GLD And SLV: Buy The Dip, Especially For SLV

seekingalpha11-23 03:40

Both the SPDR® Gold Shares ETF and iShares Silver Trust ETF suffered corrections recently due to uncertainties in interest rates.Such setbacks are only temporary in my view.I see multiple catalysts ...

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For my last work on GLD, that article was titled “GLD And Hard Landing: Historical Perspective.” In that article, I argued for a buy thesis based on the historical pattern of GLD performance during a hard landing. More specifically, I explained that: Most investors know GLD as a good diversifier due to its low correlation to other asset classes. Its hedging role during market downturns is even more potent. A closer look at the magnitude, recovery time, and timing of GLD's historical drawdowns reveals its full hedging potential in the case of a hard landing. As for my last work on SLV, that article was titled “SLV: This Pullback Will Be Short-Lived.” In that article, I also argued for a buy thesis based on the consideration of the supply-demand dynamics and also the outlook for interest rate cuts as quoted below: SLV price pulled back to $24.5 after peaking around $30 recently. I will explain why the pullback will be short-lived. Several fundamental forces can drive a price rebound. The top two are the persisting/widening silver supply-demand deficit and the overwhelming odds of sharp interest rate cuts by 2024. Since then, several fundamental changes have happened to the economic and geopolitical landscape. The Fed did cut interest rates by 75 basis points since then and helped to boost both GLD and SLV prices. However, the recent outcome of the U.S. presidential election and also the new inflation data have added uncertainties to the next steps of interest rates and geopolitical tension (especially with China, as to be elaborated on next). These uncertainties have pressured the prices of both GLD and SLV, as you can see from the following chart. In the past month (the period before and after the election’s conclusion), both GLD and SLV experienced a price decline. GLD price dropped 1.82%, while SLV saw a steeper drop of 9.11%. In contrast, the SPDR® S&P 500® ETF Trust (SPY) showed a positive performance, gaining 1.72%. Against this backdrop, the thesis of this article is to argue that the above setbacks are temporary. I still see GLD and SLV as excellent hedging ideas given the geological risks and the incoming trade tension, especially at their current entry prices. In the subsequent sections of this article, I will elaborate on this argument and explain why it led me to upgrade my rating for SLV to STRONG BUY and reiterate my rating for GLD as a BUY. Seeking Alpha In the remainder of this article, I will argue that there are other fundamental catalysts that can support a breakout besides the above technical signals. My top arguments are the central banks’ appetite for gold and also the attractiveness of silver considering based on gold-silver price and silver production. GLD and SLV: quick introduction Before diving in, let me briefly introduce both funds for readers unfamiliar with them. These funds track the spot price of the corresponding metal via physical bullion, as detailed in their fund description below.  GLD Description: GLD tracks the gold spot price, less expenses and liabilities, using gold bars held in London vaults. GLD is the first to market to invest directly in physical gold. Actively traded, the shares provide deep liquidity. NAV for the fund is determined using the LBMA PM Gold Price (formerly the London PM Gold Fix), so GLD has an extremely close relationship with spot prices.  SLV Description: SLV tracks the silver spot price, less expenses and liabilities, using silver bullion held in London. SLV gives investors direct exposure to silver by physically holding the metal in vaults in London.   The table below provides the basic information for GLD and SLV, together with a few other alternative funds. As seen, GLD, as the oldest fund in this space, was launched in 2004 and now has the highest assets under management (“AUM”) of $75.22 billion. SLV features a sizable AUM of $14.78 billion too. However, for buy-and-hold investors who are not too concerned about tradability, there are other alternatives that feature lower fees. For silver exposure, the Abrdn Physical Silver Shares ETF is a much smaller fund with an AUM of $1.51 billion but provides a lower expense ratio of 0.3%. For gold exposure, the iShares Gold Trust ETF (IAU) and the SPDR® Gold MiniShares ETF (GLDM) are smaller funds (with AUMs of $33.55 billion and $9.18 billion, respectively) than GLD, but they feature lower expense ratios of 0.25% and 0.10%, respectively. Finally, bear in mind that both GLD and SLV are considered collectibles for tax filing purposes. Seeking Alpha GLD ETF: I expect strong demand from central banks Now let’s get back to my argument that the recent corrections are only temporary. My first fundamental reason behind this argument is that I expect strong demand for gold from central banks with the ongoing geopolitical conflicts. As a reflection of such demand, the World Gold Council recently released its latest “2023 Global Gold Demand Trends Report.” The key data is provided in the following screenshot. As seen, central banks bought a total of 1,037 tons of gold last year, the second highest in history. World Gold Council Looking ahead, I expect the demand from central banks to further increase, and I expect China’s demand to be a leading factor there. According to BullionByPost data, At the end of January 2024, China's official gold reserves stood at 2,191.53 tonnes. China has seen significant growth in its reported gold reserves in recent years, adding 243.22 tonnes alone since summer 2022. Despite the growth in reported figures, many analysts believe the true figure for China's gold reserves is likely to be much higher. To better contextualize things, the figure below (provided by CEIC’s economic database) illustrates the rapid rise of gold reserve held in China’s central bank. Going forward, I see the metal role of China to be more accentuated with the ongoing geopolitical ways. There are currently multiple regional wars going on, and I think the China-U.S. tension is likely to increase under the Trump administration. I further expect these factors to encourage China (and other countries too) to diversify currency reserves away from U.S. dollars. CEIC’s economic database SLV ETF: demand-supply dynamics As for SLV, I am even more bullish (and thus this article upgrades my rating to Strong Buy) for several reasons. Similar to gold, silver also serves the role of a precious metal and a store of value. But to a lesser degree. Instead, silver is more widely used for industrial purposes, especially with the rise of new and green technologies. Thus, I expect demand for silver to enjoy secular growth in the years to come as green technologies (with solar panels and EVs as two notable examples) expand. Considering the above demand drivers, the current silver price is too low (about $31 per ounce as of this writing) compared to the production cost, in my view. As an example, the following list provides the breakeven costs per ounce of silver in 2024 for some of the most prominent silver mining companies. As seen, the breakeven cost for a few of them is close to $29 per ounce.  SilverCrest Metals Inc.: $18.65 per ounce. Pan American Silver Corp.: $26.45 per ounce. Fresnillo PLC: $25.40 per ounce. Hecla Mining Company: $28.28 per ounce. First Majestic Silver Corp.: $28.85 per ounce. Endeavour Silver Corp.: $29.43 per ounce.  Other risks and final thoughts As another reflection of SLV’s attractive price, the so-called mint ratio (MR, i.e., the gold-silver price ratio) is currently far above the historical average. The MR since 1980 is provided in the following figure. As you can see, the average MR is 65.11. The current MR sits at 84.4 in contrast. Seeking Alpha Source: Author based on Seeking Alpha data. In terms of downsides, GLD and SLV entail the same set of risks common to other commodities. These issues include the lack of organic cash flow (commodities do not generate profit by themselves) and also large price volatilities. For GLD and SLV, as aforementioned, also suffer tax headwinds as the gains are not taxed as capital gains. Finally, even though they are backed by physical bullion, GLD and SLV investors still face the so-called counterparty risks: Essentially, investors do not own the physical metal directly. Instead, investors own shares of GLD or SLV, which are a CLAIM on the underlying physical bars. As such, there is always a risk that the ETF sponsor or custodian could default and won’t be able to fulfill their investors’ claims.   All told, my verdict is that the upside potential outweighs the downside risks under current conditions. In particular, I think the recent corrections in GLD and especially SLV prices have provided attractive entry points for potential investors. I see several catalysts that can support a price rebound in the next 1~2 years. These catalysts include many countries’ (e.g., China and Russia) need to diversify their currency reserve given the geological uncertainties and also the potential demand increase for both metals in industrial applications (e.g., EV, solar panels, and AI).","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485521314"}