"My crystal ball broke a long time ago" was something an old employer used to say to our clients and our listening audience on-air weekly when I was once with another firm getting my green feet wet in the bullion business. It was lazy. It was an excuse for basically saying, "I don't have a clue." I'd rather be direct; no excuses whatsoever.
2022 is going to be a different narrative. Central banks will begin to withdraw the stimulus (i.e., end their Quantitative Easing programs) and raise interest rates in the next 12 months to help tackle the inflation dilemma. This retraction of stimulus and stiffer monetary policies that follow will likely bring on increased market volatility (Something gold and silver histrionically respond well to). I think an essential theme for 2022 will be rising interest rates and their impact on the economy and markets and the need, as I see it, to be well diversified in your wealth strategy.
You have to stand back and ask yourself why are central banks tightening? The typical answer most people assume is that the economy is strengthening. I wish that were the case. It is because the U.S./Global economy continues to be threatened by inflationary pressures and, as a result, no longer has any choice but to raise rates, albeit with a cap at the 2-2.25% range.
I see a weaker first quarter due to the Omicron variant. I see the U.S./Global economy doing average to slightly above average this year, which should help deliver another year of market gains, albeit more moderate returns for the year in the broad sense. But what about gold and silver?
What lies ahead for gold and silver?
There are good reasons for confidence. As it relates to silver and gold prices, they both appear prepared to reflect broader inflationary pressures – but my bullish stance isn't without risk. One of the biggest threats to hard assets next year would be a rising U.S Dollar (U.S. Dollar Index) in anticipation of Federal Reserve monetary tightening, as I stated above.
Some investors assume wrongly that a rising greenback on foreign currency exchanges spells doom for silver and gold. While it can be a headwind, there is also a precedent for silver and gold to rally alongside a nominally strong U.S. dollar (Think no further than 2002-2008). The U.S. dollar "strength" in perspective is up about 7% against a basket of foreign currencies this year. But it doesn't matter because this fiat paper currency has lost more purchasing power in 2021 than in any year since 1982. As measured by the Consumer Price Index, inflation hit an annual rate of 6.8% last month. Inflation is almost sure to continue. The question for investors is how to ride the next wave of inflation.
As I mentioned several weeks ago on "Hard Money," the Silver Institute forecasts a supply deficit for the physical silver market in 2022. Analysts note that industrial demand is growing, particularly on the green energy front, where silver is used in solar power and electric vehicle applications.
Silver's monetary value aside, this metal will be needed more than ever as an industrial commodity. Every single smartphone, tablet, T.V., and laptop computer is made with some silver. With the fast speed at which companies release new phone models and the future rise of emerging nations who want access to the ever-expanding list of electronic gadgets the West has, we can see just how important silver is to the future of industry worldwide. The case can be made that we cannot live without silver!
Silver also wins on the geopolitical front. The prioritization by countries of reducing climate change by reducing carbon emissions means silver will steadily increase in usage for the construction of electric vehicles, solar panels, and many other facets of the green economy. Some estimates point to a mammoth 85% increase in silver demand over the next ten years.
As we move into an uncertain future, in perhaps one of the most pivotal moments for humanity in recent history, one constant that will remain is the need for silver, and silver is known to thrive in times of uncertainty and technological advancement. But what about gold?
After reviewing the current year to gain a perspective for 2022, I look towards the key fundamental of geo-politics as a driver for what happens to gold demand over the next 12 months.
I believe we face some tumultuous times ahead. We will witness other countries' outlook towards the policies of the U.S., both monetarily and geopolitically, do about-face turns. From this, I believe that both Russia and China have assessed the U.S. administration and current regime as far weaker than the previous. Putin is now driving a wedge between the U.S. and the U.K. on one side and the spineless, incoherent E.U. nations, using energy supplies and the massing of troops on the Ukrainian border as controls to apply pressure. Either the situation intensifies to an invasion of Ukraine (not likely), or the U.S. backs off under pressure from the European Union. Meanwhile, China will continue to build its presence in the South China Sea and its global influence through its silk roads. Less appreciated is that China and Russia continue to accumulate gold and are ditching the U.S. dollar. But I digress. Let's look at 2021s metals performance.
This year has been disappointing for precious metals investors. Silver finished the year down about 11.5% in USD terms, while gold ended the year down about 3.5%. It is important to note these losses followed substantial gains in 2020 of 47.5% for silver and 24.6% for gold. Let's call 2021 a year of consolidation.
But I expected a gain in gold and silver for 2021, given the economic background. Total assets of the five major central banks (U.S. Fed, ECB, BoJ, PBoC and BoE) rose from $20.4bn USD to $32.5bn USD between February 2020 and the end of the year, which works out to an average annualized increase of 32% for each of two years. Since 2006, total assets for these central banks have increased by 500%.
Since February 2020, U.S. M2 money supply has increased at an annualized rate of 20.2% for nearly two successive years and now stands at over 90% of GDP, having started the millennium at 44.4% of GDP. There is trouble a-brewing.
There is a glut of paper dollars and similar excesses of all other major currencies in circulation, including right here at home in Canada. This glut is a global disorder that has deteriorated considerably since March 2020. The rate of currency and credit inflation has never been so high worldwide, ever. Yet silver and gold hardly reflected it. But they are about to.
We are witnessing nations' fatal but common mistake to connect rising prices (inflation) with currency debasement. In 2021, no meaningful statements were issued from any of the major central banks on monetary policy that mentioned the amount of currency being produced, only the consequences for prices and interest rates. And there is a broad consensus between central banks that rising interest rates are a last resort, which is why I stated earlier that despite some of the rhetoric, do not expect interest rates to suddenly creep up to 4% or 5% anytime soon in Canada or the U.S. The right to issue as much currency as central banks desire will remain inviolable. Watch as this develops. The ceremonial 2% inflation target, so many central banks have oft-repeated as their target rate will dissipate into the cold night and be replaced with new measurement tactics, opinions of what is okay and a broad sense of "this isn't so bad."
Get the GDP higher by whatever means necessary, and the illusion can continue. That is the narrative that will continue to bleed through this year of uncertainty. Politicians, economists, and investment strategists alike will continue to fail to understand that increases in GDP are not indicative of improved economic conditions. GDP is only a reflection of the quantity of currency and credit in the economy.
The hostility towards recognizing this fundamental error lies behind the confusion of the market response to inflationary conditions. So much so that I would even argue this is in part why we have seen the argument for cryptocurrencies as replacement currencies for fiat become so grand. Misunderstanding of what a currency is in part has led to a short-term shunning of gold and silver by many investors consumed by what we expect to replace fiat currency with. Let me be clear. It won't be Bitcoin.
Gullible investors, if they had a simple understanding of monetary inflation, were directed into cryptocurrencies in 2021, leaving gold and silver to those seeking authentic protection from upcoming monetary and economic developments. Furthermore, policy planners and their banking crony buddies managing markets have demonstrated a reluctance to embrace the facts about inflation or are simply clueless.
So, for me, 2022 is about a window of opportunity for everyday folk to insure their wealth against the financial and economic events that lie so painfully ahead of them. Those who have a sense of basic economics and deploy common sense understand that interest rates will continue to rise and for a while. And with extraordinarily high negative bond yields, financial markets are more mispriced for this consequence than at any time in recorded history.
There can be little uncertainty that central banks will continue to issue increasing quantities of their currencies in a futile attempt to alleviate their economies and ensure government deficits are covered in dealing with the inevitable market shock ahead. And with the ever more likely collapse of the Eurozone and its commercial banks, we can expect a "whatever it takes" inflationary response from the ECB.
As their world disintegrates around them, central bankers will behave like elephants in a Walmart, destroying their trustworthiness and currencies even more as their panic increases. Against this background, buyers of physical gold and silver will do so not only because they expect to profit from it but also to preserve their wealth which will be threatened by rising and then soaring interest rates as their purchasing power collapses. What you do with this information is always up to you. I implore you to do your due diligence and speak to those you trust. We are here should you require our support in any way.
Yours to the penny,
Darren V. Long