DBP - DBP: With Gold At A Yellow Light This ETF May Have A Silver Lining

2023-04-27 12:32:26 ET

Summary

• The price of gold has been on a nice run this year, emerging from a multi-year funk. It's up 20% since last October.
• But gold is stagnating at a familiar price level, which makes DBP an alternative for gold bugs.
• DBP's 20% allocation to silver alongside its 80% gold position gives this ETF 2 ways to win. But I don't see enough momentum to rate it more than a Hold.

Invesco DB Precious Metals Fund ( DBP ) might get lost in the shuffle among a hoard of gold ETFs. At just $177mm in AUM and in its 16th year, it has not dominated investors' attention like some of the giant gold offerings. But I'm making the argument that for gold-focused investors, it is worth a look as a way to hang in as gold, the traditional inflation-fighting tool threatens to burst through a long-term technical "triple-top." After all, gold investors have been stymied twice, with gold peaking at this level in 2020 and again in 2022. And, while 2023 is setting up as a time when inflation-fighting strategies may be especially useful, gold's last 2 tries at cracking and staying above the $2,000 per ounce level resulted in a big move...down...to around the $1,600 level. So, while the triple top is in play for gold bulls, so too does a support level loom, 20% lower. That's enough to make me look around for ways to stick with gold, but take some of the edge off. DBP is a good candidate for that, long-term. However, I don't currently see the broader precious metals and commodity space as attractive enough to rate this under-the-radar ETF a Hold for now.

Gold is surging! But we've seen this act before

But modern markets have a way of getting investors excited for big breakouts that don't materialize. So, investors are naturally wondering if gold, nicknamed the "yellow metal," is about to speed through a key price level, or stop cold and again disappoint long-time holders.

According to the World Gold Council 's 2022 Gold Demand Trends

"Demand for gold has reached its highest in over a decade on the back of colossal purchases made by central banks, as well as vigorous retail investor buying and slower ETF outflows, the World Gold Council (WGC)...annual gold demand jumped 18% to 4,741 tons, almost on a par with 2011, a time of exceptional investment demand."

That makes sense, since back In August 2011, the price of gold crossed above $1,900 an ounce for the first time. Last month, it finally made it to $2,000 an ounce. That's a long time to appreciate about 5% in total. In those 12 years, long-term gold investors have endured interest rates that fell to zero, and the emergence of cryptocurrency, hailed by some as a rival asset to fiat currencies like the U.S. Dollar, a reputation traditionally held by told.

But with inflation back on investors' radar, gold is re-emerging in its traditional inflation-fighting role. So, for investors who seek to participate in a potential gold price acceleration above that elusive $2,000 mark, the ETF industry provides several avenues to pursue that. While my preferred way to access gold is through ETFs that hold gold bullion, I'm more concerned with substance over style, so to speak. So the fact that DBP uses gold futures instead of holding the bullion in physical vaults does not deter me here.

Silver: More than just a shiny object

The chart below shows why that 1/5 diversification to silver can make a difference for DPB. It spent most of the pandemic period outperforming gold. While gold is essentially a straight commodity, silver has more significant commercial applications.

Here are 4 common uses for silver , other than as a financial asset to hold

1. Electrical and Electronics

We all own something electrical or an electronic with a piece of silver in it. Silver holds an excellent electrical conductivity, making it the number one choice for electronics or anything electrical such as printed circuit boards, switches, TV screens, telephones, microwave ovens, children's toys and computer keyboards. This metal is highly reliable and durable for many cycles.

2. Jewelry and Silverware

Being an attractive, reflective and moldable metal, silver is used in jewelry and silverware. It is the cheaper alternative to its sister metal gold and it resists oxidation and corrosion. Silver still can be tarnished, but a little polish allows it to shine for a lifetime.

3. Photography

Silver has been used in photography for centuries, due to its light sensitivity. Traditional photography uses film covered in silver halide crystals which are set when exposed to light creating a vivid picture. Its accuracy allows silver to be used in non-digital consumer photography, traditional film, and X-rays.

4. Antibacterial

For centuries, many people have used silver vessels to store water, wine, and vinegar to ensure freshness, but did not why silver worked. It was recently discovered that silver ions absorb oxygen, which kills bacteria. It is also non-toxic which makes it the perfect agent for water purification, bandages, dental hygiene, and even eye drops.

Here's a picture of that inconsistency in price trend between gold and silver. Over the past 5 years, they have had several periods in which they did not correlate.

Gold and Silver technical analysis is the key decision-maker here

Adding some silver exposure alongside the gold in this ETF is helpful at a time when gold still must prove its ability to cross the $2,000 level with authority. That said, I don't see a strong enough technical picture for silver. It too has flown higher in 2023, and it is also grappling with its own long-term technical resistance.

Above, the solid lines in the upper part of the chart outline that "trendline resistance," which goes back to 2020. It's a downward trend, and while silver has admirably climbed to the top of that price channel, it is not clear of it yet. That's what I'll be watching, alongside the gold triple-top, to see if DBP advances above the Hold rating I assign to it currently.

As a longtime technician, that Hold rating is frankly an easier call than in most cases. DBP offers a nice 1-2 punch with its 80% gold/20% silver allocation. But with both components in technical areas of indecision, it is best to remain neutral until the market does what it does best: tell us a story we can act on.

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