What has happened to the Price of Gold & Silver?
Bullion is a traditional hedge against turbulent economic times. So why are they going down in value now?
Throughout history gold and silver have been classed as real money with today’s paper currencies being called Fiat Currency. All Fiat Currency was backed by Gold and Silver reserves until the 1970’s when US President Nixon made the decision to remove gold as security and rely on the dollar to be trusted enough to guarantee a dollar bill was a dollar. It wasn’t long before other countries followed suit and the reserve banks sold off their bullion reserves.
The crash of 2008 highlighted the lack of confidence in paper currencies especially with quantative easing from governments. The result Gold and Silver Bullion once more became the safe haven and drastically rose in price.
Today, with stock markets plunging, most people would have expected the bullion to become a safe haven and boom in value. But it hasn’t. In fact, it has done the opposite and gone down. So, what has happened to the price of Gold & Silver?
Watching the flow of money around the markets is the key to discovering why Bullion is dropping in value and I have seen some trends that indicate there are 2 key reasons for the drop in value.
Many traders use leverage to trade. For example if you were to trade on gold going up in value then you only need a percentage of the value of the trade to complete the transactions. ETF’s are one of the main leverage tools. You can buy anything for a percentage of the cost. When the price goes in the direction you have placed your trade you sell the ETF and pocket the difference. This is in an up or down market. For example you can buy $10,000 worth of gold etf’s and only pay $1000. Then if you said Gold was going up and it did to the price you nominate you make the difference in the profit you would have made as if you owned $10,000 worth of gold. In reality you only paid $1,000 for it. If the trade goes against you then you have to cover the cost of the loss.
We have seen historical drops in the value of share markets and tradeable products. Traders have lost millions/billions on ETF’s and other tradeable contracts and have to cover those losses. Physical Gold & Silver which they owned has been sold to cover losses.
For every sell there has to be a buyer and vice versa. With so much gold and silver flooding the markets to cover Margin Calls the price goes down. That is basic supply and demand. Too much product on the market and price drops.
There are a variety of Bonds on the market, in this case I am talking about Government Bonds also known as Treasury Bonds. Government Bonds are guaranteed. In the UK there is a restriction of £1,000,000 (one million pounds per person) but other countries have no restrictions and all bonds issued by the government are guaranteed.
Bonds pay interest twice a year. When the interest rates are higher than the returns on the Share Market then money flows into Bonds. When the returns are higher on the Share Market then money flows to Shares.
We have currently seen the biggest drops in history on the Share Market so money has flowed into Bonds. Some governments have reacted and dropped interest rates while other governments have kept rates high.
When the governments of the world are in sync with dropping rates then investors will move their money into the next investment seen to offer the best security. That tends to be Gold & Silver Bullion.
What Next for Gold & Silver?
It is still regarded as a safe investment. An investment that offers a hedge against economic woes. It is still one of the traditional money flow tracks.
Already Governments are talking about the amount of fiat currency they will need to print to support countries through these difficult times. Those same countries have for several years been stock piling bullion reserves for such an emergency so there is plenty of reason to have confidence in gold and silver still being a hedge.
In an earlier post I wrote about the Basel 111 agreement which from April 2019, removed risk restrictions on bullion investing for banks to zero. This encourage banks to also buy heavily into bullion for their reserves.
It is unlikely that with both Governments and Banks investing so heavily into bullion that it will suddenly fall out of favour. In fact, the opposite is likely to happen and more money from both institutions will likely go into bullion.
When is the Best Time to Buy Gold and Silver?
The simple answer is now. Both have dropped in value due to the exceptional circumstances I mentioned above offering the best time to buy. Many bullion businesses are unable to dispatch bullion at the moment to clients but are offering storage and delayed postage.
The Gold/Silver ratio which is a marker which tends to indicate whether it is best to buy Silver or Gold is at historical highs indicating silver is very undervalued and suggesting that would be the best investment at the moment.
The economic turmoil is just starting and as it goes through it’s cycle money will start to flow back into Gold and Silver Bullion. Then both will accelerate exponentially. When will that happen, no one knows. It’s very much watch this space and watch the markets but one thing is certain there has not been a better time to invest in bullion since pre 2008 than now.