Furthermore, there are a number of fundamental tailwinds to help bring higher prices.
The Federal Reserve has cut rates to zero and unleashed a massive QE-infinity asset purchase program. They are not alone, as central banks around the world have done much of the same. On top of that, Washington passed its third fiscal bill, a historic $2.2 trillion measure. The world has known easy money for more than a decade, but not to this scale. The result of such will almost certainly bring rampant inflation later this year (bullish gold and commodities).
With the global economy contracting, currencies around the world all devalued at the same time, and U.S Treasury yields hitting record lows, this reinvigorates not only safe-haven characteristics for gold but its reserve currency characteristics.
This made the current deflationary environment gold's only near-term headwind. On March 9, the day markets digested Saudi Arabia's announcement of a crude oil price war, I joined CNBC's "Fast Money" desk to explain how this is not the time to be buying gold — at the time, nearly $1,700. Due to the virus outbreak and precipitous drop in crude oil, we were entering a deflationary environment. Over the following week, gold traded down to $1,453.
If you look back to 2008, during the great financial crisis, gold lost 34% from its peak before bottoming and silver 60%. Each bottomed in October 2008 upon the Federal Reserve launching QE1 and Washington passing TARP shortly thereafter. The rallies that ensued were historic. At their heights in 2011, gold nearly tripled and silver rallied almost 500%.
But something happened this week: hope that President Donald Trump can orchestrate a truce between Saudi Arabia and Russia. Crude oil brought near-term strength to both silver and gold. The metals incurred strong waves of buying early Thursday and saw follow-through in part due to crude oil's influence on inflation expectations.
The late week rally has gold on the brink of a breakout, one that needs silver to join the party. As seen in the chart below, gold is displaying a bullish inverse head and shoulders pattern with Feb. 28 and April 1 displaying the shoulders and that March 16 low and bottoming action being the head.
On the heels of the deflationary swoon, silver broke through a trendline dating back to 2001, as seen in the chart below. Its recovery, however, has a beautiful bull-flag pattern with the rally from March 20 to 25 being the flagpole and the consolidation over the coming days being a perfect flag pattern. This aligns a needed close above $15 in silver to not only break out of the bull-flag pattern but regain the 2001 trend line and fuel a massively bullish rally in gold, one that we would expect silver to join.
Disclosure: Blue Line Capital has positions in gold and silver.