by Ivan Martchev

June 2, 2020

Back in March, I commented that the gold-silver ratio went to an all-time high around 130-1, indicating that gold bullion relative to silver bullion was the most expensive ever – and we are talking centuries of data here. Some mean reversion was in order, but I have to admit it is coming a lot faster than I thought.

The question begs to be asked: Why now, and why so fast?

Gold/Silver Continuous Contract Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The #1 culprit for the latest monstrous moves in the markets (not only silver) are the actions of central banks and governments around the world. The biggest action is in the United States, where the Federal Reserve balance sheet has topped $7.1 trillion. Before the COVID-19 pandemic went global, the Fed Balance sheet was at 4.2 trillion (see below), and it had earlier dipped below $4.0 trillion.

Federal Reserve Total Assets Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This is a very different form of quantitative easing, significantly more aggressive than what we saw in 2008-09. The reason is that the mandatory shutdown forced 40 million people out of work for 10 weeks (so far), causing a demand shock in the economy and the need for the federal government and the Federal Reserve to “just give them the money.” The federal deficit is ballooning at a rate of $1 trillion per month.

Money cannot be created out of thin air, otherwise it loses its purchasing power. While it is unlikely we will see an inflationary problem this year, due to the high unemployment rate, we may see one in 2021 or 2022 as the present record deficit spending from the federal government and the direct lending from the Federal Reserve, dubbed “modern monetary theory,” will be significantly more inflationary than anything ever tried in the U.S. before. This is one reason why silver has recovered a lot faster than expected, as a lot happened with fiscal and monetary policy between the end of March and the end of May.

Gold Continuous Contract Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

What happened in the silver market relative to gold bullion in March is very similar to what happened in the last three months of 2008. Margin calls can be brutal when markets are moving fast, and since silver is a smaller market relative to gold bullion, it moves faster to the downside in bad times and faster to the upside in good times. It simply declines more upon margin call liquidation and recovers faster with investor interest. I don’t expect that dynamic to change in the future, with the caveat that silver will likely rise further than gold bullion if we get an inflation problem, with its patented higher volatility. A realistic three-year target for silver could very well be $50, where it got in 2011. It closed at $18 last week.

Good plays on the silver boom are Pan American Silver (PAAS) and Wheaton Precious Metals (WPM). Alternatively, Latin American silver miner Buenaventura (BVN) has lagged the silver rebound dramatically, as this is a company based in Peru, where the big culprits are the COVID-19 pandemic and massive fund outflows out of emerging markets. I don’t think the pandemic is over yet, so BVN’s under-performance may continue. Think of BVN as a higher-risk opportunity in an already high-risk sector.

Silver miner volatility is not appropriate for conservative investors, where even bullion ETFs like SLV or miner ETFs like SIL may be too volatile, and those two would be the least volatile options in this sector.

These Riots Are About Joblessness as Much as Police Brutality

As disgusting as the George Floyd death in Minneapolis may be, in this case it serves as the fuse to an already existing economic powder keg. African American and minority communities are the hardest hit by the wave of unemployment, so when such police brutality is captured on cell phone video, in addition to video of the fatal shooting of Ahmaud Arbery in Georgia, the tension was likely to spiral out of control.

United States Initial Jobless Claims versus United States Unemployment Rate Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Back in 2014, in evenings after work, I walked through a protest crowd in Manhattan after the similar death of Eric Gardner, who also pleaded, “I can’t breathe,” during a police brutality incident, and I did not feel threatened. This time around, I would stay as far away as possible from one of these protest crowds.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
Why Silver Is Moving Up Faster Than Expected

Sector Spotlight by Jason Bodner
Lessons from a National “Coming Out” Weekend

View Full Archive
Read Past Issues Here

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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