Debt Dynamics, Tectonic Plates, and Corporate Bankruptcies
In economics and markets, things take time to unfold. We wrote in last year’s report about the importance of understanding current events in the light of history. Our history is that we live in the age of unhinged and falling interest rates.
For decades, an inexorable, tectonic plate-like force has been driving interest rates, and margins, down with it. This coincides with massive credit egesta being pumped at high pressure into the market. Each downtick in the rate spewed more of the stuff. This was very much a dynamic of fresh capital excrement chasing limited profitable opportunities, versus an abundance of profitable opportunities chasing a finite amount of market-originated capital. Otherwise, why would we see the relentless and horrifying rise of Zombie firms (who borrow merely to pay the interest on their existing debt instead of borrowing to increase earnings) and other perverse outcomes?
And it was here, in the midst of this 40-year trend of falling rates, that the Federal Reserve decided to increase the Fed Funds rate from 0% to 5.5% in less than 18 months, faster than at any other time in recent history.
Since then, “higher for longer” has been the watchword on rates. In reality, the Fed has been slow to lower them, despite delivering way more Fedspeak word salads than anyone ordered.
Higher for Longer? Or Lower and Fast!
While the Fed may insist on higher for longer, the bond market is hinting at cuts coming soon. Higher rates have caused an increasing amount of economic pain and it’s hitting a fever pitch in some areas.
In the brief blip of “higher for longer,” we have seen…
1. Corporate bankruptcies steadily rising and hitting a 14 year-high in 2024
2. A surge in layoffs, including record-setting numbers in 2023 for the Tech sector
3. Rising delinquency rates on all loans across commercial banks
We are in a similar situation to last year, but worse, and here’s why…download your free Gold Outlook Report 2025 to read the rest of our macroeconomic analysis and predictions for 2025.
Reviewing Our 2024 Predictions
Last year, we made broader macroeconomic predictions and specific gold and silver price forecasts. Let’s review our calls from last year.
2024 Macroeconomic Predictions
We said: “We think there is a massive and growing downward pressure on [interest] rates. And the Chairman of the Federal Reserve is talking about cutting rates this year.”
Rates were indeed cut, though not as dramatically as we thought.
2024 Gold and Silver Price Predictions
We said: “We think the price of gold will end the year above $2,300. And silver probably at least $26. Giving us a gold-silver ratio under 90.”
The price of gold exceeded our forecast and most people’s expectations, ending the year around $2,600. Similarly, silver surpassed our projection, finishing the year at $28. The resulting gold-silver ratio fell comfortably within our “under 90” call for the year.
Now, let’s turn our attention to fundamentals for gold and silver and our price predictions for 2025.
Gold and Silver Price Predictions for 2025
“Talent hits a target no one else can hit; Genius hits a target no one else can see.” – Arthur Schopenhauer
In the spirit of Schopenhauer, talent is trying to predict what will happen next by analyzing the price action. That is, using recent gold price movements to determine where the gold price will go next. This is a high talent indeed, and most expert predictions of this sort are hit or miss.
Genius, in this sense, is looking at spreads and changes in spreads. Few pay attention to spreads, but we have long been talking about a spread called the gold basis. To oversimplify, this is the price of a gold futures contract minus the spot price of gold. This spread tells us whether it is profitable to carry gold. Carrying is buying spot and simultaneously selling a futures contract. Market makers do this when the spread is not only positive, but enough to make the trade worthwhile.
It is important to note that the trader who carries gold has no economic exposure to its price. He buys it, and it sits on his balance sheet—but he’s already sold it and locked in the price. He’s not a speculator, hoping for a gain of $250 an ounce; he’s an arbitrager working for a few bucks an ounce.
When this spread changes, it tells us whether the incentive to carry gold is increasing or decreasing. That is, it tells us what the market makers will be doing more of or less of.
And just exactly what is it that they are doing more of?
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
© MonetaryMetals
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