I was going to give up all my bad habits for the new year, but then I remembered, no one likes a quitter.–(Anonymous)
2022 was an awful year for investors. Stocks and bonds got mauled, real estate rolled over, and God forbid you bought Bitcoin in the last several years. The forty-year era of lower interest rates and making money with your eyes closed is over. Inflation is here to stay, and the now high-interest rates will continue to create more and more havoc over time.
On the other hand, gold was even on the year and silver was up 3%. Nothing really to write home about, but this is just the beginning of gold and silver making a difference. As the pain of owning financial assets increases, gold and silver will become more accepted by the public. Even though gold has gone from $250oz to $1,850oz in the last twenty years, it was just one of many assets making money. However, owning gold now is about more than just earning a profit. Over time, the possession of gold (and silver) will be increasingly critical in the world of wealth preservation. I’d like to think there’s a new sheriff in town and if you aren’t paying attention, you could be in for a world of hurt.
So, let’s quickly recap the history of gold and silver, especially the last several years. Anyone who has stuck with my newsletter emails over time knows all markets are manipulated, especially the precious metals markets. In a nutshell, bullion banks such as JP Morgan have been price-suppressing gold and silver on the “paper” exchanges for at least thirty years. However, over the last two years, in particular, the price manipulation has morphed, and this point is critical for anyone wondering why gold and silver “underperformed” as big-time inflation reared its ugly head. So, at this juncture, you might be asking: Why invest in something that has been so heavily manipulated …. and that’s what I’m now going to address.
You see, even though the banks do their selling on the NY “paper” Exchange (COMEX) and the London Exchange (LMBA), it requires a certain amount of physical gold and silver to make it happen. Now, because the metal prices have been kept artificially down, demand from Central Banks worldwide has been insatiable. Primarily led by China, India, and Russia, these central banks are buying far more gold than ever recorded over the last fifty years. Of course, it is important to understand that it’s not just the Central Banks simply taking advantage of great value. It’s also a keen awareness of where the dollar is headed – and that destination would be south of the border. The Petrodollar is no longer the only game in town. China, Russia, Saudi Arabia, India, and many other countries are now turning toward other means of exchange, such as the yuan and gold. Digital currencies, some partially backed by gold, are also in consideration. The US is losing its one true leverage and it’s only a matter of time before the dollar declines even further and possibly disappears.
What if everything fails? People used to buy gold more or less as a hedge. Now people are more concerned about absolute dollar failure.–Eric Sepanek, Scottsdale Bullion & Coin Founder
While Central Bank accumulation is off the charts, the COMEX and LMBA inventories are paper thin. And world demand for silver has been exceeding world production for multiple years now, and that difference is growing. Those truly in the know believe gold and silver are reaching a wall in which the demand for physical will overwhelm supply and the ability of the bullion banks to raid the paper markets lower. Yes, the banks are still manipulating gold and silver to this day, but they are doing it at a lesser rate and having less effect. Anyone monitoring the weekly Commitment of Traders report would know this. Also, the Bank of International Settlements has gone from leasing out on average about 500 tons of gold monthly to almost zero tons monthly. Since this leased gold has been a source of physical by the bullion banks, the banks are losing leverage to sell the paper markets lower.
Change takes time (and pain). As the bubbled financial markets continue to deflate, there will be plenty of pain to go around. And I believe the reluctance to change has caused the majority to put on blinders. Blinders to a worldwide out-of-control debt and blinders to the idea that printing trillions of dollars out of thin air will keep the world afloat (and that flooding the economy with free money will not have horrific ramifications). Clearly, much of the public is afraid and confused. Nonetheless, even with the very bullish supply and demand fundamentals in place, the problems created by COVID, high inflation, and the massive Central Bank buying, the public is not excited about gold and silver. In fact, public interest in gold and silver is at historical lows, as measured by the Open Interest report published daily by the COMEX. In short, investor interest in precious metals is at twenty-year lows. And even with the recent respectable rise in gold and silver prices, the investor/public interest has not budged. This development is VERY bullish because the public is always the last to get into a bull market and the last to get out of a bear market. And that you can take to the bank.