At the beginning of 2021, I expected that gold and silver prices would close the year significantly above where they ended 2020. As this is being written on the afternoon of Wednesday, Sept. 22, gold’s price is almost 7 percent lower than it ended last year, while silver was down more than 14 percent.
There are lots of reasons to expect gold and silver prices to be much higher in the long term than they are today:
• Gold and silver are traditional safe-haven assets protecting against the decline and collapse of fiat (paper) currencies. Over history, the mean life of a fiat currency before it fails is 40 years, while the median life is about 25 years.
• Fiat currencies tend to lose value faster and collapse sooner when governments ramp up their spending, which has happened worldwide in 2021.
• Governments and central banks have almost all abandoned any pretense of fiscal stability.
• The values of other financial assets such as stocks and bonds are being propped up by massive inflation of the money supply.
There are even fresh developments this year which “should have” helped push up gold and silver. On July 1, the first of the new Basel III bank regulations took effect, which had a slight impact at minimizing the amount of paper gold trading by banks that did not hold physical metals to cover their liabilities. In the past week, the Evergrande Group in China, that nation’s largest mortgage company, was on the brink of default on making interest payments on its $100 billion of debts owed to more than 120 banks worldwide or its total of $300 billion in liabilities. The impact of China’s government last Friday barring Evergrande from access to overnight loans has already resulting in hundreds of billions in global stock losses.
Under current global financial conditions, it would make sense for gold and silver prices to be up sharply year-to-date. But, decades of watching precious metals and other financial markets make me realize that what “ought” to happen does not necessarily match what does come to pass.
The reason that common sense doesn’t necessarily correlate to real-world gold and silver price movements is because only a tiny fraction of these metals being bought or sold are settled by delivery of physical metals. Well over 95 percent of the global gold and silver trading is in the form of paper contracts.
Even for contracts supposedly for physical metal, most of them are also settled by paper. As an example, on Sept. 16, the New York COMEX settled 10,838 gold futures contracts. Of these, 500 contracts (representing 50,000 ounces of gold) were closed out by delivery of physical metal. However, 10,338 contracts (1,033,800 ounces) were settled by “Exchange For Physical” option. Settlements by EFP typically involve payment of some cash plus ownership of a London contract for the same quantity of metal, which theoretically might (or might not) lead to delivery of physical metal sometime in the future. EFP settlements are the most expensive way to settle a COMEX contract, so a party who owed delivery would not choose this option if they instead could tender the physical metal, or cash, or shares of exchange traded funds.
The high percentage of EFP gold and silver settlements on the COMEX signals a major shortage of physical metals available on the market.
In addition to a high percentage of gold and silver trading involving paper contracts or settlement in paper forms, their prices are also influenced by the trading of derivatives contracts. By these various means, it would be possible to make it appear that far more gold and silver inventories are available on the market than are actually in physical form. Therefore, prices can be held down versus what they would be if gold and silver were only traded in physical forms.
It is clear to me now that there has been so much behind-the-scenes suppression of gold and silver prices thus far in 2021 that they both may finish the year below where then were at the end of 2020. If they do, that merely improves the odds that they will rise strongly in 2022.
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 twice in 2020), 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).