Sunday , 21 April 2024

The Case For Gold and Silver

Introduction

…The general consensus is that precious metals will continue to thrive over a longer horizon.

  • If the Fed follows through on its plan to lower rates thrice this year, it will cause the dollar to weaken and commodity prices to strengthen.
  • When positive real interest rates, which favor bond investors, turn negative, it will especially affect gold and silver prices to the upside.

This version of  the original article by Richard (Rick) Mills has been edited and abridged by the Managing Editor of munKNEE.com to ensure clarity and brevity for a fast and easy read.

In our view, the case for gold revolves around three main factors:

    1. an increasingly dovish Fed monetary policy
      • Moderating inflation shows that the Fed’s monetary policy is restrictive enough to bring inflation to heel…but we are still at positive real rates of 1% (4.2% 10-year yield minus 3.2% CPI inflation), which for gold means further rate cuts are necessary before we are into a negative real rate environment favoring gold (and silver)…
      • Arguably, interest rates have peaked, and so has the dollar which is entering the end of its bull cycle after 13-plus years. A correction is long overdue, as USD’s spectacular performance in 2022 coincided with the Federal Reserve’s monetary tightening to curb inflation.
    2. unsustainably high debt, fueled by excessive government spending
      • The US Treasury reported that, as of Dec. 29, 2023, total US debt surpassed $34 trillion for the first time (compared to just $10.6 trillion back in January 2009).
      • Around $13 trillion in government debt is expected to roll over next year, at much higher rates, meaning more money-printing is on the way so, in other words, the government can’t afford higher interest rates for much longer.
      • Also, it is an election year; consumer spending has to continue because consumers spending makes up 70% of the U.S. economy and consumers need debt payment relief to keep spending as wages and salaries soar.
    3. and central bank buying.
      • Central banks have bought historic levels of gold over the past two years, and continue to be strong buyers in 2024…
      • China is the main driver of central bank demand, last year being the largest gold buyer.
      • Also, many emerging-market economies are buying gold because they don’t want to be stuck in the same situation as Russia, which had about half of its foreign-currency reserves frozen following the 2022 invasion of Ukraine.

Challenges Facing World Gold Supply

We have previously written about the challenges facing world gold supply.

  • The mining industry is currently unable to mine enough to meet annual demand, without recycling, which is our definition of peak gold,
  • gold grades are declining,
  • there have been very few major gold discoveries over the past several years,
  • the current U.S. administration is anti-mining;
    • it has shut down a number of large mining projects…that were planned to take place on land controlled by the Bureau of Land Management, and
    • recent moves by the Biden administration suggest the White House is taking aim at precious metals production and might even cut off the supply of PMs from BLM land.

The gold market needs more gold mines to avoid having to recycle gold to meet global demand, but if Biden gets re-elected, federal opposition to U.S. gold production is likely to intensify.

The Gold-Silver Ratio

We’ve outlined the bullish case for gold, but what about silver?

  • Silver is coveted for investment purposes — like gold it is a safe haven against monetary debasement and geopolitical turbulence — but, unlike gold, it has a multitude of industrial applications including solar power, the automotive industry, brazing and soldering, 5G, and printed and flexible electronics.
    • The Silver Institute forecasts a 140Moz silver deficit this year, the third consecutive annual shortfall, against robust silver industrial demand, which is expected to grow 8% to a record 632Moz.
  • Silver investors have been disappointed with silver’s performance of late…however, according to Sprott Money, a breakout is coming, simply because silver cannot continue to be so undervalued compared to gold.
    • Using a median gold-silver ratio of 80:1 (80 ounces of silver to buy one ounce of gold), a gold price of $2,300 implies a silver price of $28.75. If gold reaches $2,500, maintaining that same ration means $31.25 silver. The thing is, though, that when silver breaks out later this year or next, it will receive the same rush of attention and speculator cash that gold is currently enjoying. As such, the price target will not simply be $29 or $31. Instead, the initial goal will be $35 or higher. That’s a greater than 50% move from here and one from which you could greatly profit if you get correctly positioned before it begins.

Conclusion

At AOTH, we see strong upside for gold and silver in 2024 but we need to wait a few more months before the Fed is certain that its tight monetary policy has worked and that inflation is licked. If, and when, the Fed starts to cut rates, likely in June, the dollar will weaken, causing commodity prices (and precious metals) across the board to rise.

Richard (Rick) Mills
aheadoftheherd.com
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