EDITOR'S NOTE: Gold and silver may have underperformed the stock market in 2021, but their lack of luster can also be considered a mere breather following their spectacular outperformance starting in 2019. The fundamentals driving gold and silver haven't changed; although the general mood has. There are many reasons to remain bullish on the yellow and white metal, and Patrick Heller of Numismatic News provides an exhaustive list of economic reasons to consider. Most importantly, he reminds us again that these metals constitute a form of “wealth insurance,” or something that can withstand the erosion of fiat-based values. Looking at the economic forecast, where you can clearly see rising inflation, crashing asset values, pandemic uncertainty, and geopolitical unrest, wealth insurance not only sounds appealing but necessary to preserving wealth and lifestyle.
Last week I mentioned how the prices of gold and silver in 2021 not only did not exceed the percentage increases that they experienced in 2020, but actually fell over the course of the year. Similarly, where I expected the price of platinum to end 2021 higher than it did at the end of the year before, its price also declined. Palladium’s price, as I expected, declined over the course of last year.
Before I move on to discuss what may happen in 2022, I think it makes sense to put 2021’s precious metals price moves into a greater perspective. Instead of looking only at the one-year results, it probably makes more sense to do a two-year analysis, so that you use a starting point before the onset of the COVID pandemic.
As this was being written on Dec. 29, shortly before the COMEX settled for the day, the spot price of gold jumped 18.7 percent from the Dec. 31, 2019, close. Over the same time period, silver rose 27.8 percent; platinum was virtually unchanged, down just 0.1 percent; and palladium was up 3.5 percent. Although gold and silver prices did not match the increases in major U.S. stock indices over the stretch (Dow Jones Industrial Average gained 27 percent, the Russell 2000 climbed 35 percent, the Standard & Poors 500 rose 48 percent and the NASDAQ soared 75 percent), those were still respectable results.
The two-year results for gold and silver are even more impressive when you consider the extreme efforts undertaken at the behest of the U.S. government – as I am confident occurred – to suppress gold and silver prices during this period. See last week’s column.
As a result, at the end of 2021, gold, silver and platinum prices were lower than I anticipated. That increases the likelihood of prices generally rising over the course of 2022.
Besides that, there are many more reasons to expect higher gold, silver and platinum prices in 2022, while I anticipate that palladium’s price will continue to decline. Here are some of the factors to consider:
• From February 2020, shortly before the onset of the COVID pandemic, to today, the total assets of the five major central banks (U.S. Federal Reserve Bank, European Central Bank, Bank of Japan, People’s Bank of China and Bank of England) have grown from $20.4 trillion to $32.5 trillion. This is the result of massive inflation of the money supply. The U.S. M2 money supply now has reached 90 percent of Gross Domestic Product (GDP), where it was only 44 percent of GDP at the end of 1999. As governments around the world are inflating their money supplies at the highest rate in history, fiat (paper) currency values are destined to fall. Gold and silver price increases have not kept up with the scope of this inflation of the money supply over the past two years.
• Although Americans are hearing that consumer prices over the past year are rising at a multi-decade high rate, they are still not being informed that the real price increases are far higher than the U.S. government is admitting. For the 12 months ended November 2021, the Consumer Price Index was up 6.8 percent. However, if the current CPI was calculated using the same methodology as formerly used by the US Bureau of Labor Statistics, the numbers are much higher. According to John Williams (www.shadowstats.com), if the current CPI increase for the year had been derived using the BLS methodology from 1990, the price hike would exceed 10 percent; or, using the BLS 1980 methodology, the annual prices would be up about 15 percent. As people realize the true extent to which their paper currencies are losing value, that will spark a greater interest in owning “safe haven assets” such as gold and silver.
• The recovery in GDP from the depths in the spring of 2020 was largely in response to the government’s expansion of the money supply and credit as opposed to actual economic growth. A smaller part of the increase was as a result of higher wholesale and consumer prices. Government officials want the public to believe there is an actual recovery rather than a mostly inflationary response. So long as most people don’t realize what is actually occurring, this inflation of the money supply will continue, which will eventually translate into higher demand to own gold and silver.
• Cryptocurrencies are simply another form of fiat currencies. Yet, because some have risen substantially in value, most people have not yet realized that they cannot permanently replace other paper (fiat) currencies as a relatively stable medium of exchange. Expect in 2022 that more people will come to understand that cryptocurrencies are not money (see my Dec. 9, 2021, column here). To the extent this happens, demand for gold and silver will increase as people seek more stable safe haven assets.
• On Jan. 1, 2022, the expansion of Basel 3 requirements for banks to maintain a net stable funding ratio will mean greater pressure for banks to either 1) hold more physical gold to cover their gold liabilities owed to customers, or else 2) for banks to reduce their willingness to sell short gold through derivatives contracts (effectively creating “paper” gold out of thin air). Some of this shift in banks’ gold operations has already occurred, but it will become more extensive in 2022. To the extent that this results is a decline in gold short sales and/or an increase in demand for physical gold, look for higher prices to result.
• Additionally, as the expansion of Basel 3 requirements for banks to maintain a net stable funding ratio to cover their liabilities leads banks to trim their gold trading operations, this will almost certainly increase the volatility in gold’s price.
• To the extent that interest rates might rise in 2022, whether or not sparked by forecasted actions of the Federal Reserve, business profits will decline. This would put downward pressure on stock prices. As more investors seek to leave the stock market to reallocate into safe haven assets, look for higher gold and silver prices.
• With interest rates now well below the rate at which consumer prices are rising, that makes holding interest-bearing investments such as bonds, certificates of deposit, money market funds, and savings accounts a surefire losing proposition. As people shift away from owning such assets, almost certainly some of those funds will be used to purchase gold and silver.
• On Aug. 31, 2021, the Federal Reserve announced that its Standing Repo Facility was made available to eligible counter-parties (i.e. banks with at least $30 billion in assets or meeting other standards) overnight loans of as much as $500 billion. Simply the fact that the Fed is contemplating that such a massive one-day liquidity squeeze could happen suggests that America’s financial institutions are not as solid and stable as the government wants the public to believe.
• The Archegos Capital Management collapse on March 26, 2021, led to at least $10 billion in losses at banks that had lent it funds to enable it to acquire highly leveraged investments. Several stocks that Archegos had acquired are now trading lower by 80 percent or more than they were last March. There are a number of other aggressive investment entities around. There is always a possibility that another one could collapse at any time – especially if the Federal Reserve goes ahead as recently indicated to raise the federal funds interest rate multiple times in 2022.