Periodically, we invite notable outside experts to share their insights exclusively for the Peak Prosperity audience. Today we’ve asked our friends at GoldSilver.com for their latest thoughts on the recent sell-off in the precious metals. Jeff Clark, GoldSilver’s senior metals analyst, presents his conclusions below that the PMs are reacting just as they did at the start of the 2008 crisis. That evidence, combined with the announced massive (and growing) inflationary rescue efforts by the central banks, gives confidence that gold & silver will similarly head higher — possible much higher — before long.
Most investors know that gold represents wealth. And that it can be one of the most effective hedges against economic and financial turmoil.
It sure doesn’t feel that way right now. Not only has their volatility spiked, neither metal has logged a gain since the Coronavirus was first widely reported on January 1. As I write on March 17, gold is down about 1%, while silver has crashed 30%.
Why are they performing so poorly? Are they really not crisis hedges?
There are answers to these questions. And when one looks at history we can even get a hint about when it will all turn around…
The Great 2020 Sell-off
First, there are a couple specific reasons that account for the decline in gold and silver right now.
Margin Calls/Liquidity Needs
The biggest factor is a direct result of the rout in stocks. The selloff has been so violent and unrelenting that there is an overwhelming and immediate need for liquidity. Cash is desperately needed by traders and investors to meet margin calls and offset losses elsewhere.
Combine the selloff in stocks with a crash in oil prices and you get a need for liquidity that is off the charts.
As many investors know, stocks were already bloated and vulnerable. More importantly, margin debt was at record highs, as Mike Maloney pointed out over a year ago.
That extreme amount of margin debt is now coming back to haunt investors. They’re forced to scramble big-time to meet margin requirements—and they are requirements. In some cases they aren’t even asked to deposit more margin; other positions are automatically liquidated to cover them.
When the global stock market is four times bigger than the global economy, it’s not hard to see that an uncontrollable selloff can force investors to raise cash.
Manipulation
Traders can piggyback off the decline by pushing prices down further. They can also put on trades designed to take advantage of the volatility and push the price down. While charges have been brought against some of these traders, this activity still goes on.
Not all short positions are nefarious. Those with corrupt intentions, however, will get burned if they try to continue the manipulation when sentiment in this sector reverses.
The important thing to keep in mind is that manipulations always fail. They will again.
The Gold/Silver Ratio Just Made History
The highest reading in the gold/silver ratio (gold price divided by the silver price) was 100.8 on February 25, 1991.
But as noted above, the silver price has fallen much more than gold in this era of unprecedented volatility. And look where that’s pushed the gold/silver ratio (GSR):
Never in 5,000 years of recorded history has silver been this undervalued relative to gold.
Why is silver underperforming so much?
There are several answers to this…
First, as many readers probably know, silver is a tiny market. As just one example, if 10% of institutional investors devoted just 2% of their assets to silver, it would exceed 425% of the known silver bullion on the planet. This is why it is more volatile: it doesn’t take much cash coming in, or going out, to impact its price.
The second factor is that mainstream investors look at silver’s high industrial use (about 55%, and another third in jewelry) and believe demand will fall. It probably will if we enter a recession. Copper and other base metals have declined, too.
But what these investors aren’t looking at yet is that silver is also a monetary metal. They will when currency worries ignite.
When will the silver price rebound and the ratio fall? Gold is likely to outperform in in the midst of deflationary scares like we have now—but when inflation begins to kick in, or any monetary issue surrounding the excessive actions taken by governments around the world, silver will respond.
History shows this. Silver’s biggest modern-day rises occurred in the 1970s when inflation was soaring, and in 2009-2011 when we had the fear of inflation. The bottom line today is that the extreme debasement of fiat currencies around the globe are not consequence free—and will drive investors into silver (and gold) when they begin to play out.
Which begs the question…
What Will Turn This Market Around?
No one will know when gold and silver bottom until after the fact. And it’s possible the selling may not be over.
But we see several key hints that tell us, sooner or later, precious metals will turn around…
Hint #1: Central Bank Tools Near Exhaustion
Governments are throwing everything they have at markets and economies.
Rates have been slashed around the world, and various forms of QE have been instituted.
These are their two main tools—and both make gold and silver more attractive.
If conditions surrounding the spread of coronavirus worsen, it’s almost certain that other measures will be instituted, just like they did during the Financial Crisis of 2008-09. And most of these efforts are inflationary in nature.
In the big picture, these interventions will drive investors toward silver and gold, not away from them.
Hint #2: Confidence in the Fed’s Ability Is Eroding
It’s starting to dawn on the mainstream: how effectively will the Fed be able to navigate the turmoil?
Consider this quote last week from Bloomberg, about as mainstream as you can get.
“Some new financial order, to replace Bretton Woods and the system that Volcker built to replace it, is now needed. A decade of monetary expansion has delayed the issue. It is hard to see how it can be delayed much further. It would be wise to brace for disruption to match what was experienced at the end of the 1970s and the beginning of the 1980s.”
That sounds like Mike Maloney!
The more this line of thinking gains traction, the more investors will turn to silver and gold. We think that’s exactly what’s coming. Watch for this shift in trend, as that’s when I think a reversal begins to take hold.
Hint #3: Spiking Investment Demand
Gold and silver both have industrial uses, as well as widespread jewelry use.
But when it comes to determining the price, the biggest influence is investment demand. And that is through the roof.
Look what’s taken place in just the past two weeks:
- Through March 13, holdings in gold-backed ETFs already total more than half of 2019’s total.
- Virtually every bullion dealer reports record-level demand. This includes com.
- The U.S. Mint is out of silver Eagles. Their press release stated, “Our rate of sale in just the first part of March exceeds 300% of what was sold last month.”
- The U.K.’s Royal Mint said last week that weekly precious metals sales quadrupled from the same period a year ago.
- Gold trading volumes tracked by the London Bullion Market Association reached almost $100 billion on Monday March 9, the highest ever daily volume.
This record-setting level of demand is likely to push prices higher once the forced selling is over.
Hint #4: History
Last, we’ve seen this movie before.
Gold and silver crashed back in 2008 with the stock markets, largely for the same reasons as today. Gold fell 30% from its high to low that year, while silver dropped a whopping 73%.
But both metals bottomed in October, and by 2011, gold had risen 166%, and silver soared 440%. And both of these rallies started before the stock market bottomed.
In other words, the selling was temporary. Once liquidity needs had been satisfied, investors rushed back into gold and silver and sent them on one of their greatest rallies in history.
Although no two circumstances are exactly alike (and yes the coronavirus is scary), the setup we see now in precious metals is not new to history. And history says that at some point they will reward investors this time, too.
If you already own precious metals, hang in there. Time will work in your favor.
If you don’t, you have a rare opportunity to gain exposure at today’s low prices, when we have high confidence demand for gold & silver is fast increasing.
An opportunity that not only will add protection against the desperate (and inflationary) actions of the world’s central banks, but could well provide extremely lucrative.
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Mine isn’t going anywhere until it is absolutely necessary for my survival. I didn’t buy it for profits. I bought it as a hedge against the behavior of our worthless government….same with ammo.
It’s the paper gold that everyone is selling. Go try and buy some silver and gold with a delivery in the next two weeks. They always get hammered initially, but it is only the paper.
Amen. I sorta looked at what was going on and ask myself the question what would shelter some of my assets and what would folks be looking for in time of need. I missed the TP thing but, nailed others. Now it is a wait and see game.
Something they didn’t mention is how much mining has been taken offline due to low prices. Some of the shortage might be made up because of slower industrial demand but they still can’t just ramp up production very fast in order to keep up.
The most important point is what Mr. Liberty said. We should be viewing it as short term investing. It’s a store of wealth. It will buy the same amount of bread or housing that it always did.
Gold-to silver ratio is well beyond 100, close to 129.
Silver is a coiled spring, but the spot price has decoupled from reality because MARGIN CALLS on TRADERS … which screws savers. Good luck finding Ag at or near spot from a dealer because they won’t reduce their asking prices to take a loss. They’ll tell you it’s the cost of doing business.
My local NJ coin dealer usually asks premiums about $5 over spot. He’s consolidating and closed one of his three locations to save money. Before the government-induced panic struck I was buying small items from him at reasonable prices, but now I’m sitting tight.
Be patient, that coiled spring is gonna unwind hard for PMs when the QE aftereffects kick in.
APMEX is big enough to not play that game. Sure, they have a margin, but it doesn’t go UP when the spot comes down….and sometimes they even have sales in which they cut their up-charge. I mean gold is gold and silver is silver. If your heritage is a foreign country with older coins, consider buying some of those for the novelty. While everyone is buying Eagles and Maple Leafs, those might be more available.
Texas Precious Metals is buying 1 oz pre-2020 American Gold Eagles at spot+$15. They are selling them for spot+$85. The sales side is only in theory. They currently list all 1 oz AMG as out of stock.
What this shows is that it’s easy when you have the infinite money printing machine to drive down the price of paper gold and paper silver, but the physical side isn’t falling for the tricks and is a closer track of actual supply and demand. Fed has already unleashed $trillions and they are talking about sending $thousands per family. With lack of goods on the store shelves, how could the result be anything but inflationary?
Glad I bought in 99…..Y2K scare.