlooks," said Krystkowiak. "As a result, the rally in all three metals cannot necessarily be construed as either good or bad news for the global economy."
'Inflationary' rise
Analysts have attributed strength in copper and silver to higher demand expectations.
"What coal was to the Industrial Revolution, and crude oil to the 20th Century, copper and silver are indispensable to green tech" - artificial intelligence and the defense sectors, which are today's "biggest boom industries," said Adrian Ash, director of research at BullionVault, told MarketWatch.
That could be seen as signs of strength in the global economy, but that also raises concerns over inflation - growth in inflation that could spell trouble for the global economy instead.
Copper prices surged to over $5 on Friday and are now up nearly 40% since early February, said Michael Kramer, founder of Mott Capital Management, in a note. "If that isn't inflationary, then I do not know what is."
Kramer said he sees copper as "third on my list when it comes to inflationary force, behind oil and gasoline in the number 1 and 2 spots."
Historically, when copper prices rise, that pushes the prices paid indexes for the ISM manufacturing and services sector higher," he said. If that holds true, and ISM service and manufacturing prices surge higher in May and June, "then team disinflation is in big trouble," said Kramer.
"If monetary policy were restrictive and R-star was as low as some think it is, then what we see in copper prices right now, or for that matter, in all asset prices, would not be happening," said Kramer. R-star is economist jargon for the real, or inflation-adjusted, interest rate at which monetary policy is seen as neither expansionary nor contractionary.
Geopolitics and de-dollarization
For gold and silver, the "underlying physical markets are finding ever-stronger bids even as Western interest rates hold at two-decade highs," said BullionVault's Ash.
"Geopolitics and de-dollarization mean that the way gold and silver trade against U.S. interest rates and the U.S. stock market has been turned on its head," he told MarketWatch.
"Central-bank demand for gold, plus the frenzy in China's private-sector bullion market, shows no sign of easing off even at these sharply higher prices," said Ash. "The key question for longer-term bulls is what will it take for Western investment flows to reverse."
Gold investments among Western households were at a record low in April, but were rebounding early this month from that record low, rising at the fastest pace in almost four years, according to BullionVault.
Meanwhile, Peter Spina, founder and president of investor websites GoldSeek.com and SilverSeek.com, believes that silver's rally on Friday, May 17 marked a historic moment in prices for the metal, and markets.
Silver on Monday entered its next phase, he said. "The stealth bull comes out of hiding - no more denying that the price move is not only for real, it is accelerating."
The technical picture for silver is" confirming the extremely bullish fundamentals," said Spina. "The silver market's structural supply deficit continues to grow with the monetary interest in silver about to explode."
Record gold prices have stoked the "monetary investment interest in silver that has been depressed in the West for years," he said, and "if we now see a wave of silver buying interest in the West, you will have an acceleration of tight physical inventories."
"Soon a true price squeeze could occur that could super-spike prices,"said Spina. "That potential alone is arousing speculator interest too."
Upside limits
Taking a look at the bigger picture, given the robust underlying demand for gold, silver, and copper, the "momentum behind the broad-based rally may ultimately prove to be sustainable for the foreseeable future," said Krystkowiak.
The significant rally for each these metals, as well as their elevated prices relative to longer-term average, however, may also limit further upside for prices, he said.
He said investors may "benefit from allocating to gold miners, silver miners, and copper miners in lieu of bullion."
Read: Missed the gold and silver rally? Metal mining stocks may be a way to catch up.
Krystkowiak points out that year to date, the Themes Gold Miners ETF has seen a return of 23.2%, outperforming the gold-backed SPDR Gold Shares ETF GLD, which has seen a return of 17.6%.
"Miners have much lower valuations relative to the broader market and may offer more potential upside as sustained higher metal prices significantly improve their margins," said Krystkowiak.
Given that, he said the rally in mining stocks "may be in their early innings."
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