There’s been little market action in either gold or silver over the past few months, says John Embry, chief investment strategist for Toronto-based Sprott Asset Management.
For one thing, both July and August are a seasonally slow period. Moreover, both metals have remained under the thumb of the bullion banks. Not surprisingly, gold has mostly traded on either side of US$1,300 an ounce, while silver has stayed below US$20.
Yet this isn’t terribly surprising given that both metals have formed massive bases, with breakout points just above these two prices.
James Turk, who’s based in the U.K. and who’s one of the best informed observers of the precious metals markets, recently noted there are two types of gold and silver buyers: long-term accumulators and trend followers.
Trend followers, the far bigger contingent, tend to respond mainly to news and price movement. Their ranks include most of the world’s hedge funds, commodity traders, as well as individual traders.
And they focus on generating trading profits from fluctuations in gold and silver — and do so whether prices move up or down. Not only are the trend followers solely oriented toward the short term, they only jump in if gold and silver prices are moving. So, if the bullion banks succeed in keeping prices in a tight trading range, as they have this summer, the trend followers tend to be absent from the buy side.
But the long-term accumulators take a different approach. Driven by value, they buy gold and silver when both are cheap. They understand the metals’ attraction as long-term alternatives to depreciating fiat currency.
But the world’s central planners, who manipulate gold and silver prices, are deathly afraid of the trend followers barging into precious metals. That’s because such an intrusion would quickly overwhelm the central banks’ schemes of price suppression.
As a result, the banks put out false information — and blatantly false information at that — about the true state of the gold and silver markets. They also continually create counterintuitive price action by resorting to derivatives, algorithms and naked short selling.
And their tactics have succeeded. Over the past three years, for example, silver has tumbled to less than $20 from roughly US$50 an ounce, while gold has fallen to $1,300 from US$1,900.
Prices will explode
But these folks are reaching the end of their tether. And when the trend followers get wise to what’s really happening, both gold and silver prices will explode.
I like gold — so much so that I think it will trade at multiples of its current price in the next few years. But I’d like to focus on silver which, during this time, is easily likely to outperform gold.
For one thing, there’s now a massive open interest in silver on the Comex, a division of the New York Mercantile Exchange. Moreover, this open interest tops annual silver production worldwide — an astounding development, given how far it exceeds the open interest to annual production of any other commodity trading on the NYME.
Admittedly, the public isn’t privy to what’s going on in the over-the counter markets. But it isn’t too hard to guess, given silver’s appalling price action, along with the chicanery on the Comex.
Then there’s the matter of the short position in silver kept in place for years by JPMorgan Chase & Co., the New York-based mega-bank. Although Morgan is reportedly closely aligned with the U.S. government, its reputation remains tarnished and seems to become even more, given its all-too-frequent brushes with the law.
Morgan’s silver suppression scheme, I’d argue, shifted into high gear when silver threatened to break through its historic 1980 high of US$50 in April 2011. Indeed, there’s a concerted effort to keep silver under $22 — a price that would represent a significant technical breakout.
A breakout would unleash the trend followers on what’s really a very tiny market, creating a nightmare for the powers that be. Yet, despite their best efforts, these folks are about to fail spectacularly as stockpiles of gold and silver continue to shrink.
Silver will be bellwether
Indeed, I expect silver to lead the way as both metals likely stage upside breakouts this fall — an event, the global impact of which, would beggar description. After all, keeping a lid on gold and silver has been critically important to the authorities as they try to maintain interest rates at levels that bear no resemblance to reality anywhere in the world.
In fact, what we now have is an historic case of truly terrible paper (bonds, bank deposits and the like) with a negative return, despite the very real risks of mounting inflation or outright default. Not surprisingly, central planners desperately hope the public won’t realize just how troubled the system really is — a situation hinted at by sharply rising prices for both gold and silver.
And the situation is troubled — completely unsustainable, to be more accurate.
In an ever more frantic effort to shield the global economy from our preposterous debt load, currencies worldwide will continue to be relentlessly debased.
But the extent of this Ponzi scheme will only be revealed when gold and silver, both of which have bottomed out, make violent “up” movements in world financial markets — something for which both metals are now gaining traction.
I then expect interest rates will track gold and silver on the upside as the investing public finally grasps that their purchasing power is being sharply cut back.
I also believe we’re no longer talking about outcomes, but about the timing of these outcomes.
In mulling over all this, it’s vital to recall the wisdom of Ludwig von Mises, one of the giants of the Austrian school of economics.
“There is no means of avoiding the final collapse of a boom brought about by credit expansion,” he unequivocally wrote in his 1949 book, Human Action. “The alternative is only whether the crisis should come sooner as the result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
Meanwhile, we’re now in the largest and most abusive credit cycle in history. More ominously, central planners have no stomach for voluntarily abandoning credit expansion. So, it would appear we’re headed for an apocalypse in the world’s currency systems — one that will spark some form of hyperinflation, not to mention immeasurable human suffering.
In the interim, I believe time is running out for investors who haven’t buttressed their portfolios with exposure to gold and silver.
Such folks need to think back to the inflation-plagued 1970s — a time I recall, considering I was then managing institutional equity. To offset any chaos in the bond and stock markets, an investor during the ’70s needed to put only 10 per cent of his holdings in gold and silver. In fact, a 10 per cent allocation was more than enough.
But in the coming years and months, world financial markets will likely be materially worse off than they were in the 1970s. Remember, by the end of that decade, America had less than US$1 trillion in funded debt. Today, it’s closer to $18 trillion.
Moreover, the U.S. is weighed down by tens of trillions of dollars of unfunded liabilities in off-balance sheet debt. So to inflation-proof his portfolio, an investor should probably put a minimum 20 to 25 per cent of his holdings in gold and silver, allocating a big chunk of the rest of his portfolio to other hard assets.
Delay is fatal
Moreover, he should act now, since delay could prove fatal.
Not only is there a demonstrable shortage of physical gold and silver in the world, but the market for the shares of the mining companies that dig up these metals is small when compared to that for bonds and other stocks.
In addition, when the trend followers start piling into precious metals, as they inevitably will, it could well be too late if an investor isn’t already properly positioned.
To show just how tight the physical silver market is becoming, consider the Shanghai Exchange — a venue that’s soon likely to elbow aside both the Comex and The London Bullion Market Association as the world’s main trading venue for precious metals.
Indeed, Shanghai recently saw the front month for silver trading at an eight per cent premium to the London price. For one thing, this is likely a sign of the future trend. For another, it shows the reality of the silver market better than the impression created by bogus pricing in both New York and London.
Ratio varies widely
In the meantime, the gold-silver ratio has been all over the map since silver set its historic price high back in 1980. Then, silver had plunged to a ratio of 14:1. But by 1991, when the metal had collapsed to a low of US$3.50 an ounce, the ratio topped 100:1.
And although it made an interim low of just over 30:1 when silver hit its recent peak in April 2011, the ratio has now stabilized at roughly 65:1.
When the upcoming bull market in gold and silver finally roars out of the pen, I wouldn’t be at all surprised to see the ratio approach lows last seen in 1980. After all, industrial uses for silver continue to grow, while above-ground inventories are still minimal.
And when precious metals do start to rise, silver will once again be seen as “poor man’s gold.” What is the upshot? Demand will overwhelm what little supply remains.
In short, there’s no way a serious investor can now own enough silver and silver producers.
Investor’s Digest of Canada, MPL Communications Inc.
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Investor's Digest of Canada •9/25/14 •