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Precious metals during a pandemic
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Precious metals during a pandemic

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Dennis Gartman, whose trading skills earned him the moniker Commodity King, once cautioned, “Silver is a young man’s game.” An older Clint Eastwood made a similar observation about tequila. I admire both gentlemen and follow their sage advice. It is the dog days of summer as I write this column and both gold and silver have enjoyed an extraordinary year to date. The former scored a new all-time record comfortably above the mercurial $2,000 per troy-ounce. Given recent peaks, Comex gold has advanced 44 percent from its mid- March bottom; silver, a stunning 154 percent. Greater than three-times performance of the white metal compared to the yellow is reminiscent of 2011 when silver made a mad dash at $50 per troy-ounce in April of that year. That kind of price action underlies Mr. Gartman’s comment. Silver stands on the shoulders of gold when they both reach for the sky, but can easily tumble down a mineshaft when it loses its balance. When you read this column in the fall, I wouldn’t be surprised by higher gold prices but am cautious about its metallic cousin. Let’s drop down a few levels to see what’s going on.

A Year’s Perilous Journey

The first chart shows Comex gold and silver prices since August of last year. U.S/China trade tensions peaked in late-summer driving gold above $1,500 and silver to $20. This is a good example of market stress when investors make an orderly move from risky asstes like stocks and high-yielding bonds to safe havens like gold and silver. Trade tensions simmered down with the the new year as negotitions accelerated. By January 10 markets rallied on expectations of a Phase I deal which was signed the following week. In the background, a novel coronavirus (covid-19) expanded from Wuhan province to beyond the borders of China. The viral infection started impacting precious metal prices in late-February as gold rallied to $1,690 and silver rebounded to $19.

On March 11, the World Health Organization delared covid-19 a pandemic.The President of the United States decared a national emergency two days later. All hell broke loose as global markets entered a period of mind boggling stress. Unlike the previous example, in extreme times many investors sell what they can and not what they want. Gold and silver were thrown overboard with everything else to raise cash. One of the few benefactors was the U.S. dollar which soared to a 39-month high. Gold stumbled below $1,500 and silver plummeted below $12. Similar liquidations of precious metals occurred after the Lehman Brothers banckruptcy during the 2007-2009 financial crisis – remember $9 silver?

Gold & Silver Prices

Fortunately, periods of extreme stress are typically short-lived as market anxiety and panic selling subside. Importantly, robust precious metal rallies often follow. Gold and silver soared in 2011 although at different times and for different reasons. The first chart includes a table comparing the current 2020 highs with those of 2011 with significant records shaded green. I believe we are in rally similar to the one that followed the initial shock of the financial crisis – we’ve got a lot more runway ahead.

A Bullish Environment

It’s a long stretch from summer to Halloween but the porch dogs are already barking at a few domestic and geopolitical witches flying around the yard: a confounding spread of virus, a stalled economic recovery, civil unrest, U.S. Election foreign interference and rapidly escalating U.S./China tensions. Safe-heavens like gold and silver thrive off the uncertainty generated by such market hobgoblins.

Some of these disruptive spirits may prove ephemeral and economic recovery could surprise to the upside by pumpkin time. Nevertheless, longer-term support for precious metals comes from the largesse of central banks and fiscal policy globally. Trillions of dollars have been poured into our economy by the Federal Reserve and Treasury to mitigate the devasting effects of covid-19. Zero-interest rate policy, bond buying and “helicopter” money (think stimulus check) have swelled balance sheets and national deficits both here and abroad.

Perfect Environment for Precious Metals

Exploding U.S. deficits, money printing and a halting virus response have eroded confidence in the dollar. After the March viral shock, the U.S. Dollar Index fell more than 9% from its high by the first week of August. By contrast, the euro, which comprises a large part of index, strengthened 11% on Europe’s more robust recovery from covid-19. Dollarized commodities which include gold and silver have benefited.

In the U.S., 10-year annualized inflation expectations (blue trace) cratered during the March upheaval but then rebounded sharply. Although the level of inflation is still quite low, the rate of rise is significant as shown in the chart. Whether long-term this results in undesirably high inflation levels or reverses and becomes deflationary is the topic of great debate among economists. Historically, precious metals perform well during periods of elevated inflation. However, precious metals still prosper if levels remain low but rise faster than interest rates.

Precious metals are noninterest earning assets - they do not generate income like a bond or stock dividend. When real rates become negative, this disadvantage becomes an advantage. A benchmark for real rates is the difference between the yield on a 10-year Treasury note and inflation expectations. Real rates (magenta trace) became negative in March and fell sharply as interest rates remained low but inflation expectations rose.

What’s Next?

Investor interest in gold remains high. The World Gold Council reports inflows into gold-backed Exchange Traded Funds have offset weakness in all other sectors of the market affected by the ongoing global coronavirus pandemic. A price level to consider is the 2011 record brought forward in time by inflation which calculates to be $2,184 per troy-ounce. If you believe the near-term outlook is scarier than the 2011 U.S. debt crisis, a reasonable target for late-2020 is $2,200-plus.

For silver, we should heed Mr. Gartman’s warning about price volatility. A stabilizing influence for silver price is expanding industrial use in solar panels, electric automobiles, medicines and even the production of face masks. Although neither metal will attain new highs in a straight line, the gold-to-silver ratio has been steadily approaching its 10-year average of 69.5 after peaking to 124 during the March madness. Combining the 2020 gold target with the long-term average results in a silver price of $32 per troy-ounce. The inflation-adjusted silver high of 2011 is $57 which I believe is a bridge too far for 2020.

Finally, if the U.S. dollar reverses to strength and deflationary forces take hold in a prolonged period of global recession, a bearish scenario could develop for both gold and silver. My bet is an alternative of slow and steady economic recovery as the pandemic is brought under control. An accommodative Federal Reserve, moderate inflation and an extended period of very low rates should sustain a bullish environment for precious metals over the next several years.


Richard P. Baker is the author and editor of The Eureka Miner’s Market Report at He owns shares of the SPDR Gold Trust ETF (GLD), iShares Silver Trust ETF (SLV), and PowerShares DB US Dollar Bullish ETF (UUP).

Richard P. Baker is the author and editor of The Eureka Miner’s Market Report at He owns shares of the SPDR Gold Trust ETF (GLD), iShares Silver Trust ETF (SLV), and PowerShares DB US Dollar Bullish ETF (UUP).


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