Why the Metals Sold Off
The recent weakness in gold and silver has a misunderstood cause. Many assume the metals are trading down in anticipation of some future event, but that is not the mechanism at work. The decline is being driven by buyers of IPOs who are selling gold to fund their purchases — gold is being used as a funding source for speculation in newly issued equities. This is distinct from the original break at the end of January and the early part of February, when gold and silver were simply due for a correction after a strong run.
A correction was warranted, but the magnitude in silver was excessive. A 20% correction in gold is plausible. A 50% correction in silver is not — that is overdone, and it has been engineered through the use of paper contracts and naked shorts. In other words, the paper market has driven silver far lower than physical fundamentals justify.
Given how low both metals have fallen this year, the present level is an attractive entry point. For both gold and silver, this is the moment to be "backing the truck up." There is also a second source of downward pressure beyond the IPO funding flows: emerging market economies are using gold as an ATM. Their liquidity is drying up, they need cash, and they are selling gold to raise it. That, combined with the IPO funding dynamic, is the source of gold's current softness.
Gold as a Hedge in Both Inflation and Deflation
A common question is how much of gold's expected value gain over the next 5 to 10 years will simply be keeping pace with inflation — impressive in itself — versus actually gaining in relative value or real purchasing power. The answer is that both inflation and deflation are good environments for gold. Over time, gold will keep up with inflation, but it actually increases in purchasing power during deflation.
The early 1930s demonstrate this. The price of gold was fixed at $20.67 an ounce. It was confiscated, and then revalued to $35 — a roughly 75% increase in the nominal price. Critically, that revaluation happened during a deflationary collapse when the input costs for mining companies were falling: the cost of oil, labor, and equipment were all dropping. Mining companies were handed a gift — their final product rose about 75% while their costs declined. This is why gold is the safe haven in either inflation or deflation. It performs poorly only during stable times, and we are certainly not headed for stable times.
Suppression Cannot Last Forever
How long can the suppression of metals prices continue? It cannot continue indefinitely. The suppression will end either when there is a failure to deliver somewhere, or when credit breaks. If credit becomes very difficult to obtain, the derivatives complex will melt down. And when the derivatives melt down, "mother nature" will take over and reprice cross-assets against one another — the market, rather than managed paper, will set relative values.
A failure to deliver in any one market would spill over into others. If, for example, there were a failure to deliver in energy markets, that would indeed carry over into a loss of trust across other commodity markets. The conviction held for the past 10 years is that the failure to deliver will come in silver. The reason is a structural supply deficit now six years running. By 2030, silver demand is projected to reach roughly 1.5 billion ounces per year against global production of only about 850 million ounces — a vast and widening gap that raises serious questions about settlement assumptions.
Why Silver Would Drag Gold Down With It
If silver fails to deliver, it will immediately spill over into gold — and that is the real problem, because gold is the anti-dollar, the anti-fiat. Gold is now a tier-one asset, meaning banks can hold it on their books with no haircut. A silver delivery failure spilling into gold would blow up the entire derivatives complex. The system came close to this late last year and early this year.
The mechanism is built entirely on trust. Credit does not flow unless there is trust or confidence of being paid back. If silver fails to deliver, holders of gold contracts will immediately step forward and say, "I want my gold. I don't want to be paid in cash — I want my metal." That stampede for physical delivery is what breaks the paper layer. The danger for investors is not merely volatility; it is the discovery that ownership structures fail under stress, that contracts and physical metal — long treated as interchangeable — are not the same thing once confidence cracks.
How to Allocate Between Gold and Silver
Portfolio weighting should favor silver over gold, primarily because of the gold-to-silver ratio. At 64, the ratio is still very elevated, which signals that silver's price will rise more rapidly on a percentage basis than gold's.
As for how much money to put into precious metals, the standard answer for the past several years has been simple: whatever you don't want to lose. Metals carry no counterparty risk. Everything else you own — a bank account, a brokerage account, an insurance contract — carries counterparty risk. Even real estate, which you can own outright, can be taxed away from you. Physical metal stands alone in having no counterparty.
The Case for Owning Miners
Mining shares deserve an allocation as well. When buying individual miners, you should obtain the physical share certificate. You cannot get a certificate for ETFs or mutual funds, but you can for individual mining companies. The reason this matters: if you hold shares through a broker, those shares sit on the broker's books and balance sheet "for your benefit," but the legal owner is the brokerage itself. If the broker goes under, it will use your assets to clean up its own debts. The certificate protects you from that.
A prudent allocation to miners is roughly 15 to 20%, or perhaps a little more. The situation today echoes the 1930s, where the end product — gold — rose much faster than input costs. Miners are more profitable now than at any point in history. Because of their operating and financial leverage, mining share prices tend to be roughly three times more volatile than the underlying metal. In an upward market, the miners will therefore outperform the metals themselves.
The recent damage in the sector underscores the leverage. Since January, most miners are down sharply: the majors are off 30 to 40%, while juniors and exploration companies are down well over 50%. There is, however, a leverage caveat in a high-interest-rate environment: the gold price must rise further before miners deliver true leverage over their input costs.
High Rates Do Not Necessarily Hurt Gold
The conventional belief that gold cannot do well when interest rates are high is wrong. Gold performed strongly throughout the 1970s even as interest rates did nothing but climb. The reason was that inflation was rising faster than interest rates were. What matters is the real rate — the gap between inflation and nominal rates — not the nominal rate alone.
Picking Quality Miners
The first criterion for selecting miners is geographic diversification. You do not want all your assets in a single location, because a country can decide to nationalize its mines. Spread holdings across countries and continents. Beyond geography, diversify across the size spectrum: majors, intermediates, juniors, and explorers. If you want to speculate aggressively, tilt toward the smaller entities, which carry more risk and more upside. Beyond that, the choice between favoring gold or silver, or blending them, is a personal decision driven by how much risk you are willing to take and how aggressive you want to be.
Fiat Devaluation and the Deflation Mechanism
What lies ahead is a devaluation of fiat currencies against themselves, exactly as the United States did in 1933–34. Currencies will be devalued to force inflation back into the system, because authorities cannot allow deflation given the enormous quantity of debt outstanding.
The deflationary mechanism comes from credit, not collapsing demand. Long-end interest rates have risen across the world, and this is deflationary for asset prices because of how borrowing capacity contracts. Consider a home buyer: anything not bought with cash is bought with borrowed funds, and the buyer's cash flow is finite. A couple of years ago, with mortgage rates around three to three-and-a-half percent, a buyer might have qualified for a million-dollar mortgage. With rates now at six-and-a-half or seven percent, that same buyer might only qualify for a $500,000 to $600,000 house. The constraint is not the selling side — it is the loss of buying power, because higher rates cut the amount that can be borrowed.
The same applies to businesses. Three or four years ago, refinancing was easy because credit was freely available and rates were low. Now rates are higher and credit is harder to obtain. If a company cannot refinance, it has nowhere to turn. Asset values are a function of the availability of credit for buyers. When credit is impeded in any way — through higher rates or simple lack of availability — there is less buying pressure on assets, which means lower prices.
Hyperinflation and Hyperdeflation at the Same Time
When do we cross the tipping point from deflation into an inflationary spiral, especially if the government begins monetizing the debt? The answer is that both will happen simultaneously. We are going to see hyperinflation and hyperdeflation — or stagflation, whatever you want to call it — at the same time. The cost of the things we need (the cost of living) will be rising rapidly, while at the same time the prices of the assets we already own will be falling. It is a double-edged sword that cuts on both sides.
To prepare for such an environment, the answer again is gold. Gold does well in inflationary times and in deflationary times; it does poorest only in stable times, and stability is not where we are headed.
The Debt-Service Time Bomb
The deeper problem is no longer just the deficits — it is the interest payments, the debt service. For roughly 25 to 30 years, the United States paid somewhere between $350 billion and $500 billion per year in interest. Even as the government piled on more and more debt, the debt-service cost did not rise, because interest rates fell continuously from 1982 until 2022–2023. That 40-year downtrend in rates kept debt service trapped inside a box of $350 to $500 billion despite an ever-growing debt pile.
Now debt service has exploded to $1.5 trillion — more than 25% of the cash flow generated by tax revenues. You cannot run a life, a business, or anything else by spending 25% or more of your income on interest alone. And that $1.5 trillion is only going to climb, because the deficits keep widening and those deficits must be funded through still more borrowing. The debt pile has shifted into another gear, requiring ever more debt to be piled on.
This is the essence of Richard Russell's longtime maxim: "inflate or die." The system only appeared sustainable because falling rates masked the true cost of carrying the debt. Debt expansion looks manageable until refinancing resets the math. The number that matters is not the total debt, but the share of cash flow consumed by servicing it. For the long-term investor, wealth protection is therefore less about chasing returns and more about surviving the policy responses to come.