How Are Precious Metals Inventory?
Jeffrey Christian: Hello! It’s Jeffrey Christian. I’m coming to you from Monex. I’m with CPM Group. We provide research and advisory services to Monex and its clients. It’s the middle of April right now. I wanted to talk to you about three topics today, all inter-related. First one is inflation. There’s been a lot of talk about inflation and reviving inflation. The question is what does that mean for gold and silver. First off, I will be honest with you, CPM Group doesn’t see inflation as being a particular problem from a long-term perspective, as we’ve written for years, we see deflation as a much bigger issue on the longer term. We do think that inflation may pick up for the remainder of 2021. We don’t see it becoming problematic, but given the amount of fiscal and monetary stimulus that has occurred, given the supply disruptions across consumer goods and services, and given the fact that we are in a rebound from a very deep recession in 2020, we think there are some inflationary pressures. Our expectation is that inflation will remain below 3%, maybe a spike up to 4 % for a month or two, but we don’t see that as being a problem. If you look at the inflation that’s important to gold and silver, in the 1970’s and early 1980’s, it took 7% or higher inflation rates before investors really were buying a lot of gold and silver as an inflation hedge. Inflation got up to 14% in late 1979 and early 1980. Inflation, the back was really broken in 1982, 1983, by the Fed under Paul Volcker and it hasn’t really been a problem since then. As I said, if you look at the state of the global economy and the U.S. economy, there are many more deflationary pressures than inflationary pressures facing us both in the short-term and in the long-term. Inflation comes from the real economy, too much money chasing too few goods and services and in that environment we have too much goods and services relative to the amount of money that might chase it. So, you have this disinflationary if not outright deflationary pressures. The other source of inflation is monetary policy and what we’ve seen since 1982 is that the monetary authorities, the Fed in the United States and Central Banks in other countries, will flood the world, or flood the market, or flood the economy with money when you have a financial or economic crisis. Once that crisis is passed, they’ll sell bonds and sop up the excess liquidity, usually, since 1982, precluding any inflationary impact. Whether or not they can do it this time going forward, it remains to be seen. There are some differences, the amount of monetary accommodation has been much greater, the globalization of financial markets is further down the road. So, there are issues as to whether or not they’ll succeed. Our expectation is they will succeed in controlling inflation. If you look at mainstream economists and Central Banks, most of what they’re writing about and studying are deflationary risks. The Fed itself would like to see inflation at 2%, but it cannot get inflation up to even 2% and 2% inflation is just not particularly problematic from an economic perspective and it’s not enough to cause investors to sort of panic and say, “I need to buy gold and silver as an inflation hedge.” So, we don’t see inflation as an issue, but we don’t see it as a factor contributing to higher gold and silver prices. We see a host of other factors that will cause investors to want to increase their exposure to gold and silver, economic, and financial, and political issues, but inflation is the one that we’re not particularly worried about even though right now, at least in the gold market and in other parts of the financial commentary market, you are seeing talk about higher inflation.
The second topic I wanted to talk to you about is gold and silver supplies. There have been shortages at times of gold and silver metal, primarily in coin form, medallion form, and small investor sized bars. Those shortages have reflected increased demand, I mean the demand for gold and silver in 2020 was double if not triple what it had been in 2018, 2019. Refineries that produce investor bars, and medallions, and national mints that produce coins, had scaled back their production reflecting the fact that investors were less interested in gold and silver in 2018, 2019. When investment demand rose in 2020, not only were the refiners and mints not quite prepared to supply that… meet that demand, but they also were facing the pandemic, which shut down some mints and refineries for a time, and then when they came back, a lot of them were operating on 1/3 capacity, so as to protect their staff from the spread of the coronavirus across the entire staff. So, you had a supply constraint just as investor demand for these products were rising. That has caused spot shortages, although the shortages I have to say are very spotty. So, you’ll find people right now that they’ll tell you they don’t have particular mintages of coins or small bars, but you can find other dealers, like Monex, who have as much as you want. So, that’s where we are and where we continue to be. We expect investment demand to remain high given all of the economic, political, and financial market uncertainties that are abroad in the world. We think that in that kind of environment, the mints and refineries will be working hard to meet that demand.
The third and final factor relates to that too, but it relates more to wholesale markets. As you’ve seen, tightness in 1-ounce coins and bars and kilo bars, you have heard people say that there’s also a fundamental shortage in 400 ounce and 100-ounce gold bars, good delivery bars, in London and New York or 1,000-ounce silver bars. That’s not actually the case. You have record inventories in London and New York, where you have reported data, and you have very high, if not record levels of inventories in Switzerland, China, Singapore and other countries. So, there’s plenty of metal there. Now, some people will counter that and say, “Yes, but it’s all allocated for,” and that’s not actually the case. If you just take the instance of London, London silver inventories are about 1.25 Billion ounces right now… 1,250,000,000 ounces, of that about 725 million ounces are allocated to ETFs. These are ETFS that actually have physical metal behind them and the total amount of metals stored in London for those ETFs is $725 million ounces. That leaves about $500 million ounces unallocated to ETFs in the London vaults alone. You’re seeing similar balances in New York and your seeing similar balances in other markets. So, there’s plenty of metal out there right now in 1,000-ounce silver bars and 100- and 400-ounce gold bars. It’s not particularly a big issue. You’d see depositories building new facilities and they’re building those new facilities, because the amount of gold and silver that is being stored is increasing sharply, and this is actually a phenomenon that has gone on for about 15 years now. Depositories around the world keep building capacity. They keep filling it up and building more capacity. Now, a lot of the metal they are storing, they are storing on an allocated basis for investors, because we’ve seen since 2002 in gold and since 2005, 2006 in silver, we have seen investors buying very large amounts of gold and silver from those years until 2011, 2012. Then you had a bear market from 2013 to 2019, but starting in the middle of 2019 investors have started buying metal again and that metal is being stored in these depositories—some of it is allocated, some of it is unallocated, and other unallocated amounts are being held by banks and brokerage houses and refineries. So, there is a lot of metal out there. Some people are charging higher premiums. Monex, I’m glad to say, is one of companies that’s charging reasonable premiums for metals, both smaller products and larger volumes at this point, and I think that that will continue to be. We’ll talk to you again in May.