Nobody knows better than longstanding gold and silver bugs that prices don't always reflect positive fundamentals. The U.S. recently experienced the highest price inflation in decades. Demand for physical bullion surged to record highs in response to that and the chaos in geopolitics.
Very little of that showed up in the price discovery at futures exchanges like the COMEX. Traders, both human and machine alike, have tuned it all out. What seems to matter most to them is something narrow and esoteric: the Federal Reserve note's performance on the DXY index.
They are focused on selling when the dollar rises in foreign exchange markets and buying when the dollar falls.
Futures traders seem oblivious to significant developments elsewhere. They may wind up getting caught by surprise.
Futures speculators are essentially standing out front of a warehouse furiously swapping claims tickets for the metal within. They haven't noticed there is a whole lot more metal headed out the back door than there is coming in.
The supply outlook isn't great for precious metals – particularly for silver. Most people don't know it, but the majority of silver is produced as a byproduct of base metal mining. A lot of silver comes from mines where copper and zinc production is the primary focus.
Copper and zinc prices have been falling this year as the outlook for manufacturing darkens. They may go lower still.
There was hope of a strong recovery in China when stringent COVID lockdowns ended several months back. That hasn't materialized, and the economic outlook there is grim.
The German economy has entered recession with the rest of Europe not far behind.
The U.S. will probably be reporting negative GDP growth before year end. Economic weakness will likely hurt the supply of silver, as base metal miners scale down production.
Falling prices for base metals isn't the only challenge miners are facing, unfortunately.
Last week, Newmont Gold halted operations at its Penasquito Mine located in Mexico – one of the largest gold and silver mines in the world. The National Union of Mine and Metal Workers wants the union profit share increased from 10% to 20%. The discouraging part for Newmont management is they agreed to elevate payouts to 10% only a year ago.
The problems are bigger in South Africa. The nation is one of the largest precious metal producers in the world despite years of unrest and deteriorating infrastructure. Now the country appears to be sliding into the abyss with widespread rioting and vandalism.
Investors outside the myopic futures exchanges are buying safe haven assets in response to a myriad of economic and geopolitical threats.
Contested elections, social strife, bank failures, rapidly declining confidence in government institutions, metastasizing federal debt, the escalating war in Ukraine, and other influences are expanding the ranks of gold and silver bugs.
These influences are not going away anytime soon. The problems are many, and leadership with solutions is essentially non-existent. Republicans just hammered out a compromise with Democrats to completely suspend the limit on borrowing and deficit spending until after the next election cycle.
Last year, central banks added 1136 tons of gold to their reserves. It was the largest addition in a single year since 1950 and the 13th consecutive year of net buying. According to the 2023 Central Bank Gold Reserve Survey, the trend is expected to continue.
COMEX inventories of registered gold and silver are a reflection of what's happening with supply and demand. Stockpiles of both metals have been in steady decline.
The latest report shows 27.1 million ounces of silver available for delivery against futures contracts. This is the lowest inventory in decades, with the exception of a period in 2016. The registered gold inventory has fallen from 15.7 million ounces in July last year to 11.7 million ounces today – a 27% decline.
Rising demand and falling supply may not matter in terms of price in the short run, but no investor should assume it is never going to matter.