Wandering in the wilderness with gold and silver

These are bewildering times. The state of the economy seems more up in the air than usual. Some say a recession is already upon us. Others that one will come yet this year, or in 2023. Others, including CPM Group, state that a recession is inevitable and imminent, but it might be 2024, 2025, or even 2026 before it arrives. The reality is that there still is a lot of slack in major parts of the North American and global economies, more rope to run out.

The same uncertainty permeates discussions of financial markets, mining capital formation, prices for gold, silver and other metals, oil market trends and conditions, interest rates, currency markets, and everything else in between.

Social standards in the United States, Europe, and maybe even traditionally courteous Canada have frayed.

And then there are politics, domestic and international. We won’t bore you with the list of issues hanging over our heads.

In this environment investors and corporate chieftains struggle to have a vision of what the future holds, compounding efforts to make good investment decisions.

It is not surprising then to read frequent excerpts from and allusions to William Butler Yeats’s poem, The Second Coming.

“Things fall apart; the centre cannot hold….

The best lack all conviction, while the worst

Are full of passionate intensity.”

Yeats wrote that in 1919, in the immediate aftermath of the First World War, during the Influenza pandemic that struck the world, and weeks after revolution effectively broke out in his home country of Ireland.

Since 1919 this poem has become one of the most oft quoted poems in the world, over and over again. The view is that the world was or is falling apart, that those who might know what to do are sidelined and rendered ineffectual with uncertainty, and the voices of passionate but misplaced nativism, anger, and hatred become deafening.

But time and time again the centre did hold, things did not completely fall apart, calmer heads prevailed, the world came back and moved forward, and the voices of the worst — the doomsayers and snake oil salesmen — were quieted for a time, at least pushed into a corner. Sounds familiar to today’s population.

This is where the world, and the metals markets, are today. Those that know are working hard to fix things, make them better. At the other end of the spectrum Yeats’ ‘worst’ rail against the Fed, the government, society in general, debt, the dollar, untold numbers of imagined conspiracies, a host of other things, and other people all wrapped up in a web of ignorance and hatred. The most preposterous and absurd theories of what is happening find wide acceptance among fearful people confused by the complexity of life.

Thus it has been, and thus it always will be.

Gold and silver

So what does this mean for gold and silver?

The key to answering that question, as always, is investment demand. An honest examination of trends in investment demand since the 1970s will provide insights into future trends in gold and silver prices.

The 1970s

Investment demand for gold was relatively nascent, in a way, in the 1970s. While investors in fact had actively invested in gold for millennia, surreptitiously during the period when gold ownership was banned, limited, or discouraged in most parts of the world, the reality was that the period of such strictures from the 1930s into the 1960s had limited investment demand for gold. Anglo American has estimated that around 344 million oz. were all that private investors held in 1966, when parts of the world were beginning to reopen private gold markets and ownership.

Even in that environment, with gold as something of a ‘newly available’ investment, investors bought a lot of gold in the 1970s, facing major political upheavals around the world as well as nationally, high inflation, deregulation, and other problems. They drove gold prices from US$35 per oz. at the start of 1970 to US$850 at the start of 1980.

Silver was different. It had been allowed as an investment and had been actively invested in all along. There were price pressures from rising industrial demand for silver in the 1950s, 1960s, and 1970s, so that the U.S. Treasury, which held around 3 billion oz. at one point in the 1950s sold off its silver and removed silver convertibility from U.S. currencies and circulating coinage. Silver prices rose sharply in the early 1970s, fell back some, and then rose to US$50 per oz. by the end of the decade. Investors had been net sellers of silver for most of the decade, until 1979.

The 1980s

During the first part of the 1980s investors continued to buy both gold and silver in large volumes. There was a general consensus that the stagflation, high inflation, low growth, and flat stock markets of the 1970s were continuing. They were not, but investors would not believe that until mid-decade. Other investors bought gold and silver because they had risen sharply to US$850 and US$50 per oz., respectively, in 1979 and early 1980 and then fallen back sharply. Some investors assumed prices would rise back to those records or higher.

As the 1980s progressed investors realized the economic, political, financial, and social fabrics were changing. Stocks and bonds generally did very well. Gold and silver prices meanwhile languished. In this environment investors bought less and less gold and silver, and prices subsided further.

The 1990s

During the 1990s economic conditions were very strong, as a combination of computerization, deregulation, globalization, containerized shipping, financial innovation, the internet, and more boosted productivity. Some mistakenly called it a “New Economic Paradigm” in which the stock market would rise forever and there would be no more recessions and inflation.

In this environment gold initially did well but then fell below its then long-term sustainable price of US$320 per ounce. Silver did poorly throughout the decade as investors sold more than a billion ounces of silver disenchanted with its inability to rise back to US$50 or higher.

The 2000s

The “New Economic Paradigm” was laid bare as a bad joke on investors in 2000 and 2001. That and a range of hostile economic, financial, and political issues began to boost investment demand for gold and reduce the flow of net silver sales from investor holdings.

In early November 2000 CPM released its 2000 Gold Survey (the predecessor to our annual Gold Yearbooks). At the briefing we stated:

Since 1980 people have asked us whether we will see US$850 gold again. We have answered that question for two decades by saying that if you can make a convincing argument that we will see 14% inflation, 21% interest rates, the deepest recession since the Great Depression, a quadrupling of oil prices, 10%+ unemployment, Soviet troops in Afghanistan, and U.S. hostages in Iran, we will grant that we could see US$850 gold again.

Today, November 2000, we are saying that we will see much more hostile political, economic, and financial conditions than we saw for two years in the late 1970s for decades to come. Decades. And, gold prices will rise far past US$850 per ounce.

We see a Golden Renaissance, in which more investors in more parts of the world turn to gold as a portfolio diversifier, alternative asset, currency and inflation hedge, and form of savings for a longer time than ever before in history. Private investors will start this Golden Renaissance, a resuscitation of gold’s financial but not monetary roles. Central banks will join later.

Well, that happened. Investors have bought more gold for a longer time than ever before, in more parts of the world at higher prices.

Silver lagged for a few years, as the net sales declined. By 2006 silver investors joined the rush, switching from a 15-year period of net investor sales to becoming net silver buyers once again, a condition that has continued since then into 2022.

It is all about investors

So what of the future, near and far?

The need for investors to be consistent net buyers of gold and silver is the basis for rising metals prices. In turn, investors will tend to buy more gold and silver when economic and political conditions are more unsettled and seemingly more treacherous.

Unfortunately for the world it seems most likely that the 22-year period since 2000 when we said the economic, political, financial, and social environment would be more hostile for humankind than it had been in the late 1970s will continue for at least a couple decades more. That is what we predicted in 2000, and pretty much everything that has transpired over the ensuing two decades is in line with those predictions.

As a result, CPM assumes that the historically unprecedented period of more investors buying more gold and silver at higher prices for a longer period of time than ever before seems most likely to continue well into mid-century.

Certainly there will be periods of greater security and less severe strains on society and the economy. Gold and silver prices will rise and fall reflecting this cyclicality. Overall, however, they seem most likely to rise in the long run.

The likely future arc of gold and silver investment demand and prices is a continuation of the arc that has been experienced since 2000.

The noise

And what about Yeats’ ‘worst’ voices? For most of the 1980s through to around 2016 they spoke to a fringe of the gold market, primarily in North America and Europe.

Market studies showed that in the industrialized nations approximately 90% of the gold and silver was bought by investors as sober portions of diversified wealth and investment portfolios. The demographics were college educated or better, professional, upper income, age 40 to 65. Opinion polls showed they did not subscribe to the conspiracy theories and other garbage thrown out about gold and silver, and rather were embarrassed to mention to friends and colleagues that they invested in gold and silver lest they be assumed to be part of that whole dark corner of the market.

That meant that the ‘guns and bunker’ crowd represented 10% or less of the gold and silver market.

In recent years, in the United States, the guns and bunker crowd — the conspiracy believers — represent perhaps 25% – 30% of gold and silver demand.

These figures should be expected to reverse in the years ahead, as mainstream investors continue to increase their demand for gold and silver while the “passionate intensity” of those expecting Armageddon dissipates once again.

The centre most likely will hold. And that is good for gold and silver.

—Jeffrey M. Christian is the managing partner of CPM Group, a commodities research and management consulting and financial advisory firm in New York. He founded the company in 1986, spinning off the Commodities Research Group from Goldman Sachs & Co., and its commodities trading arm, J. Aron & Company.