Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy / Commodities / Gold & Silver 2020
Last week was another week of wild marketvolatility for all asset classes, and precious metals were no exception.
Gold continues to be the least volatile metal. And it continues to hold up better than thechaotic stock market during most trading days. But it has experienced somedownside in recent days.
Money Metals Exchange and other bullion dealershave experienced an unprecedented surge in demand for silver and gold coins,bars, and rounds. Many dealers haveessentially sold out and/or refused to accept smaller orders because offulfillment challenges.
The month of March could set an all-time record forsales of Silver Eagles. That will depend on whether the U.S. Mint iswilling and able to supply coins to dealers in volumes that the market demands.
So far, it unsurprisingly failing to keep up withdemand – resulting in dealer inventory shortages, rising premiums, and abnormallylong delivery windows for most orders.
Money Metals’ premiums have certainly risensharply, but not as much as our competitors. But this is not price gouging, because wholesale costs have risendramatically also due to shortages.
Prices in the retail market are reflecting thefundamentals of the bullion market – which include massive demand, productionbottlenecks, and shortages. At the sametime, dealer bid prices have risen sharply, meaning – if folks are willing –they will be paid a very high premium over spot if they sell their items todealers.
A growing number of Americans are facing tremendousfinancial strain and may have no choice but to liquidate assets and raise cash.
The advantage of holding physical silver duringtimes like these instead of futures or exchange-traded instruments isclear. During the marketmayhem over the past couple weeks, some exchange-traded funds begandiverging in price from their own underlying assets in cascades ofselling.
One exchange-traded silver product, which trades asPSLV, began trading at a discount of over 10% to net asset value. That means if you owned shares of thisvehicle and had to sell, you would be getting significantly less for yourshares than they are supposed to be worth.
Part of the explanation for anomalies such as theseis that markets become less efficient when they are being driven by panicselling and extreme swings in the value of underlying assets. But a deeper and more troubling potentialreason for the large price discrepancies is that investors may have grownincreasingly concerned about the layers of credit risk and counterparty riskassociated with exchange-traded products.
A rising perceived risk of default or failure couldcertainly cause the market to attach a discounted value to any financialinstrument. That’s certainly been thecase for a lot of corporate bonds and shares now that many companies are in acash crunch.
Precious metals in physical form carry nocounterparty risk, cannot default, and will never go to zero – although aswe’ve seen that their spot prices can still succumb to waves of selling thatgrip capital markets.
Silver has gone from incredibly cheap to insanelycheap during this coronavirus crisis. One measure of just how depressed prices have gotten is that onWednesday the gold:silver ratio closed at a record 125:1. It took 125 ounces of silver to buy a single ounce ofgold!
Also this past week, the VIX volatility index forthe stock market spiked to an historic high, slightly above the levelregistered during the peak fear period of the 2008 financial crisis.
While there is certainly much more damage yet to beinflicted in the economy and quite possibly much lower stock market levelsahead, it’s also likely that many assets that were unfairly put on the choppingblock this week have put in their final lows.
Even as the U.S. economy remains on virtuallockdown, demand for commodities is likely to start picking up from China. TheCOVID-19 new infection rate there has slowed dramatically and nearly flatlined, if you believe government reports. As, Chinese factories return to production and motorists return to theroads, demand for raw materials will increase.
It may be a many months or longer, before theUnited States economy returns to something akin to normal. But when it does, a massive amount of pent updemand will hit the energy sector and commodities more broadly. Consumers and corporations will also be armedwith trillions of new coronavirus dollars that are set to be distributed tothem by the federal government.
We have never seen a bailout attempt like thisbefore. Certainly not on this large ascale or this wide a scope.
Hard to believe just a few weeks ago, Americanswere feeling grateful to not be living under an authoritarian country likeChina that can arbitrarily decide to quarantine populations and shut downentire cities.
Americans are now effectively living under acommand economy. Political decisionswill now determine which businesses are allowed to operate and which willultimately survive. Will we ever get back the freedoms we used to take for granted?Or are we in a long emergency that will never see a return to normalcy?
The ultimate consequences of this economic lockdownand the coming helicopter drops of cash are difficult to predict. This crisis could render government deficitsunmanageable, destroy Uncle Sam’s low interest rate borrowing capacity, andforce officials to adopt Modern Monetary Theory – essentially bypassing thebond market and having the Federal Reserve print whatever cash the governmentneeds.
As severe as this recent deflation scare has been,the inflationary snapback to come could catch a lot of investors completelyunprepared. And as disappointing assilver’s spot price performance has been of late, it has the potential todeliver truly explosive gains when the pressures now building in the physicalbullion market blow the lid off the paper market.
In the meantime though, please be careful outthere.
By Mike Gleason
Mike Gleason is President of Money Metals Exchange, the national precious metals company named 2015 "Dealer of the Year" in the United States by an independent global ratings group. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal, Detroit News, Washington Times, and National Review.
© 2020 Mike Gleason - All Rights Reserved
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