The Markets Feel Like 2008 - Only Worse

While you’re once again watching the red on the screen, ask yourself this, if gold is going down and plans to stay down, why are central banks all around the world loading up on Gold?

David Brady

The chart below displays a three-year weekly view of the percentage discount/premium to net asset value (NAV) for the Sprott physical gold trust (PHYS). The green horizontal line shows times when the discount of PHYS to its NAV has become «extreme» or, perhaps, «oversold». Historically when the discount is deeper than -1.8%, it has correlated with rallies in the price of gold.

This is not to say that the discount this time won’t become more extreme. Still, over time the premium/discount of PHYS (as well as for CEF) has functioned as a fairly reliable contrarian indicator, similar to market sentiment readings. As McClellan points out, a big negative premium indicates that ‘the crowd’ thinks gold prices are going lower and thus they unload their PHYS shares at a large discount to NAV.

Another indicator that the precious metals sector may be reaching a tradeable bottom in conjunction with another massive financial crisis that is followed by immense money printing, is the premiums on 90% silver coins (dimes, quarters, half-dollars). Currently, the premium to spot for bags of 90% coins is at an all-time high after spiking up quickly this year. Previously, when the premium for these coins spiked up 35% – 40% over spot, was in the summer/fall of 2008 and the spring of 2020.

The dollar, SPX and precious metals charts are strikingly similar to those in the summer of 2008. I am certain the sell-off in the metals is coming from hedge fund algorithms piling into the DXY (U.S. dollar index) and shorting stocks, paper precious metals markets (Comex futures) plus the euro and the yen. Something is blowing up in the EU credit market while the Japanese yen collapses. 

We’re starting to see Gresham’s Law take effect with physical gold and silver on the Comex and LBMA, as the amount of physical gold registered and available for contract deliveries has declined 37% since late June, and supply of physical silver on the LBMA has declined roughly 21% since the beginning of 2022. Increasingly tight supplies of physical gold and silver are another similarity with 2008.

If the markets continue to unfold the way they played in 2008, eventually there will be massive flow of capital into physical gold and silver as well as mining stocks. In my opinion the factors that coerced the global financial crisis in 2008 are the same factors at work currently, only more extreme. In my opinion, there will be a gold and silver rush sometime in the next six to twelve months that will take most people by surprise. 

Dave Kranzler is a hedge fund manager, precious metals analyst and author. After years of trading expertise build-up on Wall Street, Dave now co-manages a Denver-based, precious metals and mining stock investment fund.

This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis. The views expressed in this article are those held by Dave Kranzler and not Kinesis.