The risk of people’s wealth falling by more than 50% in the next 5-7 years is probably greater today than at any other time in history. Investors are currently experiencing extreme greed and the search for above-average growth, but the cyclical nature of historical periods suggests that such periods are followed by times when greed is replaced by fear and the search for “big” returns is replaced by the search for protection and preservation of wealth.
And not only that… In such times, “tangible”, material investments “recapture” the initiative, just as they did at the beginning of the millennium. The scenario of a resurgence of the commodity cycle or a significant reversal of the relationship between commodities and equities is very likely. The participation of the commodity sector in commodity cycles is therefore of paramount importance, as the prices of gold and silver have shown over time. But what are the reasons and factors that drive investors to invest in gold and silver?
1. The global economic picture: pessimism or optimism?
The US stock market is grossly overvalued by many indicators, including a handful of technology stocks that have driven stock indices higher. Are we about to enter a “new” era thanks to the recent tightening of monetary policy by central banks? Is pessimism replacing optimism?
The following trends will predict the severity of the situation:
-Geopolitical tensions and wars.
-A resurgence of inflation.
-Rising government debt and budget deficits.
-Currencies on the way to further devaluation.
-A “split” between the BRICS East and West.
As these events escalate, investors are beginning to curb their greed and turn in greater numbers to safe assets such as gold to preserve their wealth. At the same time, it is a good question as to what choice of safe assets investors have.
2. The world in debt
Debt is omnipresent, and the cost of debt is currently higher than ever before. The consequences of this are already being felt in national economies and households. In times like these, we need to be aware of our solutions to the debt that is being created behind the scenes, because ultimately, we “pay” for it with the loss of purchasing power of our money.
It took the US 232 years to pay off the first USD 10,000 billion of debt and “only” 100 days to pay off the last USD 1,000 billion. The US national debt has doubled on average every 8 years since 1980. Given the state of US finances, it is likely that debt will increase “super” exponentially from now on, with the US federal debt of USD 100,000 billion being reached before 2036. This predicts the current trend of doubling debt every 8 years. All empires collapse without exception, the same applies to all fiat currencies. Are new central bank “projects” called “Central Bank Digital Currencies” already being prepared behind the scenes for this?
Image 1: US debt over time
Source: Strategas
There is only one currency that has shone for more than 3000 years, and that is gold. At present, gold accounts for just over 0.5% of all global financial assets. In 1960, 5% of assets were still in gold and in 1980, when the gold price peaked at $850, it was 2.7%. Despite the desire in international financial circles to reduce the role of gold, it is becoming a haven in times like today. Not only a haven, but also an investment with above average returns as participants seek a safe and trustworthy haven.
3. Gold – protection against currency devaluation
As the French philosopher Voltaire said in 1727, every currency always returns to its true value – the value of NOTHING. We are probably not sufficiently aware that all currencies have a finite lifespan and are based on debt. The longer we hold a currency, the more that currency loses value compared to tangible forms of investment. Here we can highlight real estate, gold and silver in particular through their comparison in history.
Have you ever wondered why we should hold paper money for the long term when we get less for it every day? Currency devaluation can also happen in the short term. In the first week of March 2024, it was revealed that Egypt had devalued its currency by around 35%, followed by a sharp rise in interest rates amid the country’s worst economic crisis in decades. We do not need major ‘crises’ to lose wealth, but a look at our most important currency, the euro, will suffice. Since its introduction in 1999, the euro has lost more than 87% of its value against gold. In 1999, EUR 1 bought 124 mg of gold, today it is only 15.6 mg.
Image 2: Milligrams Gold per Euro since 1999
Source: Incrementum
Another example of the loss of purchasing power of currencies
In the last 15 years, the price of gold, measured in euros, has only fallen significantly once, marking the end of a trend in commodities that lasted more than a decade between 2001and 2012. From this perspective, this is an entirely expected event. However, if we look at the average growth rate of the euro, we see that the euro has steadily lost value against gold over the longer term, at a rate of just over 8% per year. From this point of view, it represents a real protection against the loss of purchasing power of assets, especially in the longer term. Of course, this is also evident in the short term. In times of uncertainty of all kinds that we are experiencing today, the years 2009, 2010, 2011 and 2019 are a reminder of this with their above-average growth.
Image 3: Gold returns in different currencies, last 15 years
Source: Goldprice.org
4. China’s hunger for gold (country, Chinese, Generation Z)
China seems to have long known how to “protect” itself as a country, at least partially, from the impact of the rising debt being generated in the West. World Gold Council (WGC) gold data show that the Chinese central bank added 225 tons of gold to its reserves last year and now holds 2,235 tons of gold. China’s intensive gold buying could be part of a broader global trend of ‘de-dollarization’, in which many countries that are not strategically linked to the US are moving away from dollar investments, thereby reducing their dependence on the dollar. This trend is particularly characteristic of the BRICS countries, which have recently been joined by many countries around the world.
The “outflow” of gold from Europe to China is also interesting. Swiss exports to China, which are usually a good indicator of Chinese demand for the precious metal, more than doubled in January compared with December to 77.8 tons, while shipments to Hong Kong, according to the Swiss Federal Administration, increased sevenfold to 44.6 tons.
Gold is not only in demand from the Chinese State but also from many Chinese people
WGC data show that consumer demand for gold in China (in the form of jewelry, coins, and bars) rose by 16% in 2023, with a 12% increase in demand for gold jewelry and a 27% increase in demand for bars and coins. What drives the Chinese to buy?
The Chinese are also turning to gold in large numbers because of the country’s growing economic “distress”. Many Chinese have lost faith in owning real estate and shares, which have recently been declining in value. Last year’s Chinese Lunar New Year, when the Chinese traditionally show respect for gold and believe that gold is the best way to preserve wealth, also contributed to the record demand in January and February.
Particularly interesting is the demand for gold from China’s Generation Z (born 1995-2010), which is heavily involved in China’s current “gold rush”. Among these younger Chinese consumers, the trend is to buy small gold items dubbed ‘Guochao’ (‘Chinese chic’). This is gold jewelry that expresses Chinese culture, traditions, or contemporary trends on a national level. Young people make purchases to show their respect for gold as well as for Chinese heritage and national pride. “This is completely alien to ‘Western’ youth, who are lost within ‘identities’ of all kinds and are looking for quick money and risks.
Image 4: China’s gold rush at Chinese New Year
Source: China Observer
5. Central bank demand hits record high
Central bank demand is one of the most important drivers of the current and future price of gold, and it has not abated even at record levels. Central banks bought a total of 1,037 tons of gold last year, only slightly less than in 2022. The main drivers of purchases in 2023 were the diversification of “foreign exchange” reserves, asset liquidity, and geopolitical concerns in the world. These reasons for buying continue in 2024.
Image 5: Gold purchases by central banks 2010-2023
Source: Metals Focus
Although the pace of gold accumulation has been record-breaking, central banks currently hold a much smaller share of gold compared to historical levels. In the late 1970s and early 1980s, these institutions held up to 75% of their balance sheet assets in gold, while today this proportion is less than 20%. Given the significant global debt levels, it is logical to expect that central banks will prioritize improving the quality of their international reserves to stabilize monetary conditions.
Image 6: Gold holdings in central banks
Source: Crescat
In this context, it is important to ask ourselves that if there are good reasons for central banks to invest in gold, would it not be a clever idea for people, and individuals, to protect and diversify their assets? We too can be our own ‘central bank’.
What about the future of central banks’ purchases of gold? According to a WGC survey of representatives of fifty-seven of the world’s central banks, 70% of the central banks surveyed will continue to buy, which may put further pressure on gold prices in the future.
6. The divergence between the gold price and ETFs
In the last period, we have seen an exceedingly rare event or anomaly in the gold market. The gold price has not kept up with the selling pressure sales of gold-backed ETFs. This is the largest deviation in 20 years of trading. This is a clear indication that gold is reaching new highs despite widespread disapproval in the US and the “West” and expectations of tighter monetary policy from the US. All of this confirms the reasons already outlined above that there is an extraordinary background demand for physical gold from the “East” and central banks.
Image 7: Gold price and inflows/outflows of gold ETFs
Source: Bloomberg
7. “Technical” picture or analysis of the silver price
The recent breakout of the silver price above the 15-year resistance on the quarterly chart tells us that silver may finally be entering a “bullish” uptrend. Silver is characterized by the fact that, compared to gold, it always delays its rise until it reaches a critical point or there is a significant market move that boosts its value. We seem to be remarkably close to that now. This is confirmed by the extremely high gold/silver ratio, which today (14.3.2024) stands at 1:88. In the past, we have seen extremely rapid falls in this ratio, which meant that silver began to “outperform” gold in terms of returns, to the point where it became “overvalued”. We are a long way from that overvaluation of silver at the moment.
Image 8: Silver price breakthrough
Source: Crescat
8.Fundamental analysis of silver
I have previously written in this article about the basic factors influencing the supply and demand of silver, such as industrial use, investment demand, production, and geopolitics. Despite all the outstanding data on the silver side that we have seen over the past years, the silver price did not justify this until recently.
Have we now finally reached the epilogue?
The record divergence between demand and supply may soon be coming to an end, and its price may finally reflect this. I find the graph below of falling silver production from Mexico and Peru, the world’s two largest silver producers, particularly shocking. Their current production levels are at their lowest point in 14 years. Combined production is now 25% below the peak levels of 2016. With gold reaching record levels and triggering a new bull market in precious metals, there is a significant mismatch between supply and demand that will undoubtedly drive silver prices sharply higher. Silver is not a metal that is losing its use value, but one of the world’s most important commodities, particularly important for modern technologies and green energy.
Image 9: Silver Production in Mexico and Peru Combined
Source: Crescat
Conclusion
To the mentioned above 8 main factors that will continue to drive gold and silver prices upwards in the future, we could easily add a few more. But more importantly, it is generally felt that we cannot imagine these times without investment in gold and silver. On the one hand, they represent a safe way of storing value that has built up trust over many centuries. This is particularly understood by monetary policy-makers and by those nations that know how to learn from history and cherish tradition. On the other hand, both investments bring the potential created by raw materials as the engine of progress in our civilization. If it is also a commodity that has been ‘waiting’ for more than a decade to show its potential, as in the case of silver, then an additional or major investment cause may soon be realized.
