July 6, 2022

Gold Gains Slightly On Week While Silver, Platinum and Palladium Decline

Precious metals had a tough week as silver, platinum and palladium all declined, while gold registered a small gain.

As measured by the closing London PM Fix Price, gold gained $8.25 on the week after declining by $10.75 in the previous week.  Gold remains in a solid long term uptrend.  Since early 2009, gold has remained above its 40 day moving average and every dip to the 40 day moving average has followed with rallies to new highs for gold.

Gold’s last decline to the 40 day moving average in January of this year was subsequently followed by a rally of over $220 per ounce.  A correction to the 40 day moving average would bring gold back to the $1,400 level.

 

GOLD - COURTESY STOCKCHARTS.COM

Gold has held above $1,500 as world financial markets, oil and other commodities have declined substantially over economic worries.   As the European Central Bank struggles to prevent a Greek default that could trigger a series of other sovereign defaults, debt yields are soaring not only in Greece but also Spain, Portugal, Italy and Ireland.

Markets are beginning to reflect the unavoidable truth that we are reaching an end game where sovereign governments have become the new systemic risk to the financial system.  As debt burdened governments face the prospect of financial collapse and political unrest, the only option will be to sell new debt to the central banks who will buy the debt with newly printed money.  As central banks worldwide compete with each other in massive currency debasement, gold will soar to new highs beyond predictions of the boldest gold bulls.

As the slow motion collapse in Europe unfolds, investors in the U.S. seem resolute in the belief that “it can’t happen here, we are not Greece.”  This argument is rejected by Bill Gross who runs Pimco, one of the largest bond funds in the world.  According to Gross, who recently announced that he would stop buying U.S. Treasury debt, the U.S. is actually in worse shape than Greece.

The total debts of the U.S. government, including off balance sheet obligations for open ended social programs, totals $100 trillion.  Gross notes that “To think that we can reduce that within the space of a year or two is not a realistic assumption.  That’s much more than Greece, that’s much more than almost any other developed country.”

Critics who dismiss the warnings of Bill Gross point to the current level of low yields on U.S. treasury debt.  Why would the U.S. be able to sell its debt at such low rates if the finances of the United States are worse than Greece?  The answer is that crises develop in a linear fashion.  Investors don’t worry about credit risk until the crisis is upon them and suddenly everyone wakes up and panics.

Carmen Reinhart of Harvard and formerly of the IMF correctly predicted that a sovereign debt crisis would follow the financial crisis of 2008.  In a study of bond markets as a forecasting tool, Reinhart showed that rates are a poor forecaster of  repayment risk.  According to Reinhart, “Very often, interest rates are a coincident, rather than a leading indicator” of a looming financial crisis.

Preserving wealth during the next financial meltdown will require taking steps before the inevitable crisis develops.

Precious Metals Prices
PM Fix Since Last Recap
Gold $1,537.50 +8.25 (+0.54%)
Silver $35.39 -1.99(-5.32%)
Platinum $1,751.00 -78.00 (-4.26%)
Palladium $754.00 -61.00 (-7.48%)

Platinum had a volatile week, declining by $78 on the week to $1,751.00.  After moving up by $650 per ounce between July 2009 and May 2010, platinum has been consolidating its gains.  During 2011, platinum has remained in a narrow but volatile trading range between $1,700 and $1,850 per ounce as traders try to sort out whether the predominant demand for platinum is industrial usage or investor demand.

PLATINUM - COURTESY STOCKCHARTS.COM

Palladium had the biggest decline in the precious metals group, falling by $61 per ounce for a loss of 7.48%.  After reaching a high on the year of $858 in February, palladium has been correcting in a sideways pattern.

 

PALLADIUM - COURTESY KITCO.COM

Silver declined by $1.99 on the week to $35.39 after a gain of $2.19 in the previous week.  After the sharp decline in early May, silver has been building a base in the $34 to $38 range.

 

SILVER - COURTESY STOCKCHARTS.COM

How Soon Will Silver Hit New Highs?

The recent sharp price correction in silver has left many wondering how long it will take before silver recovers and moves on to new highs.

Since hitting its April 28th peak price of $48.70 (as measured by the closing London PM Fix Price) silver declined to a low of $32.50 on May 12, for a loss of $16.20 per ounce or 33.3%.

Looking at the last major price correction in silver which occurred in 2008, we find that the 2011 correction is far less severe.   Silver hit a high of $20.92 per ounce on March 17, 2008 and then proceeded to consolidate until late July.  In August 2008, the financial crisis entered its worst phase and asset classes of every type were driven lower by panic selling and forced liquidation.

On October 24, 2008, silver reached its low at $8.88 and then began a recovery phase, closing at $10.79 per ounce on December 31, 2008.  From the March 2008 high to the October 2008 low, silver dropped by a shocking 57.6%.

 

SILVER - COURTESY KITCO.COM

 

From the lows of 2008, silver never looked back and rose to higher highs throughout 2009, closing the year at $16.99 per ounce.  The upward trend continued during 2010 and silver finally closed above the March 2008 high in September of 2010.  Silver continued to gain momentum through the final three months of 2010 and closed at $30.63 per ounce on December 31, 2010.

It took two and a half years (30 months) for silver to fully recover from the price correction of 2008.  For a variety of reasons, the recovery to new highs in silver from the May 2011 sell off should be much shorter.

Authorities were unprepared for the financial meltdown of 2008 and were completely caught off guard as to the severity of the crisis.  In February 2008, just prior to the collapse of major banking institutions, Fed Chairman Bernanke said “I expect there will be some failures.  I don’t anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system.”  It was only months later that almost every large bank in the country was on the verge of failing.

At mid year 2008, the highest ranking financial officials in the U.S. Government could still not see the financial meltdown that was imminent.  In June 2008, Fed Chairman Bernanke said the danger of the economy falling into a “substantial downturn” appears to have waned.  Literally days later, the global financial system was on the verge of collapse.

The system has not been fixed since 2008, despite the expenditure of trillions of dollars by governments and central banks to restore financial stability.  The attempt to solve the problem of too much debt by extending additional credit has failed – the cure cannot be the same as the disease.

Every economic indicator is now pointing towards another global slowdown and this time the insolvency threats extend to numerous sovereign entities which will make containment of a financial crisis more difficult.   Above all else, the world of paper currencies relies upon confidence.  Who is going to be confident that insolvent sovereign States can come to the rescue in Financial Crisis II?

Global authorities do not want to risk a replay of 2008 when the entire financial system came within a heartbeat of collapsing.  At the first signs of a potential financial crisis, central banks will use the only tool they have left and flood the world with printing press money.  The alternative is to risk a full blown Financial Crisis II which ultimately may not be containable.  As the prospects for massive quantitative easing intensify, investors seeking to preserve their wealth will turn to precious metals driving prices sharply higher.

Looking back a year from now, investors will realize in hindsight that the price dip of May 2011 represented the best buying opportunity in silver since October 2008.

 

 

 

 

 

Gold Advances On Week, Silver Retreats As Financial Crisis II Looms

Gold, platinum and palladium all advanced on the week while silver gave up most of the previous week’s gains.

As measured by the London PM Fix Price, gold gained $7 on the week to $1,540.00 while silver pulled back by $2.50 to $35.19.   Platinum moved up by $21 to $1,807.00 and palladium gained $13 to $770.00.  After the London close, prices of precious metals moved up strongly in New York trading, especially silver, which last traded at $36.39, up $1.20 from the earlier London closing price.

Financial markets worldwide pulled back sharply as the stock traders finally began to acknowledge the fragility of the world’s paper back financial system.  Governments that have borrowed and spent trillions of dollars to stimulate economic growth and support a fragile banking system now find themselves reaching the limits of their borrowing capacity.

It is becoming obvious that the financial crisis of 2008 was just a warm up act to the real financial nightmare that is looming ahead.  Despite trillions of dollars in stimulus spending, coordinated with a money printing campaign by world central banks, the economies of the U.S. and Europe have not recovered.  Unemployment continues to grow, real estate values continue to plunge, debt levels have reached unsustainable levels and real incomes for the majority of workers continue to decline.

There are numerous events that could trigger the second financial crisis  There is no way of knowing which specific event will trigger the next crisis,  nor does it matter.  What does matter is the manner in which Financial Crisis II will be dealt with by world governments and central banks.  Unable to raise taxes or take on trillions more in borrowing, monetary authorities will exercise the last resort option of money printing on a massive scale to avoid a total collapse of the world monetary system.  The gold market is already reflecting this scenario as one of the few safe havens against paper currencies that have little intrinsic value.  When Financial Crisis II gets under way, uninformed talk of a “gold bubble” will quickly disappear as investors will buy gold at any price to preserve their wealth.

Precious Metals Prices
PM Fix Since Last Recap
Gold $1,540.00 +7.00 (+0.46%)
Silver $35.19 -2.50(-6.63%)
Platinum $1,807.00 +21.00 (+1.18%)
Palladium $770.00 +13.00 (+1.72%)

Will platinum, which has lagged the price rallies in other precious metals, start to play catch up?  According to the Wall Street Journal, due to rising production costs for platinum, a price of $2,100 per ounce is necessary to encourage increased mine production.

The historical price ratio of platinum to palladium also suggests that platinum prices could rally significantly.  The Wall Street Journal notes that when palladium reached $860 per ounce in February, the ratio was 2.15 compared to 2.12 today.  The historical average of the platinum/palladium ratio is 3.0 to 4.0, suggesting that platinum is undervalued.

 

PLATINUM - COURTESY STOCKCHARTS.COM