Last week I detailed how the prices of gold and silver in 2021 not only did not exceed the percentage increases that they experienced in 2020, but actually fell over the course of the year. Similarly, where I expected the price of platinum to end 2021 higher than it did at the end of the year before, its price also declined. Palladium’s price, as I expected, declined over the course of last year.
Before I move on to discuss what may happen in 2022, I think it makes sense to put 2021’s precious metals price moves into a greater perspective. Instead of looking only at the one-year results, it probably makes more sense to do a two-year analysis, so that you use a starting point before the onset of the COVID pandemic.
As this was being written on Dec. 29, shortly before the COMEX settled for the day, the spot price of gold jumped 18.7 percent from the Dec. 31, 2019, close. Over the same time period, silver rose 27.8 percent; platinum was virtually unchanged, down just 0.1 percent; and palladium was up 3.5 percent. Although gold and silver prices did not match the increases in major U.S. stock indices over the stretch (Dow Jones Industrial Average gained 27 percent, the Russell 2000 climbed 35 percent, the Standard & Poors 500 rose 48 percent and the NASDAQ soared 75 percent), those were still respectable results.
The two-year results for gold and silver are even more impressive when you consider the extreme efforts undertaken at the behest of the U.S. government – as I am confident occurred – to suppress gold and silver prices during this period. See last week’s column.
As a result, at the end of 2021, gold, silver and platinum prices were lower than I anticipated. That increases the likelihood of prices generally rising over the course of 2022.
Besides that, there are many more reasons to expect higher gold, silver and platinum prices in 2022, while I anticipate that palladium’s price will continue to decline. Here are some of the factors to consider:
• From February 2020, shortly before the onset of the COVID pandemic, to today, the total assets of the five major central banks (U.S. Federal Reserve Bank, European Central Bank, Bank of Japan, People’s Bank of China and Bank of England) have grown from $20.4 trillion to $32.5 trillion. This is the result of massive inflation of the money supply. The U.S. M2 money supply now has reached 90 percent of Gross Domestic Product (GDP), where it was only 44 percent of GDP at the end of 1999. As governments around the world are inflating their money supplies at the highest rate in history, fiat (paper) currency values are destined to fall. Gold and silver price increases have not kept up with the scope of this inflation of the money supply over the past two years.
• Although Americans are hearing that consumer prices over the past year are rising at a multi-decade high rate, they are still not being informed that the real price increases are far higher than the U.S. government is admitting. For the 12 months ended November 2021, the Consumer Price Index was up 6.8 percent. However, if the current CPI was calculated using the same methodology as formerly used by the US Bureau of Labor Statistics, the numbers are much higher. According to John Williams (www.shadowstats.com), if the current CPI increase for the year had been derived using the BLS methodology from 1990, the price hike would exceed 10 percent; or, using the BLS 1980 methodology, the annual prices would be up about 15 percent. As people realize the true extent to which their paper currencies are losing value, that will spark a greater interest in owning “safe haven assets” such as gold and silver.
• The recovery in GDP from the depths in the spring of 2020 was largely in response to the government’s expansion of the money supply and credit as opposed to actual economic growth. A smaller part of the increase was as a result of higher wholesale and consumer prices. Government officials want the public to believe there is an actual recovery rather than a mostly inflationary response. So long as most people don’t realize what is actually occurring, this inflation of the money supply will continue, which will eventually translate into higher demand to own gold and silver.
• Cryptocurrencies are simply another form of fiat currencies. Yet, because some have risen substantially in value, most people have not yet realized that they cannot permanently replace other paper (fiat) currencies as a relatively stable medium of exchange. Expect in 2022 that more people will come to understand that cryptocurrencies are not money (see my Dec. 9, 2021, column here). To the extent this happens, demand for gold and silver will increase as people seek more stable safe haven assets.
• On Jan. 1, 2022, the expansion of Basel 3 requirements for banks to maintain a net stable funding ratio will mean greater pressure for banks to either 1) hold more physical gold to cover their gold liabilities owed to customers, or else 2) for banks to reduce their willingness to sell short gold through derivatives contracts (effectively creating “paper” gold out of thin air). Some of this shift in banks’ gold operations has already occurred, but it will become more extensive in 2022. To the extent that this results is a decline in gold short sales and/or an increase in demand for physical gold, look for higher prices to result.
• Additionally, as the expansion of Basel 3 requirements for banks to maintain a net stable funding ratio to cover their liabilities leads banks to trim their gold trading operations, this will almost certainly increase the volatility in gold’s price.
• To the extent that interest rates might rise in 2022, whether or not sparked by forecasted actions of the Federal Reserve, business profits will decline. This would put downward pressure on stock prices. As more investors seek to leave the stock market to reallocate into safe haven assets, look for higher gold and silver prices.
• With interest rates now well below the rate at which consumer prices are rising, that makes holding interest-bearing investments such as bonds, certificates of deposit, money market funds, and savings accounts a surefire losing proposition. As people shift away from owning such assets, almost certainly some of those funds will be used to purchase gold and silver.
• On Aug. 31, 2021, the Federal Reserve announced that its Standing Repo Facility was made available to eligible counter-parties (i.e. banks with at least $30 billion in assets or meeting other standards) overnight loans of as much as $500 billion. Simply the fact that the Fed is contemplating that such a massive one-day liquidity squeeze could happen suggests that America’s financial institutions are not as solid and stable as the government wants the public to believe.
• The Archegos Capital Management collapse on March 26, 2021, led to at least $10 billion in losses at banks that had lent it funds to enable it to acquire highly leveraged investments. Several stocks that Archegos had acquired are now trading lower by 80 percent or more than they were last March. There are a number of other aggressive investment entities around. There is always a possibility that another one could collapse at any time – especially if the Federal Reserve goes ahead as recently indicated to raise the federal funds interest rate multiple times in 2022.
• The government leaders in China and Russia judge President Biden to be politically weak. They are therefore ramping up their existing economic war with the U.S. by also threatening military actions. That could include China invading Taiwan and Russia advancing into the Ukraine. Russia could be trying to split the Western bloc in two with the U.S. and United Kingdom on one side and the European Union on the other. Whether or not actual military actions occur, the tensions could heighten, scaring even more people to try to get out of fiat currencies into gold and silver.
This list is not exhaustive. The sad fact is that it may only take one or two of these developments to occur to spark massive gold and silver price increases. Even more worrisome is that if none of these problems erupt in 2022, they will still threaten the financial status quo in 2023 and beyond.
The obvious means to help protect your wealth against any or all of these calamities is to establish a “wealth insurance” position of bullion-priced physical gold and silver coins and bars as part of a total investment portfolio. This wealth insurance position is meant to be a permanent holding rather than a trading position. Plan for these assets to be passed down to your heirs.
How much should someone allocate to this wealth insurance? There is no one-size-fits-all answer. Factors such as age, the state of one’s current finances, and tolerance for risk affect such decisions. A number of years ago, I considered owning 3-10 percent of one’s investment portfolio or net worth in bullion-priced physical gold and silver coins and bars to be adequate for most people. Now, I have greater fears for the future of other assets, so have increased this suggested range to 10-25-33 percent of one’s investment portfolio or net worth.
To summarize: I therefore anticipate a strong likelihood that gold and silver prices will perform well against the U.S. dollar in 2022. As for platinum and palladium, I expect that vehicle manufacturers will continue their multi-year shift toward using less palladium and more platinum in catalytic converters. As a result, I expect platinum prices at the end of 2022 to be higher than at the end of 2021, while palladium prices will decline.
Patrick A. Heller was honored as a 2019 FUN Numismatic Ambassador. He is also the recipient of the American Numismatic Association 2018 Glenn Smedley Memorial Service Award, 2017 Exemplary Service Award, 2012 Harry Forman National Dealer of the Year Award and 2008 Presidential Award. Over the years, he has also been honored by the Numismatic Literary Guild (including in 2021 for Best Investment Newsletter), Professional Numismatists Guild, Industry Council for Tangible Assets and the Michigan State Numismatic Society. He is the communications officer of Liberty Coin Service in Lansing, Mich., and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at www.libertycoinservice.com. Some of his radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio archives posted at www.1320wils.com).