August 2023 - Week 4 Edition

Why is Silver Rising While Gold is Flat?

Silver is strong this week, awaiting the central bankers’ annual conference in Jackson Hole, Wyoming, at the end of the week. This is the general excuse given for selling or waiting, but Fed speeches aren’t that important in the long run.  On Monday, August 21, silver rose from $22.75 to $23.20 (+2%) by 9:00 am in New York and then kept rising into the afternoon. By 9 a.m. Wednesday, it reached $24.21 per ounce. During the same time frame, gold rose more slowly, from $1,890 to $1,917.

There are usually three fundamental reasons why silver can rise faster than gold: (1) When both precious metals are rising at the same time, silver is like a leveraged bet on gold, since it is a smaller market and the same amount of money invested in the silver market will move silver higher and faster than gold. (2) When global economies are strong, or in times of general peace and prosperity, silver is an industrial metal and may rise faster than gold, which has very few industrial uses. Gold is primarily an investment vehicle, an adornment in jewelry and an official central bank foreign exchange component. (3) As a narrower trading market, it can be quietly cornered by billionaire investors or hedge funds who hold onto their futures contract until expiration, putting pressure on the COMEX (to deliver more physical silver than they own.

Since precious metals are not generally rising over the last few months, and the global economy is in a funk, causes #1 and #2 do not apply. As for cause #3, there are two notable historical cases of cornering the silver market. In 1979, Bunker Hunt and two of his brothers attempted to corner the silver market, driving the price of silver from $5 to $50 in less than a year before the relevant exchanges altered the rules, sending silver rapidly back down to $11, nearly bankrupting the Hunts. Then, in mid-1997, when silver got as low as $4.25, the most famous billionaire investor of our day, Warren Buffett, via Berkshire Hathaway, started to accumulate COMEX silver contracts due to expire in March of 1998. We didn’t see a replay of the Hunt spike, but silver rose 83% in 8 months, to spike at $7.81 on February 6, 1998, as Buffett’s accumulated 129 million ounces of March 1998 silver contracts were about to be delivered.

The problem is that the COMEX (Commodity Exchange) exchange does not own nearly enough silver to fulfill all of its futures contracts since most investors are “paper silver” speculators who roll over their investments before they expire. They have no intention of taking delivery of 5,000 ounces (five 1,000-ounce ingots) on their doorstep.  In 1998, it was rumored that Buffett had a heart of gold and let COMEX silver speculators off the hook, or else we could have seen a steeper silver spike to $10, more than doubling when gold was dormant.

Could such an event start to happen again this year? Some have speculated that China is making solar panels with a prodigious amount of silver and they can’t buy enough on the open market. They have invested in silver contracts with the purpose of letting them expire in order to force COMEX to deliver the silver to them at a relatively low price, while pushing the market price higher. If that happens, we might see a repeat of the 1980 or 1998 spike. This could cause Federal regulators to change the rules to suppress any spiking silver prices. They may also release silver from other sources to ease the squeeze on the COMEX. Either way, that would highlight the shortage of physical silver and the price would likely rise after such an event.

Silver American Eagles Down to a Reasonable Premium

For over a year now, I have warned against buying American Silver Eagles due to their high premium compared to other silver bullion coins available from other global mints.  American Silver Eagles still cost more than competing products but for those who want to “Buy American” and love the beautiful patriotic design of the American Eagle, that little bit more may now be worth the expense at smaller quantities. Call your account representative to survey the available silver bullion products and their comparative premiums.

U.S. Debt Soars to Nearly $2 Trillion Annual Rate as Treasury Rates Soar to 15-Year Highs

When the central bank members meet, they will speak with a lot of carefully crafted words but there is little chance they say what is really on their minds. If they did, they would likely say, “Why can’t the politicians in our respective nations – especially, the U.S. – stop over-spending on war, green dreams, bailouts, special interests, whatever ‘bridge to nowhere’ they can imagine and start being realistic about their national debts?” There are two specific indicators of this malaise in the U.S. right now – a 15-year high in Treasury interest rates and a nearly $2 trillion annual rate in our deficits.

Treasury bond yields are now at their highest levels since the financial crisis of 2008. The benchmark 10-year Treasury bond hit 4.36% on Tuesday, August 22. Mortgage rates are approaching 8%. The shorter end of the yield curve has also risen. These high bond rates reflect a new aversion by investors to buy U.S. government debt after the recent debt downgrade. On the budget side, the federal government is like that young lady, Ado Annie in “Oklahoma” who “Cain’t Say No” in spending on everything she likes from electric vehicles and wind power or solar panels to a long and seemingly unwinnable war with Russia in Ukraine.

The federal budget deficit for Fiscal Year 2023 (ending September 30) is already $1.6 trillion as of July 31, according to the Congressional Budget Office, which stated the figure is “more than twice the shortfall recorded during the same period last year. Revenues were 10 percent lower, and outlays were 10 percent higher from October through July than they were during the same period in fiscal year 2022.” Paying 5% (instead of 1%) on $34 trillion in debt means we’re paying $1.36 trillion more just to service our debt.

“When will our politicians wake up and smell the coffee?” would be an ideal Jackson Hole speech! I say, “buy more silver and gold, the bank that never fails.”

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