It sounds crazy to say that the price of Silver can increase 900% in the next 7 years. Fact of the matter is silver already did that between the years 2004-2011. The price spiked from $5/oz. to $45/oz. in seven years due to a weakening US dollar.
The first four years of the silver spike was due to US national debt ballooning out of control. The spike in silver prices that occurred from 2009 to 2011 was fueled not only because of national debt-but the new quantitative easing experiment the FED was embarking on. The fear that QE would cause massive inflation in everyday prices like gas and food bid up the prices of precious metals. QE did not cause inflation above 2% between 2008-2018 for the following simplified reasons:
- As the FED practiced QE (FED purchased bonds to drive down interest rates in order to stimulate asset classes like stocks and housing) they paid a higher rate of interest to banks on their excess reserves than the market place would’ve paid if the banks would’ve loaned money to the market place. Therefor everyday prices remained stable. If banks would’ve loaned out the money to the market place than the excess cash in the real economy would’ve caused the inflation in everyday goods.
- The US economy after the 2008 financial crisis was experiencing a deflationary process. QE therefor pushed against those forces and leveled out.
At the start of QE the FED has a balance sheet of less than $800B. Today the FED has a balance sheet of over $4T. At the beginning of QE the FED also had the benefit of being able to slash interest rates from a normal rate between 5-6%. However, even slashing the FED funds rate in 2008 from 6% to 0% wasn’t enough to stimulate the economy. Hence the introduction of QE. Today the FED funds rate is 2.25-2.50%. In the event of another recession we don’t have enough runway to slash interest rates to boost the economy. With an inflation rate of 2% we are almost still at a real interest rate of 0%. Therefor, we are only one recession away from another round of QE.
The difference between this round of QE and all of the others:
- The FED for the first time since introducing QE tried to raise the FED funds rate and unload their balance sheet to payback the $4T at a clip of $50B per month. As the process unfolded the economy began to shake. The FED at one point stated the offloading of $50B was on auto pilot has now pivoted to stating the unloading of $50B could be halted if the situation dictates. The FED has already shown the world their hand- we have demonstrated that we can’t unload our balance sheet without causing real problems in the economy. As this becomes more apparent confidence in the US dollar will begin to shake.
- As confidence in the USD and the US economy weakens- it will be become harder to sell our our treasuries to other nations that have been lending us money. Those same nations are embarking on their own version of trying to shrink central bank balance sheets. When our treasuries aren’t being purchased- the interest rates will start climbing higher and higher on short and long term bonds. As these interest rates begin to climb- the FED will have a harder time paying banks to keep the money in excess reserves. Banks will have to pay out more money via interest on savings accounts at their institutions than the return they are receiving on 10 years worth of low interest rates they lent out on mortgages. Therefor the FED would have to start paying higher interest rates to banks if they want them to keep their cash in excess reserves. So in the end the FED’s cards will be seen-they can’t go through quantitative tightening- they will only be able to issue more QE and blow past their current $4T mark now with higher interest rates. More than likely the FED won’t be able afford the rate of interest on the expanding balance sheet. Banks won’t keep the funds in excess reserve accounts. Banks will have to lend the money to the public in order to stay solvent. Massive inflation will occur as the money floods main street.
How does this scenario push silver up between 2019-2025?
- We are about to begin a period just like 2009-2011. The period when the world was worried that inflation was going to hit main street because of QE. During that period silver increased from 10 oz. to $48 oz. People will begin to realize the US can’t do anything but flood the market place with USD to keep our over leveraged economy away from higher interest rates. The FED has already shown their hand that quantitative tightening isn’t possible. That the reality is only more QE. This will stoke the fears of inflation far more than the period between 2009-2011.
- As the FED funds rate rises- so does the value of the USD. As of today the FED is in a wait and see period with interest rates. They have walked back their mid 2018 tune of an automatic two rate hikes in 2019. It is probably the USD has seen its peak within this business cycle. A downward dollar is bullish for gold and silver.
- Technically speaking- when looking at the 20 year chart we see a head and shoulders pattern. As the USD stops increasing we imagine we are at the end of this pattern and ready to make new highs.
- Silver often times follows the price of gold. Silver is a by product of other metals being mined. Today it costs approximately $1,200 to mine one ounce of gold. The price of gold today is just above at around $1,290. Just like OPEC cuts oil when it doesn’t make economic sense- so do gold mining companies to stabilize prices.
- International affairs have foreign governments buying mass quantities of gold. US sanctions stripping foreign governments and companies access to US dollar have forced them into a position to buy gold in order to store value.
- Countries that have lent the US government are purchasing gold as a hedge against their lofty lending the the United States.
In our opinion gold is going much higher. Silver flows with the price of gold but in a more volatile clip-often times 3 times the moves of gold. Our very bullish position on gold also has us bullish on silver.