Will the 2022 Ukraine war push silver higher than the 2022 FED interest rate hikes?
Wars are bad for people. Wars are also bad for the governments and armies that lose.
Winning armies gain glory. But who pays for the wars? Armies have always been expensive to equip and sustain.
Here is the first secret…no one pays for wars. Instead, immense amounts of money get printed or borrowed, and the economies of both combatting countries pay the bill over two successive generations.
This is why physical metals prices benefit from war – because their price moves higher to reflect the increasing money supply.
And here is the second secret. Either army could lose a war. Because losing countries don’t get a chance to set the rules after losing a war, winners do, debt and money issued by any combatant country during times of war carries extra risk.
That risk is called counterparty risk. Counterparty risk represents the chance the money you hold was issued by a country or government which might not exist once the war ends.
Physical metals have zero counterparty risk and thus a second reason prices rise during the war.
Effects of War on Silver
Using silver in American dollars as an example here are a selected list of price moves during wartime.
The Korean War from 25 June 1950 until 27 July 1953 saw a silver rise from US$.73 to US$.85 while touching US$.90 along the way.
And it is important to note that silver never ever fell below US$.85 again! So, the Korean war pushed silver up 16% across 3 years.
Vietnam was a long war from 28 February 1961 for the United States until 7 May 1975. Silver was US$.92 when the war started and US$4.40 when the war ended.
Once again, the silver price ran even higher during the war, touching US$6 twice in 1974. The Vietnam war pushed silver up 378% across 14 years.
Afghanistan was another long war. It really began in 2001 and shared a common history with the Iraq war.
Accepted dates are 7 October 2001 until 30 August 2021. War began with silver at US$4.40 with a finish at US$23.77 and peaking at US$49.48 in 2011 at the halfway point. Across 20 years silver moved up 440%.
Using the math above of 16% plus 378% plus 440% we know wartime saw silver move a total of 834%. That 834% spread across 37 total years.
Using just the super simple math we should expect that on average silver rallies 22% during war years.
22% on top of today’s silver price takes us from US$22.64 up to US$27.62 should war begin in Ukraine but last a single year.
No one wants war. But this NATO versus Russia problem over the future of Ukraine does not seem to have any other solution.
When USSR fell the UK and USA and Russia all agreed to guarantee the safety and independence of Ukraine.
The three countries did this in writing with the purpose of convincing Ukraine to part with nuclear weapons it inherited from the collapse of the USSR.
But today Russia has new ideas about the future of Ukraine – namely that Russia wants Ukraine to serve as a buffer space between NATO and Russia. War to impose the buffer by force is increasingly likely.
Higher Silver Prices in 2022?
However, 2022 is a very complex year. Working against higher silver prices are the central banks.
They will spend the year raising interest rates and also shrinking the money supply. Higher rates are theoretically bad for gold and silver.
And silver gets the worst of it when prices fall. Current Fed interest rate forecasts predict at least three rate hikes in 2022 with rates rising from .25% up to 1.15%.
If rising rates in 2022 were the only factor silver prices could decline to US$18.60 per ounce, at least for a little while.
That target price comes from the reference to silver’s US$18.60 level prior to COVID-19 starting in the fall of 2019.
So, will the rising rates defeat the war drums and push silver lower? Well, the US$5 guesstimate of a war premium is greater than the US$4 drop estimate from rising rates.
Therefore, if both things happened the net effect should be a silver price rise.
The chart above is a rare very long-term graph of spot silver back to 1955, using a logarithmic scale. Nobody knows the future.
But we do know that physical metals have no counterparty risk. And on balance, the quick analysis above shows silver should have a good year if both events occur.
From The Trading Desk
The Gold price has stabilised this week reaching $1,810 and remains in a tight consolidation range at the $1,800 level this morning on a weaker US dollar and the slight pullback in bond yields from their highs last week.
Inflation is still the game in play, the Bank of England raised interest rates today by 25bp to 0.5%, the first time the BOE has had two rate rises in a row in 18 years.
The BOE went on to say UK households must brace themselves for the biggest annual fall in their standard of living since comparable records began in 1990, with inflation set to surpass 7%.
The ECB met today also but they have left rates unchanged despite record levels of inflation, with the most recent reading hitting 5.1% in January.
However, the market is starting to price in a rate rise with the possibility of two as it battles to bring inflation in the Eurozone under control.
This all comes on the back of the US equity markets which had their worst January since the Global Financial Crisis as US companies starting to report their 4th quarter earning results.
At GoldCore, February has started with a bang, consistent flows with a noticeable difference in ticket size.
Also an increase in enquiries regarding holding bullion within your pension (if you need any further information on this, please contact our trading desk).
We have good stock levels and excellent availability from our LBMA approved suppliers. Buy sell through remains at 80%.
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Excellent stock and availability on all Gold Coins and bars with 1oz bars at a very competitive 3.75% over Spot and Gold Philharmonics starting at 4.5% over Spot.
Silver coins are now available for delivery or storage in Ireland and the EU with the lowest premium in the market.
Starting as low as Spot plus 32% for Silver Britannia’s
Silver Britannia’s for UK delivery or storage are still available at the lowest premium in the market also (which includes VAT at 20%). These can now be purchased online.
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GOLD PRICES (USD, GBP & EUR – AM/ PM LBMA Fix)
02-02-2022 1802.00 1803.65 1330.42 1330.37 1594.23 1596.05
01-02-2022 1806.50 1799.85 1337.89 1334.23 1603.63 1599.17
31-01-2022 1790.60 1795.25 1332.21 1337.10 1602.23 1604.77
28-01-2022 1790.20 1788.15 1337.64 1333.24 1607.96 1603.08
27-01-2022 1815.50 1806.75 1352.55 1348.56 1621.97 1618.85
26-01-2022 1845.20 1835.95 1366.00 1359.52 1635.59 1626.84
25-01-2022 1835.65 1847.30 1363.15 1372.17 1627.12 1638.56
24-01-2022 1838.25 1831.60 1361.41 1360.33 1623.73 1621.70
21-01-2022 1834.25 1837.60 1352.03 1355.41 1618.54 1619.29
20-01-2022 1836.70 1845.35 1348.87 1352.09 1619.05 1626.86
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