THE GLOBAL RECESSION could mean a new bullish period for precious metals. Does this represent an opportunity for the Mexican mining industry to boost the economy?
With a recession that could hit the economy for years, there is a lot of renewed interest in gold and silver. This has caused an increase in the price of precious metals. Bank of America predicts that gold will hit $ 3,000 an ounce by the end of 2021. This news is important to investors. But it also has big implications for the Mexican economy.
How important are gold and silver for Mexico? Mexico is the world’s leading silver producer, supplying almost 23 percent of the supply. And it’s the eighth mayor gold producer. The mining industry is essential to Mexico’s prosperity and accounts for approximately 5.5 percent of the country’s total GDP.
At the beginning of the year, Mexican mining (especially silver) was on the verge of a good time. But due to the COVID-19 pandemic, the government stopped mining for most of March and April. Some mines were confined, even longer.
Mines have recently started to reopen and are trying to speed up production to make up for lost time. It couldn’t be a better time as investors have started to focus on gold and silver.
GOLD AND SILVER PERSPECTIVES
Despite the market turmoil, gold and silver have outperformed the rest of the main commodities this year.
∞Gold is up 27 percent this year to date (MTD).
∞In early August, gold hit a record high of $ 2,000 per ounce.
∞Silver rebounded from its previous decline and rose to a 53 percent increase in MTD.
∞A positive sentiment among some of the leading analysts and managers Funding is also fueling price movements.
∞Private banks controlling part of the 6 trillion dollars in assets recommend their clients with purchasing power to allocate between 5 and 10 percent of their portfolios to gold, according to Reuters sources.
∞Some prominent hedge fund founders such as Paul Tudor Jones, Paul Singer, Crispin Odey and David Einhorn have cheered on gold.
∞In the second quarter, Ray Dalio’s Bridgewater fund added $ 400 million to its gold position, which now exceeds $ 1 billion.
∞In the same quarter, Warren Buffet’s Berkshire Hathaway initiated a position of about 21 million shares (worth approximately $ 600 million) in Barrick Gold (NYSE: GOLD).
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UNCERTAIN WORLD ECONOMY?
Both gold and silver have their own dynamics, but they share a particularity. When the world economy seems uncertain, investors tend to invest in them to preserve their resources.
Many investors are very concerned about quantitative easing, loan growth and global instability. Consequently, they are interested in precious metals. In fact, three years ago, Ray Dalio declared that gold was a hedge against political and economic risks.
Although both gold and silver show a good and strong correlation and both perform well when larger markets do not, they both have their own very specific drivers.
Of the two precious metals, gold prices are undoubtedly the most affected by the state of the world economy (but especially in the United States). Gold is seen as a hedge against instability.
The price of gold is driven mainly by the demand of investors looking to purchase the product to diversify their portfolios. This explains why gold prices can continue to rise in good times, such as after the Great Depression, as it takes some time for demand to decline.
The demand for gold has been driven by the repercussions of economic (and even social and political) unrest from the COVID-19 pandemic. A steady expansion (especially in the United States) could prolong this boom.
Another factor affecting gold is the recent decline in the value of the US dollar. For example, since the beginning of May, the US dollar has fallen more than 10 percent compared to the Mexican peso. The dollar’s decline has made gold more attractive to international buyers, and American investors themselves seem to remain uneasy about rising inflation.
As these trends appear to continue, gold prices will surely stabilize in the coming months and could reach unprecedented heights in the next year or two.
SILVER: DRIVEN BY PRODUCERS AND INVESTORS
Silver prices perform well in times of economic uncertainty. But they are also heavily influenced by industrial demand. The cost of gold production grows slowly due to high mining costs. Although, the demand for silver for production purposes, which makes up 50 percent of all demand, has remained relatively stable.
For silver, 2020 has been a particularly difficult year. COVID-19 sent markets into a spiral and shut down large amounts of production. This considerably lowered demand for silver, which was trying to break through the $ 20 price barrier as recently as June.
All of this changed in late July, when silver prices rose above the $ 27 mark. This sudden boom in value was primarily driven by the period of gold growth. As investors find it increasingly difficult to obtain gold, they often turn to silver as a measure to protect their assets.
Another important short-term price driver was the European Union’s announcement that a large part of its recovery fund would go to renewables, increasing expected silver demand for the next few years by 4 percent.
It may also be that silver was undervalued. At the beginning of this year, the ratio of gold to silver was over 100. In the last two decades, this ratio has typically been close to 60 or 70. Following the sudden increase in the price of silver, the ratio of gold to silver has returned to a more usual degree.
THE FUTURE OF MEXICAN MINING
Mexico is important in the world’s supply of gold, and even more crucial in that of silver. This means that the country is in a very good time to take advantage of the economic difficulties in the United States and the leverage of the rise in precious metals to the benefit of Mexico.
Although there is a problem: the weak US dollar. Although it is positive, as demand increases, it is a problem on the supply side. Most of the Mexican mining companies sell their product in US dollars. But the mining costs are mainly in pesos. This will lead to a reduction in profits.
For now, rising metal prices have contributed to the investment flow for Mexican mining companies. But the government was able to do more to help this sector. Useful policies could support gold miners to adopt more efficient practices and reduce costs in the long term.
This would help mining companies to take advantage of a good precious metals market and maximize their profit margins. It would also help make Mexico a more attractive country for investors and could be a valuable instrument to generate a recovery in the country.
In any case, Mexican companies are in a good position to maximize profits from the current economic climate. Assuming the COVID-19 pandemic continues to unsettle investors around the economy, gold and silver prices will likely remain high. This situation could push Mexico on the road to economic success and attract new investment into the country.
The year-to-date price referenced in this article is based on the Wall St. Journal tracking monthly continuing futures contracts.
Toni Allen is editor-in-chief of Commodity
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