Rising Gold and Silver Prices
Gold and silver have been used as money for thousands of years. The value of gold and silver is inversely proportional to the faith people have in the world’s Fiat / paper currencies.
Fiat money is currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of. – Investopedia
Year to date Gold in Rands : Up 22.84 %
Year to date Silver in Rands : Up 37.8 %
Falling global bond yields and rising debt level are bullish for silver and gold.
Falling Global Bond Yields
There are currently almost 12 Trillion Dollars of government bonds trading with negative interest rates. Three years ago Italy and Ireland were components of the infamous PIIGS, (Portugal, Ireland, Italy, Greece and Spain) they now have negatively yielding sovereign debt which means that investors are effectively paying for the privilege of buying their debt!
Falling bond yields on bonds indicate that money is flowing into the debt market. Debt is perceived to be a safe-haven investment. Investors are more concerned about return of their invested capital and not a return on their capital. Negative interest rates mean investors are prepared to pay for the privilege of what they perceive to be a safe investment. Investors trust and have faith in the bond issuer’s ability to repay that investment.
Global Debt Levels are Unsustainable
Total American Federal Government debt is $19.3 Trillion. This does not include the United States unfunded liabilities which some have estimated to be greater that 100 Trillion. (Unfunded obligations for Social Security, Medicare and Medicaid.)
Alarm Bells
According to the Federal Reserve official website, there are only 1.4 Trillion dollars in physical cash in the world.
American commercial banks have over 11 Trillion in deposits.
The total value of all derivatives is estimated to be somewhere between $630 Trillion and $1.2 quadrillion. A derivative is an investment instrument whose value is derived from the value of the underlying asset. To give you an example, a financial institution could create an investment product that tracks the price of gold but is not backed by the physical metal. The value of the investment product exists only on paper.
In stark contrast to the derivatives market, the value of all the gold ever mined in the history of the word has a value of only 7.8 Trillion and the value of all above ground silver is estimated to be only $18 billion.
Conclusion
Current world debt levels are unsustainable. We believe that at some point in the near future investors will lose faith in world central banks that issue debt and will turn to real safe haven assets of physical gold and silver bullion. Large inflows of capital to the relative tiny physical gold and silver market will inevitably drive precious metal prices to much higher levels.
