What’s Causing The Gold & Silver Sell-off?

Periodically, we invite notable outside experts to share their insights exclusively for the Peak Prosperity audience. Today we’ve asked our friends at GoldSilver.com for their latest thoughts on the recent sell-off in the precious metals. Jeff Clark, GoldSilver's senior metals analyst, presents his conclusions below that the PMs are reacting just as they did at the start of the 2008 crisis. That evidence, combined with the announced massive (and growing) inflationary rescue efforts by the central banks, gives confidence that gold & silver will similarly head higher -- possibly much higher -- before long.
Most investors know that gold represents wealth. And that it can be one of the most effective hedges against economic and financial turmoil.

It sure doesn’t feel that way right now. Not only has their volatility spiked, neither metal has logged a gain since the Coronavirus was first widely reported on January 1. As I write on March 17, gold is down about 1%, while silver has crashed 30%.

Why are they performing so poorly? Are they really not crisis hedges?

There are answers to these questions. And when one looks at history we can even get a hint about when it will all turn around…

The Great 2020 Sell-off

First, there are several specific reasons that account for the decline in gold and silver right now.

Margin Calls/Liquidity Needs

The biggest factor is a direct result of the rout in stocks. The selloff has been so violent and unrelenting that there is an overwhelming and immediate need for liquidity. Cash is desperately needed by traders and investors to meet margin calls and offset losses elsewhere.

Combine the selloff in stocks with a crash in oil prices and you get a need for liquidity that is off the charts.

As many investors know, stocks were already bloated and vulnerable. More importantly, margin debt was at record highs, as Mike Maloney pointed out over a year ago.

That extreme amount of margin debt is now coming back to haunt investors. They’re forced to scramble big-time to meet margin requirements—and they are requirements. In some cases they aren’t even asked to deposit more margin; other positions are automatically liquidated to cover them.

When the global stock market is four times bigger than the global economy, it’s not hard to see that an uncontrollable selloff can force investors to raise cash.


Traders can piggyback off the decline by pushing prices down further. They can also put on trades designed to take advantage of the volatility and push the price down. While charges have been brought against some of these traders, this activity still goes on.

Not all short positions are nefarious. Those with corrupt intentions, however, will get burned if they try to continue the manipulation when sentiment in this sector reverses.

The important thing to keep in mind is that manipulations always fail. They will again.

The Gold/Silver Ratio Just Made History

The highest reading in the gold/silver ratio (gold price divided by the silver price) was 100.8 on February 25, 1991.

But as noted above, the silver price has fallen much more than gold in this era of unprecedented volatility. And look how that has pushed the gold/silver ratio (GSR) to a much higher new record of 123+

<img class=“aligncenter wp-image-496387 size-large” src=“https://peakprosperity.com/wp-content/uploads/2021/09/image-1024x352-2.png” alt="“Gold Silver ratio chart” width=“1024” height=“352” />

Never in 5,000 years of recorded history has silver been this undervalued relative to gold.

Why is silver underperforming so much?

There are several answers to this…

First, as many readers probably know, silver is a tiny market. As just one example, if 10% of institutional investors devoted just 2% of their assets to silver, it would exceed 425% of the known silver bullion on the planet. This is why it is more volatile: it doesn’t take much cash coming in, or going out, to impact its price.

The second factor is that mainstream investors look at silver’s high industrial use (about 55%, and another third in jewelry) and believe demand will fall. It probably will if we enter a recession. Copper and other base metals have declined, too.

But what these investors aren’t looking at yet is that silver is also a monetary metal. They will when currency worries ignite.

When will the silver price rebound and the ratio fall? Gold is likely to outperform in in the midst of deflationary scares like we have now—but when inflation begins to kick in, or any monetary issue surrounding the excessive actions taken by governments around the world, silver will respond.

History shows this. Silver’s biggest modern-day rises occurred in the 1970s when inflation was soaring, and in 2009-2011 when we had the fear of inflation. The bottom line today is that the extreme debasement of fiat currencies around the globe are not consequence free—and will drive investors into silver (and gold) when they begin to play out.

Which begs the question…

What Will Turn This Market Around?

No one will know when gold and silver bottom until after the fact. And it’s possible the selling may not be over.

But we see several key hints that tell us, sooner or later, precious metals will turn around…

Hint #1: Central Bank Tools Near Exhaustion

Governments are throwing everything they have at markets and economies.

Rates have been slashed around the world, and various forms of QE have been instituted.

These are their two main tools—and both make gold and silver more attractive.

If conditions surrounding the spread of coronavirus worsen, it’s almost certain that other measures will be instituted, just like they did during the Financial Crisis of 2008-09. And most of these efforts are inflationary in nature.

In the big picture, these interventions will drive investors toward silver and gold, not away from them.

Hint #2: Confidence in the Fed’s Ability Is Eroding

It’s starting to dawn on the mainstream: how effectively will the Fed be able to navigate the turmoil?

Consider this quote last week from Bloomberg, about as mainstream as you can get.

“Some new financial order, to replace Bretton Woods and the system that Volcker built to replace it, is now needed. A decade of monetary expansion has delayed the issue. It is hard to see how it can be delayed much further. It would be wise to brace for disruption to match what was experienced at the end of the 1970s and the beginning of the 1980s.”
That sounds like Mike Maloney!

The more this line of thinking gains traction, the more investors will turn to silver and gold. We think that’s exactly what’s coming. Watch for this shift in trend, as that’s when I think a reversal begins to take hold.

Hint #3: Spiking Investment Demand

Gold and silver both have industrial uses, as well as widespread jewelry use.

But when it comes to determining the price, the biggest influence is investment demand. And that is through the roof.

Look what’s taken place in just the past two weeks:

  • Through March 13, holdings in gold-backed ETFs already total more than half of 2019’s total.
  • Virtually every bullion dealer reports record-level demand. This includes com.
  • The U.S. Mint is out of silver Eagles. Their press release stated, “Our rate of sale in just the first part of March exceeds 300% of what was sold last month.”
  • The U.K.’s Royal Mint said last week that weekly precious metals sales quadrupled from the same period a year ago.
  • Gold trading volumes tracked by the London Bullion Market Association reached almost $100 billion on Monday March 9, the highest ever daily volume.
This record-setting level of demand is likely to push prices higher once the forced selling is over.

Hint #4: History

Last, we’ve seen this movie before.

Gold and silver crashed back in 2008 with the stock markets, largely for the same reasons as today. Gold fell 30% from its high to low that year, while silver dropped a whopping 73%.

But both metals bottomed in October, and by 2011, gold had risen 166%, and silver soared 440%. And both of these rallies started before the stock market bottomed.

In other words, the selling was temporary. Once liquidity needs had been satisfied, investors rushed back into gold and silver and sent them on one of their greatest rallies in history.

Although no two circumstances are exactly alike (and yes the coronavirus is scary), the setup we see now in precious metals is not new to history. And history says that at some point they will reward investors this time, too.

If you already own precious metals, hang in there. Time will work in your favor.

If you don’t, you have a rare opportunity to gain exposure at today’s low prices, when we have high confidence demand for gold & silver is fast increasing.

An opportunity that not only will add protection against the desperate (and inflationary) actions of the world’s central banks, but could well provide extremely lucrative.

GoldSilver.com offers investors both education and world-class bullion dealer services across a wide selection of bullion products, private vault storage, global shipping, and easy payment choices.

Those interested in increasing their ownership of physical gold & silver can learn more by clicking the button below:

This is a companion discussion topic for the original entry at https://peakprosperity.com/whats-causing-the-gold-silver-sell-off/

Recently I had a knock-down, drag-out with another poster who purports to be an expert trader… and our argument was not about trading predictions, but rather the idea that dealers are charging high premiums because they are not hedged and would have to take losses otherwise. I said, no, all big dealers hedge, and they tend to keep premiums high in times of shortage because otherwise they don’t make any money since they don’t have flow. It’s also just natural supply vs demand economics… again, driven by lack of supply.
I think the article does a good job of pointing out that we really do have a physical supply shortage, in the face of an almost absurdly disconnected paper price (BTW, buying a monster box of US Silver Eagles costs more today than it did yesterday at Texas PM’s, regardless of the further eroding paper price). So, do they mostly hedge or not? Thank you, Jim

Backed up the truck to the local coin store yesterday morning just before lunch only to find he’d already closed up shop. He’s not selling anything because he can’t get re-stocked at these prices and refuses to take the losses on his existing inventory. He’s the only game in my little town so I was forced into PSLV instead.
Today the online dealers I pulled up had $10 and higher premiums on ASE’s. Crazy.

Purports is a pretty loaded word Jim so maybe I will take a pass today since your post to me (without even bothering to take the time to address me directly) is just intended to start an argument. I am not interested in arguing with you or anyone else here. I post good numbers and there are a few people who pay attention but you are not one of them. My call on the Dow (futures) was that it would bottom at 19,590 and today it finally saw its low at 19,736 meaning I was off by seven tenths of one percent. As far as what I trade goes that’s called a bullseye when you make the call four days in advance of it happening. So keep saying “purport” to yourself while adding up what the value of 3000 E-mini Dow points was worth…per contract.
Have a great day.

I will change, “purports” to, “self-identifies as” an expert trader. You are a person on the internet who has been posting here for about six weeks. I don’t know anything about you. Maybe you are a good trader, but as I stated, my line of inquiry does not relate to trading, so that is really not relevant.
As well, while I was referring to you, I was not in fact posting, “to” you, nor summoning you back to continue this discussion.

The last time I looked the ratio of physical gold to sold gold was about 1 to 2000. Given Casey’s example above in the comments, it’s far more likely that the people who actually are holding on to the physical stuff will not sell at any price right now, and those people holding onto a certificate to an ETF or share are selling them off as fast as they can smashing the price. This is the start of the break between the two. It makes perfect sense that the price of a worthless certificate is falling now, the problems is that people still think it has the value of gold, not of paper.

I bought some gold from NZ Mint about 9 years ago. I think it was, unfortunately, at a peak in the price. It has only recently made it above that cost (in local currency) but I’ve kept hold of it. I just got an email from NZ Mint to say they are finding it difficult meeting demand and asking if I want to sell it back to them. They were offering spot price with no fees (their buy price was usually a lot lower than spot). Is this a sign of the turnaround?

We really are at a low point here. Assuming civilization survives and returns to something like “normal” someday, today’s prices look pretty darn attractive.

Appreciate this article and DaveF’s recent comments on silvers value!

I’d have to agree with you SandPuppy that, from the chart, silver looks attractive … if it were anything else other than silver. As a disclaimer, I do own physical silver that I am holding onto indefinitely but I would definitely NOT buy any paper silver if, by chance, you are considering that option. Also, I’m not a superstitious person but I’m almost starting to think that silver is the cursed commodity. Judas sold his soul for 30 pieces of silver. China was on a silver standard in the 1800s and it led to the British devastating their culture in the Opium Wars, raiding their silver in the process. President Garfield pushed for a silver standard and it got him assassinated. The Hunt Brothers lost their fortune due to silver. Warren Buffet took one of his greatest losses ever investing in silver. Its track record has been one of loss to its “believers”. If you remember my post a while back, I noted silver (when it was it was substantially higher than it is now) being worth the same as it was 100 years ago! That’s downright scarey. If it dropped to $4, where I had loaded up on most of mine years ago, I’d be all in. But I also bought some as high as $30 and I’m still waiting to make that back. Just be cautious. Silver is like the Sirens of old.

Bullion dealers do hedge, at least those of any size, but hedging is not a factor in premiums. Premiums are influenced by demand, including demand for specific products; availability from suppliers, again including specific products; increased costs passed on from Mints and refiners, especially during periods of stress like now where they have to pay OT to employees, cover increased risk of defaults, higher insurance costs, etc; and dealer increases for similar reasons. Higher volatility can also push premiums higher, since risks are higher when prices spike uncontrollably. Last, scrap is more expensive to purchase by refiners when its insufficient to meet demand, which is the case now. All of these are in play now, which is why we’re seeing the spike in premiums similar to 2008-09. They’ll eventually calm down, but the risk to the perspective buyer is if gold and silver prices are higher when they do. We had an unprecedented period of low prices AND low premiums for several years–I don’t have a crystal ball but I think that era is likely over.

Maybe, but it’s more likely the result of bullion dealers that are desperate for product. I do think that when we sell we’ll make a profit not just on the price but also the premium, especially for sovereign products. I wrote about it here: https://goldsilver.com/blog/why-are-american-silver-eagle-coins-more-expensive/

Good history here, and it highlights why it’s probably best to own not just silver but also gold. Keep in mind there are equal periods where silver has been “good”–it’s been used as currency more often than gold, has been part of precious metals standards, and has seen bigger advances than gold in bull markets. Its volatility makes it less ideal as a forever investment like gold, but see what you think of silver’s potential from my talk in January: https://goldsilver.com/blog/the-coming-silver-price-shockand-my-3-best-picks-to-capitalize/

When I read Nairobi’s explanation of premiums the other day, it was not accurate. Being a trader though, he may never have dealt with the physical, just the paper. That’s my only explanation for why his understanding of what influences premiums seemed flawed.
I just checked one of the dealers that I’ve used more than most. His silver stock is almost cleaned out now, dramatically different than just a day or so ago. Even the 1000 oz. Comex bars are gone. I’ve never seen his inventory this low. He still has 2020 silver eagles though with a buy price of $14.86 and a sell price of $22.86. Ditto with 2020 silver maple leaves with a buy price of $13.16 and a sell price of $18.86. There are some of the biggest spreads and some of the biggest differences between these sovereign coins that I’ve seen.
He still has gold, more so than silver, but more than half the products are sold out.
Platinum is dirt cheap now and I’d be tempted to buy some but the spreads are too big for my taste. Platinum is almost out of stock as well.
Plenty of palladium but I think it’s had its fling for a while.

Tony, I have dealt regularly with the NZ Mint over recent years. Today I was unable to get through on the phone and my email query has not yet been answered. I am currently looking to make a small silver purchase. This is the first time ever I have been left hanging so I can see they are under big pressure.
To be clear - I am absolutely delighted to be holding physical gold and silver at the moment. I don’t hold it for what is happening today - I hold it for what is to come. What happens to the silver paper price in the short term is irrelevant to me (except that I am now forced to scrape up some cash to buy a little more if I can get it - if not - 'c’est la vie - I’ll buy a few cases of red wine).
Thumbs up to Jim H - good to see you back. I still enjoy your posts and agree totally about the paper price fix

Sandpuppy wrote “Assuming civilization survives and returns to something like “normal” someday, today’s prices look pretty darn attractive”
You have hit the nail on the head here. This is a very valid question. While the dominant narrative is that we’ll bounce back from this in a few months I’m pretty skeptical. My biggest concern with having a substantial holding of PMs has been that the price is not really going to shoot up until business as usual collapses. Should I sell my silver and, for example, buy a bomb-proof off grid solar power system was one of my dilemmas. I chose to hang onto the silver, which I’m sure will do well from here - but have I now lost the opportunity for the solar power system?
Time will tell.

I appreciate your perspective. Of course, I own both Silver and Gold, and even a little Palladium (in the form of coins that I am overly fond of - those Russian ballerinas are maybe the most beautiful coins ever minted). Time will tell if supply for coins, which is usually a minority fraction of the Silver market, catches up with demand or not. If it does, the premiums will start to drop again. No doubt industrial demand has fallen.
Gold then will be where the real disconnect happens, and while it’s interesting to see Gold fall so much less, the level of hypothecation, the ratio of promises vs. physical ounces, is probably much higher for Gold than for Silver. Maybe they exist, but I have never heard of an, “unallocated” Silver account : ) I suspect the real action in Silver, post disconnect, would not happen until Gold becomes unavailable, and for now you can still get Gold coins for about $100 over spot.


I briefly spoke with the Chief Financial Officer at the NZ Mint today. Silver supply currently very tight but they’re still selling at normal margins. 6 week delay on 1oz rounds like silver ferns. No kangaroos available as Perth Mint has declined to supply. Gold more readily available.
I bought silver at US$11.98. Interestingly the price was only NZ$1.80/ oz less than than I paid in March 2019. And due to the NZ$ slide in the exchange rate the price of gold here is within a whisker of all time highs.

Texas Precious Metals, which is known for not selling ahead, i.e. they will only sell you metal that they actually have in stock… is almost completely sold out. No Gold of any sort. No more Silver in monster box quantities. They are only showing availability of Silver Eagles in for small quantity pricing, ~ $20 per coin, or $8 premium. I have never seen this before. I have never seen them at Zero Gold.


COMEX and London OTC Spot Price Discovery Failing

What does this mean for price premiums? Due to the paper spot and futures precious metals markets not reflecting the demand and supply for physical precious metals, premiums are high and are fluctuating a lot. The precious metals price premium mechanism is there to balance physical demand and physical supply of precious metals. Despite higher than normal premiums, demand for physical precious metals continues to be overwhelming. We receive several hundred orders each day. We’ve had two hour waiting times in the shop even though we just expanded the shop to 5 counters and even though we have an extremely efficient system for serving customers. At BullionStar, we currently have about 8 customer buy orders for every customer sell order which is the highest we have seen in years.