As the crisis in Greenland escalates and the collapse of Japanese government bonds fuels safe-haven demand, spot gold extended its rally on Wednesday morning, breaking through the $4,800 per ounce milestone for the first time in history and continuing to refresh record highs, trading at $4,819.75 per ounce at the time of writing. Meanwhile, spot silver experienced a short-term decline, briefly falling below $94 per ounce.
The US President, attending the World Economic Forum in Davos, Switzerland, has shown no signs of abandoning his intent to acquire the Arctic island. The Prime Minister of Greenland has advised citizens to prepare for a potential military invasion, although he stated such a scenario is unlikely.
Opposition from European nations to the US plan to take over Greenland has sparked fears of a destructive trade war. The French President criticized US trade policies, asserting that Europe needs to develop more sovereignty to avoid "vassalization and bloody politics," while the Canadian Prime Minister declared that the rules-based international order is effectively dead.
The war of words in Davos highlights how rapidly relations have deteriorated between the US and its traditional European allies, unsettling financial markets, depressing the US dollar, and boosting demand for safe-haven assets like precious metals.
The collapse of Japan's sovereign debt market also underscores concerns about the fiscal health of major economies, a phenomenon fueling so-called "debasement trades" where investors shun currencies and government bonds.
Daniel Ghali, Senior Commodity Strategist at TD Securities, noted in a report that the situation in Japan is sparking "concerns about market-led debasement in the rest of the world. Gold's ascent hinges on trust. Currently, trust is bent, but not broken. If it breaks, the momentum will last much longer."
Peter Kinsella, Global Head of FX at UBP, stated that investors should not expect silver to deliver similarly high returns, but in a new era of "resource nationalism," gold still has significant room to appreciate.
When asked how investors should view silver, which has surged over 30% this year, Kinsella remarked, "You wouldn't buy it at these levels, that's for sure. Considering silver is up 50%, 60% since two or three months ago, I think the idea of you buying silver is pretty crazy. When you look at the volatility situation, that's even more so: implied volatility at 65%, potentially going to 70%. So, if you buy silver at these levels—already multi-decade highs—you have to be very brave, besides accepting volatility."
Kinsella described last week's US announcement not to impose tariffs on silver as "a big deal." He added, "In recent months, we've seen a substantial build-up in US inventories. What strikes me now is that these inventories might partially flow elsewhere, thereby reducing global lease rates to some extent. Of course, when you do the math, the narrative about a severe physical silver shortage might not hold up. Currently, silver's beta relative to gold has clearly played out significantly."
"I think this is more of a re-rating story for silver, but to rise substantially from current levels, you essentially have to assume a gold/silver ratio of 40 or 30, which is foolishly low compared to historical levels, where the average is around 65," he continued. "For instance, if we see gold prices continue to rise modestly, say to $5,000 per ounce by year-end, and assuming the gold/silver ratio increases slightly, then silver's price would roughly remain at current levels by year-end. Therefore, I find it very difficult to buy silver at these levels."
For gold, however, the situation is entirely different. Kinsella argued that even at record highs, gold is worth buying. "If you think about what we've seen in the first three weeks of this year—the Venezuelan President's capture, now the threat to Greenland, etc.—I'd say we have entered an era of very pronounced resource nationalism among major powers. We've seen this clearly in both Venezuela and Greenland. This tells you that this geopolitical theme can shift at any moment, and currencies aren't necessarily the best play. The best way is through investment in precious metals, so gold definitely has upside."
