When the Federal Reserve started cutting interest rates last summer, the price of silver surged. The white metal rose 35% and peaked at close to $20 an ounce.
Silver has given back some of those gains in recent weeks, primarily due to optimism about a possible trade deal with China. But fundamentally, nothing in the economy has changed. The Fed is still engaging in extraordinarily loose monetary policy. We continue to see shaky economic data. And despite all the talk, the trade war drags on.
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The Fed cut interest rates for the third time last month. And although Jerome Powell, seemed to indicate rate cuts might be on hold for now, he made it clear the central bank has no intention of raising rates. Powell said the Fed would need to see a “really significant” and persistent move up in inflation before considering rate hikes. Basically, Powell conceded that the Fed wasn’t going to be vigilant about inflation. As Peter Schiff said in a recent podcast:
Rate hikes are the furthest thing from their mind. They’re not even considering raising rates right now. So, the only thing that they’ll do is cut rates or leave them alone … This is a very dovish stand for the Fed to take.”
Even without any more rate cuts, the Fed is still injecting money into the economy through quantitative easing. Of course, it swears this isn’t QE, but it’s absolutely QE. In fact, the Fed is increasing its balance sheet faster now than it was during the rounds of quantitative easing it undertook in the wake of the great recession.
Meanwhile, the stock market continues to surge upward, even while ignoring bad economic and political data. In fact, the Atlanta Fed recently lowered its Q4 GDP forecast to 0.3%.
One of the reasons the markets keep moving up is optimism about a phase one trade deal. Of crouse, so far, we haven’t actually seen a deal. It’s all talk. In fact, Peter thinks the US is losing the trade war. Even if the US and China do eventually get a phase one deal done, we have no idea if it will have any real substance. There’s a good chance we’re looking at a “buy the rumor sell the fact” scenario when it comes to this trade deal. Regardless, putting your eggs in the trade deal basket just doesn’t seem wise.
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A silver-gold ratio is nearly 86-1. This tells us that silver is way undervalued compared to gold. It currently takes more than 85 ounces of silver to buy one ounce of gold.
Put that number into some historical perspective.
Geologists estimate that there are approximately 19 ounces of silver for every ounce of gold in the earth’s crust, with a ratio of approximately 11.2 ounces of silver to each ounce of gold that has ever been mined.
In 1792, the gold/silver price ratio was fixed by law in the United States at 15:1. France mandated a ratio of 15.5:1 in 1803. Faced with the challenges of a bi-metallic monetary system with fixed exchange rates and the aftermath of a worldwide financial crisis, the US Congress passed the Coinage Act of 1873. Following the lead of other Western nations, including England, Portugal, Canada, and Germany, this act formally demonetized silver and established a gold standard for the United States.
With silver playing a smaller role as a monetary metal, the silver-gold ratio gradually spread. The modern average over the last century is around 40:1.
Silver is much more volatile than gold due to its industrial role, but at its core, it is still a monetary metal and it tends to track relatively consistently with gold over time. When gold goes up, it almost always takes silver with it. Given the supply and demand dynamics, along with the prospects of a weakening dollar when the recession hits, it seems likely that the gap will close.
Silver has hit an all-time high of $49 per ounce twice – in January 1980 and then again in April 2011. If you adjust that $49 high for inflation, you’re looking at a price of around $150 per ounce. In other words, silver has a long way to run up. As one analyst put it, “With the long-term downside potential of silver very low versus its current valuation, the risk/reward is one of the best investments on the planet.”
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