CEF: Gold and silver trends are your best friends (NYSEARCA:CEF)

In his 2004 work The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Businesses, Economies, Societies and NationsAuthor James Surowiecki examines case studies that prove that large groups of people more intelligent than the elite few. Masses are better at solving complex problems, creating innovations, making smart decisions and predicting the future. The brilliance of the book lies in its simplicity.

As a trader in the markets since the early 1980s, Surowiecki's book The Wisdom of Crowds has only reinforced the many hard lessons market price action has taught us over decades. Market prices are always correct because they represent the levels at which buyers and sellers in the market “Crowd” meet in a transparent market. Traders and investors get into trouble when they believe they are right and the market is wrong. The ego can be the opposite of the wisdom of the crowd. The bottom line is that trends are always your best friend in the markets as they reflect the wisdom of the crowd. Since the turn of the century, gold has trended higher, with every correction representing a golden buying opportunity. The Sprott Physical Gold and Silver Trust (NYSEARCA:CEF) Product features gold and silver bars, the oldest means of exchange in the world.

Upward trend in gold – still intact

Gold (XAUUSD:CUR) continued to hit record highs in August 2024.

The chart from the mid-1970s shows the bull market for gold that began at $252.50 per ounce in 1999. The recent peak of $2,570.40 represents a tenfold increase in the rally, with a standard 400-ounce bar from London Good Delivery warehouses now worth over $1 million.

In gold terms, a US one-dollar bill from 1999 will be worth less than 10 cents in August 2024.

Although the price of gold has suffered corrections over the last quarter century, each decline was a buying opportunity.

Silver could cause a stir in the coming months

COMEX silver futures (XAGUSD:CUR) reached an all-time high of $50.36 per ounce in 1980, when the infamous Hunt Brothers attempted to dominate the silver market. While silver rose to a slightly lower high of $49.82 in 2011, the price has remained below $35 for over a decade since 2012.

The monthly chart from the early 1970s illustrates the correction in silver prices from the 2011 peak that ended in March 2020 as the global pandemic swept markets across all asset classes. Silver reached a significant low at $11.64 per ounce and has made higher lows and higher highs over the past four years. Technical resistance for silver was at the February 2021 high of $30.35. In May 2024, silver futures traded above the technical level, rising to the highest price since late 2012. At the end of August, December silver prices were around $30 per ounce as the market digests the technical breakout.

Silver tends to attract significant speculative interest as price trends develop. The path of least resistance remains bullish for silver as the market heads into the final four months of 2024. The rise in gold is a bullish factor for silver, the second most important precious metal traded in the futures section of the COMEX division of the CME.

The oldest means of exchange in the world – rare and ubiquitous

Gold and silver have been around for thousands of years. They are rare metals with industrial applications. However, over the centuries, they have played a significant role in global financial markets. Spain became the richest country in the world and the Spanish currency was the world's reserve currency from 1530 to 1640 when Spanish explorers discovered a huge silver deposit at the Cerro Rico silver mine in Potosi, Bolivia. Spain extracted over 45,000 tons of silver from the mine from 1556 to 1783. Silver also has a long history as a preferred metal for coins and has even been used as backing for some currencies in the past. However, silver's volatility caused most governments to abandon the metal as a reserve asset long ago.

Gold is a different story as it is a key component of the world's foreign exchange reserves. In recent years, central banks have increased reserves as government debt has increased and concerns about the value of fiat currency have grown. In addition, sanctions against Russia and the Sino-Russian alliance have led countries to reduce their reliance on the world's current reserve currency, the US dollar. Gold remains the preferred asset for governments, central banks and monetary authorities worldwide. Current proposals for a BRICS currency could have some gold backing to compete with the US dollar, euro and other fiat currency instruments.

In 2023, the world gold supply was around 3,000 tons. China, Australia and Russia are the leading producers with annual production of over 300 tons. At a price of $2,500 per ounce, the annual mine supply is worth $241.13 billion. In 2021, the World Gold Council estimated above-ground gold reserves at 208,874 tons, worth around $17 trillion. With US debt exceeding $35 trillion, gold is a rare asset.

In 2023, the world's silver inventory was around 26,000 tons. While Mexico, China, Peru, and Chile are the world's leading primary silver producing countries, the majority of silver production is a byproduct of the production of other metals. At $30 an ounce, annual production is worth just over $25 billion. A 2019 Seeking Alpha article estimated that there are around 1.6 million tons of above-ground silver inventories, valued at around $1.55 trillion. A small number considering that Apple Inc. (AAPL), NVIDIA Corporation (NVDA), Microsoft Corporation (MSFT), Alphabet Inc. (GOOG) (GOOGL), Amazon.com, Inc. (AMZN), and Saudi Aramco all have a market cap higher than the combined value of all above-ground silver inventories.

Gold and silver are rare, but they are ubiquitous assets because people around the world view the metals as important stores of value. The value of gold and silver is nothing new, as gold is mentioned 417 times in the Bible and silver 320 times. Gold and silver also existed as a medium of exchange long before the Bible.

In 1999, when gold was trading below $300 an ounce and silver below $5 an ounce, Britain auctioned off half of its gold reserves because it viewed the metal as a barbaric relic of the past. Ironically, the Bank of England regulates the international gold and silver bullion markets, and prices have soared over the past two and a half decades. In addition, governments have led the gold buyers and increased their reserves.

Many investment opportunities – physical securities, futures, mining stocks, ETFs

Gold and silver are in bull markets and the metals have become increasingly popular and essential assets for portfolio diversification. Many financial advisors recommend a 5-10% allocation to gold and silver. When selecting investment vehicles, there are many options. Physical gold and silver bullion is the most direct route but comes with security issues, including storage and insurance. Futures markets offer physical delivery mechanisms, but futures involve margin-creating leverage and delivery comes at a cost. Mining stocks offer exposure but they carry additional idiosyncratic risks. ETFs that track gold and silver prices and hold physical gold bullion include, but are not limited to, SPDR® Gold Shares ETF (GLD), iShares Gold Trust ETF (IAU), GraniteShares Gold Trust ETF (BAR) in gold and iShares Silver Trust ETF (SLV) in silver. These highly liquid ETFs do an excellent job of tracking the prices of the metals.

The Sprott Physical Gold and Silver Trust is liquid – the trends indicate a continued uptrend

The Sprott Physical Gold and Silver Trust fund summary states:

At $23.43 per share, CEF had $4.86 billion in assets under management. The ETF trades an average of over 500,000 shares daily and charges a management fee of around 50 basis points. CEF's metal allocation at the end of July 2024 was:

CEF holds about two-thirds of its assets in gold and one-third in silver.

On August 29, 2024, COMEX gold futures for December were at $2,553.80 an ounce, up 23.3% from the year-end 2023 close of $2,071.80. December silver futures were up 19.5% at $29.895, up from $25.016 at the end of 2023.

The chart shows CEF's 22.35% gain from $19.15 on December 29, 2023 to $23.43 per share on August 21, 2024. CEF has done an excellent job of tracking gold and silver prices.

Trends in gold and silver remain bullish. In my last Seeking Alpha article on gold on August 20, I highlighted that de-dollarization, central bank purchases, U.S. debt, the geopolitical landscape, the U.S. election and other factors could cause a parabolic move in gold. These same factors support higher silver prices, which could rise even more in percentage terms. Sprott Physical Gold and Silver Trust is an ETF that offers exposure to the two metals that are the world's oldest medium of exchange and store of value.