Precious Metals Are Sky-Rocketing, But Will It Last?

Gold has broken above a key number of $1,900 this morning, and silver continues to surge, approaching $23.00. Gold is now just over $20 away from its all time high, which is $1921.18. The question on many people’s mind, especially potential buyers, is whether this will continue. Here are some factors to look at on how and why we got here and going forward.

Is stimulus really painless? In the face of the pandemic, governments around the world have unleashed a very significant amount of cash into their respective economies, in the form of unemployment benefits and business grants/loans. Much of modern economic theory postulates that money creation is the right of government and it can do so with little consequence. This is true as long as faith remains in the fiat currency and inflation is kept at a target level using policy tools. Today the U.S. dollar, as measured by the Bloomberg Dollar Index, fell to its lowest point since January. We can also see in the chart below that since March the dollar has weakened considerably vs. gold but has strengthened vs. other fiat currencies. We may be reaching a tipping point in which there is simply too much cash sloshing around in the system, making the potential for runaway inflation real. Gold and silver are the primary way to preserve purchasing power against a falling currency.

U.S. Dollar vs. Gold (Source: Bloomberg)

Following on from the above point, a huge increase in the money supply puts pressure on interest rates, to where we now have a situation where $14.9 trillion worth of sovereign bonds yield a negative interest rate. Spot gold has closely tracked the global aggregate negative yielding debt market value and it has also very closely tracked the U.S. 10-year Treasury inverse yield (spot gold increasing as yield falls.)

Gold supply chain issues. Covid-19 put considerable strain on the gold supply chain. Gold mines around the world halted production, either voluntarily or via government order, and travel restrictions both limiting the supply of gold in its early stages. Refineries were then shut down for the same reasons. This created a shortage of metal in the major physical markets right when demand was starting to surge. This created near-record high premiums for both forward futures contracts and product, such as coins and bars. One of the key elements to solve is to figure out how much of spot price increase is because of these supply constraints, and if gold spot will contract once full supply is restored.