What the precious metals market has seen over the last week in both Silver and Gold is a worldwide surge in physical demand as prices fell. This is what happens when the management of perception backfires.
It seems poetic justice that a drive by smash-down of precious metal prices would actually trigger the beginning of the last phase of this bull market. Nevertheless, these are exactly the kinds of consequences that occur when a market has been prevented from discovering its true value.
While the market drama seems intense at the moment, the timeline for this convergence can be found using decades as the scale.
Funds, Futures and Central Banks
Although SLV, the big silver exchange traded fund or ETF, has not reported significant investment fund outflow, the big Gold ETF (GLD) has seen major drawdown of shares. This is another indication of a developing split between paper and physical demand for precious metals.
Of course, the other divergence arises between the paper price discovered on the futures market and the retail price for precious metals after premiums and the cost of shipping are added.
All of this is taking place against the backdrop of a worldwide currency war, as currencies devalue in response to enormous sovereign debt burdens and unfathomable future liabilities.
Central banks and their subsidiaries have become ever more powerful and able to infiltrate practically any paper market they choose with little regard to ethics. Furthermore, if the law threatens to obstruct the agenda, it is changed or regulatory authorities are captured.
The concern seems not so much whether the underlying physical demand is real, but if wholesale shortages are a reality?
Delays in precious metal deliveries now seem to be commonplace. That, in and of itself, constitutes an effective shortage.
Still, how much of this is due to dealers hanging on to inventory, given that many would be underwater on their positions? Also, perhaps the extent to which premiums can be utilized has some psychological limit?
Distributors and the U.S. Mint
Of course, the small physical precious metals dealer will probably lose money selling their current inventory at post-crash pricing, but they would usually simply replace that inventory at the lower price.
The problem remains that their distributors have four to five week delays — where they could lock in the price, but at the risk of the paper price going lower. The dealer is choosing not to take that risk and now is typically completely out of conventional, non-numismatic Eagles and rounds. They probably have a very low junk silver inventory as well.
This situation arises in conjunction with the U.S. Mint rationing the supply of coins provided to the wholesale distributors. For example, the US Mint recently sent out just 15,000 coins of an 115,000 coin order to one distributor. That sure looks like a shortage.
The recent price drop in silver was severe, but not exactly like silver’s Black Thursday in 1980. It was different this time, but some aspects of the decline seemed the same.
This time, a different demand character prevailed. Also, the overall level of market awareness and underlying sentiment was stronger.
Awareness of the persistent value of precious metals is growing, though mainstream sentiment is chronically low and therefore true investment interest still seems a galaxy away.
What has Changed?
All government stock piles of silver have been drawn down and this is directly related to the silver users’ once powerful lobby.
Another key factor was the great easy money credit expansion. This suckered so many people (and governments) into accumulating debt levels that they could not really afford or into slaving away at their jobs to service the debt.
Furthermore, slow, steady and often unnoticeable inflation has eaten away at the purchasing power of paper currencies, while the authorities have subsidized one asset bubble after another. All of this has created the illusion of prosperity via paper millionaires and housing barons.
Also, the silver market is dominated by the largest naked concentrated short position ever seen. This situation has developed over decades and has evolved to control the price and trading structure. By gaming, the big speculative traders have juiced on easy money in their desperate search for yields that seem increasingly harder to achieve by investment alone.
Remember why the price of silver dropped so sharply in 1980. At that time, the Hunt brothers were trying to corner the silver market, but they were forced out of their dominant long positions and were later prosecuted for their actions.
Then, the shorts were the exchange board members and the silver users, but this time, no one quite understands why the market fell so sharply. Also, the market regulators are involved in the opposite ways to how they should be.
Today’s silver market, like most commodity markets, sees trading dominated by concentrated short sellers who often move the market at will to profit from their influence. Their manipulation of the silver market is ongoing and pervasive, and this situation has resulted in chronically low pricing for silver.
These large, deep pocked shorts are typically fleecing the weak longs and profiting from their weakness by buying in the longs’ positions when they finally choke. Nevertheless, people who prefer to take ownership of silver are a diverse and growing group.
What has Changed Economically?
The economic backdrop to this latest decline in the silver market is a worldwide balance sheet blow out and a virtually zero interest rate policy or ZIRP.
Debt burdened governments have seemed increasingly eager to participate in the “race to debase”, as their countries’ paper currencies fall in unison. Only their notable decline against the precious metals shows how essentially worthless these paper currencies really are.
If interest rates rose by only small amount, the interest payments on many countries’ national debts would easily eclipse their tax revenue.
Furthermore, employment participation has fallen to multi-decade lows, and waves of baby boomer retirees have been exiting the workforce.
What Remains Basically the Same?
The key factor that has remained the same is that governments always run deficits, and then borrow to print money so that they can fund the difference. This is one reason that you can read so many articles about currency debasement today.
Governments also get first dibs on cheap credit via their debtor relationship with privately owned Central Banks.
Over time, this situation has resulted in massive sovereign debt burdens since legislators have very little incentive to cut government spending, which is typically unpopular with their electorate. Furthermore, politicians continue to promise more popular programs to help them get elected.
As the Greek sovereign debt crisis has shown the world, there is a limit to how far this overspending can go before investors lose confidence. That limit is now fast approaching for numerous other nations, thereby making owning hard assets like silver seem increasingly attractive, especially at today’s bargain prices.Courtesy: Dr. Jeffrey Lewis
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