As we look at how gold and silver have performed in the past, it gives us some idea about how they may perform in the days ahead. One of the best times to invest in a proven asset is when it has recently underperformed. Adding favorable conditions to the mix makes it an even better time for the metals to outperform. Today, we have this dual setup emerging for the metals, with recent pullbacks acting like a coiled spring and current economic conditions acting as additional springs to propel gold and silver further than they have been before. I believe we will see gold and silver reach new highs in the current bull market, and some of that distance will be traveled this year.
The Coiled Spring for Precious Metals
Depending on what time of day you price the metals, gold was down -3.7% and silver was -11.8% lower from January 1 to December 31, 2021. Considering the average annual performance of gold (+9.6%) and silver (+9.9%) since the year 2000, both of the metals clearly have some catching up to do. Our friends at “InGoldWeTrust.report” have put together some informative graphics and summaries to consider for 2022, which we will share in today’s article. InGoldWeTrust projects that by 2030, gold should be priced in the range of $4,851, with a 40% probability of being higher. Using this number of $4,851 as a guide implies an annual gain of 12.15% per year for gold. Extrapolating these gains to silver implies 12.53% per annum, based on previous performance and the current gold-to-silver ratio. But the experience with silver is usually more volatile than that of gold.
Silver More Volatile/More Explosive
Instead of a smooth, steady climb with silver, we will likely see more drastic moves from year to year, with the gold-to-silver ratio dropping as silver rises. Applying the 2030 gold projections to silver implies a silver price of $63.16 in 2030, at the current gold-to-silver ratio. But as silver bounds ahead and this ratio drops (as often happens when silver explodes higher), $80-$125 silver is entirely possible. As the graphic created by US Global Investors indicates, gold is 4.5x more likely to have a significant move higher (25%+), than a significant move lower (-25%-). Since gold and silver often travel together, it would be safe to make a similar case for silver, albeit with the impact more extreme in both directions.
Looking at previous bull markets for gold going back to the closure of the gold trading window in 1971, reveals that the average performance of gold during a bull market is a gain of over 307%. With the current bull market performance of 69%, there is much room for this bull market to gain further. In this regard, recent history is certainly on our side. The current bull market seems to be tracking the bull market of the 1970’s fairly closely. If it continues to do so, the next 3 years should be some of the best of the cycle for gold. Of course, past performance does not necessarily indicate future results, but historical patterns are often useful in determining trends.
Gold vs. Common Items
Another way to view the performance of gold and silver is to look at the price performance of other common assets over similar periods. A graphic available on pinterest.com shows the average price of common items in 1973. A new house cost $32,500, median income was $12,900/year, and postage stamps were $0.08 to mail a letter. In 1973, you could purchase a new home with 325 ounces of gold. The median income was equal to 129 ounces of gold, and an ounce of gold would purchase 1,250 postage stamps. As of October 2021, a new home cost $407,000, or an increase of 1253% since 1973. The median family income for 2021 was $79,900, an increase of 619% since 1973. And today a postage stamp costs $0.58, or 725% more than in 1973. Gold has outperformed them all, rising 1,833% over the same time period.
Besides the looming recession discussed briefly in this week’s Metal Minutes, inflation is also evident throughout the economy. These two conditions combine to create “stagflation”, which traditionally benefits gold and silver like few other assets. While I do not desire to see the difficulty experienced by many Americans during periods of stagflation, it is prudent to prepare as this scenario develops. Owning gold and silver is a proven way to protect our finances during times like these.
The Power of Negative Interest Rates
As if we needed an additional reason to own precious metals, negative interest rates provide a powerful catalyst to help the metals outperform. There is no greater interest rate environment to support gold and silver prices, than the type of negative real interest rates we are seeing today. Similarly to the post-WWII period, we find ourselves as a nation (and largely the world) in a situation where we owe more than we can reasonably pay back. Suppressing interest rates below the rate of inflation offers a way of escape and temporary reprieve, for over-indebted nations worldwide. While this environment can wreak havoc on the savings of millions of Americans, owning gold and silver offers us a shelter from the storm and helps preserve purchasing power for the years ahead.
Strength in Precious Metals Diversity
There are many ways to own precious metals, and it is important to have a diversified metals portfolio. Gold and silver bullion are the most commonly owned metals but should not be the only holdings. It is also essential to own historical coins and investment-grade coins. Often rare and investment grade coins continue to climb in value even during periods that bullion languishes. It is also important to consider platinum and palladium, to help round out your portfolio. I personally prefer platinum at current price levels, and believe that platinum will move towards parity with gold over the next few years. You might recall that platinum used to exceed the price of gold, and may someday again. Owning platinum at current levels provides an opportunity for outsized returns in the years ahead. All these opportunities and more are available from our friends at the United States Gold Bureau; I recommend giving them a call (800) 775-3504.
About the Author: Bill Stack
Financial Analyst of 29 years and Gulf War Veteran, Bill has been helping families nationwide keep their money safe and growing since 1993. As a Certified Financial Fiduciary® and a RICP®, Bill specializes in helping protect your assets with growth potential.