Are Gold and Silver in a Bubble Market?

Silver is even less protected from recession-induced sales, which is why silver's price is more volatile than gold's. It has no central banks buying it during recessions. Meanwhile, demand slows because the economy is slowing. Silver is an industrial metal and to a lesser extent an ornamental metal. Demand for most metals falls when the economy goes into recession.

There is a longtime myth of gold that has been popular in every pre-recession period. Recent buyers console themselves by saying: "Gold did not fall during the Great Depression. It went up." In the 1930s, the U.S. was still on the gold standard internationally. By law, the U.S. government bought gold from gold mines at $35/oz. So, the gold market had a legal floor.

That policy ended on August 15, 1971, when Nixon unilaterally took the United States off the international gold standard. So, the experience of the Great Depression is economically irrelevant to today's gold market. Central banks may buy gold or they may not, but they are not compelled by law to buy it. All we can say with confidence is that they will not buy silver, which is no longer a money metal.

Gold fell in the 1974/75 recession. Then it rose in the Carter-era inflation. Then it fell by 50% in the 1980/81 recession. Then it fell in 2000 prior to the 2001 recession.

My point is that gold, as an inflation hedge when price inflation exceeds what the experts have forecast, should not be regarded by investors as a universal solution to the gyrations of Federal Reserve monetary policy.

Silver is even less of a hedge. It has been de-monetized, so it is even more a captive of the overall economy.

The FED is trapped long-term in a policy of "inflate or die." It is committed to the absurd premise that a committee of academic economists (FOMC) is a better source of monetary policy than the free market. The FED has created a boom economy – i.e., a universal bubble economy - through the constant expansion of money. Like addicts, investors, consumers, and debt-issuing governments demand ever-more money from the Federal Reserve. Everyone has factored in 2% to 4% monetary depreciation. If the FED fails to provide this, the entire debt pyramid is threatened with collapse.

So, we find that the FED does not stabilize money. It expands the money supply at varying rates. Sometimes this expansion is insufficient to goose the economy into more growth. The economy then falls into recession. The FED's response is always the same: create even more money.

This process of varying rates of monetary expansion does not immunize gold and silver from wide swings in price. In the case of the period 1980 to 2001, the contraction wiped out 90% of investors’ asset value, if you factor in the 50% loss of the dollar’s purchasing power.