We published a bullish view on Silver today on Seeking Alpha. Below are some excerpts:
- The policy response to the current financial crisis creates a real risk of stagflation once the current liquidity crunch abates.
- The recent deflationary shock has triggered an all-out government and central bank inflationary response which looks set to dwarf the response seen during the height of the GFC.
- Policy measures aimed at bailing out Main Street are likely to prove much more inflationary given the higher propensity to consume among the middle class.
- As bond yields remain pinned down by QE and inflation expectations recover in response to further fiscal stimulus measures, this should see both short-and long-term precious metal drivers turn bullish.
- Silver in particular looks like a low-risk, high-potential trade which could easily double over the next 12 months.
“In addition to contractions in real GDP, inflation is caused by large fiscal deficits which create government liabilities out of thin air to pay for scarce real goods and services. When the government spends money in excess of what it receives in taxes, it does not matter whether it creates a bond or currency out of thin air; the inflationary impact is the same. For central banks that have the ability to create their own currency out of thin air thus eliminating default risk, government bonds are essentially just a form of money.”
“The recent deflationary shock has triggered an all-out government and central bank inflationary response which looks set to dwarf the response seen during the height of the GFC. Just as low volatility in asset prices lulled investors into a false sense of security with regards to financial risks, a decade of low inflation despite high fiscal deficits and debt monetization have lulled policymakers into believing that inflation is a thing of the past causing them to throw caution to the wind.”
“If there is one thing that politicians have learned from the GFC it is not that bailing out the banks is unpopular, but that only bailing out the banks is unpopular. The financial sector is perceived to have been the sole beneficiary of the GFC stimulus to the detriment of the ordinary worker. This time around, both the financial sector and the real economy are likely to be recipients of monetary bailouts in the form of tax breaks, stimulus checks, subsidies, welfare spending increases, and infrastructure spending.”
“Gold prices follow trends in real bond yields in the short term while over the long term they follow the general price level. Gold’s rally since mid-2018 has occurred alongside a fall in real bond yields but despite a fall in inflation expectations. As bond yields remain pinned down by QE and inflation expectations recover in response to further fiscal stimulus measures, this should see both short-and long-term gold drivers turn bullish.”
“The biggest winner however could be silver. Silver is deeply undervalued relative to gold on a historical basis with the current ratio of 114x more than double its long-term average. This may actually understate the level of silver’s undervaluation. Silver tends to be roughly 3x more volatile than gold and so usually underperforms in precious metal bear markets and outperforms in bull markets. This time around, silver has languished even as gold prices have risen. If we adjust silver both metals for their historical volatility as the chart below shows, silver works out to be over four standard deviations from its long-term average.”
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