What Drives Silver and Gold Prices?

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There are no less than four major fundamentals at work that can explain the precious metals markets and in particular silver the best. Each has had an unequivocal impact on pricing thus far in this secular bull market for precious metals and each fundamental can be argued alone or as part of a group.

US Dollar and World Currency Depreciation

The first fundamental is US long-term fiat dollar depreciation and by extension, since 2008, fiat currency depreciation all over the world. It is happening folks. The purchasing power of the US dollar, both domestically and abroad has dropped ominously since the last century. The chart below depicts the erosion that has taken place and defines the struggle that people have to see exactly what their dollar will purchase over time.

Central banks and the world’s largest institutions of monetary influence know this story. They are holding US dollars in the form of foreign reserves at a time when they do not want their holdings and purchasing power to continue to erode.

For this reason both gold and silver can act as an insurance policy in the event it gets too overheated in the global economy. So why might a currency want to devalue? Remember the lower the value of the currency the easier the time a country will have paying its debt. Without getting to far into the debate both gold and silver have presented investors with abundant profitable occasions as the US dollar value has traversed lower.

Long Term Inflation

The second fundamental is a wave of inflation that I expect to hit markets with a vengeance because of the fiat paper being recklessly printed during this unprecedented phase of currency depreciation. (Please see John Williams of www.Shadowstats.com for more on the subject of inflation and the true rate of inflation at street level). Leading up to an inflationary event bullion has historically performed tremendously well. Look back at the 1970’s when each precious metal rose dramatically as the fear of inflation also rose. Gold during that decade managed a climb of 2300 percent while Silver fared even better gaining 3200 percent by January of 1980. When it was all said and done both metals eventually did pull back in value. However by that point in time inflation had almost single-handedly caused double digit interest and mortgage rates.

Geo-Political Instability

The third fundamental is a repetitive wave of geo-political instability in the form of regime overthrow, regional instability from economic fallout, poorly diversified countries, and yes good old war. I suggest repetitive because this particular fundamental rears its ugly head time and time again. Simply think back to the 1970’s Russia and Afghanistan war and the Iran Hostage situation to name a couple. Today we have Syria, Iran and North Korea to name a few.

These are reasons that whole countries and geographical regions identify with assets such as gold and silver and their central banks change policy to acquire, in a net positive fashion, as much as they can. This has generally been the case now with many central bank buyers of gold since at least 2009. Look at China, Russia, Germany, Venezuela and many others for more insight on the topic of central bank buying and the repatriation of gold by countries.

Supply and Demand

Some of the greatest writers and analysts in the bullion field have already laid the foundation for understanding how much above ground silver there really is. Look no further than Ted Butler, David Morgan or even Canada’s own Eric Sprott. In short the silver supply has been used and maltreated at very low prices prior to the last decade for over three decades prior. In the case of Butler his arguments have been so compelling that he makes a case for there essentially being less above ground silver than gold at present time.

In fact, there were billions of ounces in January of 1980 when silver reached its all-time historical high of $52 per ounce. Fast forward to 2016 and it is said that there is now less than perhaps 1 billion above ground ounces available not just for the thousands of applications and critical industrial uses but for all of the world’s total demand.

At today’s price of approximately $19.00 USD per ounce, 1 billion ounces of silver would be valued at about $19 billion dollars. One investor could literally turn the market on its figurative head. (Store this little tidbit and recall it when you have already purchased bullion and you are trying to convince others to do the same.)

Conclusion

We are in possibly the worst period of economic existence we have seen in our lifetimes. Look around and see the unemployed or underemployed, the droves of foreclosed homes and the bankrupt cities like Detroit and others. Look at the stories of middle class families losing their future financial freedom by loss of pensions. Look at the people on food stamps in the US and the amount of debt owed by each man, woman and child (Now approaching $80,000 CDN per person in the US and $17,500 in Canada at last check).

Participation rates continue to drop for those in the US and Canadian job markets and the number of those on social assistance is increasing. The sobering conclusion is that things are not rosy. Since 2008 alone the US has increased its monetary base faster than in any other time in history. There will be more “bail-ins”, more lending, failure and white collar crime to come. It is only a matter of time.