Why “Tail Risk” Should Be in Your Investment Vocabulary
Posted on — 1 CommentA tail risk is the probability of a rare event occurring. The tail is the left and right portion of a normal distribution curve which resembles a bell and therefore carries the name “bell curve.”
Author and investor Nassim Taleb explored the concept of tail risk in his 2007 best-seller The Black Swan: The Impact of the Highly Improbable. In the book Taleb tries to draw the reader’s attention to the idea that too often we are blind to randomness. As a result, we are exposed to the cataclysmic fallout from events that are possible, though improbable.
Investors across the world have experienced a rude awakening to this idea. As the COVID-19 pandemic continues to ravage economies, investors are discovering that they can in fact find themselves sliding down the bell curve into tail risk territory.
The “tail” however, is a strange place. When examined from the perspective of a diversified portfolio the tail represents both threats and opportunities. Consider that “gold tends to outperform in left-tail events,” according to research recently published by the World Gold Council. This outperformance does not always look like surging returns. Sometimes outperformance simply means being able to weather the storm and hold on to assets when others are watching their investments (equities and fixed-income) sink.
Others before Taleb have attempted to warn people of the unseen dangers lurking within the Byzantine systems we build. In his book Normal Accidents, author Charles Perrow argues that “we create systems—organizations, and the organization of organizations—that increase the risks for the operators, passengers, innocent bystanders, and for future generations.”
Academic Stephen H. Kellert touched on this idea when he coined the term, “predictive hopelessness” in his book In the Wake of Choas: Unpredictable Order in Dynamical Systems. Others, like Gerald Schueler who wrote The Unpredictability of Complex Systems, explains that “complex systems all have feedback mechanisms,” and that “tiny errors will creep into the feedback system.”
Today we are seeing that the accumulation of these errors can lead to an economic system that is unprepared for a pandemic. For those who hold gold as part of a diversified portfolio, however, these risks, while unavoidable, can be mitigated. Consider additional research from the World Gold Council report which finds that the correlation between gold and the stock market becomes more negative as equity market moves intensify. That is, as the S&P 500 experiences larger swings gold increasingly moves in an opposite direction. This fact has become especially evident in the last 8 weeks of market turmoil where the correlation between gold and the S&P 500 has reached much further into negative territory than the same correlation measured over the last 59 weeks.
When sweeping upheaval hits the equities market gold often seeks the high ground, helping investors to weather the storm. As authors like Taleb, Kellert, and Schueler issue warnings, many of us go about our lives without even a moment’s reflection on what awaits around the next corner. Gold, as an investment, reminds us that we can make at least some protective measures today.
Subscribe to our newsletter! Get our tales from the vault, our favorite stories from around the world and the latest tangible assets news delivered to your inbox weekly.
Monday Morning Wrap Up – April 27, 2020
Posted onA message from David Beahm
President and CEO
Gold $3,000
It was another wild week in the economy and the markets. As we wait for the coronavirus to peak, the economic toll from the shut-down continues to mount. Never say never. We saw oil prices go negative last week. The price of West Texas Intermediate (WTI) crude oil closed below zero on April 20. That’s right, oil sellers couldn’t give barrels of oil away for free.
In this topsy turvy world of the coronavirus pandemic, we’ve seen the government print new money and give it away (helicopter money) in the form of $1,200 stimulus checks to most Americans. The Fed has gone into full-on Rambo mode in its efforts to save the economy, aggressively printing new money, even buying assets like junk bonds. The Fed has stepped, or overstepped as some might say, into the role as both the lender and buyer of last resort.
Gold climbed last week, while stocks weakened. As the COVID-19 shutdown rocks the economy, gold shines brightly as the ultimate store of value. Major investment banks are now projecting gold will climb as high as $3,000 an ounce over the next several years.
Is the Fed Overreaching?
As we wait this week for the Federal Reserve’s policy making meeting on April 28-29, its worth taking a close look at its recent actions. Like the boy who cried wolf, we’ve used the word unprecedented so often lately it’s beginning to lose its meaning.
The Fed has attempted to ride in like a knight on a white horse to save the economy from another Great Depression. The Fed ballooned its balance sheet by about $2 trillion in the past month to $6.6 trillion as of April 22. Economists are projecting it could climb as high as $9 trillion by this summer. Yes, that’s all new money printing.
In its dramatic rescue efforts, the Federal Reserve began buying junk bonds this month. Outside of actual stocks, the Fed is buying asset classes of all kinds. Is the Fed’s move into buying assets that are below investment grade dangerous? Probably.
Meanwhile, public government debt is surging, while the Fed is effectively monetizing the debt. Here’s how this works:
The Fed prints the money. The Treasury sells new government bonds to finance the helicopter money and other emergency stimulus measures and to make interest payments on its current debt. Then, the Fed buys those bonds. Read that one more time. If that has you thinking of a Ponzi scheme, you aren’t that far off.
In the midst of this, foreign holders of U.S. Treasuries are selling. Foreigners dumped over $100 billion of Treasuries during three weeks to March, according to Fed custody data. Is that worrisome? Yes, indeed. Where will we be when no one except the Fed is willing to buy Treasuries to continue to finance our interest payments on the $24.7 trillion in U.S. debt? We will be in a world where gold is the only true money.
Will the Fed Go Negative?
While Europe has seen negative interest rates (when you have to pay the bank to hold your money), we haven’t seen that here in the U.S. Yet.
Last week, a former Fed official called for just that.
“Unprecedented situations require unprecedented actions. That’s why the U.S. Federal Reserve should fight a rapidly deepening recession by taking interest rates below zero for the first time ever,” said Narayana Kocherlakota, an economist and past president of the Federal Reserve Bank of Minneapolis.
Will interest rates go negative for the first time in history? We’ll update you on Wednesday afternoon after the Fed meeting concludes. If they do, expect an EXPLOSIVE move in gold higher.
Gold: The Ultimate Store of Value
It’s no wonder that last week in a BofA Global Research report entitled: “The Fed Can’t Print Gold”, the bank upped its 18-month gold target from $3,000 and even $4,000 an ounce over the next several years. Why? Largely because central banks are underwrite fiscal stimulus and financial markets through money printing, the bank said.
Saxo Bank, a Danish bank, went even farther, targeting gains to $4,000 gold within a few years.
Economic News
The fresh economic data is bleak. Breaking news last week saw a massive 15.4% decline in new home sales in March. The West Coast and the Northeast were hit particularly hard by the social-distancing requirements, with regional home sales down 38.5% and 41.5%, respectively.
No surprise, really. Home buyers are locked down in many regions of the country, making new home inspections virtually impossible. Sure, you can look at pictures online, but there’s no chance to look in the basement and turn on the faucets. Don’t forget. Home buyers generate a lot of consumer spending on furniture and new appliances. This shuts off the trickle-through impact on economic growth in more ways than one.
Jobless claims soared again last week, as another 4.4 million Americans lost their jobs.
Since mid-March, a staggering 26 million Americans have applied for unemployment benefits. These are real people, facing dramatic economic hardship with the loss of a paycheck. Economists’ project the unemployment forecast is closing in on levels not seen since the Great Depression.
Gold Is Real Money
It’s amazing, but not surprising, to see how the investment community has rallied around gold, with the new target of $3,000.
As the Fed continues to print new dollars with abandon, investors are taking solace in the intrinsic value of gold. Gold is real money and is the best for this money printing bubble the Fed and other central banks are creating. Soon, physical gold will only be available at much higher prices.
Would you rather buy gold today at around $1,717 an ounce, or will you wait until it is above $2,000 an ounce? The choice is yours.
We would like to hear about any questions or concerns you or those of your family or friends might be having on the investment and personal finance level. Please share those with us in a comment below, on social media or our website, or by phone at 1-800-880-4653 and we can offer guidance and recommendations.
While we all try to cope and move through this pandemic, count on Blanchard as a steady source of market analysis, guidance and support for you. We know you have questions. We are here for you and we have answers.
Stay safe,
David
Subscribe to our newsletter! Get our tales from the vault, our favorite stories from around the world and the latest tangible assets news delivered to your inbox weekly.
The Nuanced Appeal of the 1873-S $20 Open 3
Posted on — 2 CommentsThe California Gold Rush changed the firmament of American life. Nearly 300,000 people came to the state seeking to stake their claim and pull new found wealth from the ground. However, this adventurous spirit precipitated some serious problems. Many indigenous populations were forced off their lands by opportunistic “forty-niners,” a reference to those flocking to California during the peak of the gold rush in 1849.
In fact, the gold rush was so momentous that its effects extended all the way to Congress where people like James Iver McKay began to notice that the gold supply in the country was increasing markedly. Eventually, he drafted legislation calling for the issuance of the Liberty Head double eagle coin. The piece was originally intended to facilitate the transfer of large sums between parties.
After considerable collaboration the final design settled on an obverse depicting the head of Liberty. She has thirteen stars surrounding her as a representation of the original US states. The reverse side featured a heraldic eagle with a double ribbon reading “E Pluribus Unum.” As the case with nearly any new coin issuance, the piece was initially met with some dissatisfaction. The Journal of Commerce, for example suggested that the coin should include an image of George Washington and that the eagle should be designed “standing out as if it were not ashamed of itself.” Few hold these opinions today as the double eagle design remains popular with collectors.
The 1873 version of the coin was part of the “Type II” issuance which were minted between 1866 and 1876. During this period of upheaval in the stemming from the Civil War Secretary of the Treasury Salmon P. Chase responded for calls to imbue the coin with a reference to faith. Therefore, he and others decided to inscribe the coin, and nearly all other coins, with “In God We Trust.” To accomplish this change the designer enlarged the circle of stars on the reverse placing the new text within the stars.
By the end of 1872 another change, this one more practical, was requested. Chief Coiner A. Loudon Snowden indicated that the “3” appearing in the date of the coin could be easily mistaken for an “8.” This change is what led to the two versions we have today, an “Open 3,” and a “Closed 3” design.
On the Closed 3 design the knobs of the “3” are identical in size and shape. In contrast, the Open 3 design features a slightly smaller upper knob. The Open 3 version is estimated to be approximately three times more rare than the Closed 3 variety.
This detail is what gives the 1873-S $20 Open 3 its charm. It is a minor, but noticeable change that has come to represent the nuanced appeal that compels coin enthusiasts to seek out the unusual and obscure. In fact, almost none of the pieces struck at the Carson City Mint in Nevada and the San Francisco Mint include the Open 3 design.
Today, the coin enjoys a unique reputation among collectors who hold the piece in esteem for both its rarity and enduring record of US history.
Subscribe to our newsletter! Get our tales from the vault, our favorite stories from around the world and the latest tangible assets news delivered to your inbox weekly.
The 1921 Peace Dollar
Posted onSoon after World War I ended, the US decided to commemorate the peace that followed with a dollar coin. When it came time to design the artwork officials had the idea to host a competition. Artists could submit designs and a winner would be selected and receive the honor of seeing 
their work on an approved piece of US currency consisting almost entirely of silver. Additionally, the winner would be awarded $1,500 in prize money. The coin was referred to as the Peace dollar.
Italian American sculptor Anthony de Francisci submitted a design which was unanimously selected by the official judges. The win was especially impressive given that de Francisci was the youngest of the artists to enter the competition. He was only 34. His wife Teresa served as the model for Liberty. It was, however, another characteristic of his work that sparked outrage.
To visually represent the theme of peace, de Francisci included imagery of an eagle perched on a broken sword. When the first written descriptions of the artwork were shared with the public many people admonished de Francisci and other officials by citing the work as emblematic of defeat. One editorial, printed in the New York Herald, remarked that “a broken sword carries with it only unpleasant associations.” The author continued, “it is regrettable that the artist should have made such an error in symbolism.”
It is likely that this sentiment was shared by others because not long after the printing of the editorial officials relented and decided to move the broken sword. They did so by hiring another artist to adjust other elements in the design in such a way as to cover the broken sword. To achieve this effect the artist made alterations to the eagle’s talons and the olive branches that were part of the original image. Accentuating these features obscured the parts of the original people believed to be defeatist.
Eventually, the design earned approval and in 1921 the US Mint struck over one million pieces. The coin was eventually released to the public in early January of 1922 with a composition of .900 silver and .100 copper. In time, the mint in Denver and in San Francisco issued additional pieces along with the Philadelphia mint. In 1922 alone, the total combined issuance of these three mints was 84 million pieces. By 1928 the mints ended their issuance of the Peace dollars.
However, in 1934 the US resumed minting the Peace dollar. This resurgence was the result of a newly passed Congressional act which mandated that the mint would purchase bulk quantities of silver which, at the time, could be bought at record low prices. As a result, between 1934 and 1935 the US mint struck approximately seven million additional Peace dollars.
Today this single coin represents so many aspects of American culture. It represents the ambitions of a young Italian American, a celebration of peace, and the ingenuity of the mints that were able to issue such vast quantities.
Subscribe to our newsletter! Get our tales from the vault, our favorite stories from around the world and the latest tangible assets news delivered to your inbox weekly.
Monday Morning Wrap Up: April 20, 2020
Posted on — 4 CommentsA message from David Beahm
President and CEO
Over the past several years of rising stock prices and economic growth, “market risk” was an abstract concept.
The coronavirus, that seemingly emerged out of nowhere in the past few months, changed all that. Risk is no longer an abstract concept for any American today. With face masks now the new normal, so many things about daily life are different. While this may be hard to hear, there won’t be an easy path to a fast economic recovery.
If you’ve been checking your retirement balances in recent weeks, it has been a horror show. The first quarter of 2020 revealed the importance of diversification and proper asset allocation in order to protect your money.
So where are you now? Are you confident about your portfolio allocation and diversification percentages? Or, do you have questions about how long the recession will last and what could lie ahead for financial markets? And, most importantly are you wondering what this could mean for your finances and investments in the months and years ahead.
Wherever you are at today, Blanchard is here for you. We believe it is beneficial to talk with a portfolio manager at least on a quarterly basis. Even if you aren’t considering making any moves, we can offer insights, perspective and assurances. Call us today, even if it just to check in. Our portfolio managers watch new economic data and market moves closely and have their finger on the pulse of the market. Rely on our expertise during these challenging times. Call us today at 1-800-880-4653 even if it is just to let us know if you enjoy our Monday morning reports.
IMF Offers Stark Forecast
The global outlook continues to darken with every passing week of the health crisis. The International Monetary Fund warned last week the world is facing the worst financial crisis since the 1930’s Great Depression. The IMF projected a 3% decline in the global economy in 2020, well below the 0.1% contraction recorded in the 2008 global financial crisis.
“The current recession has likely reduced economic activity by 11.8% peak to trough, which is roughly three times the decline seen during the Great Recession in one-third of the time,” S&P Global said last week.
Gold soars to 7 1/2 Year High
In the midst of this unprecedented crisis, gold soared above the $1,700 an ounce level last week hitting a fresh high. The bull market in gold is still in its infancy. As governments and central banks around the world embark on historic and expansive stimulus measures, forecasts are growing for gold to hit new all-time highs within the next year, well above the $2,000 per ounce level.
Safe haven demand and a pick-up in inflation expectations are also driving fresh demand for gold and will continue to fuel additional price gains.
While gold already hit Bank of America’s 2020 price target last week, analysts at the bank issued a new report saying all-time highs are now within view. Looking back in recent decades there is precedence for double-digit rallies in gold, they said.
“Gold prices have rallied 20% or more 15 times since 1981 and 30% or more seven times. The biggest rallies were in 2006-2011 during the late cycle equity rally into and after the Global Financial Crisis,” the Bank of America analysts said. “If $1,947 were to be reached, then gold would be up 27% YTD [year to date]. A 31% YTD rally reaches $2,000. A 41% rally like 2006 reaches $2,150.”
North Korean hacking threatens U.S. and global financial system.
It’s not just coronavirus risks that threaten fiat money stability, other forces are at play as well. Last week, U.S. government officials issued a warning about the threat of North Korean hackers.
It is widely known that North Korea has been aggressively pursing a massive global money grab campaign for several years. The North Korean illegal activities include digital theft stealing tens of millions of dollars in cash from ATMs, implementing enormous thefts at major banks, hijacking and extorting computer users worldwide and infiltrating digital currency exchanges.
A 2019 U.N. report concluded that North Korea had stolen about $2 billion for its weapons of mass destruction programs using “widespread and increasingly sophisticated” hacking efforts.
U.S. officials stated last week that North Korea’s hacking attempts “threaten the United States and countries around the world and, in particular, pose a significant threat to the integrity and stability of the international financial system.”
Food Supply Chain Tested By Covid-19
In other crisis news, Bloomberg reported last week that “on land and sea, vital supplies hit snags as pandemic deepens; Ship crews are stuck on board and truckers held up at borders…Covid-19 is about to put the global trading system through its most dramatic stress-test since World War II, with supply lines for essential food and medical goods entering a critical phase as the pandemic peaks in the U.S. and Europe.”
COVID-19 hit the meat sector last week. Smithfield Foods Inc., the world’s largest pork processor, shuttered U.S. bacon and ham plants last week after a coronavirus outbreak at one if its plants.
Social Unrest in U.S. Picks Up
With May just around the corner, the great debate is on in Washington D.C. and in state capitols around the country: When to reopen the economy?
Protests have popped up around the country, with some citizens banding together calling for the economy to reopen. Will stay-at-home orders be extended on May 1 and will states begin to reopen restaurants, businesses and stores?
The next several weeks will be pivotal for the health crisis and the economy. We will continue to update you here every Monday morning.
One thing hasn’t changed. In the midst of unprecedented uncertainty, gold remains the pillar of safety and security. An asset you can trust and count on to protect and grow your wealth.
Thank you for reading this.
Be safe,
David
Subscribe to our newsletter! Get our tales from the vault, our favorite stories from around the world and the latest tangible assets news delivered to your inbox weekly.
Why “Saints” Are Special
Posted onIt is often called one of the most beautiful U.S. coins.
For serious collectors, the impressive 1907 High Relief Double Eagle designed by Augustus Saint-Gaudens is often their first major purchase. For others, this prized $20 gold coin represents an aspirational trophy, which is highly coveted in the numismatics world.
What makes this unique coin so special?
For starters, the story behind the development of these coins is legendary.
Affectionately known as “Saints,” these awe-inspiring coins exist due to the partnership between two monumental historical figures of their day.
Not a big fan of American coins in circulation President Theodore Roosevelt called their design “atrocious hideousness.” He set out to rectify that.
President Roosevelt began his vision to reshape the nation’s coinage unleashing the majestic talent of Augustus Saint-Gaudens, a brilliant sculptor of that time. As the story goes, at a Washington dinner party one evening, Roosevelt tasked Saint-Gaudens with the grand undertaking to redesign America’s gold coins.
Both men admired Greece’s ancient coins and agreed that U.S. gold coins developed in that fashion would be a monumental achievement. They were right. Today, 113 years after this coin was minted, it still takes your breath away.
High Relief Made Coin Difficult to Stack
There is a relatively high survival rate of the mintage of just over 12,000 of the 1907 High Relief Double Eagles. Rumor has it, collectors immediately started acquiring these coins right after their minting.
These Saints were intensely desired due to their unique High Relief pattern. While the high relief is one of the features that collectors most admire today, it was also the reason the coin pattern was not continued. The high relief pattern, while beautiful, created problems for bankers who wanted to stack coins in back offices and also challenges in everyday commerce.
Other Unique Characteristics of 1907 Saints
The obverse of the coin shows the date in Roman numerals!
Also, the omnipresent IN GOD WE TRUST motto is noticeably absent from this coin. President Roosevelt believed the coin could be used for ungodly activities like gambling (or worse!) and did not want the name of God used on the coin.
The Coin’s Appearance
If you haven’t held a $20 Gold Double Eagle in your hand, imagine this.
The obverse showcases a dramatic full-length portrait of Liberty in a flowing gown, heralding a torch in her right hand and an olive branch in her left. She is featured in full stride with rays of sunlight behind her. Above her the word LIBERTY sits atop the coin.
Subscribe to our newsletter! Get our tales from the vault, our favorite stories from around the world and the latest tangible assets news delivered to your inbox weekly.
Monday Morning Wrap Up: April 13, 2020
Posted on — 1 CommentA message from David Beahm
President and CEO
Crisis Reshapes the Future
Black Swan. Nassim Taleb, a professor of risk engineering at New York University, popularized the term: Black Swan. It is defined as a highly improbable event with major consequences.
Think back just a few months ago.
At the beginning of 2020, the stock market was hitting new all-time highs, the unemployment rate was at a 50-year low, the economy continued to grow in the longest post-WWII expansion phase on record.
The COVID-19 health and economic crisis most certainly fits the definition of a Black Swan.
Fast forward to mid-April. There are reports the rate of coronavirus infection could be close to peaking in some states. Yet, America still faces weeks and months ahead of uncertainty and the potential for a resurgence in the virus.
Individuals, small businesses and corporations must work through the economic devastation that hit our country like a deadly F-5 tornado that struck Kansas unexpectedly one spring afternoon. This will take time. Things will look different in the months and years ahead.
Main Street and Wall Street are bracing for a second quarter that will likely record the deepest economic decline our generation has ever seen. Economists predict a double-digit unemployment rate that could easily last well into summer.
The COVID-19 stock market crash triggered a massive run on physical gold as individuals search for safety in the economic storm. This bull run in gold is projected to last throughout this current decade with record price highs.
Why? The COVID-19 crisis is reshaping our future with economic recession, bankruptcies, a massive increase in new government debt, and an unlimited expansion of the Federal Reserve’s money printing polices. QE infinity.
Even before this crisis hit, the U.S. economy was skating along in a bubble blown up by a decade of ultra-low and accommodative Federal Reserve monetary policy. Never before has our country seen interest rates so low for so long. The bubble has now burst and what lies ahead will be something we have never seen before. The crisis is setting gold up for one of the biggest bull phases in history.
Here are a few key news events from last week that will continue to support gains in gold in the months and years ahead.
National Debt Tops $24 Trillion
The national debt hit a new all-time record high above $24 trillion last week. In 1996, the national debt stood at $5 trillion. In 24 years, the debt has nearly quintupled.
The crisis is reshaping our future in very significant ways. What are the future ramifications of unsustainable debt?
- Higher interest rates.
- Lower economic growth.
- Less money to spend on government programs.
- Higher income tax rates.
In the future, this means Americans will face higher interest rates as the government will have to offer better rates to fund its debt repayment, lower levels of fiscal spending on things like the military, health research, education, social programs like Social Security and Medicare as more and more of the budget will have to go toward debt repayment, and it will mean higher income tax rates.
Economy in Free Fall
The lockdown measures currently in place across America will result in a double-digit economic contraction and recession in Q2 GDP. The consumer spending sector is most impacted by this crisis and conservative estimates peg second quarter gross domestic product at a stunning 20% decline. Former Fed Chair Yellen recently warned the economy could fall 30% this quarter.
Nearly 17 million Americans have now filed for unemployment benefits since mid-March. At this pace, a 20% unemployment rate is easy to expect. That is nearly double the unemployment rate we saw in the 2007-09 recession, but not quite as severe as the 25% unemployment rate seen during the 1930’s Great Depression. Every economic recession takes time to heal. It could be years before the unemployment rate comes back down.
Consumers Throw in the Towel
No surprise, consumer confidence plunged to an 8-year low in April. Last week, we saw the University of Michigan sentiment survey tumble 18.1 points to 71.0. The plummeting confidence numbers were driven primarily by the current conditions index. That’s no surprise since almost 17 million Americans lost their jobs in less than one month.
Bear Market Rallies – Beware of False Starts
While the stock market saw mild improvement last week, bear market rallies are a common phenomenon. After the market crash in 2008, the S&P 500 staged six different bear market bounces. Beware of false starts.
Capital Economics wrote in a research note to clients that a “sustained recovery in equity prices is unlikely until clear evidence emerges that coronavirus is being brought under control around the world. That still seems some way off…. What’s more, big increases in equity prices are quite common after major corrections and don’t necessarily mean that bear markets are over. For example, the rise in the Euro Stoxx 50 since mid-March is reminiscent of what happened to that index a similar amount of time after the collapse of Lehman Brothers during the Global Financial Crisis (GFC). It subsequently fell back to a fresh low.”
Fed Money Printing
In recent weeks, the Federal Reserve bought almost $1.2 trillion of government securities as new money printing and QE infinity kicks into gear. What lies ahead? As the U.S. Treasury auctions new bonds to pay for the $2 trillion fiscal stimulus package Congress just approved, the Fed will have to keep buying to prevent a massive spike in interest rates.
It is a like a house of cards. The Treasury sells bonds to fund public programs like the emergency stimulus package. Then, the Fed prints money to buy those bonds.
All houses of cards eventually fall to the ground.
Gold is an asset that will be left standing when that happens.
Black Swan Events
While you can’t predict what a black swan event could be, or when it will hit, we do know that they emerge at a fairly reliable pace throughout history.
We as a country will survive this crisis, but our future will be reshaped by it. And, we know there will be another black swan in the future.
Throughout it all, gold will continue to provide individuals a safe-haven investment to grow, protect and preserve wealth in these uncertain times.
Best wishes,
David
What Questions Do You Have?
Email questions for me to answer in next week’s Monday Morning Wrap at: [email protected] or email just to let us know if you like this commentary or how we can make it better. Prefer the phone? Call us at 1-866-629-2281. We want to hear from you.
Subscribe to our newsletter! Get our tales from the vault, our favorite stories from around the world and the latest tangible assets news delivered to your inbox weekly.
Special Report: The Long Bear Market in Silver – Part Two
Posted onThis is part two of our special report on the long silver bear market. You can read part one of this comprehensive article here.
Why Should You Act Now?
CPM has an impressive track record with recommendations. They don’t come often and when they do they are extremely profitable.
- CPM’s previous intermediate-term investor recommendation on silver was on 2 May 2011, when silver touched $48.19 and CPM advised selling.
- The theoretical return from following CPM’s buy and sell recommendations would have been 57,434.3%, or an 18.9% compounded return.
Major Buy Signal in Gold/Silver Ratio
Here’s another reason you should act now.
The gold/silver ratio is showing a historical buy signal, which is a reliable buy and sell indicator for silver in recent decades. Here’s some background.
Since 1971 – when the gold standard was ended, the price of gold and silver have floated freely within a large range. The gold/silver ratio hit a low at 14 in 1980 – when both gold and silver hit historical highs in the wake of massive double digit inflation in the United States. The ratio approached 100 in 1991 as silver prices tumbled to a 20-year low. Those are extreme anomalies however.
Where is the gold/silver ratio now? Another historical anomaly at 111!
What is this indicator? The gold/silver ratio is simply the amount of silver it takes to purchase one ounce of gold. The history of the gold/silver ratio can be traced as far back as Roman times. Then, the ratio was fixed at 12 or 12.5. In the 18th and 19th centuries governments around the world fixed the ratio as a way to ensure monetary stability – as gold and silver coins were widely used in trade, commerce and everyday purchases. For example, the Coinage Act of 1792 in the U.S. deemed the gold/silver ratio at 15:1.
In more recent decades, gold/silver ratio readings above 65 signaled that silver is severely undervalued and was a strong buy signal for the metal. The latest 111 reading is historically high, which means silver prices right now offers investors incredible long-term value. On the lower extreme, a very low gold/silver ratio under 50 signals that gold is cheap by historical measures.
Gold silver/ratio 65 > or greater means silver is a relative bargain
Gold silver/ratio 50 < or lower means gold is a relative bargain
The current 111 reading signals one of the best buying opportunities in silver since 2003 when silver was trading around $5.00 an ounce.
How High Could Silver Climb in 2020?
“CPM projects that silver prices might rise around 11.7% in 2020 on an annual average basis, to around $18.12 for the full year. Further price increases are expected later. Mine production is projected to be flat to slightly lower, while secondary recovery from scrap may rise somewhat due to increased recycling of spent electronics and other silver-bearing products due to heightened environmental awareness, more stringent recycling laws, and somewhat higher silver prices. Fabrication demand is projected to increase perhaps 1.6% in 2020 from 2019’s level of demand.”
“Further price increases are expected, but beyond 2020, and only when long-term investors resume buying larger volumes of physical silver. When that happens, silver prices could rise dramatically. It may be several years before that happens. Meanwhile silver prices are expected to rise modestly,” CPM Group said.
Buy Low, Sell High
Silver prices are higher now compared to where they have been in most of history, yet dramatically lower than the all-time high.
For perspective, the current silver price at around $15 an ounce level is well above the $4.00-$6.00 range where silver traded from late 1998 into late 2003. Yet, it is dramatically below the nearly $50 an ounce high in 2011.
Again, current silver prices are very low compared to the 2011 high.
If you buy silver now, there is potential for you to double or triple your money in a few years’ time as the bulls drive the market back toward the 2011 high.
Buy low, sell high – that’s something you probably learned in Econ 101.
Historical market opportunities usually don’t last long. Use the current softness in silver as an opportunity to build up your silver exposure. When prices are higher a year from now you’ll be glad you did.
Another Bullish View
Here’s what the Silver Institute said last month.
“The Silver Institute believes that macroeconomic and geopolitical conditions will remain broadly supportive for precious metals, encouraging investors to stay net buyers of silver overall, a development that should lift silver prices higher this year. Additionally, we see continued growth in physical silver investment, and forecast silver’s use as an industrial metal will rise in 2020.”
“The outlook for silver remains positive, with the annual average price projected to rise by 13% to a six-year high of $18.40 in 2020. This rally is premised mainly on a positive spill-over from gains in gold, as the yellow metal will continue to benefit from macroeconomic and geopolitical uncertainties across critical economies. Concerns about the state of the global economy will have possible negative consequences for the industrial metals, and by extension, silver. However, the weight of institutional money flowing into a relatively small market should prove sufficient for silver to outperform gold, and could cause the gold: silver ratio to drop to the mid to high-70s later this year,” the Silver Institute said.
Getting Started is Easy
From an investment standpoint, silver offers investors perhaps a once in a generation buying opportunity. Not only is silver a less expensive precious metal than gold, but it also sees additional demand from industry, technology and even medical uses, which supports the new bull market in silver ahead.
There are many ways to begin building a physical silver exposure including bullion coins, bars or for larger investments – there is bulk bullion. If you have questions, just ask. Blanchard can help.
Blanchard is a family-owned company with broad reach and deep roots in the precious metals market. We live by our name, which is known nationwide for honesty and integrity. Over the past 40 years, we have helped clients invest in American numismatic rarities and gold, silver, platinum, and palladium bullion. If you have additional questions about investing in silver, please leave them below and we can address them in a future post, or call us today to speak with a portfolio manager.
Subscribe to our newsletter! Get our tales from the vault, our favorite stories from around the world and the latest tangible assets news delivered to your inbox weekly.
Special Report: The Long Bear Market in Silver – Part One
Posted on — 1 CommentInvestors big and small, domestic and foreign, piled heartily into gold since the start of the COVID-19 bear market in stocks. Gold is one of the best performing assets classes in the first quarter 2020, yet silver remains depressed.
Many investors wonder why.
The short answer is that 1) silver reacts more to commodity cycles than gold due to its large industrial demand and 2) investment demand for silver weakened since the 2011 price high.
If you are considering a new investment in silver now or have been disappointed in the recent performance of your silver holdings, we’ll discuss the larger outlook here.
Quick take: current silver prices offer individuals one of the best buying opportunities in the precious metal since late 2003.
Why Invest in Silver?
Just like gold, there are many reasons to invest in tangible assets like silver. These are broader reasons to buy silver, and don’t include the current market dynamics, which we will cover later on in this in-depth report.
Here are three of the many reasons that investors diversify into silver.
1. Silver is a precious metal like gold. Yet, it is also so much more.
It is a physical commodity widely used in a vast array of industrial purposes. Industrial demand for silver could slow in 2020 amid a slowdown in global economic growth in the wake of the coronavirus pandemic. Yet, silver industrial demand is expected to continue to expand broadly in the years ahead fueled by growing applications in electronics, solar panels, electronics and more. New industrial uses are being found for silver almost monthly it seems.
2. It is a monetary metal (quasi money).
Yes, it’s money. Silver has been used as money for over 4,000 years. Even recently, in China prior to the Communist takeover in 1949, the primary currency used there was U.S., Mexican and Cuban silver coins. After the Communists seized control, the new government ordered all the silver to be turned in. This is a useful explanation of how fairly recently silver still was used in daily transactions as money. Its size and lower cost value versus gold make it an excellent transactional form of money. Some individuals who purchase physical silver today view it as in investment in an asset that could again be used for daily commerce, while others accumulate silver as a portfolio diversifier and store of wealth.
3. Silver is also a financial asset, a store of value and a proven portfolio diversifier just like gold.
Research by the well-respected CPM Group reveals that the optimal level for silver portfolio diversification is around 5-10%, with benefits up to 25% of one’s portfolio based on historical results from 1968 through 2018. Portfolios with silver allocation yielded better returns, with lower risk.
Let’s look at some recent history, before analyzing current silver market dynamics and forecasts.
The Long Bear Market
Since trading at $49.80 on the New York spot market in 2011, silver fell into a commodity bear market cycle. Silver is more influenced than gold by traditional commodity market cycles due to the large amount of industrial demand for the metal.
In commodity markets, high and low cycles reliably form.
Why? High prices encourage production by miners – as they see an opportunity to cash in on the high prices. Since then, silver fell to a New York spot low at $11.75 last month. We believe the low is now in.
There is an old saying in the commodity world: “the cure for low prices, is low prices.”
When you think about it, it makes perfect sense. High prices encourage mining production, which is what occurred in 2011. That creates a glut of supply and the surplus we have seen in silver in recent years.
Meanwhile, low prices decrease production as mining is less profitable, which is turn creates a supply squeeze.
Because of the large industrial demand for silver, the supply/demand conditions that dictate commodity market cycles have a larger impact on the price of silver versus gold.
Experts are optimistic that the silver bear is bottoming out right now. Silver is already showing signs of turning higher following last month’s liquidity wash-out, where investors sold hard assets like silver to cover margin calls in the stock market crash.
Don’t forget, part of the reason silver climbed to nearly $50 an ounce in 2011 was amid America’s debt ceiling crisis with widespread concerns the U.S. could default on its debt. The S&P ratings agency issued a negative outlook on US AAA debt, for the first time in history. In August, S&P downgraded US debt in a major slap in the face and warning signal to US policymakers from AAA to AA+.
Into the 2011 high, there was massive investment demand for silver as a monetary metal and store of value.
Once U.S. policymakers addressed the debt ceiling, investors began to take profits on silver which had climbed from a low around $8.75 in 2008 into the $49.80 New York spot high in 2011, and that combined with increased silver production (supply), the bear market began. We are likely at a new inflection point and expect rising investment demand for silver to continue throughout 2020.
3 Major Drivers for New Uptrend in Silver
Here are three key factors that will drive silver higher in the years ahead.
1. Falling supply
- Total annual silver supply is declining. After peaking in 2016, silver supply fell in 2017, 2018 and 2019.
- The global economy is already forecast to skid to its deepest recession in 40 years in the wake of the COVID-19 pandemic. Slower growth will decrease mining production, which will decrease silver supply, setting the market up for a shortage as we emerge from the recession.
2. Increasing industrial demand
- Solar panel use hits new records in 2019. Jewelry and silverware demand remains strong. Electronics demand continues to climb for the past five years. New innovative uses for silver are increasing industrial demand, which will hit an important inflection point as we come out of the recession with a physical shortage. The supply/demand imbalance will be a major factor propelling silver higher in the next bull phase.
3. Rise in investment demand
- Just as we saw in the 2008-2009 crisis, investment demand soared amid concerns about fiat money devaluation and a loss of confidence in government and rising government debt levels. We saw a massive surge in physical buying in silver over the last month. This will continue to expand as the recession deepens and the central bank continues its experimental money printing policies and the Federal government continues on an unsustainable path of reckless government borrowing. Investment demand will soon become another major driver in the new bull market in silver.
Intermediate-Term Buy Recommendation
In December 2019, CPM Group issued a silver buy recommendation for investors with an intermediate-term investment horizon, which CPM puts as a two- to three-year time horizon.
“The silver market is at a critical vertex at present,” CPM Group’s Vice President in charge of Research Rohit Savant said in announcing the buy recommendation. “Silver market fundamentals are precariously similar to the critically poor conditions that existed in 1989. Our expectations are that the market may avoid the long period of net investor silver selling and low prices that followed from that year, however. Prices seem more likely to rise in the years ahead rather that to decline. There are many external as well as internal factors behind our analysis. That said, super bulls will continue to be disappointed by silver.”
Join us tomorrow for Part 2 of this special report on silver. If you have any questions, please comment below.
Subscribe to our newsletter! Get our tales from the vault, our favorite stories from around the world and the latest tangible assets news delivered to your inbox weekly.
Monday Morning Wrap Up – April 6, 2020
Posted onA message from David Beahm
President and CEO
Gold Shines: Shelter in the Storm
Nearly 90% of Americans are now under some sort of lockdown as the coronavirus pandemic halted daily life as we know it. Businesses are closing left and right as the number of COVID-19 cases are exploding in New York City and other parts of the country as well.
Job layoffs are skyrocketing at a faster pace than any time in U.S. history. Over 6.6 million Americans filed for unemployment in the last week of March, which followed a record number 3.3 million people in the previous week. Service sector jobs suffered most amid social distancing. These massive job losses are unprecedented and warn that the U.S. economy may be skipping recession and moving directly into a depression zone.
Economists now project over 20 million jobs lost by mid-May. While hard to comprehend, the economic consequences of this crisis are just beginning to ripple through the economy.
In the midst of this stunning event, gold is providing investors a safe-haven in the storm. Gold is shining in the midst of carnage across other asset classes. Even U.S. Treasuries are only returning a paltry 0.5%. Here’s a quick look at financial market performance:
Year-to-Date Returns
Gainers
| Palladium | +11% |
| Gold | +8% |
| U.S. Dollar Index | +5% |
| U.S. 10-Yr Treasury Yield | +0.5% |
Losers
| NASDAQ | -18% |
| Silver | -19% |
| S&P 500 | -23% |
| Platinum | -26% |
| Russell 2000 | -37% |
| Crude Oil | -47% |
Last week, we saw more early damage to the economy from the pandemic, with a surge in the March employment rate to 4.4%. Expect it to go higher. Much higher.
The stock market traded mostly sideways last week as investors hunkered down in a wait and see mode. With the pace of the pandemic still growing here in the U.S., the stock market is unlikely to stage any sort of recovery until there are actual signs the pandemic is slowing with fewer reported confirmed cases. Health officials believe that could be months away.
What about Silver?
Silver has under-performed gold and fell in price the last two months. Why? Silver is both an industrial and monetary metal. Because it is an industrial metal it trades and is vulnerable to commodity cycles. In addition to its monetary value, there are a wide range of manufacturing and technology uses for silver. Silver is utilized in solar panels, electronics, batteries, nanotechnology applications and even water purification systems, to name just a few applications. Industrial demand for silver is expected to weaken in the short-term if we face a global recession.
Yet, it is important for investors to remember that while the current commodity cycle has pressured silver, it is much more than just a commodity. It is a precious and monetary metal.
The gold/silver ratio historically has demonstrated reliable buy signals for silver in recent decades. That well respected technical indicator is flashing a huge “BUY” right now for silver.
Readings above 80 signal that silver is undervalued and is a strong buy signal for the metal.
And, we just hit 114!
A supply/demand shortage appears on the horizon for silver as the slowdown in the global economy will impact mining operations. Truly historical investment opportunities don’t come around every day. Your dollars buy dramatically more silver in the current market environment. If you’ve been considering adding to your precious metals portfolio, silver offers excellent value at current levels. How high could silver go in the years ahead? In 2011, silver climbed above the $49.00 an ounce level.
Stocks Heading Into Worst Six Months Period
Expect the stock market to test the recent lows again as new economic data released each week reveals how badly hit the economy is in the wake of this disaster. The seasonally documented “worst six months of the stock market” are just around the corner. Historically, the May through October period is the worst performing period of the year. Investors should brace for things to get worse in stocks before they get better.
Risky assets like stocks are unlikely to recover their losses for a long time. There is still time to diversify your portfolio and protect your assets with tangible assets. If you would like expert recommendations on asset allocation during these challenging times please contact us. We can help.
In the midst of this pandemic, it is worth remembering that this too will pass. For now, please take care of yourself and your loved ones. Check in on your parents and grandparents. Stay safe and healthy.
Best wishes,
David
What Questions Do You Have?
Email questions for me to answer in next week’s Monday Morning Wrap at: [email protected] or email just to let us know if you like this commentary or how we can make it better. Prefer the phone? Call us at 1-866-629-2281. We want to hear from you.
Subscribe to our newsletter! Get our tales from the vault, our favorite stories from around the world and the latest tangible assets news delivered to your inbox weekly.
