The outlook for gold and silver bullion prices has turned back to Strong earlier last fall. Several significant factors — now accelerated by this latest crisis and the economic strains of the worldwide over-reaction to it — are increasingly working in favor of precious metals as an investment into 2020 and beyond.
The great sell-off that had been triggered in late-summer of 2011 by ETFs pulling out of and liquidating huge gold and silver positions, has long been absorbed and fully digested by the markets. Prices used to sit in a narrow band for an extended period of time after that sell-off, making price declines in precious metals appear over-exaggerated for a significant period of time spanning from 2011 to at least 2017 . Still, on closer scrutiny, both precious metals actually kept much of their value, with gold performing not too bad in particular even during that period.
Demand for Non-Fiat Investments
In the intermediate term, and with the up and coming Crypto currencies becoming increasingly popular after 2011–3, some investment money looking for alternatives to fiat or paper investments had gone into Bitcoin, Litecoin, and other of the so-called virtual “currencies” or, rather, Crypto coins or tokens.
In light of the above, we’re obviously talking about physical precious metals bullion coins and bars here, not papered-over derivatives of them like any ETFs or investment funds. While trying to play in on the demand for gold or silver, they only are tracking gold and silver prices (which may or may not be profitable, but has got nothing to do with why these prices may rise in the first place). So what this article is about is bullion-in-hand or real physical gold or silver bullion products.
Gold Now Made a Tier-1 Asset under Basel-III Rules
With a number of both fundamental and technical events more recently, this trend in favor of Crypto has seemed to be reversing for a few months prior to fall 2019. The most prominent one among these is the move of Gold Bullion in Basel III banking regulations to a tier-1 asset, up from tier-2. This means that gold held by commercial banks as a capital reserve is now an asset which is marked to market with a 100% instead of the earlier 50% of its market value when it was classed as a tier-2 asset.
By this move, one of the last major disadvantages for banks to holding gold has been lifted. Being able to account their gold holdings with 100% value increases banks’ balance sheets and, therefore, their ability to issue more loans and profit from resulting interest earnings.
Silver Bullion Coins, image ©2019 by marquixHD. All rights reserved.
Other significant factors include technical hurdles in Crypto prices which will take some more time to clear. Crypto prices — most significantly shown in the Bitcoin (core) market itself — are now forming an NSW (narrow sideways-channel, or something of a plateau) from a technical point of view. This makes it increasingly hard for Crypto prices to break out and continue upwards. Such a move is, therefore, likely not happening before the end of 2019 or early 2020.
Precious Metals Prices Have Clearly Bottomed Out
So far, the result of all of the above has been a bottoming-out in precious metals prices, followed by a significant turnaround, in the wake of this summer’s Basel III re-classification of commercial bank gold holdings. Adding to the mix are the liquidity shortages in the New York interbank or Repo market in the Fall of 2019 that was not possible to fully be swept under the carpet. As a result, the gold price received its trigger to break out of its own narrow-sideways-channel between $1300 and $1430 and began testing the $1500 barrier later last Fall. While $1500 seems to be a significant hurdle and may take some time for gold prices to tackle, once cleared the upward move in gold is likely to accelerate. Silver should then follow suit.
We had to wait some time to see whether or not Crypto tokens would be able to shrug this off easily. While this seems to actually have drained yet more capital out of the Cryptos as an asset class and dragged Crpyto market prices down further for nearly a year, the answer is now in with Bitcoin’s and other Cryptos’ renewed upward moves and new all-time highs in Bitcoin itself. Precioius Metals prices have held steady during the same period of time though, suggesting that overall demand for non-fiat investments is rising in general and that there is actually sufficient demand to lift both asset classes. These rises may come simultaneously or in waves going back and forth between precious metals on one hand and Cryptos on the other, but they are likely here to stay longer term.
Extended article revised and updated December 28, 2020, original draft was written December 12, 2019
Editor’s note: a very useful introductional booklet to Precious Metals investing has just been updated and re-released as a paperback edition, available via Amazon.com. Also available in the U. K. through Amazon.co.uk and .de for rest of Europe.