What the Gold Bull Market Is Waiting for

What the Gold Bull Market Is Waiting for

Gold may be leaving global stock markets in the dust lately. But in my view, the actual bull market hasn’t even begun.

Today, I want to alert you to a simple signal that’ll tell you when gold’s bull market really does begin. And that signal won’t happen in the gold market at all. It’ll happen in the silver market.

You see, gold has left its little sister in the dust too. The silver price has underperformed terribly. Sending the gold to silver ratio way out of whack. It hit a 5,000-year record last week, meaning silver was the cheapest ever relative to gold.

It’s not just that. The silver price has plunged in fiat terms too. Not as badly as stocks, but still.

A precious metals boom featuring only gold is a little odd, of course. It’s not the only precious metal, after all. If the bull market in precious metals is real, and if it’s happening because they’re precious metals, then at some point silver has got to make a move too.

What makes gold different is its comparable lack of industrial uses. Silver and other precious metals can be used for all sorts of things. And so their price can rise during an economic boom too. Or fall during a bust, which is what has happened.

So what if the price of silver starts to rise, in the midst of one the worst economic busts of all time? What if the precious metal nature of silver triggers it to spike in reaction to endless QE and fiscal stimulus?

That’ll be a confirmation that the gold price is on its way too. A signal that precious metals are all on the move for the same reason.

Of course, at that point, it’ll make sense to own silver too. And there’s a particular way of doing it right now that I find especially interesting.

You see, it’s incredibly difficult to buy physical silver at the moment. There’s a shortage and premiums are frightening because of this.

But silver ETFs backed by physical silver could be the optimal in between. A way to access physical silver as a convenient investment with minimal premiums. Think of it as physical silver at a discount to the true market price.

Whatever your views on the future of gold and silver prices, it’s clear there have been some serious problems in the gold market over the last few weeks.

The price of gold has completely diverged

The price of gold has completely diverged in two important ways. You’ve probably heard about the first. Or experienced it, if you’ve tried to buy gold lately.

The physical gold price is well above the financial market price, just like silver. There are shortages of physical gold, allowing gold sellers to demand far more than the price quoted on exchanges.

But the second divergence is more interesting. It’s a divergence between the financial market price of gold in London and New York. Those are the two premier gold trading hubs of the world.

The trouble is, the price difference between them keeps spiking. Spreads between COMEX futures and London spot prices hit $100 at one point.

Here’s how Yahoo Finance covered just how strange things are getting in the gold market:

“You have a bunch of shell-shocked market makers who are literally hiding under their desks and do not and possibly can not make markets in any size, shape or form,” said David Govett, head of precious metals trading at Marex Spectron. “Hence we have the lack of liquidity, the small volumes and the wide spreads.”

What’s interesting about this is that the explanations for it don’t make sense to me. The most common explanation is that there were concerns that participants in the US futures market were struggling to deliver on the tiny amount of physical gold they sometimes have to. They asked London to help out and did so by making London’s version of standardised gold bars valid in the US, despite the differences in measurements.

Here’s the problem with that explanation. If the US futures market is breaking down, why is the price higher there? Surely it should be lower.

If London has the more credible price with the better supply of gold, it should be less risky and therefore less discounted. If the US’ COMEX is struggling to provide the physical gold, its contracts should be less credible and worth less.

And so I’m not buying the explanations we’re seeing. Not that I have a different explanation, yet. I’ve asked gold expert Shae Russell for her take on the matter.

All this suggests a reckoning at some point. A spike in the gold price as there’s a rush to get hands on physical gold instead of paper speculation.

But how do you profit?

Can you trust ETFs and bullion storage companies if the crisis in the gold market is specifically in the financialised paper market? Perhaps the crisis will spread to other institutions.

Of course, you should own physical gold to protect yourself from this. But perhaps investing in gold calls for a diversified strategy in and of itself.

Another way to make sure you get access to physical gold is to own the gold that’s still in the ground. Via gold stocks, I mean. And that’s Shae’s real focus. Picking the gold stocks you should consider owning.

Those shouldn’t just benefit from having real physical gold in the ground. They should leverage the spike in gold prices too.

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia