by Claudio Grass, Hünenberg, Switzerland
It’s been an intense few weeks for precious metals investors, with gold and silver suffering setbacks and somewhat increased volatility. This has caused some observers and mainstream analysts to jump to gloomy conclusions and proclaim that gold’s bull run is over. Instead, they’re betting everything on the “great recovery” from the covid crisis and on an apparently imminent roaring comeback of the world economy. However, when one takes a closer look at the reality on the ground, at the state of the real economy and at the historical context of precious metals performance, arguments like that appear to be increasingly hollow and unconvincing.
Ever since the beginning of the year, politicians, central bankers and institutional figures of all kinds have been publicly celebrating the “great recovery”, an incredible economic bounce back from the global pandemic crisis and often taking credit for it too. To paint this rosy picture, and with the full support of mainstream media, they point to things like the vaccination drive, stock market performance, the gradual reopening of some businesses and the easing of social restrictions. Especially over the last quarter, in the US and in Europe, we’ve been bombarded with hopeful messages about the vaccine providing all the answers to end this crisis, with promises of getting back to normal and with grand plans to reopen the economy.
Naturally, this narrative has boosted optimism among market participants and ordinary citizens alike, a majority of which truly believe that the end of the covid crisis is very near. The inclination to believe and to hope this will be the case is totally understandable. After a year and a half of lockdowns, isolation and financial distress and uncertainty, one cannot be blamed for clinging onto the promise of a swift return to normalcy. Nevertheless, a more calm and dispassionate examination of the facts quickly exposes all the erroneous assumptions that are baked into this kind of wishful thinking.
The vaccine promise
For one thing, the vaccination drive, especially in Europe, was a total disaster from the start. Poor organization, miscommunication, unfulfilled orders, hoarded and lost vaccines and incredible mismanagement right at the top of the EU, all resulted in long delays and botched rollouts all around the bloc. And while some of these issues were eventually ameliorated, today, all these months after the first dose was administered, and after jubilant self-congratulatory statements by health officials about the public acceptance and the high demand for the vaccines, the vaccination rate is slowing down again. A very similar picture can be found in the US. In both cases, the threshold for “herd immunity” is nowhere in sight, and most people who need to or want to be vaccinated, already have been.
This calls into question the ambitious goals and the timetables set out by various national governments, who know have the opposite problem from the one they faced just a few short months ago: too many vaccines and not enough people willing to take them. Should this trend persist, the economic miracle that was promised by the mass rollout of the vaccine and the magic switch of herd immunity that would ensure a safe and sustainable return to the way things were before covid are very likely to remain elusive.
Betting on the reopening boost
Another very commonly cited reason for the widespread optimism and the high hopes that keep fueling the markets is the idea of reopening and the revival of business activity across most major economies. This assumption could have been justifiable a couple of months ago, but by now it is obvious that it will not be a smooth process. In some cases it is doubtful whether there will be a meaningful reopening at all. New variants of the virus, new outbreaks and “hotspots” keep popping up, and so do reopening reversals, returning social restrictions and new travel bans. The new “Delta” variant is a great example, having already been presented as a reason in many countries to postpone their reopening plans or to enforce much harsher measures and even new lockdowns.
However, even in some advanced economies that haven’t adopted this kind of “one step forward, two steps back” approach, where most business activity has been allowed to return, the remaining restrictions and burdens are often simply untenable. Proof of vaccination is required to access many services or to enter brick and mortar businesses, including the extremely hard-hit hospitality, entertainment and restaurant sectors. Failing that, daily testing is demanded, a burden that many consumers and employees cannot bear or simply refuse to. For example, in many European nations, the high cost associated with the frequent testing requirement can be prohibitive for most citizens, but so are the fears of a positive result that would trigger an obligatory quarantine that could endanger their jobs.
Overall, it is becoming increasingly clear that there are many good reasons to fear another round of harsh restrictions in the fall. Whether it will be because of yet another new variant, or because of new flareups in fresh covid cases, it seems very unlikely that the path back to “business as usual” will be straight and unobstructed.
Monetary policy signaling
If one were to embrace the narrative and analysis of the mainstream financial press, the most recent pullback in precious metals prices was a direct result of the Federal Reserve hinting at tightening its policies at some point in the future. Plausible as that might sound on the surface at least, we must keep in mind two very important factors. First and foremost, the reason that the Fed, and any other major central bank for that matter, is now forced to consider tightening is the inflationary pressure that is now becoming too intense to ignore. This inflationary era that we are now entering is obviously highly favorable for precious metals investors.
Secondly, investors must understand the difference between signaling a policy change and actually going through with it. Given the enormous debt that governments have accumulated, the extremely overstretched and frothy stock markets, looking for an excuse to massively correct, as well as the state of the real economy, hiking interest rates is simply untenable for the foreseeable future. In all likelihood, rather than an attempt at forward guidance, the Fed’s public stance was aimed at soothing inflation fears and at projecting confidence that it is all under control.
Therefore, looking at the bigger picture, the fundamentals and the investment case for precious metals remains solid. If anything, the recent developments on the pandemic front and the noticeable uptick in inflation data have further strengthened the outlook for gold and silver. And while summer generally tends to be a quieter time for precious metals, this summer in particular appears to offer a very attractive buying opportunity, one that perhaps might not appear again for quite some time. The current price levels, provide excellent entry points for both gold and silver, as well as a great chance to build up one’s existing positions.
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