Gold’s (And Silver’s!) Time Has Arrived

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by Adam Taggart, Peak Prosperity:

Are you well-positioned for it?

Peak Prosperity publishes ALERTs very rarely, and only when my co-founder Chris Martenson and I are concerned enough to take personal action.

On May 8, I released an ALERT informing our premium subscribers that, concerned by the ramifications of the global central banks’ response to the coronavirus,  I was moving a material percentage of my portfolio’s cash reserves into precious metals, notably into silver as the gold/silver ratio then of 110:1 remained near a record high.

Since the issuance of that ALERT, gold has broken above it’s previous all-time high price, moving up 14%, from $1,717/oz to $1,950/oz.

And silver has performed strikingly better: rising over 55% from $15.75/oz to $24.50/oz. As anticipated, the gold/silver ratio has fallen nearly 30% to 80:1.

However, much more important than this near-term pop in the precious metals is their outlook going forward.

We’ve been writing for years here at PeakProsperity.com about gold and silver’s extreme undervaluation given the risks we’re facing in our monetary and financial systems. And yet, for years, the metals languished as capital flowed eagerly into “paper wealth”, fueled by central bank liquidity, record low interest rates, and a rampant increase in debt and deficits.

Back in 2017, Grant Williams famously and correctly nailed the neglected state of the precious metals in his prescient work, Nobody Cares.

A year ago, as gold managed to break above it’s longtime ceiling of $1,350/oz, we began loudly alerting our readers that the years of neglect were finally over. That, indeed, investors were beginning to “care” again.

Fast forward to where we are today, a pandemic and +$5 trillion in global central bank liquidity later, and now it’s seeming that suddenly Everybody Cares about the precious metals.

Gold’s — and silver’s — time has arrived. Precious metals are finally back in a secular bull market.

Key questions to address at this moment are:

  • How much further are prices likely to move from here?
  • What are the odds of a price correction in the near term, given how far and how fast prices have moved recently?
  • How well-positioned are you to take advantage of this bull market in the metals?

Fundamentals: Higher Prices To Come

Money Printing/Inflation Concerns

More currency = inflation. Milton Friedman famously and correctly stated: “Inflation is always and everywhere a monetary act”.

Well, since March 1, the US Congress has already approved nearly $3 trillion in legislation (with another $1-3 trillion on the way, depending on which political party’s plan gets passed). And the Federal Reserve has already expanded its balance sheet by over $2.5 trillion, with forecasts of another $2+ trillion being added later this year:

Projected 2020 Federal Reserve balance sheet

And that’s just the US. The rest of the world is following suit:

Global monetary policy chart

Billionaire seasoned investors like Paul SingerRay Dalio, and Paul Tudor Jones are now raising loud concerns about the diminishment in purchasing power all of these new freshly-printed trillions will have on national fiat currencies. When big dogs like these, who have feasted on and benefitted magnificently by the status quo over the past decade, fret about about the central banks “printing too much”, you know it’s time to worry.

TINA (There Is No Alternative)

In today’s environment of zero-to-negative interest rates, big financial institutions and pension funds aren’t able to get a meaningful return on the bonds the hold in their portfolios:
Negative yields chart

The absence of yield is forcing portfolio managers to diversify into gold. While gold also has no yield, it offers a hedge against today’s extreme valuations in equity and bond prices, as well as powerful purchasing power protection:

Gold’s Record Rally Fuelled by Unlikely Buyers (Bloomberg)

July 29, 2020

“Safe government bonds have always played a very important role as a portfolio diversifier and will continue to be, but we have to recognize that their potency is diminishing due to the low absolute level of yields,” said Geraldine Sundstrom, who focuses on asset allocation strategies for Pacific Investment Management Co. in London.

“We need to diversify our diversifier and look for safe haven beyond government bonds. Given Pimco’s view that rates will be kept very low for years to come causing depressed levels of real yield, gold feels like an appropriate diversifier,” she said.

Pimco, which manages $1.9 trillion in assets, is far from alone. In a May note, Citigroup Inc. cited “new non-traditional investors in bullion, including insurance companies and pension funds” as part of the fuel behind the rally.

As we’ve been educating readers about for year, it’s very important to note that gold  — and especially silver — is extremely underowned as an asset class even though the investable markets for the metals are much smaller than many realize. It will only take a small percentage of the world’s capital to shift from stocks and bonds into the metals to send their prices soaring much higher:

“There has definitely been more widespread institutional ownership of gold than in previous rallies,” says John Reade, chief market strategist at the World Gold Council. “Gold’s in the conversation now with much more investors than it was 10 or 20 years ago.”

Even so, gold ownership among the professional class is viewed to be low. The total value of investor positions in gold futures and exchange-traded funds is equivalent to just 0.6% of the $40 trillion in global funds, according to UBS Group AG strategist Joni Teves. That position could easily double without the allocation looking extreme, she wrote in a note.

Reade, who previously worked at hedge fund Paulson & Co., reckons no more than one in five institutional investors has an allocation to gold.

The world’s privately-held gold bullion amounts to $2.5 trillion, with much of it tightly held by investors not looking to sell anytime soon. If just a few of the large institutional funds not currently invested in gold decide to start accumulating, gold will quickly become known as “unaffordium” (hat tip to GoldSilver.com’s Mike Maloney).

Silver is much crazier. Since most of the silver ever mined has either been commercially consumed or used for jewelry/religious purposes, private above ground stores are tiny: about $48 billion (that’s with a “b”, not a “tr”). Even if we add to that all of the $17 billion or so in annual silver expected to be mined this year, that’s only $65 billion.

It would take only a few billionaires taking a stake, or the tiniest amount of demand shifting from the $20 trillion US Treasury market into silver, to convert the metal into “unobtanium” (again, hat tip to Mike).

Technical Analysis: A Short-Term Pullback Likely

With such a large advance happening so fast, a short-term pullback in the prices of gold and silver are probable; even welcome.

A 10-15% correction would keep the price action from becoming overheated and turning into a blow-off top, which typically gives up most of its prior gains. Also, such a modest correction would give investors opportunity to enter the market/add to their positions at lower prices.

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