Tuesday , 18 June 2024

Are Gold and Silver Still a Buy? Absolutely – & Here’s Why (+3K Views)

Prospect Of Future Rampant Inflation Will Cause Gold and Silver Prices To Go Even Higher!

After the impressive run in precious metals last year that saw gold rise 29.6% and silver rise 83%, the question on many investors’ minds is whether there is still any run left in these commodities. [Read on for a clear understanding of what we can expect for gold and silver – and why.] Words: 1027

So says Ananthan Thangavel (www.lakshmi-capital.com) in an article* which Lorimer Wilson, editor of www.munKNEE.com, has reformatted and edited […] below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.) Thangavel goes on to say:

[As the chart below shows] since the beginning of 2011, gold and silver have badly underperformed equities, which is a surprising trend given the high correlation between all 3 since August. The divergence in performance begs the question of whether investors are finally rotating assets out of precious metals (the alleged “fear trade”) and into stocks.

S&P 500 vs Silver and Gold Prices Chart

Why Have Gold And Silver Gone Up In The Past?

In our opinion, precious metals such as silver and gold do not serve as fear trades, but rather trade on forward inflation expectations. [Indeed,] from both of the following charts, which show gold and silver [performance] over the past 35 years versus the Consumer Price Index Year-over-Year % Growth (including food and energy), it can clearly be seen that gold and silver track very well to the CPI, with the notable exception of recent years that we will discuss later.

CPI Inflation vs Gold Prices Chart

CPI Inflation vs Silver Prices Chart

It can be seen that both gold and silver peaked in 1980, at the height of inflation. The spike in inflation that peaked at the beginning of the 1980s saw the CPI Index peak at almost 15% year-on-year growth, a lofty inflation figure. This peak also marked the parabolic peak in the rally in gold and silver prices that began in 1976. For those 4 years, gold rose 508% and silver rose an incredible 775%. The rally in silver was largely caused by the Hunt Brothers manipulation of the metal, but the fact remains that both metals rallied incredibly in the face of quickening inflation. Also of note is that both metals quickly collapsed down to much lower levels as inflation waned quickly.

Are Gold and Silver Curently In A Bubble?

Applying this information to our present-day scenario [clearly shows that] the steady ascent of both gold and silver is not indicative of a speculative bubble. Both metals have quite a ways to go to achieve the same percentage gains witnessed 30 years ago. Also, both metals have risen in a much more stable manner (i.e. gold at 18.3% annualized vs. 67.4% annualized) than in the late 1970s. Gold and silver would have to have a dramatic parabolic run-up, followed by an equally dramatic selloff, in order to have been considered a speculative bubble, something that has not happened yet.

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From an inflation fundamentals standpoint, it appears that inflation may have to top-out before we see the end of the precious metals rally. Even though little actual inflation has yet to be witnessed in the CPI, precious metals have already seen a substantial rally. This is due to the expectation of a highly inflationary upcoming period.

Why Do Gold and Silver Prices Already Reflect Future Inflation?

While the money supply of the U.S. has grown exponentially since the financial crisis, CPI growth has remained muted due to the low velocity of money. Simply put, the velocity of money is a measure of how fast money changes hands in an economy. If the money supply is high, but the velocity of money stays low, inflation will not happen. To make this theoretical argument more concrete, consider that most of the money the Fed “created” since the financial crisis has gone to banks balance sheets. The banks have not turned around and lent that money, because their lending standards and underwriting process are still extremely strict due to wound-licking left over from the credit crunch. Once the banks start lending money more freely, the effect of the hugely larger money supply will start to be felt in CPI growth. This coming CPI growth phenomenon is the event that precious metals are pricing in. There is no question as to if the velocity of money will increase, only when.

What Does Quantitative Easing Mean For The Future Price Of Gold and Silver?

While banks around the world from China to Australia to Brazil are raising interest rates to tame inflation, the major currency economies (US, UK, Euro, Japan) have no ability to do so and will not in the near future. The countries that have raised interest rates are the ones experiencing massive organic growth, huge capital inflows, and food price inflation problems. However, the major curerncy countries have no engines of growth, are experiencing capital outflows, and have no shot at anything but paltry GDP growth for the foreseeable future. In order to ensure their economies do not fall back into recession, these countries have engaged in competitive currency debasement (i.e. seeing who can print money the fastest) in order to make their exports look more attractive to emerging economies as well as each other. Printing money and creating excess liquidity also has the added bonus of inflating risk asset prices and making things look generally rosier through the glasses of inflation.


As long as there is the anticipation of future inflation and continued currency debasement gold and silver will continue to be extremely worthwhile assets to own.


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Editor’s Note:

  • The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
  • Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
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One comment

  1. I have invested in silver and gold for the reason given in your article. In the case of silver though, there are other good reasons to anticipate a higher price as the months and years go on. Industrial demand and uses have been encouraged by the low price of silver while mining has been discouraged for the same reason. In addition Ted Butler has succeeded in drawing the attention of the Commodity Futures Trading Commission, CFTC, to the extreme naked short futures positions of several banks including JP Morgan. Although the CFTC has been hesitant to institute position limits it appears that JP Morgan and others are reducing their short positions. Manipulation in the silver market has kept the price of silver artificially low, below the market price. There may be no such manipulation going forward and that should allow silver to rise to the traditional gold silver ratio as gold goes up as well.