What will happen after gold and silver’s price consolidation?

As expected, the precious metals markets continue to consolidate after a near vertical move the past 90 days, including new highs for gold several weeks ago. Silver has risen over 100% in that same period. It is a normal, corrective, and necessary part of any trend to resume its primary move—which, in the case of precious metals, is UP.

Once this consolidating move is over, a move back above $2,000/oz for gold is expected with an anticipated move to fresh new highs in the $2,250–$2,500/oz area. This would also coincide with a move in silver to north of $32/oz, with $35+/oz being a real possibility.

These price levels will prevail eventually. How do we know this? The relentless money printing (stimulus) trend—and the ensuing dollar depreciation (i.e., inflation)—ensures hard money will increase in value versus fiat Federal Reserve notes. It’s really not rocket science, and you don’t need an economics degree to figure this out: more money printing = more debt = a less valuable US dollar.

The Fed welcomes higher inflation

As noted in our article “Hello Inflation, My Old Friend,” inflation rates may be about to accelerate as the Fed now openly embraces inflation and aims for an “average” of 2%. According to our central bankers, this requires pushing inflation above 2%—overshooting for an “unspecified” period of time. Hmm, “unspecified period of time”? Really?

Who is harmed by this approach? Anyone holding dollar-denominated assets like US Treasuries and bonds or receiving a fixed income from annuities, pensions, and Social Security. Even an inflation rate of 2% per year means our purchasing power will be halved within a few decades. But we don’t think inflation will stop at 2%, and we are not alone. If legendary investor Stanley Druckenmiller is right, we will be facing devastating inflation.

China’s new threat to US Treasuries

It’s no surprise that holders of US Treasuries are becoming very concerned, as they should, about the prospects of losing their purchasing power. These days, you would have to be pretty naive to hold US Treasuries when your yield is close to zero and your underlying asset is being debased.

In fact, the second-largest holder of US Treasuries—the Chinese government, with over $1 trillion—is now selling them. 

After recently selling 20% of their US Treasuries, the National People’s Congress Financial and Economic Affairs Committee announced last week that China would aim to hold $800 billion in US debt “under normal circumstances” but added that “It might sell all of its US bonds in an extreme case, like a military conflict.” Um, is that China’s way of subtly hinting they will weaponize their holdings of US debt by selling it to hurt the dollar?

Ponder this: What happens if other world powers begin dumping their US Treasury holdings and stop accepting US currency in international trade? Answer: The dollar’s current status as the world’s reserve currency and its value (what’s left of it) would completely collapse.

Recently, the dollar’s decline has been slowing. After all it had its steepest single-month decline in a decade this past July. Nothing goes up or down in a straight line. Hence, precious metals recently consolidated as well.

The Calm Before the Storm

But make no mistake: as our Fed’s money printing continues at full speed, so will the dollar’s decline over time, which means that precious metals prices will continue to rise, protecting portfolios from inflation.

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