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The Silver Series: The Start of A New Gold-Silver Cycle (Part 1 of 3)

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The world has experienced a decade of growth fueled by record-low interest rates, a burgeoning money supply, and historic debt levels – but the good times only last so long.

As the global economy slows and eventually begins to retract, can precious metals offer a useful store of value to investors?

Part 1: The Start of a New Cycle

Today’s infographic comes to us from Endeavour Silver, and it outlines some key indicators that precede a coming gold-silver cycle in which exposure to hard assets may help to protect wealth.

The Start of a New Gold-Silver Cycle

Bankers Blowing Bubbles

Since 2008, central bankers around the world launched a historic market intervention by printing money and bailing out major banks. With cheap and abundant money, this strategy worked so well that it created a bull market in every sector — except for precious metals.

Stock markets, consumer lending, and property values surged. Meanwhile, the U.S. Federal Reserve’s assets ballooned, and so did corporate, government, and household debt. By 2018, total debt reached almost $250 trillion worldwide.

Currency vs. Precious Metals

The world awash in unprecedented amounts of currency, and these dollars chase a limited supply of goods. Historically speaking, it’s only a matter of time before the price of goods increases or inflates – eroding the purchasing power of every dollar.

Gold and silver are some of the only assets unaffected by inflation, retaining their value.

Gold and silver are money… everything else is credit.

– J.P. Morgan

The Perfect Story for a Gold-Silver Cycle?

Investors can use several indicators to gauge the beginning of the gold-silver cycle:

  1. Gold/Silver Futures

    Most traders do not trade physical gold and silver, but paper contracts with the promise to buy at a future price. Every week, U.S. commodity exchanges publish the Commitment of Traders “COT” report. This report summarizes the positions (long/short) of traders for a particular commodity.

    Typically, speculators are long and commercial traders are short the price of gold and silver. However, when speculators and commercial traders positions reach near zero, there is usually a big upswing in the price of silver.

  2. Gold-to-Silver Ratio Compression

    As the difference between gold and silver prices decreases (i.e. the compression of the ratio), history suggests silver prices can make big moves upwards in price. The gold-to-silver ratio compression is now at high levels and may eventually revert to its long-term average, which implies a strong movement in prices is imminent for silver.

  3. Scarcity: Declining Silver Production

    Silver production has been declining despite its growing importance as a safe haven hedge, as well as its use in industrial applications and renewable technologies.

  4. The Silver Exception

    Silver is not just for coins, bars, jewelry and the family silverware. It stands out from gold with its practical industrial uses which account for 56.1% of its annual consumption. Silver will continue to be a critical material in solar technology. While photovoltaics currently account for 8% of annual silver consumption, this is set to change with the dramatic increase in the use of solar technologies.

The Price of Gold and Silver

Forecasting the exact price of gold and silver is not a science, but there are clear signs that point to the direction their prices will head. The prices of gold and silver do not accurately reflect a world awash with cheap and easy money, but now may be their time to shine.

Don’t miss another part of the Silver Series by connecting with Visual Capitalist.

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Central Banks

The Anatomy of the $2 Trillion COVID-19 Stimulus Bill

A visual breakdown of the CARES Act, the $2 trillion package to provide COVID-19 economic relief. It’s the largest stimulus bill in modern history.

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The Anatomy of the $2 Trillion COVID-19 Stimulus Bill

The unprecedented response to the COVID-19 pandemic has prioritized keeping people apart to slow the spread of the virus. While measures such as business closures and travel restrictions are effective at fighting a pandemic, they also have a dramatic impact on the economy.

To help right the ship, the Coronavirus Aid, Relief, and Economic Security Act — also known as the CARES Act — was passed by U.S. lawmakers last week with little fanfare. The act became the largest economic stimulus bill in modern history, more than doubling the stimulus act passed in 2009 during the Financial Crisis.

Today’s Sankey diagram is a visual representation of where the $2 trillion will be spent. Broadly speaking, there are five components to the COVID-19 stimulus bill:

CategoryTotal AmountShare of the Package
Individuals / Families$603.7 billion30%
Big Business$500.0 billion25%
Small Business$377.0 billion19%
State and Local Government$340.0 billion17%
Public Services$179.5 billion9%

Although the COVID-19 stimulus bill is incredibly complex, here are some of the most important parts to be aware of.

Funds for Individuals

Amount: $603.7 billion – 30% of total CARES Act

In order to stimulate the sputtering economy quickly, the U.S. government will deploy “helicopter money” — direct cash payments to individuals and families.

The centerpiece of this plan is a $1,200 direct payment for those earning up to $75,000 per year. For higher earners, payment amounts will phase out, ending altogether at the $99,000 income level. Families will also receive $500 per child.

There are three other key things to know about this portion of the stimulus funds:

  1. There will be a temporary suspension for any student loan held by the federal government. This means no payments required and no interest accrued until the end of September, 2020.
  2. Borrowers with federally backed loans can request forbearance on mortgage payments for up to six months.
  3. There will be an expansion of unemployment benefits, including a four-month enhancement of benefits. This plan includes freelancers, workers in the gig economy, and furloughed employees.

Big Business

Amount: $500.0 billion – 25% of total CARES Act

This component of the package is aimed at stabilizing big businesses in hard-hit sectors.

The most obvious industry to receive support will be the airlines. About $58 billion has been earmarked for commercial and cargo airlines, as well as airline contractors. Perhaps in response to recent criticism of the industry, companies receiving stimulus money will be barred from engaging in stock buybacks for the term of the loan plus one year.

One interesting pathway highlighted by today’s Sankey diagram is the $17 billion allocated to “maintaining national security”. While this provision doesn’t mention any specific company by name, the primary recipient is believed to be Boeing.

The bill also indicates that an inspector general will oversee the recovery process, along with a special committee.

Small Business

Amount: $377.0 billion – 19% of total CARES Act

To ease the strain on businesses around the country, the Small Business Administration (SBA) will be given $350 billion to provide loans of up to $10 million to qualifying organizations. These funds can be used for mission critical activities, such as paying rent or keeping employees on the payroll during COVID-19 closures.

As well, the bill sets aside $10 billion in grants for small businesses that need help covering short-term operating costs.

State and Local Governments

Amount: $340.0 billion – 17% of total CARES Act

The biggest portion of funds going to local and state governments is the $274 billion allocated towards direct COVID-19 response. The rest of the funds in this component will go to schools and child care services.

Public and Health Services

Amount: $179.5 billion – 9% of total CARES Act

The biggest slice of this pie goes to healthcare providers, who will receive $100 billion in grants to help fight COVID-19. This was a major ask from groups representing the healthcare industry, as they look to make up the lost revenue caused by focusing on the outbreak — as opposed to performing elective surgeries and other procedures. There will also be a 20% increase in Medicare payments for treating patients with the virus.

Money is also set aside for initiatives such as increasing the availability of ventilators and masks for the Strategic National Stockpile, as well as providing additional funding for the Center for Disease Control and expanding the reach of virtual doctors.

Finally, beyond the healthcare-related funding, the CARES Act also addresses food security programs and a long list of educational and arts initiatives.

Hat tip to Reddit user SevenandForty for inspiring this graphic.

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Central Banks

Chart: The Downward Spiral in Interest Rates

As interest rates continue their historic spiral downwards, the world’s central banks are running out of conventional tools to settle markets.

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During the onset of an economic crisis, national governments are thought to have two chief policy tools at their disposal:

  1. Fiscal Policy
    How the central government collects money through taxation, and how it spends that money
  2. Monetary Policy
    How central banks choose to manage the supply of money and interest rates

Major fiscal policy changes can take time to be implemented — but since central banks can make moves unilaterally, monetary policy is often the first line of defense in settling markets.

As the ripple effect of the COVID-19 pandemic rages on, central banks have been quick to act in slashing interest rates. However, with rates already sitting at historic lows before the crisis, it is possible that banks may be forced to employ more unconventional and controversial techniques to try and calm the economy as time goes on.

The Fed: Firing at Will

The most meaningful rate cuts happened on March 3rd and March 15th after emergency meetings in the United States.

First, the Federal Open Market Committee (FOMC) cut the target rate from 1.5% to 1.0% — and then on Sunday (March 15th) the rate got chopped by an entire percentage point to rub up against the lower bound of zero.

Fed rate cuts historical

As you can see on the chart, this puts us back into familiar territory: a policy environment analogous to that seen during the recovery from the financial crisis.

ZIRP or NIRP?

It’s been awhile, but with interest rates again bumping up against the lower bound, you’ll begin to see discussions pop up again about the effectiveness of zero interest rate policy (ZIRP) and even negative interest rate policy (NIRP).

Although the latter has been used by some European banks in recent years, NIRP has never been experimented with in the United States or Canada.

Here’s a quick primer on both:

NIRP and ZIRP

With rates sitting at zero, it’s not impossible for the Fed and other central banks to begin toying more seriously with the idea of negative rates. Such a move would be bold, but also seen as highly experimental and risky with unforeseen consequences.

Global Rate Slashing

Since only the beginning of March, the world’s central banks have cut interest rates on 37 separate occasions.

The only exception to this rule was the National Bank of Kazakhstan, which raised its key rate by 2.75% to support its currency in light of current oil prices. Even so, the Kazakhstani tenge has lost roughly 15% of its value against the U.S. dollar since February.

Here’s a look at cumulative interest rate cuts by some of the world’s most important central banks, from January 1, 2020 until today:

Central Bank Moves YTD

Going into the year, rates in developed economies were already between 0% and 2%.

Despite not having much room to work with, banks have slashed rates where they can — and now out of major developed economies, Canada has the “highest” interest rate at just 0.75%.

Helicopters on the Horizon

With central banks running out of ammo for the use of traditional measures, the conversation is quickly shifting to unconventional measures such as “helicopter money” and NIRP.

Life is already surreal as societal measures to defend against the spread of COVID-19 unfold; pretty soon, monetary measures taken around the globe may seem just as bizarre.

Put another way, unless something changes fast and miraculously, we could be moving into an unprecedented monetary environment where up is down, and down is up. At that point, it’s anybody’s guess as to how things will shake out going forward.

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