Friday, December 10, 2010
What's Next For Silver?
December 7, 2010
Thanks to a rude interruption when the banker-cabal launched one of their trademark ambushes of the silver market, that "smooth ride" was somewhat abbreviated early in November. Under different circumstances, I might wonder whether that man-made pause in the market was enough of a consolidation to prepare silver for yet another leg higher. Given current circumstances, however, there appears to be no doubts about silver's current status.
As I observed in that earlier commentary, this recent spike by silver duplicates a chart-pattern which had already had two previous cycles. After both of those sharp spikes, silver suffered wicked sell-offs, thus those following that previous analysis may now be worried that history is about to repeat.
There are two very good reasons why silver bulls should have no fears of the previous pattern continuing to play-out. To begin with, the last crash in silver - which began at the end of the summer of 2008 - was by no means a "natural" reaction of the market to the spike in the price of silver. Rather, as I have written often before, the "Crash of '08" was a Wall Street/U.S. government "joint effort".
Wall Street was desperate to hide the fact that it, and it alone was "going down" with the crash in the U.S. housing sector, and overall economy. Meanwhile, the U.S. government had its own motive for engineering a commodities crash: postponing hyperinflation. Had that massive manipulation/intervention not taken place, there would have been no "crash" in the price of silver - despite the sharp run-up.
How can I be certain of this? This brings me to my second reason for believing there will be no crash in silver following this spike: there isn't anymore silver. No, I'm not claiming that the entire crust of the Earth has been scraped clean of silver. It's the "above ground" silver (i.e. global stockpiles) which has been exhausted. There hasn't been this little available silver in the world for thousands of years.
In that respect, it is irrelevant whether silver had just advanced by 10% or 1000%. If we are "out of silver", the price is going much, much higher. Silver investors should not necessarily expect the same "smooth ride" we saw when silver rocketed from $20 to $30/oz (the first time). That part of the previous chart-pattern has been completed.
In fact, no one can say with certainty how silver will behave in the near future - with the exception of concluding that the price will not make any significant move lower. Indeed, we see signs of inventory "stress" all over - aggravated by the endless inventory-fraud perpetuated by those reporting this data.
Not only are bullion-dealers having difficulties keeping any stock available for buyers, but even the U.S. government itself is desperately looking for ways to weasel-out of making silver available for its own citizens. First there was the announcement by the Obama regime (and reported by GATA) that it was seeking to repeal the law which requires the U.S. mint to produce enough minted coins to "meet demand".
With the general public in North America just beginning to catch-on to the value and scarcity of silver, demand can only go higher, and government mints around the world have struggled to keep pace with demand even prior to this latest spike in interest. Thus, the U.S. government just made a second announcement today: it is delaying the release of a brand-new series of commemorative silver coins dubbed the "America the Beautiful" series.
Given that the government had instructed official dealers to gouge Americans for these coins - by adding a $9/coin "premium" to the price - the "official" reason for delaying the release is that "prices are too high". Yes, delay the release today because prices are too high - and wait instead until silver is $40/oz or $50/oz. That makes sense.
From silver analysts to silver mining executives, anecdotal reports are rolling in that even "industrial" users of silver are having greater and difficulties in locating available stock for their businesses.
More alarmingly (from the perspective of massive silver-shorts like JP Morgan), following their latest attack on the silver market, buyers responded to the "sale" on silver by holding out their hands and asking for "delivery" of roughly ¾ of total COMEX inventories. For the moment, we can expect that silver-buyers will allow themselves to be bought-off with paper "bribes".
As GATA has reported in the past, such tactics have quietly been taking place with the London gold market for roughly a year. But this is no "solution" for JP Morgan and the rest of the silver-shorts. Obviously, the first thing that most of these COMEX customers will do after accepting their paper bribes in lieu of real metal is to buy even more silver for delivery in the next month's contract.
Markets rarely simply shoot higher in a straight line, no matter how out-of-balance that market had previously become. Thus silver investors (and especially those new to the sector) should not be recklessly buying silver, and by "recklessly" what I am referring to is the use of "margin". While the recent hikes in margin-requirements by the CME Group (owner of the COMEX) were clearly intended to be manipulative, as we come closer and closer to an absolute default in this market, we should expect margin requirements to legitimately be raised still higher in the future. Those greedy traders who get hurt by such moves have no one to blame but themselves.
What we know about the silver market today doesn't give us the luxury of "mortgaging the farm" in order to place massive bets on silver. However, what current fundamentals do allow is for ordinary people to invest a significant portion of their wealth in this monetary "insurance" - and know that they have no fears over the longer term of this investment losing value.
Such "one-way" trades are very rare in markets, and those sitting on the fence have no time to dither. Prices could explode still further, inventories could completely collapse - or both - in the near future. While investors will not enjoy quite as much "up side" on their investment as those who started their buying with silver closer to $10/oz, there can be no doubt that over the long-term that silver is heading to a three-digit price.
Knowledgeable investors in this sector already know that the average, long-term price ratio between gold and silver (over roughly 5,000 years) has been approximately 15:1 - and that was when silver was truly abundant in the world. With silver stockpiles exhausted, it would be silly not to expect silver to breach that ratio on the up-side.
Given that the price of gold is at $1400/oz, that implies silver hitting $100/oz even if the price of gold was to freeze at the current price. No one who understands this sector expects that to happen. Adjusted for real inflation, gold would have to rise to over $7,000/oz just to equal its previous high in 1980 - as calculated by John Williams of Shadowstats.com. This means that it is certainly not beyond the realm of possibility that silver could reach a four-digit number over time.
Ordinary people need to protect themselves from the monetary depravity of bankers, as they relentlessly drive the value of the paper currencies they foisted upon us to zero. This mandates that every person must protect their wealth with precious metals, or "go down" with the bankers (and our economies). However, thanks to those very same bankers, people can purchase their monetary insurance today and expect to make nice profits.
Merry Christmas!
Wat Doi Suthep - The Temple for Gold Bugs
Wat Doi Suthep, Chiang Mai, ThailandVisiting Wat Doi Suthep today demonstrated very clearly the Thais understanding of gold as a precious metal. The only metal worthy of covering their most sacred relics for thousands of years. Even the Thai money, the Baht used to be a reference to a weight of gold (just like Pound Sterling used to be a weight of sterling silver).
Empty Asia
The river Ping flowing past Ban TakLike Australia, Thailand's small country towns are losing their banks, doctors and basic government services, reinforcing the need to move to a regional centre or city.
Thursday, December 9, 2010
Asian road trip
I have just completed the quintessential Asian road trip - a 600km (375 mile) blast up Thailand's highyway 1 in a honda civic, from the centre of the rice belt to northern Thailand's largest city Chiang Mai.
Whilst the driving style at times reminds you that most Thais believe in reincarnation and that some are very eager to prove the theory the road is in most parts without fault.
At between 4 and 8 lanes wide and a dual carriage way it makes Australia's (and I am assuming the USA's) highway 1 look like a goat track. If the west is even to tread water we need to keep up with the pace of Asia's export supporting infrastructure projects. This highway shows what a few hundred million dollars can achieve, unlike the US the Thais aren't throwing money at banks that should have been let fail, they are building their future, not papering over the errors of the past.
America's fading influence in Asia
For over 20 years Bangkok's expats and rich and famous sent their children to International schools to study all their lessons in American English, but even in SE Asia's most American fixated country America's influence is fading. Many schools are now looking to the rise of a new empire and offering lessons in either English or Mandarin or both. The market has spoken, you need to speak the language of the buyer, and increasingly so that language is Mandarin.
Fed's QEII is leaking from the nappy
Seems the Fed's fetid QEII is leaking to all corners of the earth, not only is the Australian $ and Brazilian Real at multi decade highs, so is the Thai Baht, and like the rest of us in export oriented economies the Thais are none to happy about it.From the Bangkok Post:
Little seen blocking baht's continued rise
The relentless rise in the value of the baht has again put Thai policy-makers in a bind. This time the baht has catapulted to 29.5 per dollar, a record high from roughly 33.2 per dollar at the beginning of 2010, and is set to continue its upward momentum next year after having taken a breather during the past few weeks.
The baht breached 30 against the dollar for the first time since 1997 when its devaluation precipitated the Asian economic meltdown. It has advanced more than 12% versus the greenback this year amid an influx of overseas capital. To be sure, the baht has been the best performing currency among its regional peers during the first 10 months of the year, save for the Japanese yen.
There are a multitude of factors which will continue to underpin the baht's strength in the coming year. Chief among these is the torrent of potentially destabilising capital inflows, attracted by high growth prospects for Asia, low government debt and currency appreciation. Like other emerging market countries, Thailand is bearing the brunt of easy money policies in the industrialised world, as money flows to higher-yielding markets, wreaking havoc on the currencies, creating inflationary pressures and complicating economic policy.
The huge capital inflows into Asia will further be underpinned by the Federal Reserve's US$600 billion asset purchase plan, increasing the amount of dollars available that can be invested in higher-yielding assets here. While the Fed is expected to buy $600 billion of treasuries between now and next June or roughly $75 billion a month, it might eventually raise the amount if this unorthodox measure fails to invigorate the ailing US economy, as was the case with the first round of "quantitative easing" two years ago when it increased the amount from $600 billion to $1.75 trillion.
By injecting liquidity into the system through newly created money, the Fed's second round of quantitative easing, dubbed QE2, will have the effect of lowering long-term yields and further depressing the value of the dollar. Historically low US and euro zone interest rates mean that foreign investors will continue to flock to Asia in search of higher yields, pumping up currencies and precipitating asset price bubbles.
This will likely prompt a variety of responses from our policy-makers, such as stronger foreign exchange intervention and more measures to stem the flood of capital inflows......read onMonday, December 6, 2010
The ABC Bullion blog travels to SE Asia
For the next month the ABC Bullion blog travels on a fact finding mission to SE Asia. Currently in Bangkok, I have just read the following article in the local English language newspaper, The Nation (bought from the local 7-11, of course):From The Nation newspaper:
What times we live in! Gold has been set aside as a commodity and the banknote has become a monetary instrument instead. This is the opposite of what it has been for thousands of years.
From my discussion about the monetary history of gold in the previous article, "Timeless Passion of Gold, Part 1", gold had been considered as 'real' money throughout the history of monetary instruments. Although civilisations have switched to using fiat (paper) money as an official medium of exchange instead of gold; gold is still a material with full qualities of exchange. As time passes, gold has become a commodity that can be bought by money instead of a monetary instrument that is used for purchases of other commodities.
As a commodity, gold is viewed as an asset for investment like stocks, bonds, options etc. The purpose of which is for speculation (betting on capital gain). Nevertheless, investing in gold might not be as exciting as investing in other investment vehicles according to the general notion of investment strategies. Gold only gives out capital gain (or loss) when you sell it; it does not give out cash flows like bonds or stocks; and the price moves relatively slow. Therefore, the realisation of gain (or loss) could take a long time and possibly lead to opportunity loss. Moreover, gold is not an asset that is appropriate for daily trading because of its illiquidity, with one exception for Gold Futures, GF.
So if gold is not deemed as a good investment choice, should it still be worth gaining our attention?
The answer is yes, especially when governments around the world are struggling to secure their fragile economies by injecting massive amounts of money into their economies at the speed of light through Quantitative Easing and other economic stimulus packages. This can raise the inflation expectation and eventually deteriorate the real value of currency. As currencies lose their values, more people are turning their interests to gold; for example, emerging markets like China and India are investing more in gold and pushing the demand for gold up even further; hence, gold prices skyrocketed. The nominal price of gold reaches "All Time High" again and again, outstripping the gain in all other major currencies. The higher price does not mean that gold is becoming more expensive; instead, currencies are becoming relatively cheaper. Do not forget that the background of gold is real money; it has retained its real value as it always has since the gold supply has neither increased nor shrunk much. Looking at it this way, the gold price only reflects what is going on in the economy or the reaction to monetary policies, not the other way around. Therefore, whenever there is a crisis followed by excessive liquidity, the nominal gold price will rise with inflation as opposed to banknotes that will easily be impaired during high inflation. This is why gold is one solution for inflation hedging, to be more precise, a crisis hedging.
The inherent value of gold is the reason why gold is an appropriate tool to hedge against inflation. Since its value does not get diluted with inflation, its demand increases every time there is inflation. To elaborate on that point, imagine an 80-year-old granny digging up her treasure she buried in her backyard when she was twenty, if that treasure were a one-dollar banknote, the banknote would worth nothing compared to its value 60 years ago; on the other hand, if the treasure were a gold bar, it would be worth a fortune comparing to when she buried it. Amidst the uncertainties of economic outcomes, which significantly affect the value of currencies, the store value of gold is one certainty that people can rest upon. Thereby, given the current situation of a weakening dollar, gold has once again regained its popularity.
All being said, I want to summarise that gold should rather be viewed as an object that can naturally maintain its value and used as a store of value than being viewed as an investment alternative that yields returns. Gold has inherent value that can't be controlled, at least not as much as with paper money. So buying gold would be a wise decision if you were to believe that 600 billion dollars from QE2 is just an appetizer and needs protection for the upcoming bitter main course. All in all, gold could never be overshadowed by the storms of financial catastrophe. Gold still holds its major role in the world economy from generation to generation.
People still desire gold as they ever have; this is truly … the "Timeless Passion of Gold".
By Sarun Lerdhirunwong, Risk Management Officer, Financial Risk Management and Operations Department, Bank of Thailand. The views expressed are the author's own.
Got Silver?
ABC Bullion's CEO, Janie Simpson's article in Australian Resources and Investment magazine:
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Australian Resources and Investment magazine
