- Monetary debasem*nt, negative real interest rates, and central bank buying are bullish drivers for Gold & Silver
- The gold/silver ratio is expected to fall significantly, making silver an attractive investment. Industrial demand for silver in solar panels and electronics is also bullish.
- Geopolitical tensions and the "de-dollarization" trend support gold prices. Central banks are buying record amounts of gold as a reserve asset.
- Mining equities offer leverage to rising gold and silver prices. Royalty & streaming companies and developers with large, high-quality resources are favored.
- Gold is seen heading to $3,000-$5,000+ per ounce, with silver rising to $35-$70+ per ounce. Timing the peak is difficult, but the bull market has years to run.
Why Investors Should Invest in Gold
The current macroeconomic and geopolitical backdrop has created a favorable environment for gold and silver investment. With most asset classes at historically elevated valuations, gold offers a compelling opportunity for portfolio diversification and asymmetric returns.
The Monetary Debasem*nt Thesis
The primary bull case for gold revolves around the debasem*nt of fiat currencies, particularly the U.S. dollar. When governments print money, as much as they have recently, it's going to create inflation, which will create a very difficult environment for businesses and the economy.
In addition, excessive sovereign debt levels have forced central banks into a corner - they must allow significantly negative real interest rates to persist in reducing debt-to-GDP ratios to sustainable levels.
This dynamic is extremely bullish for gold, which correlates negatively with actual interest rates. The way out of this is a much weaker dollar and a sustained period of significantly negative real interest rates by allowing interest rates to be well below inflation rates and nominal GDP growth rates
Central Banks Pivoting to Gold
One of the most potent indicators that gold is reasserting itself as a monetary asset is the behaviour of central banks. In recent years, central banks have been net buyers of gold, with China and Russia leading the way. Last year, central banks bought over 1,200 tons of gold in a market where the total new production is 3,400 tons." This represents over a third of the annual mine supply being absorbed by central banks alone.
The motivation behind this buying is clear. As the world moves towards a multi-polar currency regime, gold provides an ideal neutral reserve asset with no counterparty risk. Since 2014, foreign central banks have not added to their Treasury holdings and have net sold about $300-400 billion, and they've been steadily buying gold that whole time.
Geopolitics & De-Dollarization
The geopolitical backdrop is also supportive of higher gold prices. Rising tensions between the U.S. and China/Russia have accelerated the trend towards "de-dollarization" - i.e., countries seeking to reduce their reliance on the dollar for international trade. China and other nations are increasingly settling commodity transactions in yuan or local currencies, with the imbalances then netted out and settled in gold.
This has significant implications for gold demand. The Chinese yuan oil demand is turning gold back into an oil currency, and on an annual dollar production basis, the oil market in dollar terms is easily +10 times the size of the physical gold market. If even a tiny fraction of the oil trade migrates to gold settlement, it would significantly boost demand.
The Set-Up for Silver
While gold is the primary monetary metal, silver also has a vital role to play. With the gold/silver ratio at historically elevated levels, we see substantial upside for silver as it mean reverts lower. When you have a gold bull market, it's always confirmed by the silver ratio firming up against the dollar.
The gold/silver ratio could break down from a technical perspective. The silver-gold spread tells us silver is not only going up in price but also causing the spread to break out in its relationship to gold. Similar breakouts in the ratio occurred before major silver bull markets in the late 1970s and 2010-2011.
Silver also has several supportive fundamental drivers. On the supply side, we saw a 200-million-ounce shortfall between demand and supply last year. At the same time, industrial demand for silver is rising rapidly, driven by its use in solar panels and electronics.
Even the Silver Institute recognized that silver will be in a 100% imbalance by 2030 – so 1.5 billion ounces of demand versus 800 million of supply. A breakout in the gold/silver ratio and rising industrial demand has created a highly bullish backdrop for silver. The gold/silver ratio could drop below 70 this year, implying silver prices of at least $35 per ounce. In the long term, with predictions for gold ranging from $3,000 to $10,000+ per ounce, the upside for silver is potentially much more significant – $70-100 silver could be achievable.
Profiting from the Bull Market
Mining equities offer significant leverage for investors seeking exposure to rising gold and silver prices. When you have revenues of $1.2 billion and 42 employees, you can see how incredibly wealth-creating it is. It's a matter of buying an asset and getting both price and land optionality for free.
The most favored sub-sectors are royalty & streaming companies and developers with large, high-quality deposits. If you want to be in the space and have the safest asset apart from bullion, royalty & streaming companies like Franco Nevada and Wheaton Precious Metals are worth considering. As for developers, look for explorers with good deposits but cash constrained… if silver was $50, what would the silver in the ground be worth?
Ultimately, while mining equities have lagged bullion in recent years, this is about to change: We can see consistent bull market conditions for gold mining equities. We will start to see the flow happen.
Now is the time to invest in gold and silver. The combination of monetary debasem*nt, negative real rates, central bank buying, geopolitical tensions, and industrial demand has created a perfect storm for rising precious metals prices.
While the exact path higher is difficult to predict, the potential upside is substantial.
You don't need $5,000/oz gold to be a successful investor in the precious metals area. If it went to $3,000 the gold stocks would go up 100%." The precious metals complex looks for investors looking for an asymmetric bet with significant optionality.
The Investment Thesis for Gold
- Gold acts as a hedge against monetary debasem*nt and inflation. As central banks continue to expand their balance sheets, gold should rise in value.
- Negative real interest rates are highly bullish for gold. With sovereign debt levels at unsustainable levels, central banks will be forced to keep rates below inflation for an extended period, driving flows into gold as a store of value.
- Central bank buying is a significant source of demand. Central banks have been net buyers of gold for over a decade, and this trend is accelerating as they seek to diversify reserves away from the U.S. dollar.
- Geopolitical tensions are supportive of gold. The trend towards "de-dollarization" and using gold in settling international trade should boost demand, particularly from China/Russia.
- For investors seeking leverage to the gold price, royalty & streaming companies and developers with extensive, high-quality resources offer the most compelling risk/reward.
- Despite the strong fundamentals, sentiment towards gold remains relatively subdued. This suggests that there is still significant upside as mainstream investors re-allocate to gold.
- Key price targets for gold are $3,000 on the conservative side, potentially reaching $10,000 or higher. For silver, $35-50 appears likely, with $100+ possible if gold rises towards the higher end of forecasts.
Macro Thematic Analysis
There are three key macro drivers for the gold price: debt, currency debasem*nt, and inflation. When you're printing money, you're going to create inflation. This is a critical point – unlike in previous cycles, the debt overhang is now so large that central banks are effectively trapped. They must keep actual rates negative to make the debt sustainable and avoid a deflationary bust.
The last time the U.S. faced a similar debt situation was post-WWII. The solution then was financial repression - i.e., capping interest rates below the rate of nominal GDP growth to deflate the debt. We could see a similar playbook unfold now, with the Fed allowing inflation to run while holding nominal rates low. This will keep rates deep in negative territory, which is the ideal backdrop for gold.
Significant inflation or outright debt restructuring will likely be necessary to make the debt sustainable. The U.S. and the West are now beyond the event horizon of the sovereign debt black hole… the way out is much higher gold prices because that de-leverages the whole system and recapitalizes the financial system. The other major macro factor discussed was the geopolitical backdrop. The weaponization of the U.S. dollar and financial system has accelerated the trend towards "de-dollarization – i.e., U.S. adversaries reducing their dependence on the dollar. As part of this, countries like China and Russia are increasingly settling trade in their currencies, with imbalances netted out and settled in gold.
Look to producers like Perseus Mining, Alkane Resources and Westgold Resources in Australia. In Canada, developers and producers like First Mining, G Mining Ventures, Karora Resources, Victoria Gold, Rio2, GoGold Resources and Serabi Gold.
