As I often say, there’s nothing like zooming out to get a wider perspective. It’s often too easy to just focus on daily, monthly, or even yearly data for a particular asset to understand what might come next. And no matter how you slice it, silver is exceedingly cheap. This chart shows the silver price over the last 50 years.
We can clearly see that in that time frame, silver has twice flirted with the $50 level, both in 1980 and 2011. And despite 41 years having passed since silver’s first peak at $50 in 1980, silver is still currently 50% below that all-time nominal high. It’s incredible to think that after so long and so much fiat money printing that silver is still so cheap.
Now let’s look at the silver price adjusted for inflation. In my view, this is more realistic, because naturally, prices for practically everything rise over time as input costs rise.
As you can see, the $125 peak shown in this chart is nearly 5 times the current price of silver near $25. Even the 2011 $50 peak, adjusted for inflation is $60 today, and that’s still 2.4 times higher than the current silver
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Silver is so unique, I like to call it the ‘Irreplaceable Metal’. In many ways, that’s true because it’s more or less equal parts money and industrial metal, and because trying to substitute with other metals in many of its industrial applications is either impossible, or nearly so.
Since this letter is all about silver, it’s worth taking the time to better understand silver’s many demand drivers.
Silver is a multi-purpose metal, with new applications being developed on a regular basis.
Consider that silver is the best conductor of heat and electricity. That makes it highly prized in electronic components like wiring, switches and printed circuit boards. As one of the most reflective substances, silver is crucial to solar panels. Since it’s both malleable and ductile, silver makes for beautiful jewelry and silverware. These characteristics also make it ideal for micro-electronics like tablets and smartphones, since it can be shaped and pressed into minute spaces without the risk of breaking.
In many cases, gold can serve the same purpose as silver. The advantage that silver has is its price. Of course, it’s more costly than say copper or nickel. Often, that doesn’t matter, simply because they don’t have the
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At the end of June a new set of regulations, known as Basel 3, came into effect in Europe. In January the same rules will apply in England. These rules are supposed to strengthen requirements around leverage and lending for banks.
There are three parts of Basel 3 that matter to gold.
- The Available Stable Funding (ASF) factor determines how much each kind of liability can contribute as funding on a bank’s balance sheet. The most stable kinds of liabilities, like Tier I bank equity, are given a 100% factor; the least stable are given 0%. Basel 3 gives unallocated gold (paper gold) a 0% ASF, which means it has to be backed by assets.
- The Required Stable Funding (RSF) applies to bank assets. The key Basel III change is that the RSF factor for unallocated gold positions has been reduced from 100% to 85%.
- The Net Stable Funding Requirement (NSFR) is the ASF divided by the RSF and must be at least 100% at all times. This is just the math saying banks need assets to back their liabilities.
A paper gold holding is both an asset and a liability. It’s an asset
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This is gold over the last 3 days. I’m including the chart because it feels like today’s price action captures what it’s been like to be a gold investor so far this summer.
OK, so perhaps that’s a touch dramatic. Gold hasn’t always given up its gains within a few hours. But it hasn’t exactly done a great job of holding onto gains either.
This chart shows gold over the last year. No one reading this letter needs to be reminded of the long slow slide from August 2020 through March 2021, though this chart does remind that there were moments in that period that gave us hope…for a little while.
Of course, charts are all about context. If I showed only the last six months, gold would appear bullish. Certainly, the gains from March through May were lovely, even if June gave half of the gained ground back. Now that it’s over, we can see that July was a more stable month of sideways-to-up action.
Works for me, especially because August through October are the best months of the year for the yellow metal. Entering that period from a stable and slightly positive footing helps.
I’m speaking
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There’s always a dance between gold and inflation.
As an inflation hedge, gold should do well in inflationary environments. The rationale is two-sided. On one side, investors turn to gold to protect their wealth when inflation is eroding the value of bank accounts and bonds. That’s the classic inflation hedge/safe haven argument. On the other side, gold faces less competition as a safe haven when inflation is running because bonds perform poorly, with both capital and yield getting eroded.
That all says gold should go when inflation rises. But nothing is ever simple.
The complication here is that central banks usually raise interest rates to combat inflation. And higher rates reduce gold’s appeal from both sides: higher rates boost bond yields, helping the safe haven competition, and (2) higher rates cap the inflation that’s eroding bank accounts and keeping real yields negative (at least, that’s what rate hikes are supposed to do).
So how gold reacts to inflation depends on the context. New inflation in a low-rate environment probably supports the yellow metal while slowing inflation in a high-and-rising rate environment probably doesn’t. The Fed controls the wide swath in between through its hold on interest rates.
That
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I connected the right dots last week but got the direction wrong.
On the heels of weak ADP jobs numbers out last week on Wednesday, I guessed Friday’s official July jobs numbers would also surprise to the downside. And I thought that would be good for gold because weak job numbers would remove almost all impetus for raising interest rates.
The converse I also said would be true: that strong jobs numbers would be bad for gold because they would support the idea of tightening. Unfortunately, that’s what happened. On Friday we learned that the US economy added 943,000 jobs in July, pushing the unemployment rate down to 5.4%. Analysts had expected 845,000 new jobs and unemployment at 5.7%.
In response, gold dropped almost US$40 per oz.
The drop I’m discussing happened on August 6 and is circled in yellow. It pulled the yellow metal from US$1800 per oz. down to US$1760, a level that has provided support since the spring (marked in orange below).
For gold to be sitting just on that support level was apparently too tempting for a group of gold bears out there who decided to attack. On Sunday night, someone dumped 24,000 gold contracts
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Transitory. That’s something we’ve been hearing a lot lately.
At its latest FOMC meeting the Fed naturally decided to keep the fed funds rate target at 0.25%.
It also decided not to mess with the $120 billion monthly bond buying program to help “support the flow of credit to households and businesses.” Par for the course.
Meanwhile inflation numbers of the previous four months have been anything but typical. The Fed’s favored Personal Consumption Expenditures Price Index has soared: in February it was 1.6%, March 2.4%, April 3.6% and in May 3.9%.
But headline CPI recently came in at 5%, reaching a 10-year high.
These recent months of elevated and increasing prices may have been exacerbated by price plunges due to the COVID-19 pandemic. But those were for a few months, and their effects should already have dissipated. And yet, they haven’t.
In fact core inflation, which excludes volatile energy and food prices, recently touched 3.8%, its highest in 30 years.
The Fed is looking increasingly wrong in its assessment that the inflation numbers we’ve been seeing are transitory. That means investors would do well to seek shelter from inflation-protection assets. And as I’ll show, for multiple reasons, chief
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One district in the world is attracting the lion’s share of gold exploration attention these days and it’s Newfoundland.
It started with a famous Yukon prospector called Shawn Ryan and a junior explorer called New Found Gold (TSXV: NFG). Ryan is famous for sparking the modern Yukon gold rush. He staked the property where Kaminak Gold outlined a few million ounces; he optioned projects to dozens of explore-co’s based on his soil sampling grids and novel early exploration approaches, including being a pioneer in drone-based LIDAR imaging and using small, track-mounted drill rigs to get top-of-bedrock samples before committing to a full drill program.
That all happened in the last gold bull market. Even as explorers continued to flock to Yukon, though, Ryan’s attention started to shift. A combination of big picture geologic thinking, a near dearth of exploration, a history of small, high-grade mines, and a population that was generally resource friendly made him wonder about the gold potential in Newfoundland.
I’m not suggesting Ryan was the first. Marathon Gold has been advancing the Valentine Gold project in NFLD for a decade; Valentine now hosts almost 5 million oz. gold and is on its way
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Within any bull market, there are surges and setbacks. Metals take turns rising and declining. Stocks take turns running and correcting.
Overall, it means that investors need to move with the ebb and flow to maximize entries and exits.
It’s harder than it sounds. When things are rising, it’s natural to want to jump in. When a stock or a metal steps back after a run, it’s easy to think you missed your chance and it’s now all over.
But if you believe we are in a metals bull market, then buying the dip is one of the best approaches.
Take copper right now. It ran hard from February to March then stepped back. Then it ran hard again from mid-April to mid-May.
Capstone Mining, a mid-tier copper producer, is a good example of how metal price moves like this play out in stocks. Here’s Capstone’s 6-month chart.
The larger gains by CS compared to copper is straight leverage. Capstone produces copper. Its cost to produce are fairly stable, especially over a short timeframe like this. When the price it gets for its product rises significantly against set costs, all those gains become
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Despite its recent selloff, Bitcoin remains the king of crypto currencies.
Its market recently exceeded $1 trillion. That’s a long way from its humble beginnings shortly after the 2008-2009 financial crisis.
Bitcoin will keep facing challenges as some governments disparage and regulate it, while others try bans of one form or another.
I doubt that will meet with much success. Big name money managers and high-profile tech entrepreneurs have gotten on board, many reversing their earlier doubts.
Bitcoin is decentralized, the blockchain is verified by over 100,000 independent nodes globally, and it has a hard limit supply of 21 million coins. Other cryptos and central banks may want in on this sector, but there will only ever be one Bitcoin.
Still, I think precious metals-backed cryptos could become serious contenders in the digital currency revolution, as the world looks for the security of safe havens with the convenience of crypto.
Crypto De-Fi Revolution
Bitcoin has come a long way. Today, it’s gained not only the acceptance of big-name investors like Paul Tudor Jones, Ray Dalio and Elon Musk, it’s been integrated by a number of well-established payment systems. MassMutual, a 170-year old insurance behemoth, bought $100 million worth of
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