$8 Trillion Reasons to Own Gold & Silver

There are some new realities beginning to take shape in the wake of the latest implementation of the international banking regulations known as Basel III.  Besides what we have discussed on the topic previously, there are new revelations about what may have been going on behind the scenes, and how things may change moving forward.  Famed Mexican billionaire Hugo Salinas Price posited in a recent article that the reason Basel III was not delayed again is because Russia and China were going to release a gold-backed digital currency that would decimate the Western financial system.  In order to prevent this, the Bank of International Settlements (BIS) agreed to acquiesce to some demands of Russia and China regarding unallocated gold to nudge reserve currency status a few steps away from the dollar and towards gold.

In essence, even though the BIS may continue to exert broad influence on the gold price and the financial markets, the people influencing the BIS are not entirely the same as before.  If Hugo is right, the future price of gold will be more influenced by the central banks of China and Russia (who have increased influence with the BIS) and less by the traders on the LBMA or the COMEX.  That is, prices will be determined more from physical demand and supply issues, than from the manipulation of paper contracts.  There will also be a greater desire and/or willingness to allow the value of the dollar to decrease, in favor of a worldwide Central Bank Digital Currency trading system based on the value of a basket of currencies that includes gold.  Basel III was largely responsible for both the gradual increase in the price of physical gold over the last couple of years and for the smash down seen in the paper spot price over the last couple of weeks, as banks exited their short positions.

In the same way that Western banks have been exiting their positions of unallocated gold and silver, governments and central banks worldwide have been exiting their positions of dollar-based assets.  So much so that the Federal Reserve (the “Fed”) has had to purchase much of the debt being issued by the Treasury.  Instead of the Treasury auctioning off newly issued debt to buyers around the world, the Fed has stepped up to purchase much of it.  This is because there has not been sufficient demand for U.S. debt without higher interest rates.  But right now, the government cannot afford to pay higher interest rates because debt levels are so high.  Instead, the Fed steps in to make the purchases, thereby avoiding the interest rate catastrophe that would sink the American economy - at least for now.  The current balance sheet of the Federal Reserve is currently over $8 trillion - and it’s still growing.

But this borrowing from one pocket to place funds in another cannot continue for long without consequences.  One of the consequences seen lately is a hugely overblown stock market.  Notice in the chart below how the recent record-breaking performance of the NASDAQ has closely mirrored the rise of the Fed balance sheet.  In the past, slowdowns or reversals of debt purchases have resulted in a declining stock market.  There is nothing to indicate that future debt reductions would yield a different result.  While the markets may rise a bit further as the Fed works its way to $9 trillion and beyond, this will not likely happen in a straight line.  There may be hiccups along the way, with a few small drops before an eventual plunge of 40% to 50% off of current valuations.  Technical analysis graphics indicate that stocks may drop soon.

Meanwhile, the future looks bright for gold and silver.  With the combined efforts of the #SilverSqueeze movement and the closing of unallocated metals positions related to Basel III, physical silver appears set to soar.  There is also a recognizable seasonality to the silver price, which shows we should be witnessing an increase of 9% by year’s end, even without Basel III or #SilverSqueeze.  When we consider the additional demand for silver coming up in the electric vehicle (EV) and solar power industries, it is hard to imagine silver not rising considerably more than that (perhaps 18% to 25%) by year’s end.  Of course, another way to view this is in relation to the dollar.  With massive dollar creation continuing unabated, it is hard to imagine the dollar not falling in value relative to physical silver.

Gold seems primed for a similar rise, albeit to a somewhat lesser degree, due to the decreased volatility of gold in relation to silver.  In both the silver chart shown above, and the gold chart shown below, the line represents the average annual performance of each over the last 20 years.  Between now and year’s end, gold could be expected to rise an additional 6.5%.  Of course, past performance is not necessarily indicative of future results.  When we factor in the effects of Basel III and the increased worldwide demand for physical gold, we could reasonably see gains 2 to 3 times as high (13% to 20%).  

A word of caution seems timely, as the dynamic for the physical gold and silver markets has already changed considerably from a couple of years ago.  With the drastic reduction in the number of unallocated metals contracts changing hands, liquidity in the gold and silver sectors will be reduced.  This might portend a larger gap between not only “spot” and physical prices, but also between the price paid to purchase physical metal versus the price received for selling.  In other words, it may become more expensive to purchase and/or find metal to purchase, so purchase sooner, if you can, rather than later.  A large component of gold and silver price has been mining cost.  Mining costs are somewhat dependent upon oil prices, which some analysts expect to rise to $100/barrel in the coming months.  A higher oil price tends to raise the floor underneath gold and silver prices, thereby decreasing the risk of losses in the short to medium terms.