The rally in gold and silver prices is just getting going

[GoldCore]

Some who are considering buying gold bullion or silver investment often look closely at the price and ask ‘is now a good time to buy gold’. This is understandable after all no buying decision should be one that you take lightly and often people want to feel like they have bought ‘at the right time’. So, in this week’s blog, we look at recent gold and silver price gains in the perspective of the financial crisis of 2008 – 2011. Remember, whether you buy gold today or tomorrow, it should be viewed not just as an investment but also as insurance for your portfolio. 

In our post on April 13 Has the IMF Told the World to Buy Gold? we discussed the IMF’s (International Monetary Funds) recent release of its Global Financial Stability Report and World Economic Outlook and pointed out that many of the major financial stress factors caused by the rapid tightening of the monetary policy outlined in the reports are positive for gold and silver prices. 

How does financial stress impact gold and silver prices

This week we start with putting gold and silver price gains from financial stress in perspective of the recent Great Financial Crisis of 2008-2011. 

The chart below shows that silver prices have already rallied 40% from September 1, 2022, with a steep climb starting in mid-March as the problems of Silicon Valley Bank started to unfold and gold prices have climbed almost 20%. We also remind readers that one of the signs of a bull market in precious metals is when the silver price is rising faster than the gold price. 

Gold and Silver Price Chart

Looking back to the last financial crisis, from the first market concerns about liquidity, and when NetBank failed in September 2007, to the peak of that bank failures cycle, because of the series of quantitative easings by central banks, and the bailouts of Greece, Portugal, and Ireland; Silver reached a peak in April 2011 with a 400% gain and gold reached a peak in September 2011 with a gain of 280%.  

In other words, the rally in gold and silver prices is only now getting going and has quite a distance to run higher as current financial vulnerabilities are exposed.

Gold and Silver Price Chart

There is the added complication of inflation (see our post on March 30 The Fed is now in a tug-of-war between fighting inflation and saving the banking system) and the much higher debt levels of governments and households. 

The third flagship report published by the IMF last week was the Fiscal Monitor which discusses fiscal policy (governments sending less) tightening after the rapid increase in spending to support their respective economies during Covid.

 

Governments must deal with high debt levels, alongside modest growth (negative economic growth in the near term) while having to pay higher interest rates on their own debt.

The report states that governments are likely to face additional spending pressures in 2023 as ongoing geopolitical tensions may lead to further increases in defense spending and fiscal support to address negative effects from disruptions to international trade. Industrial policies, including government subsidies, may also emerge to foster import substitution … 

… Low-income developing countries, many of which are in or near debt distress or have limited fiscal space, face a particularly difficult balancing act. Many developing countries are grappling with tighter budgetary constraints.

The additional spending pressures, combined with slower growth, and tighter monetary policy due to ongoing inflation pressures will add to debt levels.

3 Reasons Why Patrick Karim is Bullish on Gold

 

Over the medium term, under current policies, public debt is expected to rise to close to the record levels seen at the height of the pandemic.…. Related fiscal risks typically manifest themselves in weak growth and tight financial conditions. (See chart below from the Fiscal Monitor report.)

Low Growth, Rising Rates and High Debt

The IMF expects debt governments to continue to run deficits and debt levels to rise in all three major categories – advanced economies, emerging markets, and low-income developing countries.

General Government Primary Balance and Debt Chart, 2019-27

In China, it’s not the central government that holds massive debt, but instead the local governments in aggregate.

China, one of the world’s most indebted nations, has not experienced a full-blown financial crisis, yet. There were a few close calls. In 2019, the government had to seize a regional bank, for the first time in decades, to prevent a run on deposits.

Last year, a wave of real estate developer defaults ended up with homebuyers threatening mortgage boycotts. Both scares got defused. One may even argue that China is now a safer place for investors after Beijing tightened regulations on unruly local banks and aggressive home builders.

There is one more elephant in the room

But there is one more elephant in the room: Borrowings from local government financing vehicles. For years, municipalities have been relying on these off-balance-sheet entities to fund infrastructure and support the local economy.

LGFV debt rose to 57 trillion yuan ($8.3 trillion) in 2022, or 48% of China’s gross domestic product, according to estimates from the International Monetary Fund (Bloomberg, 04/16). 

Elephant in the room

With land prices tumbling and slowing growth in China some provinces are appealing to the central government for a bailout.

And in the US there is the eroding of confidence due to the ongoing raising of the debt ceiling debate which will turn into a crisis and a possible US government shutdown in mid-June if Congress continues to bicker and stonewall (for more on the debt ceiling see our post from January 19 What happens if the debt ceiling raises).

Bottom line – there are many crises on the horizon which will turn more investors to precious metals thus propelling prices higher.

[Pete]

I don't look at any forecasts these days because most of them are total B.S.
So called "experts" and "people in the know" spew out endless videos and recommendations.
My memory takes me back to the period when silver was heading for the moon etc. etc. and all the pundits were analysing Chinese buying, shortages of metal vs paper contracts, Morgan Stanley .... blah blah blah.
Now over a decade later silver hasn't returned near to its highs despite the expert predictions and the market at the time.
Gold to me looks high and is trading high but remember to strip out inflation and currency weakness.
It is still a great asset to own especially if purchased a while back but will it maintain its steady upward trend ?
No-one knows but you can attach any global event to explain an upward or downward trend.
Not so long ago pundits were predicting the collapse of the USD and last Autumn the pound was essentially parity with the dollar.
Everything currently is risky and the tide could change without warning so maintain a diversified portfolio at all times.

[CANV]

silver was sub 16 pounds on the 1 st of sep..   I neither agree or disagree with the conclusions but I hate chart manipulation .  start the chart on the 1 st April 2022 n see how it looks.  

[HonestMoneyGoldSilver]

You come across and look very good on camera. I love your moderate Irish accent too @GoldCore

@Pete - I somewhat agree with you. It's grating to see 101 different sources pumping out videos on the daily that massively overstate the importance of everything and draw conclusions that are not entirely obvious from an objective POV

I've said it before here in full knowledge that people have been saying this for years and been profoundly wrong - this time it is different

Gold and silver are not moving as they "should" be moving. Silver is outstripping gold and when both are appreciating significantly during the same period in which rates are being raised, these are two extremely strong historic indicators of the infancy of a bull market for PMs. Note I said infancy even though we have seen some nice gains and gold is close to its ATH. This is only the beginning

Why is it only the beginning and why will it be different this time? Well, there are 4 main reasons IMHO amongst dozens:

1) There are strong industrial use cases for silver in particular but also gold. The properties of these materials lend themselves to electronics and biotechnology. I remember almost a decade ago reading about gold nanotech programmable matter that could attach itself to cancer cells (or any other designated cell). Then you can both identify and irradiate the cancer on a molecular level, which is a marked improvement over current treatments. A single treatment would have cost millions 10 years ago but now with improvements in manufacturing, AI and tech, these sort of treatments could become viable on a macro level. There is the recent development of using gold-based drugs to fight superbugs which have become resistant to antibiotics and traditional multi-drug treatments. If we consider the list of superbugs is increasing and more pathogens are becoming resistant to antibiotics in humans and livestock, it is feasible that we will be left with no choice but to use gold-based or other new technologies in order to save lives. The world pre-antibiotics was a brutal place:

"Dr. Sara M. Soto González, and her team at the Barcelona Institute for Global Health in Barcelona, Spain, tested 19 gold-based compounds against various hard-to-treat bacterium. Sixteen (84%) of the compounds proved effective in treating drug-resistant infections"

Gold-based drugs proving effective in treating deadly 'superbugs' | Kitco News

Silver is the best conductor of any element and is used in electronics and batteries, along with gold for certain applications. Advanced and developing markets are becoming more dependent on technology with the internet now considered a basic human right. Everyone has a phone. Go to Marks & Spencer's and a scary number of NPCs are driving EVs. There are legislative acts in important jurisdictions mandating EVs (e.g. California, UK, EU, Canada, Hong Kong, Japan). I'd love to know where they're getting the raw materials from - there simply isn't sufficient mining capacity to make all those vehicles before 2035, inclusive of a range of resources, not just silver, but anyway

2) The western stacker. According to the available data, less than 1% of people hold physical precious metals, let's just call it 1% with recent trends. Compare that with cryptos and in particular bitcoin, with >10% of the population holding some. Consider how insane the premiums on physical are right now with only 1/100 people buying. If 10/100 people started buying, even in modest quantities, the market simply couldn't handle it. Demand would vastly outstrip supply and that is only going to do one thing to prices - send them to the bloody moon.

A thing that I find fascinating as an Ulster-Scot (The Founding Fathers/US Constitution) and a stacker, is that 14 US states and counting, including Texas, are pushing forwards with legislation to make gold and silver legal tender once more, as per the US Constitution. The legislation requires each state to hold a % of their total funds in physical PMs at vaults within each state. Some states (Wyoming, Arkansas, Tennessee, Texas) are concurrently creating digital currencies based on gold and silver as well as accepting physical for all government debts, taxes and commercial payments. This is a nascent movement that is gaining strength on a daily basis not just within the US but internationally. The west including the USA has had enough of dollars, euros and pounds, and wants to ditch them in favour of precious metals. Precious metals have been the primary characteristic of money for thousands of years, the only real money there's ever been. Fiat and paper are currencies or promissory notes, they are not money. Crypto is not money, it's a payment system just like fiat with zero intrinsic value. Then we have the BRICS and the markedly different nature of the international arena today compared with the last great bull run on precious metals in the 1970s/80s. There is 220 times more consumer credit available today for investment globally relative to the 1970s/80s, the stock market is also about 50 times larger. Precious metals have been ignored for decades, that is changing

3) The central banks. They're stacking gold in huge amounts, 2022 saw record purchases of recent times. The BRICS are making the headlines but combined the BRICS have about $320 billion in gold whereas the USA has like $480 billion and western Europe in the region of $700 billion

https://www.gold.org/goldhub/data/gold-reserves-by-country

4) The general financial environment. As I mentioned above, gold and silver are not acting how they "should" be acting. Silver appreciating faster than gold is a key bull indicator for PMs. When interest rates are being hiked at an historically high velocity and inflation is high, investors should not be favouring precious metals, the opportunity cost is too high - If you fear recession and are "risk-off"you can dump your money in short-term treasuries, UK gilts or US TIPS and make the risk-free rate, so why would you take on precious metals? They are a safe-haven obviously (Yen, euro, GBP and USD are not the havens they used to be) but it's bigger than that. It's a generational change, a protest against the last 52 years of fantasy-land currency creation with zero backing that has crushed the middle classes, led to extreme inequality, inflated asset prices, helicopter money, growth stocks, cryptos and rampant consumer inflation. We've almost reached the stage that people are unhappy going to work and being paid in fiat, it has reached that stage amongst certain individuals and now in certain states and sovereign nations. 

We are yet to see the rockets being lit for precious metals and they are flirting with ATHs. When the opportunity costs are lower both in terms of interest rates and inflation, both of which are expected to ease at the end of 2023 or the beginning of 2024, what is that going to do for PM prices? From an objective POV it can only cause PMs to rise significantly from current levels, smashing the ATH for gold without question and pushing silver to who knows where. I've predicted $30 silver by the end of 2023 but that doesn't mean that's what I think silver is worth. In all honestly silver "should" be $100/oz already but I understand there are many obstacles and significant time between now ($25) and then ($100)

From my personal investment perspective, I set my hypothesis based on fundamentals that the absolute bottom of the silver market was $18 and more likely $20, so when silver hit $20 I put my money where my mouth is and went big, then regretted not going bigger and bought in more when it dipped below $21. The inflation rate is officially 10% but it's way more than that. I'm getting annoyed going to the shops and seeing my favourite items go up in price every two weeks. Food inflation is 50%, energy is 150% for my household. Other bills like internet, sports (sports are a utility to me), insurance premiums, etc, are up by more like 25%. So for me putting significant funds in silver (I already owned gold) was a freeroll. My money is evaporating by > 10% in the bank on an annual basis anyway so even if my punt on silver goes sideways, I am no worse off than if I took "no risk" and left my money in the bank. I didn't invest expecting silver to moon to $100, the $30 figure was always my pessimistic goal, but $100 + is certainly on the cards and gold could very easily add 50% + to its current price within 2 or 3 years. I think a lot of ordinary people have worked out this last paragraph for themselves and this is leading to the modern rush for precious metals, which is pushing premiums off-the-charts and building a foundation for sustained spot price increases

So yes, IMHO, this time is different and if it's not, I will be shocked. Here is one way to judge your investment. Would you be more surprised by $15 silver or $30 silver? I personally believe $15 silver is impossible and $30 is just a matter of time. The danger is, like with BTC when it hit $60K +, that FOMO and FUD kick in and a bunch of people buy at the very top of the market and have to wait years/forever to break even or else must swallow losses. This happened with PMs during covid, a bunch of FOMO and FUD buyers are still waiting to break even. I like their chances a lot more now than in 2020/21 as so many more factors are in their favour. 

IDK what it is about these Goldcore posts but they almost compel me to write an essay 🤣, apologies to the readers and thanks if you made it this far. 👼

 

[FourNinesFine]

Very interesting @HonestMoneyGoldSilver.

Humour an inexperienced stacker... what's FUD?

Ta.

[HonestMoneyGoldSilver]

20 minutes ago, FourNinesFine said:

Very interesting @HonestMoneyGoldSilver.

Humour an inexperienced stacker... what's FUD?

Ta.

Fear, Uncertainty and Doubt