Emerging inflation supports rising gold and silver prices

Market experts believe gold and silver could be the main store of value as a new period of inflation approaches.

When, on the first day of trading in New York for 2021, gold initially climbed US $ 50 per ounce (AU $ 65 / oz) above its previous close, opinions were divided as to why. its shattering (and that of money).

Silver was up US $ 0.87 (AU $ 1.10) when Comex opened on Monday, also a strong jump.

The decoupling of gold and stocks was an opinion. Fear of another re-inflation. General concern about the global economy and a stock market crash, another.

Jeremy Grantham, co-founder of Boston-based investment firm GMO and almost always described as a “legendary investor,” started the New Year with a warning.

“The long, long bull market since 2009 has finally become an epic bubble in its own right,” he wrote.

“With extreme overvaluation, explosive price increases, frenzied issuance and hysterical behavior by speculative investors, I think this event will be recorded as one of the great bubbles in financial history, just like the sea bubble. of the South, 1929 and 2000. “

Add to that Alan Greenspan’s oft-quoted remark – “In the absence of the gold standard, there is no way to protect savings from confiscation by inflation” – and you have an answer. for the new peak in gold and silver.

And inflation or reflation are now words on many lips.

What is remarkable is that this rebound of the two precious metals comes just weeks after they were knocked out and the referee was on the verge of counting “eight and more” according to some commentators.

We will come back to this, but a small embezzlement of money.

Silver is expected to hit US $ 40 / oz in 2021

At the same time, the gold / silver ratio has been in the spotlight.

As of this writing, the ratio still stubbornly hangs above 1:70.

However, this week The Money Manifesto Author David Morgan, who also runs a widely read online newsletter, sees silver hitting US $ 40 / oz (A $ 51 / oz) this year. It is not the return to US $ 50 / oz ($ 65 A / oz) that silver insects crave, but if it is reached, it is likely to rebalance the relationship with gold in a broad way. measure.

A price of US $ 40 / oz would mean a 45% gain – and no one is suggesting gold will see that kind of action this year.

Mr Morgan says it will be the demand for silver from solar panel makers, combined with its safe haven status as a precious metal, that will do the trick.

“The amount of money that was bought by the funds [was] 300 million ounces of physical silver. It is totally unheard of. We’ve never had this kind of demand for investing in silver in decades, ”he said.

Still, 1:70 is much better than the 1: 128 ratio that occurred in the silver market last year.

Plus, the ratio is at its lowest in several years, and remember, it pushed the lead above 1:90 in mid-2019.

Christopher Ecclestone, director and mining strategist of London-based Hallgarten & Co, predicts the ratio will continue to rebalance in favor of silver over the next two years.

“You are more likely to see silver in the US $ 30 range than we see gold above US $ 2,500 / oz over the next twelve months,” he said. week.

Inflation, gold’s best friend, lurks

The fear of the recovery is back.

Bond traders in New York were bullish in early 2021, hoping that the vaccine rollout would lead to a rapid economic recovery in the United States and that news service reporting companies would be seen as ” reflation game ”.

The team at the Liechtenstein investment firm Incrementum is convinced that we are on the verge of a wave of inflation.

They point out that Richard Nixon’s decoupling of the greenback from gold in 1971 had a huge unintended consequence.

He transformed the US economy from a metal-backed regime (like gold) to a debt-backed regime.

In just one month – June 2020 – the United States created new debt not too far from the level created in the republic’s first 200 years.

Between 1776 and 1976, the US government raised approximately $ 1,000 billion in total. In June of last year, debt exploded an additional $ 864 billion (A $ 1.11 trillion) in just 30 days.

Total credit market debt in the United States was US $ 1.6 trillion in 1980.

Last year it reached 80 trillion US dollars (103,200 billion Australian dollars).

The US budget deficit reached US $ 3.3 trillion (AU $ 4.2 trillion) last year, triple the amount added in 2019.

Gold considered the best portfolio investment

Incrementum, which publishes the widely read annual We believe in gold report, sees inflation sweeping away commodities, with other commodities following gold’s path through what he sees as the new inflationary period.

Even agricultural commodities are on the move, with increasing interest in soybean futures in particular.

Gold, Incrementum adds, will be the central and primary store of value during this cycle. The firm was also bullish on silver.

“Gold’s function as a hedge against inflation and extreme events could prove to be the best component of its portfolio in the years to come,” reads the recent alert report to the inflation of society.

“Gold’s resilience in the face of uncertainty is also attributable to the large number of historical events it has survived and the institutions it has survived.

“Gold has been a currency for thousands of years and is one of the oldest cultural institutions.”

Gold miners

But what about the gold mining industry as opposed to the metal they produce or explore?

This writer had been tracing the rise of gold since the early 2000s and two things were notable.

First, the stock prices of gold companies, especially producers, have for several years lagged behind the rise in the price of the metal.

Second, very few large investors or institutions were interested in the sector.

Indeed, several Australian brokers had gotten rid of their gold analysts at this time due to the gold malaise of the 1990s.

So there weren’t many analysts interested or knowledgeable about the industry – it was left to Angus Geddes of what was then a fledgling investment firm, Fat Prophets, to make an early call that the metal was in. route for US $ 1,000 / oz. .

Fortunately Australia is now better served in terms of gold research and institutions have been vendors ready to invest in the sector in 2020.

Now, too, it looks like gold stocks are setting the tone with good drilling results and findings setting individual stock prices ablaze.

Fund managers ‘misinformed’ about gold

But, apparently, the new interest in gold is not everywhere.

Well-known US gold scholar Doug Casey recently said that fund managers have been ‘misinformed’ about gold since college and gold stocks are not even on most investors’ radar. institutional.

“These gold mining companies are making money at this point, and ultimately [the fund managers are] will find out, and they will pile into it, ”he added.

Casey also pointed out that the total market capitalization of the gold mining industry is less than Apple’s cash reserve.

And it follows that the value of the major silver producers is even much less.

Limits on metal production – but not on fiat money

There are obstacles in getting your hands on all the gold and silver you want.

Gold production has increased only modestly in recent times, unlike iron ore, for example, where production can be increased to meet demand in a relatively short period of time.

There is no surplus of gold.

The supply of silver is highly dependent on the availability of by-products. This supply decreases when base metal miners shut down or reduce production when the price of their primary metal falls.

In contrast, central banks can create “wealth” at will.

As the Incrementum team points out, the cost of digital creation of € 100 is the same as the cost of creating € 10.

But there is a world of cost difference between mining 10 ounces and 100 ounces of gold or silver.

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