In investing terms, I’m bullish on silver and precious metals in general. I don’t know when my intuition will be validated by events, just that at some point in the near future it will.
But is that time now? Are prices now – finally – breaking out? Over the past 4 weeks, silver has risen from $18.70 toz to $21.22 toz. Out of 19 trading sessions this past month, silver prices have fallen only three times, while gold prices posted declines for five of them. And while gold prices traded recently at just over a two-month high, silver tapped its highest in more than three months.
This surge certainly seems to back this up, especially when compared to the list of fundamentals as well as geo-political and economic events affecting precious metals:
1) Inflation is rising, something even the US Fed and most central banks now acknowledges, although it is dismissed this as mere “noise.”
2) Wars are escalating, breaking out or threatening to erupt all over the world (Ukraine, Iraq and Syria amongst the current hotspots).
3). Interest rates either at near zero or even negative ... and, per central bank “guidance,” set to remain so indefinitely.
4) Continuing reports that the economy is NOT recovering as was predicted. The possibility even exists that the US will soon officially be in a recession (two consecutive quarters of declining GDP).
5) Stock market “bubble” still expanding, creating the potential that when it finally bursts the fallout will be immense (and will likely see a bigger run to precious metals as “safe haven” assets).
6) Demand for physical gold and silver remains high especially in China, India, Russia and set to continue.
7) Growth of government debts and government spending continues unabated.
The list could go on, but the point from the above is that there is no shortage solid, common-sense reasons precious metal prices should be rising.
This brings me to the question I asked at the beginning of this article: is that time now? Are the long-term fundamentals finally starting to prevail and push prices higher, with more increases to be expected in July, August, September?
The next few weeks might be a test that proves whether this is the case. The key for Silver will be a successful close above this year’s high of $22.20 toz set in February. For clues, we need to look at the current fundamentals, particularly the economic outlook:
The most notable news last week was the sharp downward revision to US 1st Quarter GDP, from an original annualized rise of 0.1% to a huge fall of -2.9%. As usual Wall Street analysts continue to be optimistic for the 2nd Quarter, but the signs from recent business and consumer surveys have tended to disappoint. Furthermore, initial official figures for Services Spending in the US for April and May, representing 68% of GDP, show very little growth for the first two months of the current quarter.
On top of this bad news, reports from April suggest underlying credit conditions in the US are rapidly tightening. Tightening monetary conditions are bad news for an economy that appears to be slowing both sharply and unexpectedly, while prices are rising. They had a word for it: stagflation. These were the conditions that prevailed in the 1970s bull market for gold.
A combination of a slowing economy, tightening credit conditions and increasing price inflation also represents growing stress for the financial system. This appears to be taking the US Federal Reserve by surprise according to recent FOMC minutes, so further intervention may be required. This could be a reason for traders to turn negative on overvalued equities and bullish for gold and silver in the coming months.
I’ll be watching closely to see what transpires. What happens could tell us much about where we place our trades in the months to come.
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