Gold & Silver: Sell-Off Risk & Accumulation Strategies in 2024

There are many striking similarities between 2008 and today with respect to the financial system and the economy. In many ways the reality beneath the surface is worse now than it was back then. This is a view that is not unique to myself. 

The 2008 financial crisis

In 2008 gold and silver should have been soaring both as a flight to safety play and as an alarm to signal the impending de facto collapse in the banking system. But after hitting all-time high of $1,020 (Comex April gold contract basis) the price began a 31% decline through late October:

The timeline above shows the key events. To most of us who studied the financial system and were active in the precious metals sector and the stock market, it was obvious well in advance that the housing and credit markets, and the entire banking system, were in big trouble. Yet, right after Bear Stearns blew up the gold price (and silver) began to decline.

On top of this, the collapse of Lehman was well-telegraphed that summer, yet the gold price was hammered for two months leading up to Lehman’s demise. After bouncing, the price again was hammered a month in advance of the advent of Quantitative Easing (or “money printing”). Once QE commenced, over the next two-and-a-half years gold traded up to successive all-time highs while silver just missed its 1980 ATH of $50.

Gold Price Manipulation

At the time it was clear that the western central banks and governments actively pushed the price of gold lower in an effort to prevent gold’s role as the proverbial « canary in a coal mine. » I believe that the same dynamic may be occurring now. However, I also believe that enormous ongoing accumulation of gold by the east will derail any effort by the western central planners from preventing the price of gold from signaling the impending systemic doom. 

Turning to the present, it’s been clear since March 2023 that big problems are percolating in the financial system. This is particularly the case with – but not confined to – the regional banks, who are choking on heavily distressed commercial real estate loans as well as big losses on investment positions in long-dated Treasury and agency bonds. The Fed pumped $400 billion in reserves into the banking system in March 2023 and also made available a QE-like credit facility for the next 12 months (Bank Term Lending Program – BTFP). 

Is history repeating? 

In my view, similar to early 2008, it’s obvious that there’s growing stress in the financial system. Delinquencies with auto and credit card loans, particularly subprime, are back to their 2008/2009 peak. Mortgage delinquencies are escalating. And the CRE crisis could re-erupt at any time. Also, while access to the BTFP facility was terminated in March 2024, 69% of the amount drawn on it is still outstanding, indicating that a majority of the banks who used the facility are unable to repay the amount borrowed.  

Per the growth in the Monetary Base since March 2023 and in M2 since October 2023, the Fed has quietly pumped reserves into the banking system to provide banks with liquidity. In addition, the Fed removed the sentence « the U.S. banking system is sound and resilient » from the FOMC policy statement released after the February 2024 FOMC meeting. The point here is that the financial system is increasingly growing unstable and actions by the Fed in response to developments in the banking system confirm this assertion. 

In terms of the comparison between the trading action in gold during the summer of 2008 and the potential action currently, I think it’s possible that the Western Central Banks, in conjunction with the LBMA and Comex bullion banks, could attempt to push the prices of gold and silver lower ahead of either an impending blow-up in the financial system or the official implementation of a massive QE program – or both.

Today’s price action 

The big move in the precious metals sector since the beginning of March has left both gold and silver technically vulnerable to a potential price management-driven sell-off.  The chart on the next page is a one-year daily of the gold price through June 25th using the Comex continuous contract as the price basis. It’s a rolling snap-shot of the front-month contract which is tracked by most traders who trade gold futures. 

Technical Indicators 

By mid-May gold had become technically overbought per the Relative Strength Index (RSI) and the Moving Average Convergence/Divergence (MACD) momentum indicators (not shown). 

While the MACD and RSI have declined to what would be considered neutral levels during the month-long price decine, for now it looks like the 50dma, which had been support since October 2023, may now be technical resistance, at least for now.

There are some other technical downsides for now but it suffices to say that gold and silver are vulnerable to a sharper sell-off, particularly if the banks look to bomb the market with Comex contracts in order to monetize their rather large net short positions in Comex gold and silver futures. 

Further adding to this risk is the fact that July and July tend to be seasonally weak for the metals, as a summer lull engulfs the market and India typically pauses its massive gold importation ahead of its seasonally strongest buying period starting in late August and running through year-end. 

Possible short-term scenarios 

This is not to say that I expect a sharp decline through October like the one that occurred in 2008 despite the presence of a plethora of fundamental factors that should be driving the precious metals sector considerably higher. However, I think there could be some downside price risk over the next several weeks if the price management team is directed by the Fed to put downward pressure using LBMA and Comex paper derivatives. 

That said, I also believe there’s a strong possibility that, notwithstanding India’s lower level of gold importation for the next two months, the continued enormous demand for physical gold from eastern Central Banks, particularly China, could make it difficult for the Western banks get too aggressive in their efforts to manage the gold price. 

Physical supply & demand 

The physical demand for gold from the east that has been driving the price of gold higher was not a prevalent factor in 2008. Furthermore, the large supply deficit that is projected for silver this year by the Silver Institute, combined with massive silver consumption in India and China for ongoing national solar installation programs, should put a high floor under the price of silver.

I thus believe that fundamental factors combined with the massive Eastern hemisphere central bank and investor demand for gold and silver make the precious metals a more compelling investment and wealth protection asset now than ahead of and during the great financial crisis of 2008. 

In my view any abrupt sell-off like the ones that have occurred recently should be viewed as opportunities to accumulate positions in gold, silver and mining stocks.