By Mike Gleason
After getting off to a rough start to open the week, precious metals markets appear to be stabilizing.
Gold and silver prices got walloped in a futures selling raid ahead of Monday’s market open. Some leveraged speculators who faced margin calls had to sell long positions to raise cash.
This sort of forced selling is indicative of a possible washout bottom. But we will need to see a stronger snapback in the days ahead in order to confirm that.
Metals markets have responded poorly this summer to inflation data that continues to come in hot. Hard assets are taking a back seat to the stock market where rising prices have actually helped large companies post better than expected quarterly profits.
How sustainable that profit growth will be is highly questionable. In the later stages of rising inflation, upward pressure on wages combined with downward pressure on discretionary consumer purchasing power can eat into corporate earnings.
That’s when hard assets outperform just about all other investments. Low-yielding bonds obviously have no chance while inflation is running high. But most sectors of the stock market are vulnerable to real declines as well.
Past hyperinflations in history such as in Weimer Germany and more recently Zimbabwe show that wealth is destroyed, not increased, by rapidly rising prices. No economist would suggest that hyperinflation is a path to prosperity. Yet many economists, including those who work at the Federal Reserve, would have us believe that a measured level of inflation somehow makes us more prosperous than if we had no inflation.
The case for precious metals ownership doesn’t rest on a hyperinflation scenario. It doesn’t necessarily even assume rising inflation.
If inflation just fails to go down as much as financial markets are pricing in, then gold and silver can be expected to offer superior upside compared to bonds and cash. The only way low-yielding paper assets can offer positive real returns over time is if inflation rates plunge and stay down.
Apparently, that’s what a lot of investors think will happen. They are convinced that the Federal Reserve has the inflation situation under control and will act to tighten monetary policy whenever necessary. Yet the Fed is doing the exact opposite right now – under inflation conditions that would have caused previous central bankers to immediately hike interest rates.
Even if recent inflation readings prove to be transitory, the Fed admits the price increases won’t reverse or stop. They’ll just continue at a hopefully less robust pace.
But over the years and decades, even a relatively mild level of constant inflation compounds to create the same sorts of price-distorting and wealth-destroying effects of hyperinflation…in slow motion.
The latest country to be plunged into hyperinflation is Venezuela. Its socialist government recently announced it would significantly alter the value of the currency, the bolivar, to avoid having to continue issuing it in increasingly absurd denominations.
News Report: As of October 1st, this 100 Bolivar note will be the highest denomination, equivalent to today’s 100 million Bolivar note. That means six zeros will be removed from a currency that has been so devalued by hyperinflation that it’s become practically worthless. Inflation in the first four months of this year was nearly 300%, and last year it was 3,000%. That’s why the country’s de facto currency has become the U.S. dollar, but millions of Venezuelans don’t have access to it. By slashing six zeros off its currency, the government hopes to reinstate the widespread use of its own coin.
The 1 million bolivar note is currently worth about 25 U.S. cents.
But quarters have also lost a tremendous amount of value over time. Today a quarter is worth less than three cents in 1964 purchasing power terms. In other words, U.S. coinage has lost close to 90% of its value since the final year silver quarters were minted for circulation.
The good news for those who have held onto pre-1964 silver quarters is that they are now worth far more than their face value. Based solely on their intrinsic metal content of 90% silver, pre-1964 silver quarters are worth about $4.25. And that’s with the silver market being extremely depressed at the moment.
When silver prices recover, 90% silver coin values will rise just as surely as any form of silver bullion. Most silver stackers have a healthy supply of these so-called “junk” coins on hand. They are convenient for potential barter transactions. And since they are no longer minted, they could command scarcity premiums in the future.