Strong Demand Pushing Bullion Premiums Higher Again

The best time to buy gold and silver was before the world began its slide into insanity.

The second best time to buy metals may be now.

Many long-time bullion investors have held off, expecting prices would fall. Premiums did come down significantly over the summer – as did silver prices in particular. However, premiums never fully normalized, and they are now once again on the rise.

Anyone waiting for lower premiums is waiting for the drivers behind strong demand to shift. That may be a while.

To expect lower premiums from here requires faith in the following relatively far-fetched scenarios:

• the spike in inflation is “transitory” after all.
• central bankers will decide it is time for stimulus-addicted economies and debt-addicted governments to go cold turkey.
• politicians will give up on COVID lockdowns and vaccine mandates.
• supply chain disruptions will soon be resolved.
• unemployed people, who have grown dependent on government transfer payments, will return to work.
• crooked bullion bankers will cease efforts that keep gold and silver prices artificially low, thereby encouraging buyers and discouraging sellers.

Until much of the above becomes true, the economic and political environment will continue driving waves of new buyers into the retail bullion markets. And investors looking to sell metal will remain few and far between.

The current lack of selling isn’t the only constraint on supply.

Producers – miners, refiners, and mints – are also sensitive to challenges including inflation in fuel prices, supply chain disruptions for equipment and parts, labor shortages, and lockdowns.

If the bullion markets are an indication, investors are betting heavily against a quick resolution to the problems above.

Meanwhile, there is no resolution in sight to the country’s burgeoning debt problem other than more Federal Reserve currency creation.

Republican Senator Mitch McConnell’s deal with Democrats last week authorizes the government to borrow another $480 billion through December 3rd. At that point, the resolution of the current debate will undoubtedly enable the Treasury Department to continue selling bonds to the Fed.

The Fed has a dual mandate to fight inflation and promote full employment. To the extent the central bankers take that mandate seriously (not much in our view), they have a real dilemma brewing. The labor market is signaling a need for more stimulus at the same time rampant inflation is demanding they tighten.

The unofficial Fed mandate is to promote higher stock prices and to act as the buyer of last resort for multi-trillions in new federal debt. That means any attempts to tighten will likely be window dressing and short-lived.