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SIVR and GLD: Impact of Record Dollar Strength (NYSEARCA:GLD) | Pro Club Bd

Mathieukor

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Precious metals investors all know that dollar strength is almost perfectly and negatively correlated with gold and silver prices (because gold and silver prices are expressed in dollars). With dollar strength approaching a 20-year high, it’s about time contemplating his inevitable demise. In addition to providing protection against the dollar index, there are several catalysts to support a silver and gold rally, both in the short and long term.

Therefore, the thesis of this article is to consider using the Aberdeen Standard Physical Silver Shares ETF (NYSEARCA:SIVR) and the SPDR Gold Trust ETF (NYSEARCA:GLD) to hedge such risks and benefit from these catalysts. You will see in the rest of this article that I believe the main catalysts are:

  • First, since US short-term Treasury rates (1 year, 2 year, and 3 year) are all hovering around/above 3%, these rates have all already reached their target range, as outlined in my previous articles. In fact, short-term interest rates are high enough to already cause an inversion of the yield curve. As a result, the dollar’s strength will lose momentum as we move forward.
  • Second, there are a number of geopolitical developments that are helping to weaken the dollar and trigger a gold/silver rally. China has systematically reduced its holdings of US debt. As war broke out between Russia and Ukraine and the US froze Russian dollar assets, I think this is just another consideration for China to further reduce its dollar holdings and increase other holdings of other assets (including precious metals). As you can see in the US Treasury chart below, China’s holdings of US Treasuries have shrunk from $1.06 trillion before the war broke out to current levels of $980 billion. It’s the first time since 2010 that China’s US holdings have fallen below $1 trillion. Japan has overtaken China as the largest holder of US dollars, but its holdings have also declined, as you can see in the chart.
  • After all, both SIVR and GLD are at their most attractive levels against the stock in more than a decade.

Major foreign government bondholders

US Treasury Department

SIVR and GLD: basic information

Both are large funds and popular with gold investors, and we think they only need a brief introduction. In addition, I have already covered their basic information separately in my previous articles. Here I’ll just highlight a few things I’ve gleaned from my previous articles:

  • Both are indexed to LBMA prices. And GLD is a much larger fund. SIVR has approximately $884 million in assets under management; In contrast, GLD has more than $55 billion.
  • Investing in ETFs backed by physical bullion is treated as owning physical silver or gold. As a result, gains from both SIVR and GLD are taxed at the same maximum rate of 28% or 29.6% as collectibles, rather than the normal long-term and short-term capital gains.
  • In terms of expenses, SIVR charges a lower expense ratio of 0.3% and GLD charges a slightly higher expense ratio of 0.4%.

SIVR and GLD

Source: ETF.com

In terms of price movements, GLD has historically shown much lower price volatility than SIVR. And the chart below illustrates well the past year, which was full of important events, including a war. As you can see, all major asset classes (stocks, bonds and precious metals) have suffered total losses. Both the stock market (represented by (SPY)) and the bond market (represented by (AGG)) suffered an overall loss of around 9%, while GLD only suffered an overall loss of 4.6%, the smallest among the four assets compared here. In contrast, SIVR suffered an overall loss of more than 26%, the largest among the four assets.

SIVR vs GLD vs SPY vs AGG Return

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Dollar strength near 20-year high

The dollar index (an average of its exchange rates against a basket of other major currencies) currently stands at 106.5. The last time we were at this level was around 2002-2003, which is around 20 years ago, as you can see from the chart below. The dollar index is up about 18% year-to-date.

A strengthening dollar index weighs on silver and gold prices in two ways. First, since both SIVR and GLD are dollar-denominated, as previously mentioned, the stronger dollar had a direct and negative impact on their prices. Second, as the dollar strengthens, it becomes a more attractive asset itself (e.g. short-dated Treasury note yields are higher. As a result, investors would be more attracted to the dollar and less to other assets (e.g. SIVR). , GLD or shares).

Looking ahead, I see the dollar is now losing steam for further strengthening. I see that the short-term Treasury rates (1 year, 2 year and 3 year) have all already reached their target ranges. And beyond that, I see geopolitical developments that will further dampen their strengthening and catalyze rallies in precious metals, as detailed below.

Dollar strength near 20-year high

Source: Investing.com

SIVR and GLD as a hedge against geopolitical risk

As mentioned, the main geopolitical risks are the ongoing war between Russia and Ukraine and tensions between the US and China. China in particular has systematically reduced its dollar investments. Such a reduction could only be made for economic reasons. But it could also signal China’s plan to diversify its assets (through other currencies and also precious metals). For example, the following CNBC news commented:

  • China’s government debt portfolio fell to $980.8 billion in May, according to Finance Ministry data released Monday.
  • It was the first time since May 2010 that China’s inventories fell below $1 trillion.
  • The decline in China’s share has also been attributed to Beijing working to diversify its external debt portfolio.

I agree that China’s reduction in dollar assets is not purely for economic reasons. More recently, there has been a view that US sanctions against Russia have also had an impact (an example from a NIKKEI report is cited below). And I see SIVR and GLD as effective hedges against such geopolitical uncertainties, as elaborated below.

As Beijing and Washington have intensified their competition for global influence, China has gradually reduced its holdings of government bonds to reduce its reliance on the dollar. Some observers believe US moves to deny Russia access to dollars, including freezing its foreign exchange reserves, could also play a role.

US Treasury bonds held by China and Japan

US Treasury Department

SIVR and GLD are attractively priced

Historically, both SIVR and GLD have been effective hedges against major geopolitical uncertainties. And their price action (particularly GLD price action, as just mentioned) over the past year provides a more recent illustration. Finally, it can be argued that unlike bonds and stocks, gold and silver are the only assets that do not also represent the liability of others.

Also, both SIVR and GLD are weak and negatively correlated with other assets as you can see from the chart below. GLD has a correlation of 0.37 versus bonds and 0.10 versus the stock market. And SIVR has a correlation of 0.23 versus bonds and 0.33 versus the stock market. SIVR’s higher correlation with the stock market is due in part to its broader industrial applications.

SIVR and GLD are attractively priced

Portfolio visualizer

Finally, both the SIVR and the GLD are priced at their most attractive levels versus stocks in more than a decade. The next two charts show the price ratio of SIVR to SPY and GLD to SPY since 2010. As you can see, in 2011 the price ratio for SIVR peaked at 0.4. Currently, the price ratio sits at 0.045, down almost tenfold and near its lowest level in more than a decade.

It is very similar with GLD. The price ratio has fallen from a peak of 1.6 in 2011 to its current level of 0.41, a nearly four-fold decline and also near its lowest level in more than a decade.

SIVR and GLD prices

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Final Thoughts and Risks

The dollar index is currently near a 20-year high. And my thesis here is to urge investors to prepare for the downfall (which I think is just a matter of timing). Also, I view both SIVR and GLD as suitable vehicles to hedge downside risks and other geopolitical uncertainties such as the ongoing Russia-Ukraine war and US-China tensions. Additionally, both SIVR and GLD are priced versus equities at their most attractive levels in more than a decade.

Finally, between SIVR and GLD, we now see a particularly attractive time for a silver-gold trade as discussed in our earlier article. Our current silver and gold holdings are listed below. As you can see we have maintained a 9% overall exposure to gold and silver. But we have increased our silver allocation significantly, by about 1.5% in June to 6.75% (ie almost 30% from last month). This is because the gold-silver price ratio hit 88 in June, one of the highest historical levels. We see that the risk/reward profile is heavily skewed towards owning silver at such levels.

Aggressively growing portfolio holdings

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Finally risks. As non-revenue assets, their expenses result in a charge of fees. As previously mentioned, SIVR charges a lower expense ratio of 0.3% and GLD charges a slightly higher expense ratio of 0.4%. These appear negligible in absolute terms, but could be more substantial when compared to their total return potential (typically a few percent per year over the long term). This is also why we prefer the iShares Gold Trust ETF (IAU) to GLD for our gold exposure.

IAU fees are 0.15% lower than GLD. With SIVR in particular, investors need to be aware of the extreme price volatility. As noted, SIVR suffered an overall loss of more than 26% over the past year, the largest among the four assets compared in a previous chart. Over the long term, the annualized standard deviation of the SIVR is not only the largest (31.3%), but also far outperforms other assets. The top assets with the second highest volatilities are GLD and SPY, with standard deviations of 16% and 14%, respectively.

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