What investment asset class has performed the best YTD in 2020, that also did the best in August? If you said Silver, you’d be correct. Outpacing even the tech-heavy Nasdaq, Silver bullion was up 15.4% in August, and is up 57.6% so far in 2020. As we have been talking about recently for Gold, one of the biggest sponsors of the rise in Silver recently has been the Federal Reserve. With a stated goal to “increase inflation”, and a commitment to keep interest rates artificially low for an extended period, Gold and Silver have a bright future ahead. While these policy announcements have also been beneficial for stocks, Silver is in the unique position of being only halfway to it’s previous high. Meanwhile, some sectors of the stock market are at record highs and showing signs of an imminent pull back. Higher inflation, and devalued Dollars often go hand in hand.
Wall Street Hot for Silver
Why has Wall Street warmed up to Silver? Some of the same reasons that Gold has caught the attention of major investors such as Warren Buffett, are also driving Silver higher in the current environment. While Gold has more room to run as a monetary metal and a store of value, Silver has additional demand as an important industrial metal. Many of today’s technological advancements and products require Silver to work efficiently. Paper silver investment products that have an implicit Silver backing have also grown in popularity recently, which has helped those of us who own Silver metal directly. Silver is such a small part of the investment landscape in terms of the amount of Silver available, that even small increases in the level of investment interest can cause large price increases in Silver. Currently there is huge demand on Wall Street for exposure to Silver, which I believe will increase from here.
What does this mean for those of us who already own Silver, and those who want to own more? It means brighter days are ahead, and that the Silver train is just now leaving the station. While many of us that bought more Silver at $14 have seen it double in price, we could easily see it double again within 2 years. When we think about the previous high Dollar price of Silver being in the $50 range, the current price near $28 has plenty of upside, and is nowhere near the bubble territory seen in bonds and tech stocks. This is why some of the sharpest minds on Wall Street are turning to Silver as well as Gold, as a place to both protect past profits and find new ones. We have the Federal Reserve to thank, for helping our Silver holdings in similar fashion to how they have helped our Gold holdings as of late.
Modern Portfolios Include Precious Metals
The same policies that have made bonds a less attractive place to be, have helped set Gold and Silver on fire. Besides the big names on Wall Street that we have discussed in the last few articles, there are also blue-collar pension plans that are changing investment allocations to include Gold and Silver. Instead of a traditional 60-40 portfolio of stocks and bonds, some are moving towards a 55-35-10 portfolio, which includes a new category for precious metals. Bonds are not able to provide sufficient returns in this low-interest environment, and stocks have more perceived risk than many are willing to accept. This is helping move Gold and Silver out of the investment shadows, and into the mainstream investment class. We have certainly been here before, but it is rewarding to see it happening again.
Whether the new FED policies to increase inflation will be successful in helping the economy or not remains a mystery. None of us, including the FED itself, have ever been here before. Some things however, we already know. We know, for instance, that how the government measures inflation is far different from how they used to measure it. It is also different from how average consumers experience “inflation” in their daily lives. While inflation is often quoted at a rate that removes “volatile food and energy costs”, American citizens don’t get to remove volatile food and energy costs from their required expenditures. For a more realistic view of what inflation looks like for the average citizen and how to protect yourself, consider this brief discussion.
Something else we know is that the reason the Federal Reserve has become so accommodative with money creation and lower interest rates, is because the economy is in much worse shape than the stock market currently indicates. Many companies have already declared bankruptcy, while others have announced plans to do so. Thousands of small businesses have closed forever this year in the wake of the Covid 19 pandemic, and the commercial real estate market is reeling from less demand for office buildings. Together, this implies lower earnings ahead for many corporations, lower stock prices, and less ability to service debts such as bank loans and bond interest. Hence, the new interest in Gold and Silver from many who formally made their fortunes in stocks, bonds, and real estate. The instability we currently see in these markets and in society itself is leading wise investors to the relative safety of Gold and Silver.
“Buy American” Trend Lifting Gold and Silver
Another reason the Federal Reserve is flooding our financial system with currency, is to make up for decreased demand for US treasury securities from abroad. While the funding needs of the US government have continued to grow, the international commerce previously used to meet those funding needs has dried up due to trade disputes and the global pandemic. There is a new call for manufacturing to move back to the United States, as people and corporations are urged to “build and buy” here in America. While such a transition is certainly needed, it will likely take several years before it comes to fruition. Meanwhile, goods and supplies coming in from abroad are becoming more scarce while the supply of domestic Dollars (stimulus payments etc) available to purchase these items has increased.
More Dollars available to purchase fewer items, leads to higher prices for those items in Dollar terms. This is the stated goal of the Federal Reserve, and it appears to be working. But how does this benefit the owner of Gold or Silver, when few places will accept Gold or Silver as payment? Gold and Silver are not normally used as currency, in the current monetary system. While they are often useful in bartering situations, they are more often useful as a store of value that can be converted back into currency at a later date. With the Dollar decreasing in value over time, Gold and Silver can help preserve your purchasing power as they move higher in Dollar terms in the days ahead.