Everyone loves a sale on popular items. As of the time of this writing (8/11/20), Gold is on sale at a 9% discount from last week, with Silver at a 19% discount. But only if you act quickly. Even at these discounted rates, Gold is up 24% YTD, and Silver up 34% YTD. This puts precious metals ahead of the S&P 500 Index (+3% YTD), the Dow Jones Industrial Average (-3% YTD), and even the growth oriented Nasdaq Index (+20% YTD). Both Gold and Silver have surpassed our price projections for 2020 by the middle of August, and appear to be poised to move higher. Rather than a rout, the currently discounted prices offer a welcomed opportunity to enter the metals sphere or add to your precious metals holdings.
Why the Precious Metals Pullback?
One of the reasons for the recent pullback in Gold and Silver prices is the CME (Chicago Mercantile Exchange) has raised the margin for the futures contracts for Gold and Silver, by 6.9% and 15.2% respectively. This put pressure on traders in the metals sphere to liquidate positions to raise cash to cover their leveraged positions in Gold and Silver contracts. Similarly, record amounts of electronic and paper Gold and Silver were traded today - equal to approximately 2-years worth of Silver production worldwide. And still, Silver remains a top performer for 2020. The powers that be are trying to prop up the equity and bond markets, while deflating Gold and Silver, to no avail. There is a reason Gold was declared a Tier-1 asset for Central Banks, and worthy of their (and our) consideration. Central Banks have purchased more Gold in the last 7 years, than they have in the previous 40 years combined. They appear to know something the rest of us should as well.
While we will likely continue to see volatility with Gold, Silver, stocks, bonds, and real estate, the natural inclination of these assets is to move in different directions. Unfortunately, there is immense pressure building in the economy in a downward direction. Whether we agree with each local government’s response to the Covid-19 pandemic or not, the results have been nearly catastrophic economically in some regions. Imbalances are developing which are hard for policy makers to understand or manipulate. While property values and rental rates are trending lower in metropolitan areas, millions still are not paying their rent. At the same time, food prices have been climbing steadily since the pandemic began, with many Americans visiting food pantries for the first time ever. This means that we are seeing inflation and deflation at the same time, which is hard for policy makers to address.
Struggling Business Environment
Record numbers of small businesses have been permanently closed, while bankruptcy among large businesses are at a 10-year high. These are not signs of a healthy or recovering economy. We discussed last year the probability of a recession in 2020, even before the pandemic had materialized. The pandemic merely sped up the journey to recession, and made it more pronounced. While government interjections of cash probably saved 30-35 million jobs, there are indications that the effects of the recession may extend into late 2020 or 2021, according to the CEO of the nation’s largest bank.
Part of what makes this recession unique and has helped propel Gold and Silver higher than we originally projected, is the unusual amount of cash that has been created and distributed to the American people. While most recessions see average incomes decline, this recession has seen annualized incomes rise by over 30% so far, due mostly to ballooning government transfer payments and debt. While the payments have been unevenly distributed, they have been extended beyond the normal banking bailouts that were the hallmark of previous financial emergencies. This time it seems, the government has been bailing out individuals and small businesses as well.
Gold & Silver Price Projections
All this necessitates an update to our projections for Gold and Silver moving forward. As we finish this article early morning 8/12/20, Gold and Silver are already beginning to propel higher once again. While it remains likely we will see significant down days from time to time, we believe the trend continues to be in a northerly direction. We could reasonably see Gold in the $2300-$2400 range before year end, and Silver near $35 as well. As discussed previously, there is currently a disconnect between the “spot” price of precious metals, and the actual price paid to secure the metal itself. The premiums for Silver in particular are significant. While these projections represent an 18% rise for Gold and 33% rise for Silver between now and December 2020, we believe they are reasonable expectations given the current economic climate and downward pressure on the Dollar.
What alternatives do we really have? The bond and equity markets are precariously lofty, due primarily to infusions of Federal Reserve cash. Many of the bonds and ETF’s recently purchased by the Fed represent corporations on the verge of bankruptcy, in a category known as “junk bonds”. The sector of the stock market showing the best performance this year (Nasdaq) is due to an outsized performance of only a handful of technology companies, with many stocks in the index already in decline. The commercial real estate sector continues to struggle as companies break or renegotiate leases. Many learned during the Covid-19 pandemic that employees can often be as productive working from home, thereby lessening the need to rent office space in expensive districts.
Newly Minted Millionaires
Despite the efforts of bullion banks and hedge funds to contain the rise of Gold and Silver, precious metals continue to be stellar performers with plenty of upside. We recommend taking advantage of occasional dips to invest in the upward trend ongoing in Gold and Silver. A few years ago we added precious metals to our local financial planning practice, and began informing our community of the need to diversify into alternative assets such as Gold and Silver. The performance of the metals over the last couple of years has helped some of our clients become “millionaires”, for the first time in their lives. While that was not a stated or promised goal, the protection of future purchasing power certainly was. Precious metals continue to provide purchasing power protection with limited downside for relatively low cost, when we consider the alternatives.