Rich Checkan: Gold Nowhere Near Top, Use Price Dips to Buy

Key Concepts

• Gold and Silver Prices: Current market status and historical bullish outlook.
• Bull Market Indicators: Factors used to determine the top of a bull market for gold.
• Interest Rates and Inflation: Impact on investor preference for gold versus traditional savings.
• US Dollar Strength: Correlation with gold and silver prices.
• Gold-Silver Ratio: Indicator of market sentiment and potential price movements.
• Mainstream Media and Investor Sentiment: Growing coverage and public awareness of precious metals.
• Geopolitical Crises: Influence on precious metal markets.
• Dow-to-Gold Ratio: A long-term indicator of gold's value relative to the stock market.
• Morgan Stanley's 60/20/20 Portfolio: Recommendation for a significant gold allocation and its potential market impact.
• Central Bank Buying: Historical and ongoing influence on gold prices.
• Goldman Sachs and Bridgewater: Other financial institutions with bullish forecasts for gold and silver.
• Average Gold Holdings: Comparison of current holdings to historical norms.
• Bond Market Impact: Potential consequences of shifting investment from bonds to gold.
• Debt Addiction: The underlying economic problem driving the need for hard assets.
• Western Investor Behavior: Shift from selling to buying precious metals.
• Customer Trends: Reasons for selling and buying precious metals.
• Premiums: Rising costs for physical precious metals due to demand.
• Silver Squeeze: Dynamics in the London silver market.
• Industrial Consumption of Silver: Growing demand from sectors like solar cells.
• Substitution Buying: Investors moving from gold to silver due to price.
• Precious Metal Cycle: Current stage and expected duration.
• Technical Analysis: Cup and handle formation in silver.
• Market Pullbacks: The need for and potential impact of price corrections.
• Fiscal Responsibility: The role of government spending in market behavior.

Precious Metals Market Update and Outlook

This discussion with Rich Checken, President and CEO of Asset Strategies International, provides an in-depth analysis of the current precious metals market, focusing on gold and silver. Despite rapid price increases, Checken maintains a bullish stance, arguing that current indicators suggest no immediate top in sight and that prices are poised for further significant gains.

Current Gold and Silver Prices and Market Sentiment

• Rapid Price Movement: Both gold and silver have experienced swift price appreciation. Checken initially predicted silver would reach $50 before gold hit $4,000, but gold reached its target first, with both metals moving in tandem.
• No Top in Sight: Despite the quick ascent, Checken asserts that there is "no top in sight." He notes that even at previous all-time highs, gold was considered "dirt cheap" and silver even cheaper. This sentiment persists as prices continue to climb.
• Fundamental Support: Checken emphasizes that the underlying fundamentals have consistently supported higher prices, with no indication of a downturn.

Indicators for a Bull Market Top

Checken outlines several key indicators he monitors to identify the peak of a gold bull market. Currently, none of these indicators are signaling a top:

• Price Targets: He conservatively estimates gold's potential to reach $3,800 to $5,700, which is two to three times previous highs.
• Market Duration: The current bull market is not yet 10+ years old, a typical duration for commodity bull markets.
• Interest Rates: For investors to be dissuaded from buying gold, interest rates need to be significantly higher than the current real return (nominal rate minus inflation). High single to low double-digit interest rates are required to make term deposits more attractive than precious metals.
• US Dollar Strength: A strong and strengthening US dollar typically acts as a headwind for gold. Currently, the dollar is weak, trading below 100 on the legacy index, and further weakening is anticipated.
• Gold-Silver Ratio: This ratio needs to fall to between 35:1 and 50:1 (ounces of silver to buy one ounce of gold) to signal a mature bull market. The current ratio, just breaking 80:1, indicates the bottom of a previous cycle and the upward movement in gold and silver prices as investors enter the market.
• Mainstream Sentiment: While mainstream media coverage (e.g., Wall Street Journal, Financial Times) and prominent figures like Jamie Dimon are discussing gold allocations, Checken notes that the general public (e.g., his Uber driver) is not yet talking about their gold and silver profits, indicating a lack of widespread speculative frenzy.
• Geopolitical Stability: While there's a glimmer of hope for peace in the Middle East, ongoing conflicts like the war in Ukraine and domestic unrest contribute to a risk-on environment that favors precious metals.
• Dow-to-Gold Ratio: This ratio needs to fall to 5:1 (ounces of gold to buy the Dow Jones Industrial Average). Currently at 11-12:1, there is significant room for gold to appreciate relative to stocks.

Checken advises against nervousness about a top, suggesting that any pullbacks should be viewed as buying opportunities within a larger bull market.

Morgan Stanley's 60/20/20 Portfolio and Market Impact

Morgan Stanley's recommendation of a 60/20/20 portfolio, allocating 20% to gold, is highlighted as a significant development.

• Potential Investment Inflow: If Morgan Stanley's $4.8 trillion in assets under management were to adopt this allocation, it would translate to $960 billion invested in gold. At $4,000 per ounce, this would purchase 240 million ounces of gold, or approximately 7,465 metric tons.
• Comparison to Central Bank Holdings: This amount rivals the US central bank's gold holdings (8,133 metric tons).
• Central Bank Buying Context: Over the past three and a half years, central banks have been buying around 1,000 metric tons of gold annually, which has been sufficient to drive prices to new highs. Morgan Stanley's potential investment would be more than double this annual central bank demand.
• Domino Effect: Checken anticipates that other financial firms will follow suit, with institutions like Goldman Sachs already revising their forecasts upward to $5,000 for gold and $65 for silver next year. Bridgewater's Ray Dalio's recommendation of a 15% gold allocation is also mentioned.
• Global Average Holdings: Historically, average global gold holdings are around 2%. Current penetration is about 0.5%. Even a move back to the historical norm would be substantial, let alone reaching 5-15%.

Impact on the Bond Market

The shift of 20% from bonds to gold, as recommended by Morgan Stanley, is expected to negatively impact the bond market.

• Funding Sources: The bond market is a primary funding source for global economies.
• Potential Recession: Pulling funding sources could lead to a pullback or recession in traditional markets due to reduced commerce.

Mainstream Wake-Up to Debt and Solutions

The shift in recommendations from major financial institutions signals a growing awareness of the economic landscape, particularly the problem of debt.

• Debt Addiction: Governments worldwide are addicted to debt, spending more than they earn.
• "Death by a Thousand Cuts": The alternative to outright default on currency obligations is expanding the money supply, which devalues each currency unit and puts upward pressure on prices of all assets, including precious metals.
• Hard Assets as Protection: Investors are increasingly seeking hard assets and commodities to protect their portfolios from currency devaluation.
• Lack of Problem Solving: While the solution (hard assets) is being recognized, Checken notes that the underlying problem of overspending is not being addressed by policymakers.

Western Investor Re-engagement

Western investors, who had been largely absent from the precious metals market, are now beginning to re-enter.

• Shift from Selling to Buying: As a dealer, Checken observes a transition from more buying than selling to outright sales of precious metals.
• Late Entry: While late to the game, Checken believes it is "not anywhere near too late" for these investors.
• Liquidation Still Occurs: Some liquidation still happens due to individuals needing funds for debt repayment or estate settlements. However, the overall trend is shifting towards buying.

Customer Trends and Premiums

• Prevalent Trends: Selling due to immediate financial needs (credit card debt, bills) and elderly clients preparing estates for heirs remain prevalent.
• Rising Premiums: As investor demand increases, premiums on physical precious metals are starting to inch up, reflecting pressure on fabrication demand.

Product Recommendations and Silver Squeeze Dynamics

• Lowest Premium Focus: Checken advises focusing on products with the lowest premiums for the best deals.
• Silver Squeeze in London: The London silver market is experiencing tightness. This is attributed to a significant shipment of silver to the US ahead of anticipated tariffs from President Trump. This move left London with insufficient warehouse stocks, leading to reverse flows of metal back to where it's needed.
• Above-Ground Supply: While demand is picking up, Checken believes there are still sufficient above-ground supplies to meet demand, though the metal may be in the "wrong place."

Drivers of Silver Prices

Silver's price appreciation is driven by several factors:

• Industrial Consumption: Increased demand from industries like solar cells is a significant factor.
• Substitution Buying: Investors, seeing gold's high price, are turning to silver as a more affordable alternative.
• Market Strain: The combination of industrial demand, investor buying, and the logistical issues in London is putting pressure on a somewhat strained market.
• Gold's Leadership: Gold typically leads precious metal trends, with silver following and then outperforming. Silver's smaller market capitalization means that the same inflow of dollars has a larger percentage impact compared to gold.

Precious Metal Cycle Stage

Checken places the current precious metal cycle at approximately halfway through, or slightly more.

• Central Bank Head Start: The cycle began with significant central bank buying, providing a strong foundation.
• Investor Participation: Investor participation is now increasing, which Checken believes will drive the market much further.
• Longer Cycle Expected: This cycle is anticipated to be longer than the typical 10-year cycle due to the unique combination of central bank and investor demand.
• Technical Targets: Based on a 45-year silver cup and handle formation, silver could reach $90-$100 per ounce upon breakout. If silver reaches $100, gold could reach $3,500-$5,000 based on historical ratios, though Checken believes these numbers could be even higher.

Key Factors to Watch

Checken is looking for a slight pullback in the market for technical reasons (backfilling from lower levels), though he doesn't see it happening imminently due to the strong trend.

• Dollar Trend: The movement of the US dollar remains a key factor.
• US Fiscal Responsibility: Developments in US federal budget funding and any signs of fiscal responsibility could lead to a short-term pause.
• Market Reaction to News: The lack of market impact from recent peace talks in the Middle East suggests that rational behavior is unlikely in the short term.

Checken reiterates that any pullbacks should be embraced as buying opportunities, as the current bull market is far from over.