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Supply & Demand Are BOTH Crashing in the Unfolding Carnage
Gold & Silver Mines Shuttered; Physical Silver “Most Undervalued” Asset
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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
We continue to see unprecedented demand for gold and silver here at Money Metals Exchange, so we will forego an outside guest interview again this week in the interest of time. Servicing our customers has been an all-hands-on-deck effort with lots of overtime and new hires in order to get the job done. I’m proud to report that we continue to ship out your orders at a breakneck pace -- and Money Metals STILL has more inventory in stock and ready to ship than most of our competitors it seems. Well without further ado, here is this week’s market update.
A surge in coronavirus cases, an expansion of economic lockdowns, and an explosion in unemployment claims hit markets this week. But this deluge of bad news didn’t seem to catch investors by surprise. Instead of crashing to new lows, the stock market held within a trading range and rallied yesterday following the release of a horrific jobs report.
It’s been a huge week for commodity markets as oil prices posted their biggest single day percentage gain ever Thursday, popping more than 25%. Oil prices lifted from their severely depressed $20 per barrel level after President Donald Trump met with oil executives and announced Russia and Saudi Arabia would agree to curtail production.
Turning to the precious metals, volatility finally tamped down a bit after three straight weeks of some of the wildest moves we’ve ever seen in both the spot market and the bullion market. Gold spot prices currently check in at $1,640 per ounce, down 0.7% for the week. Silver, meanwhile, is essentially unchanged on the week to trade at $14.75 an ounce as of this Friday morning recording.
With so many disruptions and dislocations now hitting the economy, investors have to ask themselves: What is truly sustainable? A great many businesses won’t be around after this global pandemic finally recedes. Entire industries will never be the same. And so many families will be financially wiped out.
Government “stimulus” may well prevent politically favored companies from going under. But at the cost of putting federal spending and borrowing on an even more unsustainably steep trajectory.
While there is no limit to how much currency the Federal Reserve can create to prop up the government and the entire financial system, there are limits to the U.S. dollar’s credibility as a store of value. And they are likely to be tested as the currency supply accelerates upward.
At the same time, production of scarce assets such as precious metals and an array of commodities is likely to fall off a cliff. The current supply and demand dynamic in most raw materials is both unprecedented and unsustainable.
The big story we have been told with regard to crude oil is pandemic-driven demand destruction. The global oil market is seeing demand contract by up to 25 million barrels per day as economies remain virtually shut down.
To make matters worse for oil producers, Russia and Saudi Arabia had been flooding the world with more output. They drove crude prices down so low that the entire North American shale industry, which was already reeling, now faces the prospect of being driven out of business.
In the first quarter of 2020, oil prices suffered a 66% crash – a record drop for a single quarter – settling right around $20 per barrel. At that price, nearly the entire energy sector is unsustainable. From the frackers to the deep-sea drillers to even the more conservatively positioned diversified energy giants, $20 oil simply doesn’t work.
Until oil prices get back above $40, the only way some of these companies can hope to survive is by drastically shrinking their operations. Wells are being capped. Industry analysts anticipate a 70% drop in U.S. drilling over the coming months.
At the same time, demand is also expected to recover from current levels. Although energy use will increase gradually at first as sections of the economy reopen, demand can increase a lot faster than supply – especially when that demand is being accelerated by $6 trillion in federal stimulus so far, and likely even more ahead.
Similar supply and demand pressures face the base metals and precious metals mining industries. Multiple mines around the world – from South Africa to South America – are currently shuttered due to the coronavirus.
Even before the pandemic, the mining industry was in distress due to low market prices for metals. First Majestic CEO Keith Neumeyer had determined it made more business sense for the company to hold onto its silver assets rather than sell them into the market at extremely depressed prices.
This year could see a record decline in mining supply for silver and other metals. And while the crude oil market entered the year with a supply glut that has only continued to grow, silver and palladium in particular were headed for supply deficits. Although industrial demand is currently way down, when it does recover, it will be difficult to see how those deficits don’t widen and perhaps lead to price spikes.
Analyst and MoneyMetals.com contributor Steve St. Angelo expects investors will continue to seek precious metals for financial security during this pandemic and its aftermath. But there may simply not be enough gold and silver above ground to go around – not at current prices, anyway.
Here are some more of Steve St. Angelo’s thoughts from a video presentation he posted earlier this week:
Steve St Angelo: As a lot of large cities in the US and around the world, and countries are on lockdown and they're going to continue to be unlocked down. I believe the US now according to Trump, is on lockdown till the end of April. That's another month. This is really going to damage the system and so we're going to get into a financial storm in the next several months. So, I believe the precious metals, you’re going to see a lot more investors move into the precious metals and there just won't be the supply.
I believe we're going to see serious trouble with the bond market in the next month or so. And that's going to cause trouble with actual bank accounts, the money market accounts, all the money… the digits that are held in the commercial banks, and then as well as the fiat money, the currency in circulation. So right now, the total gold value, and this is identifiable above ground investment stocks, central bank and private is valued about $4 trillion. Compare that to the base money supply, which is about $28 trillion. That's seven times more than all the gold. Now, get silver, total silver value is only $40 billion. It's 100 of the gold. Again, to me, I believe the most undervalued asset is physical silver, and we'll start to see that in the future as more and more investors move into silver to protect wealth.
Well that will do it for this week, thanks for listening. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then, this have been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.