As our headline chart illustrates, gold and silver appear to be going their separate ways, with gold drifting lower while silver gradually ticks higher. This week, gold fell $51 from last Friday’s close to trade at $1772 in European morning trade today, while over the same time zone silver drifted 20 cents lower to $27.07.
The fall in the gold price since early January contrasts with all other inflation indicators, except the increasingly meaningless CPI. The table below shows how cryptocurrencies, commodities and equities have performed since 23 March, when the Fed’s accelerated QE was introduced.
The increase in prices for base metals, energy and soft commodities are not far from doubling, tracking the increase in M1 money supply. Keynesians are saying that the increase in commodity prices is a secular bull market foreshadowing economic recovery, confirmed by increases in equity prices reflected in Nasdaq and the S&P. But this reading ignores the price effects of substantial increases in money supply, evidenced in a 75% increase in M1 and a 23% increase in M2 (82% and 24.8% annualised respectively), as well as the fall in the dollar’s trade weighted index of 11%.
Without doubt it is monetary inflation driving prices, because there is no offset to these price increases. Having fallen $300 since August, the price of gold is the notable exception: why?
The financial world is dominated by the macroeconomic theory of the inflationists. They do not realise that the rises in prices evidenced in the table above are the result of monetary inflation and do not portend a genuine economic recovery when the lockdowns are over. The bullion banks are desperately short on Comex, and there is no bullion in size available in London and Zurich. They are trapped and have to believe in the Keynesian no inflation myth. Our next chart confirms their problem.
Their net short position first hit record levels in December 2019, leading to a crisis which the establishment tried to resolve by a coordinated bear raid the following March, driving the price down from $1700 to $1460 in only six trading sessions. But the bullion banks’ net short liabilities never fell below previous records and the gold price then rose rapidly to a high of $2075 on 7 August.
Clearly, the move down to current levels over the last six months is an attempt by bullion banks to close their shorts at a time of accelerating monetary inflation. Failure to do so risks breaking them and creating a crisis at the heart of the financial system.
What we don’t see is the amount of central bank leasing to provide temporary liquidity in London. We got a sniff of that last August when it was revealed that 40 tonnes of GLD’s gold was in the Bank of England’s vaults. But today, it is likely that the Bank is redoubling its efforts in a covert leasing operation to keep an inevitable crisis at bay.
It cannot succeed for long in these inflationary times and the next run up in the gold price could provoke a serious and very public crisis. And as for silver, the shortages of physical are less easy to deal with, and could be the canary in the mine.