A Price Shock is About to Hit Late Comers to Gold and Silver

The investing public always comes late to the party. That, we already know. It’s predictable, like a constant. Unsurprisingly, mainstream investment inflows have just begun to pour into the metals (albeit, the wrong way, which we’ll touch upon later). Gold and silver have been moving upwards, the latter breaking out sharply. Though gold has been advancing for quite some time, it too is about to challenge a major high point.

Let’s take a look at gold via COMEX:

Despite the overblown sell-off in March due to COVID-19 fears, the trend is pretty clear and steady. Right now, we see gold in a tight range of consolidation. The volume fueling gold prices appears to have dwindled, as investors are trying to digest what’s going on amid the stock market rallies despite the sobering economic data that keeps coming in.

However, note that safe-haven demand for 30-Year Treasuries has fallen, anticipating the negative effects that the current central bank stimulus may exert on both yield returns and the purchasing power of currency.

Now let’s turn to silver.

Silver has staged a magnificent 56% advance from its March low of $11.65. Although most mainstream investors equate gold with safety, the notion of silver as “sound money” seems to elude most of them.

Hence, investors were buying up US Treasuries despite the negative implications that monetary and fiscal stimulus might have on those assets. Answering doubts as to silver’s sound money attributes, we see the metal’s reckoning as it rises to meet 30-Y bonds.

With gold now trading at $1,723 per ounce, and silver hovering at the price of $17.99 per ounce, we see the prices of both metals moving higher not only supported by current monetary and fiscal measures (which will weigh on the economy for months to come) but also on the dwindling supplies of gold and silver bullion and coins (especially non-CUSIP Silver and Gold).

Premiums will rise, and that’s bad news for investing latecomers. Historically, the bullion market has had adequate levels of liquidity and availability. But considering fears of a depression-like scenario and the institutional reaction to such data, liquidity in the bullion market has fallen to levels unprecedented. Besides, there’s no reason to believe that COVID-19 won’t shut down mines or slow down mints.

And should forthcoming economic data spark a panic and signal an even greater economic downturn, the demand for sound money and safe-haven assets will spike, potentially bringing gold and silver prices through the roof.

Aside from economic data, the signs of a weakening economy are already present in our local environment as we conduct our day-to-day activities. Take shopping. It’s clear that the global supply chain is straining under the pandemic. The food supply chain has been disrupted as commercial and grocery supplies remain separate (the food sent to your local restaurant is not the same food sent to your local grocery store).

Because suppliers can’t simply shift the supply chain, lots of food is being wasted, milk dumped, crops allowed to rot, and livestock euthanized, sadly enough. Because of this glut and waste, food prices are going to rise.

In the meantime, central bank printing presses worldwide will be working overtime to stem the pandemic’s impact on the global economy. Yet, many small to midsize businesses, many of which are on a time crunch to pay their bills, will become insolvent, as many are operating on too short a time frame and too small a cash flow to stay in business.

The Federal Reserve sees unemployment remaining in double-digit numbers by the end of 2020, possibly between 20% and 30%, Great Depression levels.

All of these developments, from the economic realities that besiege us to the monetary and fiscal solutions implemented to stave off their implications, may only increase the severity of the coming downfall--that is, negative consequences from both the illness and the cure.

And these factors are what will be supportive of even higher prices for gold and silver.