Supply, Demand, and Depreciation: Key Drivers for Copper, Gold and Silver as the Economy Reopens / Commodities / Metals & Mining

The metals markets are being pulled in multiple directionssimultaneously like never before. The global virus-triggered economic freezehas caused industrial demand for all commodities to crater.

At the same time, mining output is also crashing as virus fearsforce many mines around the world to suspend operations.

What is the “right” equilibrium price for copper, silver, gold,and other metals in an environment of such extreme and unstable supply anddemand stresses? The verdict of the market changes – often dramatically – dayby day.

In March, hard assets tumbled along with stocks as investorspriced in increasingly dire scenarios for the economy. A double-digitcontraction in U.S. GDP and double-digit spike in unemployment becameinevitable after economic lockdowns spread across the country.

Now hopes are growing for the economy being able to startreopening in May and reverse some of the damage done by the draconian policiesprescribed Dr. Fauci and adopted by most state governors.

Still unknowable, however, is how quickly the economy will beable to heal itself… and to what extent demand for raw materials will recovertoward pre-virus levels.

The biggest wild card in all this may be the effects ofunprecedented fiscal and monetary stimulus.

Already the federal budget deficit is set to explode to anall-time record over $3 trillion (likely closer to $4 trillion) and represent agreater share of the U.S. economy than at any time since World War II. Alreadythe Federal Reserve’s balance sheet has ballooned to $6.1 trillion as centralbankers furiously try to prop up everything from mortgages to junk bonds.

All this is leading toward a devaluation of the U.S. dollar.That should naturally make sound money – gold and silver – more valuable indollar terms.

However, as we saw last month, demand destruction amidst awrecked economy pull down precious metals prices quite suddenly – if onlytemporarily. Gold hassince rebounded strongly to a new 8-year high while silver is regaining itsfooting from historically depressed levels.

Drilling Down into Supply and Demand Fundamentals

The Silver Institute had forecasted in early February – backwhen the economic impact of the virus was thought to be minimal outside ofChina – that global silver demand would rise by 3% in 2020. The Instituteprojected supply would nearly keep pace with 2% growth (which would be thefirst annual increase in five years).

Those forecasts now have to be thrown out the window.Both demand and supply are set to plummet in the near term.

On the plus side, investment demand for silver bullion productsspiked last month to levels dealers had never seen before, clearing outinventories of most coins, rounds,and bars.

Bullion buying has receded from the frantic pace seen at thepeak of the panic but remains strong. Safe-haven buying could remain a featureof investor psychology for many months ahead until an effective COVID-19vaccine is widely available – and that figures to be 12-18 months out.

As for mining supply, it’s going to be a long road ahead beforemines are fully operational again. Platinum and palladium production islargely offline in South Africa. Mexico’s giant Peñasquito mine, one of thecountry’s leading sources of gold and silver, suspended operations on Monday.

The silver supply picture is complicated by the fact that fewprimary silver mines exist. Most silver is produced as a byproduct of miningother metals (copper, lead, zinc, gold).

Base metals producers are shutting down. As Reuters reported,“Copper prices advanced on Tuesday, with London copper touching a four-weekhigh, as more virus-related mining disruptions in key producing countriessparked global supply concerns.”

Best-Case and Worst-Case Scenarios

Given the extreme dynamics setting up in supply, demand, andmonetary expansionism, market conditions are likely to remain volatile. We dothink we have seen “peak fear” in this cycle – but not the end of uncertaintysurrounding the virus and the economic damage it could continue to inflict.

In a best-case scenario, COVID-19’s spread steadily declinesinto the summer and the economy embarks on a V-shaped recovery. In a worst-casescenario, the virus makes a devastating resurgence in the fall, the economylocks down all over again, and markets descend back into chaos.

If the optimistic outlook prevails, then rising industrialdemand for copper, silver, platinum, and palladium can be expected to drivethose metals higher. Demand can recover faster than supply, which can’t simplybe turned back on like a switch.

If the pessimists prevail, then all bets are off. Rounds ofasset deflation will lead to accelerating hyperinflationary monetary responses.Social chaos, martial law, and possibly a postponement of elections couldresult.

In such a scenario, no investment could be counted on to performwell. But gold, the ultimate money, can always be counted on retain value evenduring the worst of times.

Stefan Gleason isPresident of Money Metals Exchange, the national precious metals company named 2015"Dealer of the Year" in the United States by an independent globalratings group. A graduate of the University of Florida, Gleason is a seasonedbusiness leader, investor, political strategist, and grassroots activist.Gleason has frequently appeared on national television networks such as CNN, FoxNews,and CNBC, and his writings have appeared in hundreds of publications such asthe Wall Street Journal, Detroit News, Washington Times, and National Review.

© 2020 Stefan Gleason - All Rights Reserved
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