In May 2019, silver prices moved quickly from about $14 to $18 in a quiet trade higher. It was an odd period – one that I remember analyzing in great depth with the great commodity analyst Matt Warder. Right before that massive March 2020 selloff, silver had a remarkable second half of 2019.
Volatility was quite low at the onset of this trade. After about a year of quiet hovering under $15, it became a stupidly cheap trade. This allowed investors to buy low-priced calls and ride to spectacular profits during that summer.
Fast forward a few years, and it almost feels like we completely ignored the 2020 rally in silver. This is because Bitcoin, stocks, and other assets were rallying to nosebleed levels. Silver prices aren’t really moving all that much despite the ongoing worries about inflation across the market. In fact, it’s pulled back over the last year as investors pile into NFTs and other things that they can’t physically touch.
Now, while everyone is panicking around Russia and recent inflation numbers, we’ve seen a slow, creeping rise in gold, platinum, and other safe-haven assets. I’ve set a price target for silver at $25 for the end of the year. That’s good news for the SLV, which is still a cheap trade. But it’s gold that feels so curious to me right now.
Will Gold Rally Again?
Make no mistake: I would rather own bullets than gold bars any day of the week. But gold’s market allure (I do own it) has faded for so many investors over the last decade. It wasn’t exactly the best performing asset in 2021. While every commodity on the planet seemed to rise (except for peanuts, of course), gold was range bound above that $1,750 level.
The last time we saw the price of gold rally – and I mean really rally – was back during the 2011 crisis. And then again during the post-COVID rally that saw the Fed pump trillions in cash into the market. It’s reasonable to think that this is temporary – and another possible head fake.
The 2011 rally fell on the backs of a credit downgrade for the U.S. dollar and worries about the debt ceiling. But that was back when the U.S. national debt sat at a paltry $14.6 trillion. About 10 years later, we’ve doubled that debt – $30 trillion. And there’s no plan to stop spending money at a blistering pace.
But during that period, gold – despite its luster and worries about debt – remained muted. It took about nine years for gold to go from above $1,800 then down and then back above $1,800 on a semi-consistent basis. Now, two years after the Fed unleashed trillions in new cash into the economy and we experienced significant moves higher on inflation, gold sits above $1,900.
Asset Repricing Possible
I hate to say that this time is different. But in my gut, this feels like a repricing of the asset is underway. One that moves the price to a consistent mental level that we revisit as buying opportunities on a regular basis.
For silver, that price had been $22.50 for me after the first swing higher in 2020. For gold, that level was $1,750. When it fell to that level, I rebalanced my portfolio and ensured that at least 5% of my assets were in this shiny metal.
I’m preparing for that mental reset level to change. I think now that gold can push to the $2,000 level and create a new psychological barrier. Then it could level out in that range up to $2,100 per ounce.
That would be our new floor while we anticipate some semblance of economic stability from interest rates, inflationary deceleration, and a rediscovery of stock prices all across the market. If gold gets to that $2,000 level, I will say that this $1,900 level will be the new line.
Where Gold is Likely Not Going
There are some analysts out there who argue that gold should be $5,000 per ounce. They believe we’re going to experience a dramatic run on the asset in the future. Don’t get swept up by this. In a scenario where gold trades at $5,000 per ounce, you’ll want to own more ammunition and canned food than you would a hunk of metal. Also, I don’t advise you to purchase physical gold and store it on another continent. Which is an option that some dealers will provide.
Finally, pay close attention to the banks. In 2020, Bank of America even projected that gold prices could hit $3,000 because “you can’t print” the commodity. If and when banks start really pumping gold and we see it in the pages of Barron’s and The Wall Street Journal – I might have to say that the gold rally has ended.
Right now, there are a number of gold miners that are trading at very low discounts. Rising prices and inflationary pressures will likely fuel a series of mergers and acquisitions across the industry.
For those reasons, I’d advise investors to look at companies that are trading at very low buyout multiples. These stocks could benefit from straight out buyouts or at least some significant rotation of capital into their coffers. These options include Sibanye Stillwater (SBSW), Harmony Gold (HMY), Galiano Gold (GAU) and Iamgold Corp (IAG). That’s a fantastic starting list in case we do see gold rally once again.