Gold and silver prices set to trend even higher

So far this year, the price of gold has risen by 28% and the price of silver by 46%. These are undoubtedly fulminating price gains made in a relatively short period of time. However, from our point of view, it seems quite likely that this is not the end of the appreciation in value of gold and silver against the world's major fiat currencies, especially for two interrelated reasons.

First, central banks around the world can be expected to continue to expand the amount of money. It is generally considered "good policy" to print increasing amounts of new money as a reaction to the economic collapse caused by the politically dictated blockade. Increased money supply is likely to drive up prices, either consumer prices or asset prices or a combination of both. 

Second, monetary policymakers are pushing market interest rates downwards, as this not only increases the money supply, but also supports the economy, by reviving output growth and employment. While it may help overburdened borrowers, the side effects of artificially lowering interest rates are shocking. 

It makes savings impossible. Without a positive real interest rate, there is no way to protect money holders against the loss of purchasing power of money. Moreover, artificially suppressed interest rates lead to price distortions in the financial markets, fuelling speculative bubbles and bad investments, making already crippled economies even more vulnerable to adverse shocks.

In this context, it should be noted that the interest rate policy of the United States Federal Reserve (Fed) is of utmost importance, as the Fed is producing the world's reserve currency, the greenback, and it is fair to say that United States interest rates serve as the world's "key interest rates". If the Fed decides to lower interest rates to zero, or even below zero, the impact will be equivalent to a seismic shift.

With the disappearance of U.S. interest rates, the global financial markets would lose their most important "compass". Trying to assess the fundamental value of, for example, stocks, bonds, derivatives and real estate would become like fishing in murky waters, or making blind guesses. In such a scenario, chaotic consequences for financial markets and real economies can be expected.

Under these conditions, the relative attractiveness of holding gold and silver increases from an investor's point of view. The purchasing power of gold and silver cannot be lowered by the central banks that run the printing presses. Moreover, gold and silver - unlike bank deposits and short-term debt - do not carry a risk of default. Both metals provide a hedge against the collapse of the fiat money system, which may not be around the corner (as the chance of survival of the fiat money system is greater than most people might think), but which is certainly a more than zero probability event.

Against this backdrop, we have increased our estimates of precious metal prices. The price of gold may reach the level of around 2550 USD/oz by mid 2021 (with an upper band of around 2780 USD/oz and a lower band of around 2310 USD/oz). As for the price of silver, a move towards 48 USD/oz in the next 12 months seems plausible to us.