With Thanks to Central Banks

With Thanks to Central Banks

Thursday, 11 February 2021

The biggest news to hit financial markets this week was Elon Musk announcing Telsa had made a $1.5 Billion dollar investment into bitcoin, in an attempt to have part of their cash holding deliver a better return than what is currently offered by savings accounts. Interestingly, bitcoin broke out into new all-time highs, however Tesla slightly sold off, finishing lower on the day. Perhaps there were a few Tesla investors out there no so convinced that taking a $1.5 Billion dollar bet on one of the most volatile asset classes on the planet was a good idea.

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The reason why this story is so important, is that it represents financial markets in 2021 in a nutshell. This is yet another creation of Central Bank policy and an adverse effect of the zero-interest rate environment of recent years. We see it everywhere at the moment from the Gamestop Saga, to the action in the silver market last week, through to the bull market in crypto currencies; and that is the collective mindset that cash is becoming worthless (or savings, if you will). If you think about your saving account delivering a negative return after inflation and tax, then what incentive is there to save in a conservative or prudent fashion? None. With no returns and no incentives to behave ourselves, we market participants are throwing cash at everything left right and center in the hope for higher returns. We have lost the ability to properly account for risk. When money is starting to be seen as worthless, it only makes sense for companies to also start looking for alternatives to cash.

For Elon Musk, it was Bitcoin that was the desired alternative, but anyone who follows Tesla closely would know that he is not the most risk aware individual. What was also listed in a filing to the Securities Exchange Commission was that Tesla could ‘invest a portion of such cash in certain alternative reserve assets including digital assets, gold bullion, gold exchange-traded funds and other assets as specified in the future,". So it could be very soon that we see Elon diversify some of the company’s cash balance into gold also.

One adverse effect to this ‘lack of respect for cash’ movement is that we are starting to see much larger financial bubbles, with much higher frequency. The size and volatility of these bubbles are being exaggerated by the fact that call options availability and popularity is also skyrocketing. In 2021, speculators seem to want the biggest return possible, and any concept of risk is being thrown out the window. Game Stop shares is one of many examples, but they will all end the same way. The party never lasts forever so be careful not to get caught up in the hype. After rising above $400 per share GameStop is back to $53 this week.

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This broader theme that we are seeing could have other implications should it continue to gain traction. One implication is that of higher inflation. Yes, that thing that Central Banks have been fighting for the past few years may turn into their worst nightmare.

The massive amounts of fiscal and monetary stimulus are starting to get the bond markets attention, with inflation expectations starting to rise. Long-term US bond yields this week hit their highest level in a year and investors continued to sell down US Government debt.

The 30-year Treasury yield briefly traded above 2% this week as the trend in higher yields continues. Inflation is back on the radar, and once it starts to take off it can be hard to control. This psychological phenomenon that we are seeing around investors attitude to cash could certainly help inflation to start snowballing, so although we see higher yields keeping a lid on gold and silver prices currently, watch those inflation numbers closely. If they start to build, gold and silver will likely see rapid inflows as natural inflation hedges.

The thing that should concern markets about inflation, is that the only realistic response by Central Banks will be to tighten monetary policy, should it get out of control. This means higher interest rates and the potential of pricking the biggest credit bubble the world has ever seen.

Why Silver Investors Should Think Long Term

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Silver prices have stabilized for now, but unfortunately the level of demand is still making it difficult for us to source physical cast bars. Quite quickly we can see a physical shortage of investment sized bars when we see a big spike in demand. Those following the silver price may have been disappointed to see the market correct back to USD $27 per ounce, but silver was never supposed to be something to make a quick buck in. We talked last week about the flaws behind the ‘silver short squeeze’ mainstream media hype, but there are many reasons to like silver for the long term.

Price action remains bullish on a long-term level as we are clearly in a nice uptrend since the March 2020 lows (see above). Investment demand for silver remains strong, solar PV demand is expected to continue into 2030 and silver is also an important component in electric vehicles. 

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Visual capitalist put together nice infographic on silver demand which you can find here. For more on the more longer-term silver outlook, I did an interview with Kitco News this week which you can read about here. There are many long-term fundamental reasons for silver to perform well in the future, but investors should see silver as a long-term savings vehicle, rather than a short-term speculation.


John Feeney

Guardian Gold Sydney

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Or on Twitter @JohnFeeney10



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