A Shifting U.S. Dollar Could Impact Precious Metals Prices

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Precious Metals

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Several years ago, analysts and mainstream publications once speculated the yuan would eventually replace the U.S. dollar as the world’s reserve currency.

But with most commodities still priced in U.S. dollars, especially oil, the U.S. dollar has remained the world’s reserve currency.

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The U.S. dollar is also a key currency in the precious metals market.

Source: MetalMiner data from MetalMiner IndX(™), Macrotrends.net and Yahoo.com

U.S. and Chinese gold bullion prices, as seen in the chart above, move closely together. Meanwhile, they both tend to move inversely against the dollar.

In other words, as the dollar gains strength, gold prices grow weaker in both countries.

The yuan fluctuates more widely against the dollar, with little apparent impact on gold prices.

Source: MetalMiner data from MetalMiner IndX(™) and Investing.com

Here is a more typical look at the relationship between U.S. values, with gold priced per ounce, which clearly shows the inverse price relationship.

MetalMiner recently caught up with Americas Silver Corporation President and CEO Darren Blasutti regarding underlying gold and silver price trends.

Blasutti explained the transition away from oil supports gold’s bullishness. Once that happens, the rationale for holding U.S. dollars weakens greatly, while currency diversification, including precious metal purchases, will continue to make sense.

Whereas industrial metals have shown more price volatility during certain periods, gold prices have stayed relatively more stable, according to Blasutti, therefore making it more attractive for mining companies.

Source: MetalMiner data from MetalMiner IndX(™)

Gold prices have enjoyed some price support during the past year or so, but still remain lower than in the recent past. Still, prices are trading in a fairly stable sideways band and have done so, more or less, since 2013.

Historical Roots in Silver

Prior to moving into gold mining, as most other major silver companies have done to date, Americas Silver Corporation mined a mixed market basket including silver, zinc and lead.

With prices for silver quite low in the recent past, it’s difficult to justify mining the metal from a cost perspective. As a result of falling silver prices following the acquisition of two key silver projects, Americas Silver Corp. transitioned from predominantly silver mining toward lead and zinc.

Over time, the mining strategy shifted toward higher grades of lead and zinc and lower silver quality. It made more sense to take advantage of higher zinc and lead prices, while silver prices suffered a lengthy slump.

Into the foreseeable future, while silver prices remain lower, the company continues to focus on mining its lower grade silver, leaving the higher grades in the ground because the company remains bullish on long-term silver prices.

“When silver does come back, we can increase ounces quite dramatically on the silver side,” Blasutti said.

The company’s acquisition and startup of the Relief Canyon Mine, located in Pershing County, Nevada, for gold mining will transition the company from a base metals mining company back into a precious metals mining company.

“Part of the impetus to get back to precious metals was to get a commodity that we thought had less volatility,” Blasutti said. “Gold has shown to have less volatility in the last period, much more than the base metals. Base metals traded in a range and gold has traded in a range, but the range hasn’t been severe [for gold].”

Source: MetalMiner data from MetalMiner IndX(™)

So far, even with the trade war at hand, silver prices remain low.

Source: MetalMiner data from MetalMiner IndX(™)

As shown in the chart above, the gold-to-silver price ratio continues to increase toward gold.

But as pointed out by Blasutti, those remaining silver companies stand to win big once prices for the metal turn around. He pointed out the last time prices stood at around this ratio (90.3:1), silver came back.

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What This Means for Industrial Metal Buyers

Given projections for the reduction of oil use in the long-term as stricter emissions standards come into effect, demand for the dollar could decline into the future.

As demand for the dollar weakens, we can expect gold prices to rise. Once gold reaches higher prices, silver may finally follow suit, with the gold-to-silver ratio finally dropping back from current highs that strongly favor gold mine production.

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