SILVER ALERT: $100 Silver Prices? Are We Going To Hit it?

Key Concepts

• Precious Metals Market: Discussion on the current state and future outlook of gold and silver prices.
• Market Corrections: Analysis of recent price movements and the absence of a significant correction in gold and silver.
• Central Bank Buying: Examination of the role of central banks and other entities like Tether in purchasing gold.
• Dollar Dominance: Exploration of the declining reliance of foreign central banks on US Treasury securities and the US dollar.
• Asset Diversification: The strategic shift by central banks away from concentrated holdings in a single asset.
• Market Crashes and Liquidity: The impact of a severe market downturn on asset prices and the search for liquidity.
• Long-Term Investing Strategy: Advice on holding quality assets through market volatility versus attempting to time the market.
• Speculative vs. Quality Assets: Differentiating between highly speculative stocks and fundamentally sound companies during market downturns.

Precious Metals Market Analysis

Adrien Day discusses the recent performance of gold and silver, noting that the market has not experienced a significant correction. He suggests that the recent price action, particularly over the last ten days, has been remarkably strong, indicating substantial buying interest on the sidelines from individuals who missed the initial upward trend. Day believes that the current lows for gold and silver have likely been seen, and the primary question is how long it will take for them to reach new convincing highs. He attributes this pent-up demand to both retail investors and central banks, with Tether also being a significant buyer in the gold market. The only notable pullback in buying has been from non-official Chinese retail investors who experienced a "mania" in October.

Tether's Gold Purchases

The conversation delves into why Tether, a stablecoin pegged to the US dollar, is buying gold. Day explains that Tether has a gold-backed stablecoin in addition to its US Treasury-backed one. With declining interest rates in the US, the revenue generated from their US Treasury stablecoin will decrease. This likely incentivizes them to build their gold-backed stablecoin. Furthermore, Day notes that the individuals behind Tether are "hard asset oriented" and have also invested in assets like farmland, making gold purchases consistent with their investment philosophy.

Central Bank Reserve Diversification

A key point raised is that global central bank gold reserves have surpassed their holdings of US Treasury securities for the first time since 1996. Day clarifies that the US dollar still represents a significant portion (around 50%) of foreign central bank reserves, with gold at approximately 20-23%. He argues that this shift signifies a desire to diversify away from a concentration in a single asset issued by a "fiscally irresponsible" and potentially "weaponizing" government. He points out that dollar holdings by foreign central banks have significantly decreased from over 75% at the beginning of the century. Day posits that central banks will continue to reduce dollar holdings, and gold is the most viable asset for them to allocate large amounts of reserves into, as other currencies like the Euro have seen declining percentages in reserves.

Hypothetical Market Crisis Response

In a hypothetical scenario of a 2008-like crisis with a 30-40% stock market decline, Day anticipates a liquidity crisis where everything will go down as people seek to sell assets for cash. He advises that while selling highly liquid assets quickly might be prudent, it's a mistake to sell long-term holdings based on the expectation of buying them back cheaper. He cites historical examples like 2008, 2001, and 1987, where attempting to time the market by selling at the absolute top and buying at the absolute bottom is rarely successful.

Supporting Evidence for Long-Term Holding:

• 2008 Crisis: Gold stocks (XAU) fell more sharply than the S&P 500, hitting bottom in October before the S&P's major collapse. However, the XAU doubled by March, before the S&P bottomed.
• Recovery: In extreme cases like 2008, quality assets recovered to new highs in less than a year (approximately 10 months).
• Client Experience: Over the last 20 years, Day has had very few clients (six or seven) who insisted on selling everything to buy back later, and every single one of them lost money on that trade due to fear of buying back after a significant drop.

Caveat on Selling: Day clarifies that this advice applies to quality assets. For highly speculative stocks that have seen a significant price jump due to specific news (e.g., drill results), trimming those positions and holding cash if nervous about the market is a reasonable strategy.

Silver's Performance

The conversation concludes with an observation that silver has actually held up better than gold stocks and gold since the peak in October. This is considered incredible, especially given the initial expectation of a significant drop in silver prices.

Conclusion and Takeaways

The discussion emphasizes that while market corrections are inevitable, the recent lack of a deep correction in precious metals suggests strong underlying demand. Central banks are actively diversifying away from the US dollar, with gold being the primary beneficiary. In times of market crisis, holding quality assets and riding out volatility is often a more successful strategy than attempting to time the market. Speculative assets, however, may warrant a more cautious approach.

Contact Information

Adrien Day can be found at adrienday.com.