Low real interest rates and geopolitical uncertainty have helped fuel gold to being the best
performing currency this year, returning over 10% against the USD. While we think gold remains
a good investment in the current environment, we re-iterate our idea from our weekly of June
19th to combine gold exposure with silver exposure (or go long silver vs gold). Gold is the poster
child for precious metals and tends to get all the attention, but when gold rallies, it can become
a crowded trade and ultimately starts to lag hitherto ignored silver (top-left chart). Since June
19th, the gold/silver ratio peaked out at ~93 and has sold off sharply to under 87.

The traded silver market is much smaller than the traded gold market, which means silver is
prone to much larger moves (up and down) and greater volatility, so when silver does follow
gold, it can do so aggressively. Furthermore, gold/silver tends to fall when inflation starts to rise
(top-right chart), as both are late-cycle phenomena. From a positioning perspective, assets in
the two biggest gold and silver ETFs are rising, but we can see that silver buying can overshoot
much more than gold buying (bottom-left chart). Both ETFs have only seen a fairly mild pickup
in buying so far. Finally, gold miners have surged lately, but we are seeing signs of buying
extremes. The last chart shows our fractal sell signal for the HUI (NYSE Gold Bugs Index) has
triggered lately. We would prefer precious metals exposure through silver and gold.

Click on image to enlarge

Source: Macrobond, Bloomberg and Variant Perception