Two Scenarios for Precious Metals in the Unfolding Cronavirus Crisis / Commodities / Gold & Silver 2020
Extreme volatility in the equity markets has investors wonderingwhat to expect. Even the hardiest of stock market bulls are finally asking someserious questions about whether the top is in.
Stocks have long been priced for perfection and suddenlyconditions are looking far from perfect. The coronavirus may be the pin whichpricks the latest Fed-blown bubble.
Precious metals investors have been preparing against a rainyday. They may be less surprised by the turmoil in markets over the past coupleof weeks. But there are still big questions about how metals prices mightbehave, especially if the current turmoil in markets should evolve into afull-blown financial crisis.
Here are two metals-market scenarios worth considering:
Scenario #1 - The 2008 Financial Crisis Revisited
During the immediate aftermath of the event, everything getssold - a repeat of what happened in 2008. Investors buy bullion, even astraders dump leveraged futures in a rush to the sidelines on Wall Street.
Greg Weldon of Weldon Financial said metals investors couldeasily see a replay of 2008 in a recent Money MetalsWeekly Market Wrap podcast. He notedthe record number of active contracts, or open interest, in gold. The weakhanded speculators who have chased the gold price higher will bequick to dump positions as prices move against them.
It won’t matter if more conservative investors are pouring intothe physical markets for gold and silver. The futures markets are almostentirely untethered from physical supply and demand. Price discovery there isdriven more by leverage, volatility, algorithmic trading, and bullion bankfraud.
Thus far the Treasury market action is reminiscent of 2008.Investors are buying bonds hand over fist and yields have fallen to newall-time lows.
As long as confidence remains in the U.S. dollar and U.S.Treasury debt, investors will look for safe haven in those markets. They arecurrently the widest and deepest markets on Earth and there aren’t too manyother places for big money to go.
As the dust settles, look for money to pour back into gold and silver. Just as in 2008,speculators will be trying to position for what comes next.
Precious metals will pop up on the radar as a beneficiary ofsafe haven demand. These traders will also anticipate the Federal Reservequadrupling down on stimulus measures and look for assets which can benefitfrom the weaker dollar and lower interest rates.
However, should confidence in U.S. Treasury debt and the dollarfinally collapse, markets will look nothing like 2008.
Scenario #2 - The Mother of All Bubbles Pops
Government debt is far beyond what citizens can hope to repay. Areckoning is coming and the only question is when market participants at largewill acknowledge that fact. When confidence evaporates, the party for centralbankers and their political allies in government will be over.
Money is currently flooding into the bond markets, so at leastsome confidence remains. However, there are some key differences today versus2008. The U.S. Treasury better hope investors continue to buy first and askquestions later, because bonds are an obvious bubble.
U.S. Treasury bond prices are at an all-time high. Meanwhilefederal debt has nearly tripled since 2008.
Deficits are currently expected to be more than $1 trillionannually.
If recession strikes and officials respond with stimulus thosedeficits could easily balloon to $2 or $3 trillion.
The supply of Treasuries is already vast and a tidal wave of newissuance seems to be building. The Fed has been acting as the buyer of lastresort. Will investors just continue to shrug as the central bank monetizesever larger portions of the national debt? Maybe, but maybe not.
Steven Grey recently covered just how precarious the bond marketis in a Wall Street Journal op-ed. Should interest rates start to rise, therewill be enormous pressure to sell Treasuries. A market at all-time highs makesa dubious safe haven.
Interestingly, the U.S. dollar is not acting like it did in2008. The DXY index has been under pressure since the market turmoil began acouple weeks ago. Currency traders lack confidence in the dollar. That may becontagious when it comes to the bond markets which most certainly aren’t wellpositioned for any serious inflation.
Don’t Gamble, Just Prepare
Betting on the first scenario only to find out we got the secondwould be disastrous. Anyone fleeing into cash or government bonds, just as thedebt bubble finally bursts could be wiped out entirely.
The second scenario is coming, whether it be now or later. Thesheer amount of debt accumulated cannot be paid, so it won’t be – at least notin current dollars. There is little point in trying to predict exactly whenthis reality will dawn upon the rest of the country.
It is safer to assume it could happen at any time. If we get areplay of 2008, metals will ultimately do well anyway.
By Clint Siegner
Clint Siegner is a Director at MoneyMetals Exchange,perhaps the nation's fastest-growing dealer of low-premium precious metalscoins, rounds, and bars. Siegner, a graduate of Linfield College in Oregon,puts his experience in business management along with his passion for personalliberty, limited government, and honest money into the development of MoneyMetals' brand and reach. This includes writing extensively on the bullionmarkets and their intersection with policy and world affairs.
© 2020 Clint Siegner - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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