One of the greatest difficulties for the precious metal investor is to understand the true value of gold and silver. There is a huge range of analysis on the internet on what the real price of gold or silver should be. While this debate will continue, there still seems to be one factor this is totally overlooked.
Recently, Don Harrold came out with a YouTube video on how silver has been a poor inflation hedge since 1914 as it has underperformed its expected price for most of the time.
In this part of his video he brings back an interview of what he said about silver in 2011, when silver had shot up to $43 on ounce. Basically, Harrold was saying that he was not a buyer of silver at time because the current price had shot way above its expected price based on the inflation rate.
Harrold provides this screen shot in his video to show that silver had way out performed its expected priced (base on inflation) in two periods.
The numbers at the bottom do not represent actual years, but the number of years since 1914. The two huge price spikes were in the 1976-1980 & 2009-2012 periods. The blue line represents what the expected silver price should be based on a normal inflation rate.
Harrold includes a table that shows this rate of chance since 1914. He explains that for most of the years since 1914, silver has been a lousy inflation hedge.
This is another table showing that the 2013 expected price of silver should be $19.13, and the current actual price at the time was $19.45… which according to these statistics, Harrold believes is right in line with the inflation rate.
I found out about this video from a member on my site. This is one of the pluses in having great members… they help keep you informed of what is going on in this huge world of the Internet.
The question that was raised to me was…. is Don Harrold’s logic on the silver inflation hedge data accurate? So, of course I had to watch the video because anytime there is good quality work out there that may offer a different opinion than mine… it’s important to check it out.
I responded by saying, “In an Economic-Energy Vacuum, Harrold’s logic makes perfect sense. However, what happened for the past 100 years will most certainly not be the same in the next 100. I can assure you of that.
Harrold remarks, that if silver corrects below its Blue inflation trend line, it may be a good time to accumulate silver. But, he warns investors that it may be another 10-20 years before we get another spike up to $35 (average a year) or higher. So, if you want to buy silver, maybe the next generations of you family members could benefit from it.
Again, Harrold’s logic on the silver inflation price trend at face value is correct. You cannot deny this chart except by one LARGE FACTOR.
Most of you who have read my work, know that I believe the biggest factor to impact the world going forward is peak energy. I have written several articles on the Shale Oil & Gas Bubble based on information from some of the best alternative energy analysts.
The reason why this so-called 20 year cycle will not repeat itself is due to the fact that global oil production is in a plateau and will soon decline. Where we came from and where we are going is nothing like mankind has ever witnessed before. When the price of gold and silver corrected and remained low after 1980… the world had another 30+ years of increased global oil supply.
The United States has overbuilt its economy to a level that it will soon not be able to sustain. In the future there will be huge swaths of industrial, commercial and residential real estate sitting vacant with no function or relative value. Trying to quantify the value of assets in this new world of “Collapse Economics” will be challenging to say the least.
That is why I believe valuing silver as an inflation hedge as Harrold has done will become increasingly worthless as the U.S. Dollar collapses as well as $100 trillion of paper assets implode due to future energy constraints.
I am not going to get into many energy details here, but there is one I would like to focus on today. Even though Global oil production has been in a plateau since 2005 (only rising recently due to U.S. Shale oil), Net Oil Exports are declining as domestic consumption from the top oil exporters is increasing.
The chart below is an estimated change in Middle East net oil exports. The chart was produced using data from the BP 2012 Statistical Review and the new 2013 issue has been published in which some of the figures have been revised.
According to the 2011 data, the Middle East produced 27.7 mbd in 2011 and consumed 8.0 mbd which left 19.6 mbd (million barrels a day) of net oil exports shown by subtracting the amount in the Red Area (domestic consumption) from the Orange Area (overall production).
BP has since revised its figures for 2011 to show 27.9 mbd with consumption of 7.9 mbd which actually revises the net oil exports for the Middle East to 20.0 mbd. However, their 2012 figures actually show a decline for the first time.
In 2012, Middle East oil production was 28.3 mbd and consumption increased to 8.4 mbd, which provided the market with a 19.9 mbd of net oil exports in 2012. While this is only 100,000 barrels less a day compared to 2011, it shows what happens to a country’s oil exports as production peaks and consumption increases.
Even though the Middle East increased its overall production in 2012 by 0.4 mbd, its 0.5 mbd of additional domestic consumption devoured all of the gains. Who in the energy industry brings up this lil ole TID BIT… aye?
I calculated a simple 1% annual decline rate for the Middle East out to 2025 and the same increased trend of consumption. As you can see, Middle East estimated net oil exports can fall nearly 6 mbd by 2025 even though their total production has only declined 2-3 mbd.
This is the double-whammy of the oil EXPORT LAND MODEL designed by Jeffery Brown. When we add the total impact of the Export Land Model to the entire world, we will see available net oil exports to the remaining 155 oil importing countries decline faster than the fall of global oil production.
There are many other energy factors to consider including the high cost of energy on the global economy as well as the falling EROI – Energy Returned on Invested.
While silver has kept up with the so-called inflation rate, it has done so using the Fiat Dollar as a gauge. What happens to Harrold’s inflation metric when the Federal Reserve Note goes the same way as the Zimbabwe dollar? How do you measure inflation when the fiat money supply becomes worthless?
As I have stated several times, ENERGY is the key going forward. Silver and gold will become great stores of value because they contain “ECONOMIC ENERGY.” This term coined by Mike Maloney is an excellent description to describe what is locked into each ounce of silver and gold compared to the pennies that it cost to produce a $100 bill.
What is taking place at the Fed is that they can write a check that has no funds to back it up whatsoever to create money out of thin air. And this isn’t the only problem.
The huge Interest Rate Swap market which is by far the largest amount of derivatives on the planet has destroyed the real rate of interest and the ability to value of goods and services properly.
What happens when the Dollar finally collapses (AS ALL FIAT CURRENCIES DO) including the $100 trillion in paper assets? Where are investors going to store and protect their wealth?
Because the gold and silver market are so small, any move into the precious metals will make their values increase to insane levels. This is the factor that Harrold does not consider because he is trader and as he says, “I Can’t quantify data that I don’t see.”
The world is awash in ENERGY IOU’s masquerading as paper assets. Gold and silver are not Energy IOU’s, as they are bought and paid for ECONOMIC ENERGY. While this may be hard to quantify with data as the future is hard to predict, we can be rest assured that what happens going forward will be directly related to Energy values and physical assets and not paper trading based on Financialization.
Business as usual in the world will be over when the impact of peak energy is finally felt. Well, let me clarify that…. the market is already feeling the pain of peak oil, but due to the Fed and Central Bank monetary printing it is being masked.
The Shale energy companies are loaded with debt because they are producing natural gas below its Break-Even cost. To allow the illusion of growth and sustainability, these energy companies have to borrow money to keep production flowing to offset these huge annual decline rates. Ultra-low interest rates (due to the huge interest rate swap market) have allowed these companies to hold huge amounts of debt on their balance sheet with very little in the way of interest service charge.
What the hell happens when interest rates rise? The whole thing blows up in their face. Again, this is another factor that Harrold does not see. Harrold is a very smart guy and probably a very good trader, but when it comes to Energy fundamentals and the real driver of the economy… he probably doesn’t have a clue.
Silver and Gold will become great stores of value and excellent investments in the future due to Peaking of the Driver of the Economy — ENERGY.
This isn’t something we can quantify as we have no idea how to live in a world that has a falling energy supply. We will soon find out.
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