With the recent rise in precious metals prices to record levels in Dollar terms (in the case of Gold), many are wondering what is ahead. Specifically, Gold’s previous record spot price in Dollar terms was reached on September 6, 2011, at $1,921.41. As you have likely heard, Gold went higher in nominal terms this week. It is currently (at the time of this writing) at a spot price of $1,954.89, and has been fluctuating daily in an overall upward trend the last few years. Some are calling this a speculative top, implying a correction is overdue. While decisions to sell are entirely personal and based upon individual circumstances, there are several conditions that support a continued rise in precious metals. Mild corrections are normal, even in a climbing market. It is my opinion that we are not likely seeing a peak now, but rather a period with new types of momentum, gathering steam for the years ahead.
Inflation Adjusted Prices Indicate Room to Run
Using the current government-defined method of calculating inflation, the previous record Gold price of $1,921.41 in 2011, would need to be $2,252.74 in 2020 adjusted for inflation. In other words, the value of the Dollar has declined by 1.78% per year since 2011, meaning that Gold would need to reach $2,252.75 to set a new inflation-adjusted record high spot price. As we have written about previously, there continues to be a larger than normal difference between “spot” price, and the price to obtain actual metal. Currently (at 7:51 AM on 7/29/20), the price to sell back a 1oz Gold Eagle (in good condition) is 1% higher than the spot price of $1,954.89. This speaks to the continued demand for physical metal, regardless of the level of the spot price.
Silver also reached a high point in 2011 of $49.80, in the New York Spot Market. Using the same inflation metric of 1.78%, the price would need to be $58.39 in 2020, adjusted for inflation. For Silver, the difference between spot price and metal acquisition price is even more pronounced than it is for Gold, on a percentage basis. With the current “spot” price of Silver at $23.33, you can currently sell back a 1 oz Silver Eagle for 6% more than spot. The Inflation Calculator graphic below was provided by DollarTimes.com.
But what about when we consider the rate of inflation experienced by the average person living in the USA? As discussed here, the Chapwood Index is perhaps a more representative way to consider the effects of inflation on the average American family. Using a 7% rate of inflation as indicated by the Chapwood Index, the previous high Gold price of $1,921.41 from 2011 would need to be $3,601.06 in 2020, before we get concerned about Gold being near a “speculative bubble”. Viewed this way, $2,000 Gold is much closer to previous support levels than it is to new heights, in relative Dollar terms. For Silver, the potential for future gains is even greater than for Gold. $49.80 Silver in 2011 would equal nearly $100 ($93.33) in 2020, adjusted for inflation using the Chapwood Index. By this metric, Silver has a longer way to go before attaining bubble status.
Support is Building
A couple of years ago, “support” was around $1,200 an ounce for Gold, and $15 for Silver. Support for our purposes often means the price at which Gold or Silver can be profitably mined by most miners, and the lowest price physical metal is available to investors. Prices below support levels are considered extreme bargains that don’t usually linger long. Today a case could be made for Gold support at $1500-$1700, and Silver at $16-$18, due to supply constraints and labor issues related to COVID-19. Our traditional view of “support” needs some modification, in light of current events with the restrictions on Gold and Silver production. When we look at the prices needed for Gold and Silver to equal their previous highs in real inflation adjusted terms, it gives us the proper perspective. Even with Gold near a new high in nominal $Dollar terms ($1,954.89), it is still closer to it’s base support level, than it is to $3,601.06 (inflation-adjusted previous high).
The Power of a Deciling Dollar
There are many reasons why Gold and Silver will move higher in Dollar terms. One of the main reasons has to do with the Dollar itself moving lower. The stage has been set for further declines in the value of the Dollar. Whether it be because of lower interest rates, increased levels of debt, increased levels of currency creation, or less worldwide demand for Dollars, the effects are the same. Lower Dollars, higher Gold and Silver. As the chart illustrates, the Dollar is at a 2-year low level, and headed lower. This may be great for domestic manufacturers exporting goods overseas, but can be a challenge for US Consumers purchasing goods manufactured elsewhere. A falling Dollar means higher prices at the grocery store, the clothing store, and the gas pump, in Dollar terms. It also means higher prices for Gold and Silver.
Most people did not purchase Gold and Silver at their previous peaks in 2011. While impossible to time the exact top or bottom for precious metals or any other asset, the recognized trend can be our friend. Bottoms don’t last long in the metals, because demand soon outstrips available metal supplies. Tops don’t last long either, but for a different reason. There are often fewer willing to sell into a precious metals rally, than there are willing to purchase during a precious metals trough. For this reason, much of the metals owned today are held by people and organizations that purchased them near support levels. While you may likely have unsold gains in your current stack of precious metals, there are many folks out there looking for an opportunity today such as precious metals.
Wall Street Newcomers
Some of the largest investment banks today are now recommending to their clients to begin purchasing precious metals, such as Goldman Sachs. Bank of America has told their clients to expect $3,000 Gold from here. We could list many other similar stories and names, but you get the idea. While some speak only of the current highs in nominal $Dollar terms, those who manage $Trillions of this nation’s wealth are just now beginning to promote the asset class that we have been writing to you about for several years. They expect great opportunities in the future for those entering the precious metals markets today. For those of you who entered in the last few years, the continuing opportunities are even greater.