I think this is my sixth piece on precious metals in the last five months. It is not a subject I've covered frequently over the years, but those markets continue to change rapidly and they likely will continue to be in the news as paper currency continues to lose its luster and as the national debt grows rapidly. That's what happens when politicians throw around the word "trillion" as if it is inconsequential.
I get it. We are in uncharted territory with the economic fallout from Covid-19 and are trying to spend our way through in order to avert a depression. But honestly, even before this terrible pandemic reared its ugly head and millions lost their jobs and sources of income, budget hawks had all but disappeared anyway. Someday, there will be fallout.
Keep in mind, I am not a gold bug per se. I scoff at the TV commercials that entice (or perhaps try to scare) consumers to purchase precious metals, but there is something going on here.
Just two weeks ago, gold had hit a record (not inflation adjusted, though) and was trading at around $1,950 an ounce, while silver was just under $25 an ounce. Last week, gold hit $2,064. Meanwhile, on Monday, silver eclipsed last week's six-and-a-half-year closing high of $28.43, ending the day at $29.25.
That isn't the end of the story; on Tuesday silver corrected, falling 10% to $26.28, while gold gave back 4.5% to close at $1,947. Whether this is the end of the run for metals or just some profit taking remains to be seen, but an impressive run it has been nonetheless.
Meanwhile the demand for physical silver seemingly has been strong; perhaps the cheapest way to own the "poor man's gold" through what is known as junk silver (coins with no numismatic value minted in 1964 and before), physical silver continues to trade at a premium to the spot price, although that premium in percentage terms has fallen considerably.
A $1,000 bag of junk silver (containing 715 ounces of silver) will cost you about $21,600 (that's down from $23,500 on Monday), or the equivalent of about $30.27 an ounce, which represents a 15% premium to the spot price. In mid-March, when spot silver was at $12.57, the premium for physical silver was 63%. One-ounce silver American Eagles, which have been minted since 1986 and are popular, will now run you about $36 for the more common varieties, a 37% premium; in mid-March that premium was 95%.
Those who don't want to own physical metals (they do need to be stored, after all) can get exposure via ETFs such as the Sprott Physical Silver Trust PSLV, which is up more than 70% since late March (it was down 14% Tuesday) or the iShares Silver Trust (SLV) (up 75% since late March, but down 14% on Tuesday ). The former has some interesting attributes, among them the ability to redeem shares (units) for physical silver.
Meanwhile, the gold/silver ratio, which measures the number of ounces of silver it would take to purchase an ounce of gold, stands at 75, down from 79 two weeks ago, as silver has been rising more sharply than gold, Tuesday's moves notwithstanding. That measure, as a reminder, has averaged about 60 over the past 20 years and averaged 47 during the 20th century.
The thing to keep in mind about precious metals is that they are not an investment, but rather a hedge against uncertainty. Prices can turn on a dime. When economic conditions are good, when worries are low, they can sink into the background and premiums of physical metals can evaporate. However, in this environment, some money will flow into real assets, with exposure to metals being one of the easiest for investors to obtain.
If investors instead decided that metals were no longer a store of value, as they have been considered for centuries, and found something else that would help them navigate uncertainty or hedge against declining currency values, prices could plummet. However, it does not appear that we are there yet, or perhaps ever will be.