LAWRIE WILLIAMS: Silver: Maybe I spoke too soon but still a gamble.

My article of yesterday saying we wouldn’t be surprised if silver fell to $10 an ounce or less may have been a little premature.  Silver remains weak for the time being and could yet fall a little further but perhaps not quite as far as $10 or below if reports we are hearing on the non-availability of physical metal prove to be correct.  Also the behaviour of the gold price in its apparent reluctance to fall much below the $1,500 mark without making something of a partial comeback belies the apparent overall weakness in the two key precious metals.  We still have little confidence in the future paths of the pgms though, but they could make some gains if and when gold and silver prices do take off.

While much of what I wrote in yesterday’s article (Silver sandbagging may not be over yet) will still be accurate and relevant, the degree to which I reckoned silver might still fall may have been over-pessimistic.  Today, as I write, the Gold:Silver Ratio (GSR) has hit a perhaps ridiculously high 127 and prices of both gold and silver remain under some selling pressure which looks ever-increasingly like engineered selling on the futures markets exacerbated by margin calls,  The wild swings in the equities markets may have prompted individual investors and funds to climb back into the market in the assumption that they might be picking up bargains as encouraged by mistaken media pundits.  Instead they have been caught in the proverbial dead cat bounces and have ended up throwing good money (often borrowed) after bad.  We fear the markets have further to fall yet with virus cases accelerating in the U.S. and Europe.  Both silver and gold are probably at lower levels than can be justified, but they may well not have hit bottom yet! Yes they will almost certainly recover some months, or even years, down the road but there could be more grief for precious metals investors yet.

As for the pgms, platinum looks to have been hit even harder than silver and we certainly wouldn’t be surprised to see palladium once again trading below the gold price.  Whether it will come back to parity with platinum, or below it perhaps won’t happen yet, but it may over time.  And as for rhodium – only a couple of weeks ago it was trading at around $12,000 an ounce.  Today it is at $3,500.  How the mighty have fallen!

What we are hearing from sources in the U.S. and Europe, though, is that the price falls for both gold and silver are almost entirely futures markets driven (in other words by paper gold and silver markdowns) coupled with dollar index strength.  This only really suits those financial institutions which held massive short positions in both metals,  We suspect that once the majority of these short positions have been unwound, the prices could be let rip, at least temporarily. 

It may also be, though, that it is in government and central bank interests to see gold and silver prices kept under control but the Trump Administration will be particularly concerned with the strength of the dollar against competing currencies as this will make U.S.-manufactured goods increasingly uncompetitive in global markets.  The problem is that the Fed has already cut the U.S. base interest rate effectively to zero and is presumably extremely reluctant to take them into negative territory.

The latest FOMC meeting is currently under way and eyes will be on any outcome on the interest rate front.  President Trump has in the past suggested the negative interest rate solution which puts the FOMC into a between a rock and a hard place situation.  If it does go negative, which the Fed is presumably extremely unwilling to do, that could bring the dollar back a little and thereby boost the gold price.  But then the rest of the world might all cut interest rates into similarly negative territory – at least those that are not there already.  This would be an enormous blow to global confidence in penalising prudence and who knows what would be the result in investor sentiment.  Talk about unleashing  a whirlwind!

But then nothing like the current financial situation has occurred before with the spread of a virus causing governments to take unprecedented steps to control it.  The measures that are being taken are themselves hugely recessionary and unemployment will soar.  More people will likely be put out of work than in the depths of the depression of the early 1930s.  It took a world war to reset that situation.  Let’s hope history doesn’t repeat itself as weaponry nowadays is far more lethal and could likely lead to a true Armageddon if the power of potentially competing militaries is used to its full extent.

OK I’m painting a worst case scenario here and it probably won’t come to that.  How can one protect one’s wealth under current circumstances, or even perhaps profit from the shake-out that is to come.  There will be a small group of companies which will be profiting from the current situation – there always are.  And as for the utilisation of precious metals, one investor I have been corresponding with suggests buying precious metals ETFs while bullion is in apparently short supply and subject to premiums – while ETFs tend to reflect the prices as set by the futures markets (thus are not affected by these premiums).  And when the whole system stabilises and the premiums on bullion fall away, sell the ETFs in favour of buying bullion which by then will surely be on a strong upwards path.  That appeals to my logic – but in the oft repeated mantra of Michael Lewitt of Credit Strategist fame perhaps one should just ‘buy gold and save yourselves’.  Silver maybe offers a better possible long term return than gold, but if the 60% of silver which depends on industrial usage doesn’t see a pick up then that perhaps becomes more of a gamble.  And whatever you do, don’t buy on margin!  That holds you too much hostage to fortune if things don’t work out as planned.

18 Mar 2020

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

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