Gold prices are being driven up by demand from India and China; silver prices by demand from various industrial users. Don Vialoux picks 4 ETFs to buy for precious metals.
Rapidly rising prices everywhere have rendered traditional inflation-hedge gold’s prospects “exceptional” between now and September, according to longtime equity analyst Don Vialoux.
Mr. Vialoux, who lives in the Toronto suburb of Oakville, runs the seasonality-focused website, timingthemarket.ca, which he founded with his son and fellow analyst, Jon (who also created and runs equityclock.com).
Speaking to Investor’s Digest of Canada in a June 1 telephone interview, he noted that the performance of the iShares S&P/TSX Global Gold Index ETF (TSX—XGD) has bettered that of the S&P 500 and S&P/TSX Composite indexes since the beginning of May. Units also recently moved above their 20-, 50-, and 200-day moving averages.
Typically, seasonal influences for gold and silver in US or Canadian currency becomes positive on a real and relative basis compared to the S&P 500 and TSX Composite from mid-June through the third week of September.
Meanwhile, North American gold and gold stock prices are highly correlated to the expectation of rising inflation rates, a trend that played out through April and May in Canada and the United States as prices for food, fuel, and commodities climbed on the post-pandemic recovery.
In the event that inflation becomes unbearable, it will be necessary for the Bank of Canada and the Federal Reserve to intervene, but otherwise, both have vowed to maintain a policy of “easy money”, says Mr. Vialoux. A much-increased money supply translates to a relatively-higher valuation of the gold supply as well as a busier stock market.
In addition, the central banks’ attitudes mesh well with the new US presidential administration, which has fit the historic pattern of strong growth in the first year (the second year tends to be the worst for markets).
The analyst advises: “Use weakness between now and mid-June to accumulate gold, gold equities and related ETFs for a seasonal trade to near the end of September.”
A weak greenback drives gold up further
That said, deflation could further enhance the prospects of gold miners in Canada, at least as far as the US dollar is concerned.
“The US dollar has been weak here during the last little while, but it’s actually come down to where you expect the US dollar to flank support,” Mr. Vialoux explained June 1. However, it continued to get weaker relative to other currencies such as the loonie and the Chinese yuan, over the preceding 48 hours.
“The US dollar doesn’t want to find support. It wants to go even lower, and ultimately that’s even more bullish than the comments I originally gave you. Gold prices could benefit significantly (since) the value of gold in US dollars will be quite high.”
Although the analyst says most shifts in gold prices are related to inflation and currency influences, its seasonality is tied to demand from India (by goldsmiths making jewelry in anticipation of Diwali) in the summer and China in the winter (given its popularity as a Chinese New Year present).
COVID closures suppressed jewelry sales a year ago, but the festive appetites for going out and indulging in luxuries (as well as large items ranking somewhere between essentials and luxuries, such as new cars) are returning in force.
Skip the diamond ring; head to the silver mine
Silver prices, on the other hand, are not typically as connected to inflation concerns, but rather depend on demand from various industrial users. Lately, an increasingly connected world has driven greater use of silver, the most conductive metal.
As Mr. Vialoux points out, a glut of (almost) post-pandemic manufacturing has raised demand. “World producers of things are starting to use more and more silver in their products, mostly related to electronics” and other “smart” devices.
For broad exposure to gold and its miners, the analyst recommends the aforementioned iShares gold ETF as his first “best buy”.
As for silver, he touts the Horizons Silver ETF (TSX—HUZ) as a Canadian-dollar denominated “best buy” option. Investors who have more faith in the greenback’s fate or who may already have US dollars available may wish to buy shares of the Global X Silver Miners ETF (NYSEARCA—SIL) or the iShares Silver Trust (NYSEARCA—SLV).
This is an edited version of an article that was originally published for subscribers in the June 18, 2021, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
Investor’s Digest of Canada, MPL Communications Inc.
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