Americans Just Can’t Get Enough Gold And Silver

Precious metals markets enter the month of May with some mixed signals near term.  But the long-term picture continues to look constructive.  All the metals appear to have put in major bottoms during the panic selling of mid to late March.

Barring another wave of virus outbreaks and economic lockdowns, the gradual reopening of state, local, and national economies should start to unleash more industrial and jewelry demand in the not too distant future. 

And the extraordinary fiscal and monetary stimulus being pumped into the financial system will, if nothing else, work toward the debasement of the U.S. dollar. 

Earlier this week, the Federal Open Market Committee met and pledged to keep interest rates near zero for as long as necessary. In prepared remarks, Federal Reserve chairman Jerome Powell admitted the economy is contracting at an unprecedented rate but vowed that the Fed would come to the rescue with a “full range of tools.”

Jerome Powell: The forceful measures that we as a country are taking to control the spread of the virus have brought much of the economy to an abrupt halt. Many businesses have closed, people have been asked to stay home and basic social interactions are greatly curtailed. People are putting their lives and livelihoods on hold at significant economic and personal cost.

Overall, economic activity will likely drop at an unprecedented rate in the second quarter. Inflation is also being held down, reflecting weaker demand as well as significantly lower energy prices. Both the depth and the duration of the economic downturn are extraordinarily uncertain. The Federal Reserve's response is guided by our mandate to promote maximum employment and stable prices for the American people, along with our responsibilities to promote the stability of the financial system. We're also committed to using our full range of tools to support the economy in this challenging time.

The Fed’s tools have built a gargantuan balance sheet that currently comes in today at a record $6.6 trillion.  The ultimate consequences of its unprecedented actions are still unknown. But the huge rallies in the stock market and precious metals markets last month suggest strongly that the central bank has successfully held deflation at bay.  

But all the king’s men have not been able to put Humpty Dumpty back together again, at least not yet.  In fact, the situation in the real economy continues to worsen at a dramatic rate. 

This week, the federal government announced that Americans filed another 4.5 million new unemployment claims across the U.S., taking the total to over 30 million jobs lost in the past 6 weeks.  This number is set to grow further -- and will be slow to recover, even when the lockdowns are loosened.

In fact, as spending behaviors continue to change in our consumption-based economy, it’s unlikely that certain jobs and businesses will ever return.  And once the full extent of the carnage sinks in with the American people and policymakers, new financial panics and government interventions could ensue.

Nevertheless, we could see the velocity of the greatly expanded currency supply pick up in the months ahead as some people return to work and spend back into the economy.  That would have major inflationary implications.

We can look to precious metals markets for clues about inflation expectations among investors.  Last month gold hit an 8-year high just shy of $1,800 an ounce before pulling back.  That move was not confirmed by silver or other metals. 

However, the more speculative gold mining stocks did record new multi-year highs. The miners led the stock market out of its March crash, becoming the strongest sector of all.

That bodes well for gold and silver prices. Mining stock investors are anticipating a healthier market for metals producers.  And key to their ability to grow their profits is being able to sell mined products at higher spot prices.

On Thursday, the World Gold Council reported that total investment demand for the gold surged 80% year-on-year in the first quarter to 540 metric tons.  Strong bullion buying and ultra-stimulative monetary policy led Bank of America recently to raise its upside target for gold to $3,000 per ounce while pointing out “the Fed can’t print gold.”

Meanwhile, both platinum and silver have traded at historically large discounts to gold this year.  Silver wasn’t able to gain much ground on gold in April. It remains extremely depressed in the paper market – although somewhat less so in the physical bullion market where silver coins continue to command large premiums above spot.

To be sure, Americans seem to be waking up to a need to buy financial insurance in the form of physical gold and silver, and a slowing in retail demand is nowhere in sight.

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