Precious Metals’ Soaring Prices Drives Buyers

August 20, 2020


Patrick A. Heller

Have you heard the adage of “be careful what you wish for as you may get it?” That certainly applies to people who purchase precious metals in anticipation of soaring prices.

If the prices of gold, silver, platinum, and palladium rise significantly, these moves would not occur in a vacuum. Instead, the increases almost certainly would be a reaction to economic and political developments, many of which could be negative to you personally.

The most obvious negative development leading to rising precious metals prices is a decline in the purchasing power of paper currencies. Through Wednesday this week, for example, the U.S. Dollar Index had declined over 10 percent from where it was on March 19, 2020, about when gold and silver prices hit their low for the year.

The rise in gold and silver prices over the past five months coincided with the U.S. government enacting multi-trillion-dollar spending and debt programs, with soaring unemployment from the Covid-19 coronavirus economic lockdowns, diminishing returns on bonds and savings, the failure and bankruptcy of many businesses large and small, important industries such as restaurants, airlines, lodging and vehicle rental suffering major declines of activity, and a number of other financial ills. The political, health and fiscal problems were not caused by rising gold and silver prices. Instead, the combination of these problems sparked surging demand for physical precious metals.

If none of these calamities came to pass, it is quite possible that gold today would still be around $1,500 and silver might be well below $20.

Now, I consider it prudent to own some bullion-priced physical gold and silver as a small part of one’s investment portfolio or net worth as a form of “wealth insurance” against the risk of falling values of paper assets such as stocks, bonds, and fiat (paper) currencies. I don’t consider such holdings to represent the hope to make a nice profit from them—simply because of the other negative occurrences that would spark higher prices.

In the Far East Asia Currency Crisis in 1997, the Indonesia rupiah currency fell by the greatest percentage. Citizens of that country whose wealth was denominated in the rupiah were financially devastated. Indonesians who owned sufficient physical gold and silver saw their living standard largely unaffected. I doubt that many natives of that nation became wealthy in absolute terms because of owning precious metals.  Where they benefitted was from being much better off than the large majority of the population.

I tracked the prices of 10 non-precious metals and energy forms over time. In the five weeks ended Aug. 11, 2020, every one had increased in price as measured in U.S. dollars. Nine of the 10 were up significantly: zinc +17.2 percent, cobalt +16 percent, natural gas +15.7 percent, aluminum +9.6 percent, nickel +7 percent, lead +6.9 percent, copper +4.4 percent, tin +3.5 percent, crude oil (Brent) +3.4 percent. Even the tenth, molybdenum, was up 0.9 percent. When you consider that the US Bureau of Labor Statistics two weeks ago reported that the labor cost per unit in the most recent quarter was +5 percent from the prior quarter, these inputs all signal significantly higher consumer prices in the near future. Thus, in addition to the negative developments noted above, a significant increase in the rate of consumer price increases is looming.

Yes, I anticipate that owning some bullion-priced physical gold and silver will be a great financial move. But, if you are thinking you should own some gold and silver as a way to “get rich,” think again. Think about the big picture, such as what will happen to the prices of the consumer goods and services you purchase. When you contemplate all the factors, you might hope that all the problems that might spark higher precious metals prices would not happen at all, or you may temper your hopes and expectations to realistic outcomes.

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