July 2020
Inflation. It's a dreaded word to all things financial. Yet here we are, faced with global food prices rising for the sixth month in a row. At the same time, global forecasts for increased price inflation in 2021 in many sectors of the economy are steadily growing.
The one-two-three (and four) punch of price inflation, political destabilization, dollar weakness, and financial system distress means that the case for increasing gold and silver prices is strong. Nobody has to be happy about the reasons why. But we are thankful gold and silver are available to act as the cornerstone of your portfolio during these uncertain times.
All the best,
The OWNx Team
X-cerpt
As the world continues to be filled with uncertainty, a small version of normalcy has returned for us here in Kansas. My [Josh] kids participate in several sports activities throughout the year. My 12 year old son Max enjoys playing shortstop and catcher for his baseball team. The coaches that pour into these kids’ lives are amazing. They volunteer their time to teach the game as well as lessons that the boys can take into many areas of their lives as they grow older.
Last week, the “Gladiators” had a game against a team that had beaten us badly the first game of the season. 16-2 bad. That game in June only lasted 3 innings and we were over-matched. The other team crushed the ball and we couldn’t stop anything they were doing. Our boys were discouraged, but not to the point that any of them wanted to give up. Throughout the next several weeks, I watched them get better. So we knew heading into a rematch of our 16-2 loss that this game was going to be different. What I didn’t know was that the umpire was going to have a profound impact on our boys - in a good way.
I won’t go into the details of the game, but let’s just say it was completely different than the first one. Our boys’ pitching, defense, and hitting were on a completely different level. Due to the absence of one of our coaches, I had the privilege of coaching 3rd base, so I got to see things up close and personal. I had some proud dad moments when Max made some great plays at shortstop, but honestly, all of the Gladiators really stepped up. The final score was a 6-4 loss, but everyone was so excited. It was the best the boys had played all season.
What came next filled my thoughts for days after the game. After a tip of the cap occurred between the two teams (no “good game” handshakes due to COVID), the umpire, a college-aged young man, came over to our coach and asked if he could have a moment to talk to our boys. We gathered together on the outfield grass and he spoke encouraging words over the team--individually and collectively. He pointed out Max’s play at shortstop, the way our pitcher performed, and many other individual moments. He also told us that he had not seen anyone play our opponent all season to that level of competition. They were undefeated and typically ran the score up on everyone. I was standing there and could see the Gladiators, one by one, being lifted up for what they had done the past few hours. It was a special moment and they were recognized for it, not just by their coaches and parents, but an outsider with a very unique perspective.
The umpire didn’t have to do that, but his decision to do so had a lasting impact on all of us who were there. So, why do I share this with you? That evening reminded me how important it is to be on the lookout for opportunities to have a lasting impact on those around me. Whether it is what we continue to build each day for our OWNx clients, or personal relationships I have in my life, having an impact on others is a vital component to our lives while we are here on this planet. It’s easy to get caught up in what is happening in our own lives. But having an impact beyond ourselves requires an intentional step into the uncomfortable, and I believe during this time especially, we can and should all go there together.
Josh McCleary - Co-Founder and COO
Gold and Silver - responding to global realities.
We delayed the release of this month's newsletter for over a week because of the price action of gold and silver. We wanted to see how they would respond after gold broke out to a new all-time high. Many factors are impacting gold and silver prices at this time. A major one is the reality that not only will COVID be with us for longer than many hoped, so will the economic impact of the shutdowns, supply chain disruptions, and trillions in new government spending. The supply chain disruptions could have been more transient in nature had the virus dissipated this summer. Now they will become more systemic in nature, likely resulting in shortages in key industries such as food, and, to a lesser extent, energy. This combined with surging retail demand for precious metals means that the price action of gold and silver is strong and likely to remain so. Sudden unexpected developments in the financial markets could cause brief and sharp selloffs. We would see those as tremendous buying opportunities.
Spreads between large bar and deliverable items remains high. We do anticipate that there will be a period when those spreads ease significantly as capacity to produce smaller items increases. Until then, unless you have a compelling reason to have it in your hand right now, best to continue to accumulate bullion in big bar form. It's the smartest, simplest, and most cost effective way to maximize the ounces you own.
What Do the Charts Say?
In our last newsletter, we pointed out that the metals had come off the panic liquidation phase and begun a new uptrend. Gold had reached multi-year highs, however, silver lagged and had not broken out above multi-year chart resistance. Two months later, the picture has changed - for the better. Today we are providing three charts because of the importance of where we are in this new gold and silver bull market.
The first chart is a 15 year chart of gold.
As you can see on the left half of the chart, when the last bull market began, a distinct channel was formed that the price remained within for three years. The last phase was a parabolic move upward (red oval) that decisively broke the upper bound of the channel. That "blow off top" marked the end of the bull and the beginning of a nearly five year bear market. Now compare that to today's price action. Once again a new upward channel has formed. It is noticeably steeper than the last one. It is also showing more volatility. We've seen one break out of the channel on the low end (March panic this year). Today, we see a break above the upper channel (orange oval). What does this tell us?
First of all, this bull is likely to be a bit more wild than the last one. Moves both up and down could be swift and temporarily break the channel formed. It happened on the downside in March and has happened now on the upside. That means caution is warranted at this time. No market can sustain a parabolic move. Admittedly, we live in unprecedented times. This move above the channel could run a bit further. However, long-term investors do not want to see it continue much further. In fact, if you follow our dollar-cost-average and buy-the-dips strategy, we would be happy to see it pull back to the lower end of the channel over the coming weeks and months. It would be great for long-term investors if the price pulled back to the $1,800-$1,825 area over the coming weeks. This is the price it had to fight through to confirm the new bull market. Pulling back to touch that, which happens to also be near the lower channel of the present uptrend, would set up a very nice chart. It would create a similar pattern to what we saw in 2009 (blue oval), and indicate that this market has much further to run. Will it happen? Time will tell. No two bulls are the same. But they often rhyme.
Now, a closer look at the two year gold and five year silver charts.
Gold has decidedly broken out from a healthy consolidation phase that lasted from April through June when the price traded between $1,650 and $1,800 after that nasty panic March low (blue lines). A new uptrend channel has formed over the last 18 months that will help inform intermediate trend changes in the coming months and years. The surge over the last week should be watched with caution. Markets of all kinds do get overbought, and when they do there are often brief and sharp pullbacks. In fact, it would be healthy if gold pulled back into the channel and touched the $1800 to $1850 level over the next month or so. As such, dollar-cost-averaging is a good strategy going forward.
Now for silver. Its chart is a bit harder to define. That is often the case early in a long term bull market. Silver is simply more volatile than gold, and in this case, has some catch up to do to close the gold-silver ratio. That makes charting it a challenge. What we can see, however, is that it has decidedly broken above pesky overhead price resistance at $18.75. Historically, when both gold and silver break out above long-term resistance, it confirms that a long-term bull market is indeed underway. In the case of silver, it would be healthy to see it pull back to the $22.00 range (orange oval). The gold to silver ratio has fallen from a high of 120:1 to its present 80:1. During the last bull market, it fell as low as 16:1. Could it happen again? Yes. Will it? Nobody knows. What is probable is that it will at least fall into the 40s. If that occurs, the price of silver will rise at twice the percentage rate of gold.
The price action of both gold and silver are very positive right now. While in the short term, prices may be overbought, the long term bull seems healthy and confirmed.
It looks like price inflation is coming in 2021.
M2 (money in circulation) is a measure of money that makes its way to main street. When it rises substantially, it devalues the purchasing power of existing money. This is monetary inflation, and it is happening already. Additionally, the food supply chain has been severely disrupted, resulting in the destruction of huge quantities of meats, fruits, and vegetables. Finally, weakness in the US dollar internationally puts upward pressure on import prices.
These three combined are setting the stage for significant price inflation in 2021. It is an environment where gold and silver prices have risen consistently throughout history. We don't anticipate it to be any different this time.
Inflation 2021: Bond Investors, Buckle Up
"Powell pulled the lever on the money printing quantitative easing machine early and often in March. Back in 2008, the Fed didn’t get into “extraordinary measures” until things got dicey later that year. Powell skipped the foreplay and tossed a few trillion onto the table. In doing so, all previous records were smashed in the largest money creation event of all-time (as defined by M2, the measure of the amount of money “out there” in circulation)."
Expect an inflation problem going into 2021, strategist says
Michael Howell, CEO of Crossborder Capital, discusses the economic impact of the coronavirus pandemic.
US food supply chain: Disruptions and implications from COVID-19
"By now, ripple effects into that previously balanced system have become clear. Distribution channels have been upended, with food stranded upstream, creating food-security risks for vulnerable populations."
Gold, silver prices surge to highest levels in years
"Tuesday’s price surge reflected "what happened in Europe,” George Gero, managing director at RBC Global Wealth Management and a member of the COMEX board of directors, told FOX Business after European Union leaders agreed on a 1.8 trillion euro ($2.06 trillion) spending package to bolster the region’s economy in the wake of COVID-19." That and a few other reasons...
Gold Prices Hit Record as Dollar Drops
Gold prices zoomed to a record Monday, as a weakening dollar injected new momentum into a rally driven by uncertainty about the world economy.
Suggested Reading
Going Local: Creating Self-Reliant Communities in a Global Age
We posted a link to this book back in March. At the time we didn't realize how spot on it would be. This trend is growing in the age of food supply chain disruption and the realization that the existing chain is anything but resilient.
Note: The OWNx office will be closed on September 7th for Labor Day.