September 2019 - Week 4 Edition

Global Tensions Escalate, Sending Gold and Silver Sharply Higher

Gold recovered strongly from $1,500 on Friday to $1,525 on Monday, September 23. Silver recovered even more strongly, rising by over 4%, from $17.90 on Friday to over $18.70 on Monday. The temporary “breather” we predicted in the bull market of the precious metals appears to be over, with both gold and silver on the rise again. Most of this buying surge is due to the crisis situation arising in Iran and Saudi Arabia over the missile and drone strike on Saudi oil fields, along with rising U.S./China trade tensions.

In addition to rising tensions in the Middle East, there were also more protests and rising violence in Hong Kong over the weekend. Next Tuesday, October 1, marks the 70^th anniversary of the Chinese Communist Revolution on October 1, 1949, during which China plans massive celebrations in Hong Kong harbor, among other places. It will be interesting to see if there are some protests during the celebration.

The main conflict fueling gold’s rise is in the Middle East, where an attack on Saudi Arabia’s oil fields caught the world by surprise. Oil prices rose nearly 15% in one day, the largest daily rise in 30 years, although prices retreated when several nations released their reserve supplies. The fact that 18 drones and 7 cruise missiles took out half of Saudi Arabia’s capacity – and 5% of the world’s daily oil production – with relative ease implies that another big strike or combined strikes could do far more damage.

President Trump tweeted that the U.S. was “locked and loaded” – meaning that the U.S. is ready to strike at whoever is responsible for the missile attack. That pushed gold prices back up over the weekend, as the President and world leaders weighed their options. The President approved sending U.S. troops to Saudi Arabia to bolster air and missile defenses and will seek United Nations sanctions early this week. Iran is certainly acting like a nation that wants to be punished further – either economically or by military action. 

As these tensions escalate, we can expect gold and silver to escalate, too, as the world’s top crisis hedges. Goldman Sachs sees gold rising to $1,600 in the next few months as investors seek safe havens. Bank of America Merrill Lynch analyst Michael Widmer said gold could climb to $2,000 in the next two years.

With rising gold and silver prices, we’re seeing more gold and silver ads, particularly American Eagle ads. Rising gold and silver prices often result in better response rates from new customers for many coin dealers, which lifts demand for bullion coins at first and then rare coins.  This lifts prices for both types of coins, eventually creating more rare coin collectors. This has been the proven case during past large increases in gold and silver bullion prices since the 1970s.

Silver Resumes its Strong Bull Market Surge

After dipping to $17.47 in September, silver surged strongly to $18.70 on Monday, fulfilling our July prediction of $18 prices this year – a prediction made on July 8, when silver was barely $15.

You can’t explain silver’s Monday surge based on “crisis haven” demand alone, since crisis investing is a major role of gold, not silver. Silver has more industrial uses than gold, and silver is also “poor man’s gold,” a “starter kit” in the precious metals for those who can’t afford to buy multiple ounces of gold.

Industrial, jewelry and silverware demand are steady and solid, but the investment demand for silver is the great “lever” in silver’s price. The silver market is so small that a doubling of investment demand can send silver soaring. History shows that silver only moved above $21 twice in the last 40 years – in 1979-80 and 2010-11 – but in each case, as soon as silver shot above $21 it moved rapidly up to $50. Specifically, the peak price was $50.36 in January 1980 and $49.82 in April 2011 (in the futures market). 

We’re not saying that the price of silver can reach $50 that rapidly again, but as we approach $20 and $21, anything can happen when investment demand turns into a buying stampede…

On July 8, when silver was barely $15 per ounce, we concluded our analysis by saying, “And here’s the kicker: As of July 8, 2019, gold is $1,400 and silver is $15.07, yielding a gold-silver ratio of 93-to-1, a 28-year high. The all-time high was 100-to-1 in 1991.  After that, the most recent low ratio was 31-to-1 in 2011, and the 20^th century low was 15-to-1 in 1980. There is no magical historical ratio of silver to gold, but in historic terms, silver has a lot of room to catch up to gold from these 93-to-1 levels.”

Now, the gold-silver ratio is down to about 81-to-1. If we returned to the 31-to-1 gold to silver price ratio, silver would be around $65 per ounce at $2,000 gold, or $50 at today’s gold price of around $1,550. At a more realistic 60-to-1 ratio, we’re liable to see $30 silver when gold reaches $1,800 – by 2020?

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