Gold And Silver: The Big Picture

This last week saw continued volatility in the precious metals markets, though both gold and silver needed to take a rest after having moved roughly 7% and 10% higher respectively since the beginning of the month.

On Wednesday, CPM Group, a precious metals consultancy firm previously noted for its bearish outlook on gold, nonetheless offered a more positive view longer term for the metal over the next 8-10 years. Their publication “Gold Outlook” was released this week and reminds readers that investor interest in precious metals like gold continues. Strong evidence for this demand can be seen in Asian premiums, as well as retail coin and bar sales in the West, even as demand for exchange traded funds has declined this year. In the United States, silver coin sales are nearing record territory, although demand for paper silver has declined somewhat since 2011. Longer term, the determination of physical holders to buy while paper holders sell is a bullish development, as it reveals a shift in mass psychology regarding the need to diversify one’s portfolio with a real physical asset like gold and silver. Unlike the period following the 1980 peak in gold, when physical sales declined along with paper speculation, the recent dropoff in prices was caused solely by paper (or electronic) disinvestment.

Another long term, fundamental factor in the rise of gold and silver comes from the belief of central planners that inflation is nonexistant currently and actually needs to increase. This is the view held by many among western central bankers, and is part of the reason why FED bond purchases will not decline much from the nearly 1 trillion a year mark, as made clear this week by the US central bank. FOMC statements released Wednesday continues to affirm that the deflationary threats from the 2008 crisis remain. The ultra-loose stance of the world’s largest central bank should be of concern to anyone who wonders if inflation might one day get out of hand

And in India, known as one of the world’s leading gold markets, inflation is already making its presence felt. The Indian central bank continues to raise interest rates while attempting to curtail demand for gold among Indian citizens. Many observers note the similarity to policies once adopted by the US government in the late 1960s and 1970s, and how those policies failed to dampen demand for gold as both inflation and interest rates rose strongly.

My question for any gold or silver bear is this: if gold and silver went up nearly 7 times over the last 10 years with no meaningful inflation in western nations, how much more will the metals go up when inflation is officially recognized as a problem by those in charge?