Gold and Silver’s Potential in a Volatile Market

In the late 1990s, the United Kingdom decided that gold had lost its luster as a financial asset and was a barbarous relic of yesteryear. The irony was London has long been the hub of international physical gold trading, with the Bank of England, as a supportive regulator.

Promoting transparency, the U.K. Chancellor of the Exchequer, Gordon Brown, announced an auction of half the U.K.’s 300 tons of gold reserves. The process sent the precious metal to a $252.50 per ounce low in 1999. The U.K. might have believed other worldwide governments would follow, shedding gold reserves that had always been integral to foreign currency reserves, but they miscalculated. The gold market aptly called the 1999 $252.50 low the Brown Bottom.

The U.K. auction was a watershed event, causing a blowoff low. In the nearly two and one-half decades following the sales, gold has made higher lows and higher highs, reaching the latest peak at over $2,070 per ounce in March 2022. Every price correction in gold has been a buying opportunity since the 1999 Brown Bottom, and the bullish trend continues as the market heads into Q2 2023, with gold flirting with the $2,000 level over the past weeks.

Markets reflect the economic and geopolitical landscape, which favors the bullish trend in the metal that has thousands of years of history as a currency, hard asset, and store of value. In a sign of further irony, after gold rose over $600 in 2007, on its way to triple that level only four years later, the U.K. made Gordon Brown the country’s sixth post-war Prime Minister of a total of thirteen, without having won a general election. As Prime Minister, the U.K. took his hands off the country’s national treasure, that shrunk from over 600 to 310.29 metric tons.

Gold is money- Fiats depend on faith and credit

• Gold’s role as money dates to pre-biblical ancient times.
• Gold had long been behind the world’s leading currencies.
• While foreign exchange instruments abandoned gold, central banks, and governments continue to own gold and classify it as an integral part of their foreign currency reserves, validating the precious metals’ role as a means of exchange.

Global bifurcation supports gold

• The U.S. dollar became the world’s reserve currency after WWII.
• The China-Russia alliance threatens the financial status quo.
• At a March summit between Chinese President Xi and Russian President Putin, the Chinese leader said, “Right now there are changes—the likes of which we haven’t seen for 100 years—and we are the ones driving these changes together.” President Putin agreed.
• China’s plans include a change in the worldwide financial system that could cause the U.S. dollar’s dominant role to decline.
• The uncertainty of threats to the current world order supports higher gold prices. 

Inflation remains a nagging issue beyond monetary policy’s control

• The Fed and ECB have used monetary policy to lower inflation to an arbitrary 2% target rate.
• Supply-side inflation caused by the pandemic’s legacy, the war in Ukraine, and shifts in the geopolitical landscape could be immune to monetary policy tightening.
• The recent bank failures and UBS’s takeover of Credit Suisse will tighten credit, but it also creates uncertainty about financial institutions’ solvency.
• Gold has been a safe harbor for savings throughout history.

Governments continue to favor gold

• Gordon Brown’s forecast that gold was a barbarous relic of yesteryear was wrong.
• The World Gold Council reported that central banks purchased the most gold in 2022 since it began keeping records in 1950, buying 1,136 metric tons.
• China and Russia are significant gold-producing counties and have been increasing their strategic reserves with international market purchases and vacuuming domestic output. Strategic holdings are state secrets, so government buying is likely far higher than the 1,136-ton level.
• Sanctions on Russia in early 2022 caused the central bank to declare that 5,000 rubles were exchangeable for one gram of gold, stabilizing the ruble and pushing the Russian currency higher against the U.S. dollar. The experiment could be a blueprint for China as President Xi challenges the dollar’s dominance over the coming years.
• Increasing gold’s role in the worldwide financial system is bullish, given the rising U.S. national debt at the $31.6 trillion level.

Gold is a liquid asset with many investment choices

• Silver tends to follow gold and tends to move on a percentage basis on the up and downside. A continuation of gold’s bullish trend supports higher silver prices.
• The most direct route for gold and silver investments is the physical market for bars and coins.
• Futures and futures options have delivery mechanisms, as holders of contracts can stand for physical delivery.
• Gold and silver ETF products that own physical bullion tend to track the metal’s prices, incorporating storage and insurance fees into the ETF prices.
• Gold and silver mining shares provide leverage as miners invest significant capital in extracting the metals from the earth’s crust.
• Junior mining shares exploring for gold and silver tend to be more leveraged as they invest less capital in identifying prospective reserves.
• Uncertainty as the markets head into Q2 2023 favor continued gains in gold and silver over the coming months and years.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!