Precious metals got off to an explosive early start to 2020 as tensions between the U.S. and Iran drove safe-haven buying.
Of course, gold and silver markets will need more than a geopolitical flare up to drive a long-term bull market advance.
The question for investors is whether the fundamental picture now looks promising or fleeting.
From fiscally reckless trillion-dollar deficits in Washington, to a Federal Reserve obsessed with generating higher rates of inflation, to mining supplies of gold and silver tightening, the ingredients for a big bull market are in place.
Fed Doubles Down on Higher Inflation
With the Fed now on pause with interest rates after having thrice cut in 2019, it is also engaging in massive backdoor debt monetization (“not QE”). Its balance sheet will likely rise to an all-time record sometime this spring, further cheapening the real value of the Federal Reserve Note in the process.
Loose monetary policy should continue being supportive of higher asset prices in general.
During a press conference in late 2019, Fed Chairman Jerome Powell indicated he would like to a see a significant and sustained rise in inflation before hiking rates again.
Earlier this month, John Williams, president of the New York Federal Reserve Bank, said the Fed should consider “doubling down” on its inflation target – pushing consumer prices higher by reinforcing public expectations that the Fed will remain accommodative.
Higher inflation coupled with low interest rates could potentially be rocket fuel for precious metals markets.
Why Silver May Be the Metal to Own in the 2020s
One of the most remarkable technical developments of 2019 was the gold:silver ratio spiking to 95:1 – its highest level since the early 1990s. It finished the year at 85:1.
A continued decline in the gold:silver ratio toward more historically normal levels would entail not only an outperformance in silver – but also likely a bull market in both gold and silver.
The last powerful decline in the gold:silver ratio from 2009 to 2011 translated into silver surging up over $49/oz and gold making a record high at $1,900/oz.
Silver may be the metal to watch (and own) in 2020 and beyond. If global industrial and investment demand picks up even slightly, supply will struggle to keep pace.
In fact, silver mining supply is heading in the opposite direction. The Silver Institute’s World Silver Survey shows production falling at an annual rate of 2%.
Mines have been depleting their silver reserves and haven’t had the incentive to develop new projects given low spot prices and geological challenges due to declining ore grades.
According to Katusa Research, “The average head grade has fallen by over 50% since 2010. This is not a good situation for a miner. In a world where input and production costs are rising yet profit per tonne of rock has fallen by 50%, this poses serious long-term potential problems.”
Investing in a miner is always in iffy proposition, even if you do your homework. The busts tend to outweigh the booms.
And in the case of silver miners, most are primarily in the business of mining other metals (such as lead, copper, nickel, zinc, or gold) – and only mine silver as a byproduct.
The lack of a healthy primary silver mining industry can work to the advantage of physical silver investors. It means that supply will remain constrained in the years ahead.
Even if higher spot prices begin to make mining silver more profitable, the beaten and battered industry won’t have the immediate capacity to grow production to any significant degree. It will take years of rebuilding.
In the meantime, once silver breaks above overhead technical resistance from $20-$21/oz, the path should be clear for a run toward its old record high.
The Platinum Wild Card
The other metal with big upside potential in the 2020s is platinum. It has gotten clobbered by palladium and rhodium in recent years. But the extreme price disparity between platinum and those other two platinum group metals makes it a compelling alternative for automakers and other industrial users.
“Platinum had fallen out of favor among investors after Volkswagen AG’s emissions-cheating scandal in 2015 prompted commuters to turn away from diesel vehicles. The market has overestimated the decline in demand for autocatalysts,” reports Bloomberg (via Mining.com)
“By 2025, about 850,000 metric tons of palladium used in autocatalysts could be substituted with platinum…”
Although downside is likely limited, platinum could spend much of 2020 basing out before substitution kicks in to push prices much higher in the years ahead. Adding to the fundamental story will be a rise in the use of fuel cells for power generation, which use platinum.
The Gold Safe Haven
As always, precious metals investors should first stake out core positions in gold and silver. They are money, first and foremost.
Monetary demand for gold – led by central banks in Russia, China, and elsewhere – is likely to remain strong.
Even if the global economy falters and causes industrial demand for the white metals to slip, gold buying won’t necessarily go down. It could even increase on a flight to safety.
Gold may not be the cheapest metal, but it is cheap relative to the U.S. stock market. And the protection physical gold provides from the risks of financial turmoil is invaluable.