The Rally in Gold and Silver Prices Is Just Getting Going

Some who are considering buying gold bullion or silver investment often look closely at the price and ask ‘is now a good time to buy gold’? This is understandable after all no buying decision should be one that you take lightly and often people want to feel like they have bought ‘at the right time’. So, in this week’s blog, we look at recent gold and silver price gains in the perspective of the financial crisis of 2008 – 2011. Remember, whether you buy gold today or tomorrow, it should be viewed not just as an investment but also as insurance for your portfolio. 

In our post on April 13 Has the IMF Told the World to Buy Gold? we discussed the IMF’s (International Monetary Funds) recent release of its Global Financial Stability Report and World Economic Outlook and pointed out that many of the major financial stress factors caused by the rapid tightening of the monetary policy outlined in the reports are positive for gold and silver prices. 

How does financial stress impact gold and silver prices

This week we start with putting gold and silver price gains from financial stress in perspective of the recent Great Financial Crisis of 2008-2011. 

The chart below shows that silver prices have already rallied 40% from September 1, 2022, with a steep climb starting in mid-March as the problems of Silicon Valley Bank started to unfold and gold prices have climbed almost 20%. We also remind readers that one of the signs of a bull market in precious metals is when the silver price is rising faster than the gold price. 

Gold and Silver Price Chart

There is the added complication of inflation (see our post on March 30 The Fed is now in a tug-of-war between fighting inflation and saving the banking system) and the much higher debt levels of governments and households. 

The third flagship report published by the IMF last week was the Fiscal Monitor which discusses fiscal policy (governments sending less) tightening after the rapid increase in spending to support their respective economies during Covid.

Governments must deal with high debt levels, alongside modest growth (negative economic growth in the near term) while having to pay higher interest rates on their own debt.

The report states that governments are likely to face additional spending pressures in 2023 as ongoing geopolitical tensions may lead to further increases in defense spending and fiscal support to address negative effects from disruptions to international trade. Industrial policies, including government subsidies, may also emerge to foster import substitution … 

… Low-income developing countries, many of which are in or near debt distress or have limited fiscal space, face a particularly difficult balancing act. Many developing countries are grappling with tighter budgetary constraints.

The additional spending pressures, combined with slower growth, and tighter monetary policy due to ongoing inflation pressures will add to debt levels.

Over the medium term, under current policies, public debt is expected to rise to close to the record levels seen at the height of the pandemic.…. Related fiscal risks typically manifest themselves in weak growth and tight financial conditions. (See chart below from the Fiscal Monitor report.)

Low Growth, Rising Rates and High Debt

The IMF expects debt governments to continue to run deficits and debt levels to rise in all three major categories – advanced economies, emerging markets, and low-income developing countries.

General Government Primary Balance and Debt Chart, 2019-27

In China, it’s not the central government that holds massive debt, but instead the local governments in aggregate.

China, one of the world’s most indebted nations, has not experienced a full-blown financial crisis, yet. There were a few close calls. In 2019, the government had to seize a regional bank, for the first time in decades, to prevent a run on deposits.

Last year, a wave of real estate developer defaults ended up with homebuyers threatening mortgage boycotts. Both scares got defused. One may even argue that China is now a safer place for investors after Beijing tightened regulations on unruly local banks and aggressive home builders.

There is one more elephant in the room

But there is one more elephant in the room: Borrowings from local government financing vehicles. For years, municipalities have been relying on these off-balance-sheet entities to fund infrastructure and support the local economy.

LGFV debt rose to 57 trillion yuan ($8.3 trillion) in 2022, or 48% of China’s gross domestic product, according to estimates from the International Monetary Fund (Bloomberg, 04/16). 

Elephant in the room

With land prices tumbling and slowing growth in China some provinces are appealing to the central government for a bailout.

And in the US there is the eroding of confidence due to the ongoing raising of the debt ceiling debate which will turn into a crisis and a possible US government shutdown in mid-June if Congress continues to bicker and stonewall (for more on the debt ceiling see our post from January 19 What happens if the debt ceiling raises).

Bottom line – there are many crises on the horizon which will turn more investors to precious metals thus propelling prices higher.

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