Clients have lots of good questions about metals and markets. From time to time, we like to publish the questions as well as our responses. If we get calls from clients with these questions, we know there are many more people out there wondering about the same topics.
Q: Where are silver premiums headed?
A: At the moment premiums appear to be headed lower – particularly for silver. The wholesale market is more stable than it has been for much of the past three years.
Producers of privately minted rounds and bars have been ramping up production. At the same time, buying activity softened in November and December. This allowed dealer inventories to finally recover on many key products.
The lesson of the past few years is that bullion premiums are quite sensitive to physical supply and demand.
This is in contrast to the COMEX paper price of silver and gold. Extraordinary demand for physical gold and silver seemingly had no bearing on prices in the futures markets. At least not until recently.
The vaults backing the trading exchanges reported a continuous decline in inventory, and alarm bells have started to ring.
Although premiums have come down, bullion buyers may simply be taking a breather. Geopolitical turmoil and falling investor confidence in financial assets remain as major drivers. The next wave of people seeking the safety of physical metal may not be more than one headline away.
Q: Where do you expect gold and silver prices to go in the months ahead?
A: The truth, of course, is we don't know. If the futures markets worked properly as a vehicle for honest price discovery and responded as expected to fundamentals like supply and demand, forecasts might be more viable.
When you add influences like market manipulation, algorithmic trading, and leverage, price direction gets much harder to predict.
It is best for investors to think in terms of probabilities. Our view is it is more likely for physical gold and silver prices to move higher over time rather than lower.
Q: Will Fed rate hikes hinder precious metals markets?
A: Metals are particularly well suited for the times in which we live. Price inflation is anything but “transitory,” as Jerome Powell had laughably claimed. This year, Powell finally acknowledged price inflation as a serious issue and the Fed responded by driving interest rates higher. That bolstered the Federal Reserve note dollar versus other major currencies.
America's current monetary policy tries to fight the inflation it creates by triggering a recession and higher unemployment. It has been ugly for real estate, stocks and bonds in 2022. The year ahead may hold even worse for conventional markets.
The Fed spent most of the last 15 years fostering an addiction to zero interest rates in these markets.
They aren't going to fix that without inflicting a massive amount of pain on investors.
Fed watchers are waiting on Jerome Powell's every word for signs that the “pivot” is coming. Historically, the politicians and Wall Street bankers who control the Fed have a low tolerance for pain.
Therefore, the FOMC at some point can be expected to reverse and march back toward monetary easing. Perhaps Congress will resume stimulus by mailing another round of checks to everyone.
Q: What are some of the qualities that differentiate owning precious metals from investing in the stock market?
A: As a tangible asset held in your possession, bullion has no counterparty risk. It can't go bankrupt or default. It doesn't commit fraud and it doesn't make terrible decisions. It doesn't even rely on electricity or an internet connection to work.
Private, portable and enduring coins, rounds, and bars are a time-tested hedge against out-of-control central bankers, hostile politicians, ESG malinvestment, and other troubling developments that currently cloud the outlook for most conventional assets.
It is important to note the decline in confidence and unhinged monetary and fiscal policy are long-term trends with no end in sight. That is why metals have outperformed stocks over the last two decades plus.
As of this writing, the S&P 500 is up 180% since January of 2000. The gold price vastly outperformed over the same period – up 540%. Silver has gained 350%.