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Precious metals, particularly gold and silver, have been on a dazzling run in 2024. As of late September, gold has surged by 28%, and silver has outperformed with a 31% increase. This meteoric rise is fueled by a perfect storm of economic factors and geopolitical uncertainties.

In this article, we'll uncover the driving forces behind this precious metals boom and explore how Canadian investors can potentially capitalize in on this "glittering" investment opportunity with ETFs.

Federal Reserve's Dovish Stance

In September, the Fed surprised markets with a sharper-than-expected 50bps rate cut, and ongoing signs of a slowing labor market, softening inflation, and weaker-than-expected income growth suggest more cuts may be on the horizon.

Markets are increasingly confident that the Fed will implement further rate cuts, with a 54% chance of a 50-basis points reduction in November.

This dovish stance has bolstered the appeal of non-yielding assets like gold, which tend to perform well when interest rates are low, as it reduces the opportunity cost of holding bullion compared to interest-bearing assets.

Central Banks Policies

Central banks outside the U.S. have adopted similar accommodative monetary policies, with China notably announcing plans to issue 2 trillion yuan ($284.43 billion) in special sovereign bonds as part of its fiscal stimulus. This global shift toward dovish policies and monetary easing has made assets like gold and silver more attractive to investors.

Furthermore, silver has significant industrial applications. It plays a crucial role in expanding sectors like electrification and solar panel manufacturing, where rising demand from green energy initiatives is helping drive up its price, alongside broader gains in industrial metals.

The recent economic stimulus from the world's second-largest economy (China) could further drive demand for silver, potentially pushing prices even higher.

Central Banks Gold Buying Spree

A key factor in the gold rally has been the aggressive accumulation of gold by central banks, aimed at enhancing economic stability and hedging against currency fluctuations and inflation. In 2023, central banks added 1,037 tonnes of gold, marking the second-highest annual purchase on record, following a peak of 1,082 tonnes in 2022. This buying spree has played a significant role in driving the gold surge over the past year.

Geopolitical Uncertainty

Gold's allure as a safe-haven asset has intensified amid the ongoing war between Russia and Ukraine, coupled with escalating tensions in the Middle East. The conflict between Israel and Hezbollah has worsened, marked by border skirmishes, the assassination of Hezbollah leader Hassan Nasrallah and other top-ranking leaders, and retaliatory bombings in several Lebanese cities following rocket attacks by Hezbollah on Israel.

With the growing risk of a broader regional conflict that could involve the axis of resistance (Iran, Iraq, Yemen), the U.S., and the rest of Israel's allies, investors are likely turning to gold as a hedge against mounting uncertainty and market volatility.

ETFs for Canadian Investors Looking to Capitalize on the Precious Metals Rally

Canadian investors who believe the precious metals rally will continue have several ETF options to easily gain exposure to gold and silver.

Gold and Silver Bullion ETFs

For investors looking to gain exposure to precious metals without purchasing physical gold or silver, ETFs offer a convenient option. Funds like the iShares Gold Bullion ETF (CGL), BMO Gold Bullion ETF (ZGLD), Purpose Gold Bullion Fund ETF (KILO), iShares Silver Bullion ETF (SVR), and Purpose Silver Bullion Trust ETF (SBT) provide easy access to gold and silver, allowing investors to benefit from price movements in these metals without the need for direct ownership.

See list of all Gold ETFs listed in Canada

See list of all Silver ETFs listed in Canada

Gold and Silver Mining ETFs

Investors can also gain exposure to gold through gold miners ETFs, such as the iShares S&P/TSX Global Gold Index ETF (XGD) and the BMO Equal Weight Global Gold Index ETF (ZGD), both of which focus on companies in the gold mining sector. These ETFs offer additional benefits, like the potential for higher returns through operational leverage. When metal prices rise, mining companies often experience amplified profits, as production costs remain relatively stable, leading to stronger earnings growth.

However, this opportunity comes with greater risks compared to holding physical gold. Mining companies face operational challenges, including fluctuating production costs, regulatory hurdles, and management decisions that may affect profitability. As a result, while mining ETFs may provide higher returns, they also tend to be more volatile than direct investment in the metals.

For investors seeking more aggressive growth, the BMO Junior Gold Index ETF (ZJG) offers exposure to smaller gold mining companies, which tend be volatile but can deliver outsized returns during a gold price surge.

Income-seeking investors might consider options like the Global X Gold Producer Equity Covered Call ETF (GLCC) or the CI Gold + Giants Covered Call ETF (CGXF), both of which employ a covered call strategy. These ETFs invest in gold producer stocks while selling call options to generate income from option premiums. This strategy is particularly effective in flat or mildly bullish markets, enhancing returns through consistent income.

However, in a strong gold rally, the upside is capped as the ETFs may be forced to sell shares at the strike price if prices rise above it. Therefore, covered call ETFs are best suited for investors seeking income with moderate exposure to gold, rather than those looking to capitalize fully on sharp price increases.

See list of all Gold Mining ETFs listed in Canada

Currently, there are no pure silver miners ETFs available in Canada. However, investors can explore ETFs with broader exposure to precious metal mining companies, such as the Dynamic Active Mining Opportunities ETF (DXMO) or the RBC Global Precious Metals Fund (RGPM), which may include some silver exposure. It's crucial to review these ETFs' holdings on their official websites and conduct thorough research to understand their specific exposures.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.