For a long time now I’ve been telling friends to buy gold and especially silver bullion. I haven’t really had time to explain why but I think now I should make an effort. This is a massive story but I will try to be brief. I believe that gold and silver are seriously undervalued. I also believe that there is going to be a crisis in confidence in the money we currently use which will cause a sudden and serious loss of value (very high inflation). Ownership of gold and silver are an insurance against this happening. Once it does happen it will be too late to take out that insurance policy.
Precious Metals to Paper Money
Gold and silver have little relevance to most of us today. Apart from the occasional jewelry purchase very few of us have much to do with them in a day to day sense. This was not always the case. For much of human history they were used as everyday money. When Judas betrayed Jesus he did so for 40 pieces of silver. When the US Constitution was written, the dollar was defined as a set weight of silver.
Gold and silver possess certain qualities which make them ideal for use as money. The ancient Egyptians and the Incas had no knowledge of each other yet each used gold and silver for money, as have most human civilizations.
More recently, over many years (even centuries) people have been gradually persuaded to leave their gold and silver in vaults for safe keeping. In return, they received credit notes. In the UK, people could deposit a pound of sterling silver with the Bank of England and receive a note with the words “I promise to pay the bearer, on demand the sum of one pound” signed by the Governor of the Bank of England. These notes became known as “Pounds Sterling” and for many years have been used as money.
A similar thing has happened all around the world until today, gold and silver are not commonly used as money anywhere. During this process, the custodians of gold and silver have gradually eroded the rights of people to redeem these credit notes for actual precious metals (PMs). In 1971 Richard Nixon severed the final link, ruling that the US dollar could no longer be redeemed for gold. As the Dollar is the world’s reserve currency this had the effect of ending gold’s role in all of the world’s currencies.
Since that time, gold has been mostly kept in central bank vaults and credit notes for this gold and silver (Dollars, Pounds, Yen, and Euros etc.) have been used as money, despite the fact that they could no longer be redeemed in PMs. They had in effect, been defaulted on.
The Law of Supply and Demand
Imagine if apples and oranges are equally valued in a society. If twice as many apples are produced as oranges, then oranges will be twice the price of apples. As you probably realize, more supply or less demand means lower prices. Conversely higher demand or lower supply means higher prices. The law of supply and demand is not a law passed by government decree; it is more like the law of gravity or the law of diminishing returns. Trying to circumvent this law is about as sensible (and usually just as painful) as trying to circumvent the law of gravity.
Gold and silver are commonly known as commodity money and like other commodities they obey the law of supply and demand. When gold is used as money it is exchanged for every type of “goods” .When there are more goods, in relation to the amount of gold, the value of gold rises. When there is less gold in relation to the amount of goods for sale then its value increases. Fortuitously, the amount of gold in the world increases at roughly the same rate as “stuff”. This makes the value of gold remarkably constant over time. In Roman times, if you went to a high end tailor for a fine suit of clothes and a nice pair of shoes it would cost around one ounce of gold. Today, and at most times in history, it would cost about the same. This quality of gold and silver is related to their scarcity and the difficulty of mining them. Producing more gold or silver is a difficult and time consuming exercise. The amount of gold in the world rarely increases by more than 2% per year.
Money without gold
Prior to the 1971 Nixon gold default, one ounce of gold had been worth 35 US Dollars since 1933. Looked at another way, a dollar was a credit note for one thirty fifth of an ounce of gold. This was a period of stable prices in virtually all goods and also, not coincidentally, one of rapidly rising real incomes. Clearly the value of gold could not fluctuate against the dollar when one was a credit note for the other. After the default Nixon declared that the dollar would now be backed by “the full faith and credit of the US Government”. This was somewhat ironic considering they had just defaulted on their obligations and cheated their creditors.
In theory of course, as any modern, Nobel Prize winning economist will tell you, there is no reason why dollar bills have to be redeemable in gold or silver. Since we’re using them as money already there is no good reason why they wouldn’t hold their value as they had before. Unfortunately, here on Planet Earth, there is a reason.
Gold and silver can be trusted to hold their value (and therefore are suitable for use as money) because they cannot be easily created. They have to be dug out of the ground in a very expensive process. Nature provides a barrier which cannot be easily overcome. There is no such barrier to creating pieces of paper with ink on them.
Inflation
Imagine coming into possession of a fantastic printing press. Simply by turning the handle, fresh hundred dollar bills come out, perfect in every way and indistinguishable from the real thing. How soon would you find a desperate need to print some? Sooner or later the temptation would be too great. Maybe your wife would need an operation or perhaps you would lose your job. Finally you give in and start printing with abandon, living the high life with your friends and neighbors and having a fine old time.
Eventually the police catch up with you and you find yourself in court. The prosecution accuses you of stealing from all other dollar holders. “No” you cry, “I wasn’t stealing, I was stimulating the economy, look at how well the local Ferrari dealer is doing, not to mention the fine wine shop and travel agents. When they get this money they spend it on groceries and petrol and everyone is better off”. Of course no judge would accept such a ridiculous argument unless he was mentally retarded, or an economist.
Printing money, or creating it out of thin air is stealing, this fact is indisputable and if there is such a thing as the perfect crime then this would have to be it. You don’t have to break into someone’s house or hold them up at gunpoint. Amazingly, the people you rob don’t even know that you have done it. Even if people do suspect they have been robbed, it is so easy to blame it on someone else. When prices go up, blame the shopkeepers, blame the unions, blame greedy corporations, blame anyone but yourself, the real thief.
The Origins of the World’s Greatest Scam
So who is it printing all this money? Most people assume the Government creates money but that is only half right. This scam originated centuries ago from jewelers and goldsmiths who invariably had very secure vaults as part of their businesses. As a sideline, these goldsmiths would offer safe storage of other people’s precious metals (PMs) for a fee. People would deposit an ounce of gold or silver and receive a credit note in return. When they wanted to buy something with the gold, rather than collecting the gold, they would simply use the credit note. After a while the jewelers realized that people were not redeeming the invoices but were simply using them as money. This was when they hatched their scheme.
As well as jewelry and vaulting services, they now started making loans. Rather than lending PMs (real money) they would lend out credit notes for gold or silver which would circulate as money. The jewelers (or bankers as they had now become) would charge interest on these loans. Lending out money they didn’t have, was of course highly profitable and as long as not too many people tried to redeem their credit notes for PMs (what we now call a “run on the bank”) then all would be fine.
Of course, this should be highly illegal, here are just a few of the more obvious reasons why:
· Taking a client’s precious metals (PMs) into safe storage and then lending them out to a third party without permission.
· Lending PMs which don’t exist and charging interest on them.
· Inflating the money supply, thereby diluting the value of existing PMs, effectively robbing current holders of gold and silver.
All these reasons and more, mean that modern banking contravenes any number of legal principles regarding property and contracts law. If you or I were to operate a similar scheme we would surely be locked up.
You may be wondering then, why the government has never clamped down on this. The simple answer is that this scheme is so profitable and so successful, that the bankers have been happy to cut governments in on the deal. The banks simply extend massive loans to governments who get to spend the money and leave the taxpayers paying the interest (to the bankers) through income taxes long after the politicians have retired (on large salaries). In fact before this scheme began, income taxes were virtually unheard of.
Banks have also (allegedly) used their money and influence to discredit and marginalize any politicians who have opposed them. The way this stolen money corrupts not only governments, but entire societies is too large a subject to cover here.
This graph above shows the price of oil in dollars, pounds euros and gold. It is quite clear that if we still used gold as money that the price of oil would be the same as in the 1950s. The reason for the increase in prices is purely money printing (theft).
Why Governments Hate Gold
Essentially this scheme has been going on so long that even the people running it no longer understand properly how it works. You would expect that economists would have a clear understanding of all this but that is not the case. The only entities who employ economists are financial institutions (read banks) and governments. Arguing against the system of money creation is professional suicide for an economics teacher and the only ones left with an understanding of the truth are what is known as the “Austrian School” (Google Ludwig von Mises institute).
Consequently, all lectures, textbooks and information about economics today are written to make this scam look like a benefit to society. Perhaps because of this, not a single mainstream economist could predict the global financial crisis one week before it began (Princeton economics professor and Fed Chairman, Ben Bernanke was denying it weeks after it had already started).
So although most government employees are oblivious to this situation there are those in finance and treasury departments, not to mention Central Banks, who clearly understand the following.
· Governments all want to freely spend other people’s money without the highly unpopular tactic of taking it off of them at gunpoint (excessive taxation is akin to armed robbery. If you don’t believe me, try not paying yours and see what happens).
· The best way to do this is by borrowing money that your successors will have to pay back haha!
· The primary mechanism for government borrowing is through the bond market.
· In normal times the banks do not lend directly to governments. By lending out counterfeit money however they reduce the cost of borrowing in the bond markets. The fake money competes with real money to reduce the rate of interest which means governments can borrow far more than they otherwise would be able to and still afford the repayments.
· The bond markets are many times bigger than the largest stock markets. Bond market traders are not “mums and dads” but dedicated professionals who have a thorough understanding of the market.
· Bond traders always watch inflation rates. If the rate of inflation is expected to be 5% then at a 5% interest rate they will make zero profit. Typically bond traders will expect a premium over the expected inflation rate to compensate for the risk of lending. The higher the expected inflation rate the higher the cost of borrowing for governments. For highly indebted governments (today that means virtually all of them) high interest rates spell disaster (think Greece).
· For this reason (and others) governments and banks are constantly looking for ways to pretend that inflation is lower than it really is. Rather than measuring actual inflation, which is growth of the money supply, they pretend that inflation is actually rising prices (which are caused by inflation) and pretend to measure these instead. They then jiggle the figures by such things as taking out any goods which go up in price such as food and fuel (which is fine if you don’t eat or drive) and add in things which naturally get cheaper such as flat screen televisions or computers.
· Bond traders know, or at least suspect this and look for other ways to gauge true inflation. One of the favorites is to watch the price of gold. Since gold is real money which cannot be created out of thin air, it reflects a solid rate of value against which other currencies can be measured. When the gold price starts going up in dollars for instance, it suggests that in reality, the dollar is losing value and bond traders begin demanding higher interest rates to compensate. If this were to happen in the current environment the resulting meltdown would likely make the GFC look like a tea party.
So now we can see why a rising gold price is an anathema to governments and banks. Since they openly manipulate other currencies and interest rates both overtly and covertly (the word Libor may ring a bell) it is implausible to think that they wouldn’t try to intervene in the gold and silver markets to keep this scheme going for as long as possible. The next question then, is how could they be doing this?
Gold and silver price suppression
Legal restrictions:
Governments suppress the price of PM’s through laws limiting their use as money. This has been done with varying severity from country to country. In the US, ownership of investment gold was outlawed in 1933 (until 1971) by President Roosevelt who forced Americans to hand it over in return for paper dollars. This was then deposited in a custom built depository called Fort Knox where some of it is still supposed to be held today. With a greatly reduced monetary role, PM’s became less desirable and therefore less valuable than they otherwise would have been. By restricting the use of gold and silver as money, governments force their citizens into the use of government and bank created “fiat” money. This gives the government and banks the power to steal from the people at any time they wish. Since money is power, siphoning money from the people to the government equates to a huge increase of government power and a consequent loss of freedom for “We the people”. Brutal dictators Lenin, Mussolini and Hitler all banned the private ownership of gold shortly after gaining power.
“Paper” Gold and Silver:
Most large PM investors today are institutions such as insurance companies, pension funds, hedge funds, etc. When these institutions want to take a bet on a rising gold price, they don’t want to send an armored van down to the local gold dealers and take delivery. They want investments that can be purchased with the click of a mouse and stored on a hard drive or in a filing cabinet.
Originally, cash was a paper promise for gold and silver. Shortly after this promise was defaulted on, a new way of owning such promises (the futures market) was invented by…..you guessed it, banks and government. The futures markets started as a way for commodity producers to transfer risks of future price volatility to speculators. Farmers could be sure of prices before planting crops and so forth.
The futures market in Gold and silver wouldn’t have been possible before 1971 as the gold price in dollars (or dollar price in gold) was fixed. After the default, with wildly fluctuating prices of PMs the futures market was a way for miners to guarantee a price for their product in the future allowing decisions on new mines or expansions to go ahead. Unfortunately the futures markets provided a mechanism for the powers that be to control and manipulate the price of gold and silver.
If you have the option of buying gold at $1000 or a three month futures contract for gold at $900, obviously the futures contract looks more attractive. Not only do you get the gold cheaper, you also save on storage costs. This means that in a normally functioning market, the futures prices heavily influence the spot price of physical PMs. Since the futures market is many times larger than the physical market, the paper market tends to set the spot price of physical gold and silver.
In theory, a futures contract is sold by someone such as a miner who is confident of having gold to sell by the time the contract expires. In this case, the payment is brought forward, but the purchase of gold still occurs and consequently has no long term impact on price.
In reality, many of these contracts are sold by big “bullion banks” who have a fraction of the gold they are selling contracts for. Big institutions have little or no incentive to take delivery at the expiry of a contract. Only around 1% of PM contracts stand for delivery on expiry with most simply being rolled over into a new contract. At a hearing on precious metal prices, establishment figure Geoffrey Christian admitted that there were perhaps 100 times as many contracts of various stripes as there is physical metal to cover them. If true, the amount of PM’s that actually exist is far less than most traders believe. If all the money spent on futures (and other derivatives) had instead been spent on actual PMs, the price would have to be much higher.
Exchange Traded Funds
The largest PM ETF’s (GLD in gold and SLV in silver) are run by HSBC and J.P. Morgan respectively. These banks have traditionally been the largest short sellers of gold and silver on the futures exchange. The only entities allowed to withdraw PMs from these funds are “authorized participants” (read big banks). Now I’m no contract lawyer but after a cursory look through the prospectus of SLV I would think getting blood from the proverbial stone would be easier for a shareholder of this ETF than it would be to get your hands on any metals. If these ETF’s have issued shares not backed by real PMs, then this would represent more money which should have gone into silver and gold and driven up the price (anyone thinking of buying an ETF should consider Eric Sprott’s PSLV or PGLD).
Psychology and propaganda
With the ability to sell “paper gold and silver” in lieu of real metal, the Bullion Banks have the ability to “set” prices pretty well where they want them. For years now Theodore Butler has been alleging that they have been doing just that, whilst the regulators turn a blind eye. Many of the big institutions investing in PMs use stop loss strategies to limit downside risk. That is to say they plan to sell their futures contracts if the price drops below a certain level to limit risk. By driving down prices with a wave of paper selling, the banks allegedly trigger these stop losses and use the ensuing panic selling to buy back their “shorts” at much lower prices, making big profits in the process.
This price volatility makes investment in PMs unpopular with investors especially as it is often so counterintuitive. In recent times, announcements such as additional money printing or bank and sovereign failures which should be wildly bullish for gold have been followed by price declines caused by massive selling of futures. This has damaged gold’s traditional status as a safe haven asset which appreciates in times of turmoil. The financial press, who are largely beholden to big banks for advertising revenue, have acted as cheerleaders for lower PM prices. Throughout the 12 year bull market they have done everything possible to steer people away from owning PMs as a safe haven.
Apart from being totally immoral and highly illegal, this highly profitable scheme has an Achilles heel. It means that the banks wind up carrying a huge short position more or less permanently. In other words they have sold huge amounts of PM’s which they don’t actually own. If people were to lose faith in the system, real gold and silver would begin trading at a premium to the contracts. In this case there would be a powerful incentive to take delivery of PMs rather than rolling the contracts over. With so little metal backing these contracts up, a default would be highly likely. The resulting short squeeze would be the worst nightmare of the banks and governments, spelling a very unpleasant end to the gravy train of free money and multimillion dollar bonuses. A bail out of the “too big to fail” banks would require money printing on a scale which would undermine credibility in the US dollar.
Government Stockpiles of Gold and Silver
Since governments are sitting on huge stockpiles of gold (and previously silver), we would expect the temptation would be for them to use this metal surreptitiously to supply the needs of those who demand physical metals. We know this has happened with silver. After WW2 there was a stockpile of some 5 billion ounces which has all but disappeared. Most of this has been literally “burned up” by industry which uses tiny amounts of silver in thousands of products. Silver has more uses than any other commodity other than crude oil.
Recent Monetary History
After WW2 the world went onto the “Bretton Woods” quasi gold standard which left the US Dollar as the world’s reserve currency. The dollar was redeemable in gold by other central banks (not by US citizens who were forbidden from owning gold). Exchange rates to the dollar were fixed meaning that all currencies were redeemable in gold at a fixed rate. During the 1960’s, foreign banks were becoming nervous with fears that the US printing money to pay for a war in Vietnam and ever growing welfare programs. They began redeeming their dollars in gold, rapidly draining the US gold reserves.
The London Gold Pool
During this period the US collaborated with the Europeans to cap the gold price at $35.00. This was done overtly using a mechanism called “The London Gold Pool”. These governments used their collective gold stocks to sell into the market whenever the price began to rise above $35.00. The US started this arrangement with around 28,000 tons of gold but by the time the Gold Pool was overwhelmed by demand in 1971, they a little over 8,000 tons left.
Dollar Debasement
Once Nixon defaulted and the dollar was no longer redeemable in gold, there was no longer any risk of losing gold. Governments and banks could now borrow, print and spend as they pleased. This inflation of paper money led to a catastrophic collapse in the value of the dollar which showed up as rapidly rising prices.
The Volker Fed
The gold price naturally soared and within nine short years one ounce of gold went from $35.00 to $850.00. At that point, Paul Volker took over the reins at the Fed and put a stop to the money printing. This caused interest rates to spike (less money printing initially means higher interest rates) causing a savage recession. Despite the pain, confidence in the dollar was restored, setting the US up for high growth and good economic times in the Nineties.
Greenspan and Bernanke
Unfortunately, with the good times came the urge to print more money. Alan Greenspan took over the Fed at the end of the Eighties, and ensured that each new economic crisis was “fixed” by a wave of money printing which would bail out reckless banks and boost the stock market into a huge bubble.
Sadly, there is no such thing as a free lunch and the stock market bubble burst in late ’99. The ensuing money printing intended to “fix” things didn’t help of course, it just created another bubble, this time in housing. When this bubble burst triggering the GFC, the money printing went off the scale. Due to the nature of money creation however, this money inflation hasn’t shown up yet in rapidly rising prices (although they are rising a lot faster than the government will admit).
What is happening instead is that rather than prices plummeting, in a savage deflation, they have mostly remained fairly stable. More recently however, US stock and house prices have started to rise. This is seen by some as the beginnings of a recovery. Others see it as the inevitable consequence of rapid money printing.
The “canary in the coalmine” is the price of gold and silver. As previously mentioned, professional bond traders are watching this signal, ready to sell bonds and drive up the cost of government borrowing exponentially.
Plunge Protection Team
Someone who wrote an academic paper on this subject in the mid 1990’s is current US Treasury Secretary, (and former Wall St Banker) Larry Summers. As head of the Treasury, Mr. Summers is in charge of the “Plunge Protection Team” which has the power, without any congressional approval, to spend virtually unlimited amounts of cash to ensure that financial markets don’t get too unruly. In other words, they are mandated to secretly manipulate financial asset prices to prevent excessive price volatility.
The Gold Anti-Trust Action Committee (GATA) believes that the Fed, the US Treasury and other Central Banks around the world have been involved in a covert scheme to rig the PM markets and keep them from exploding higher with the “Plunge Protection Team” being central to these efforts. This would extend their ability to print money and siphon wealth from producers and savers. GATA are not just conspiracy nuts but are professional traders and legal experts in the gold and silver markets. They have been dismayed by the corruption of these markets and have spent years compiling evidence from such things as minutes of Fed meetings, government financial reports and the like. The case they present is very compelling, especially coming from such authentic sources.
Gold Stocks Sold Off?
Apart from regular raids in the futures markets, they advance the idea that the central banks have been surreptitiously selling off their (our?) hoards of gold for years. In order to gain maximum effect this is mostly done without the knowledge of the general public. This promotes the belief that there is plenty of gold in the market place and a whole lot more in central bank vaults. If GATA are correct however then there is far less gold and silver than people think. Here are a few of the ways they are accused of dumping PMs into the market:
· Leasing PMs to “bullion banks”. The bullion banks run the PM exchanges in London and Chicago and dominate trading there. The central banks lease out their hoards of PMs to these banks at rates of around one percent. The banks then sell this metal into the market, depressing prices and use the proceeds to buy government bonds which (used to) pay much higher rates of interest. For anyone who has ever leased a house or car, you will probably realize that selling something you have leased is not part of the deal. If the bullion banks want to close out the deal, they would have to buy back a huge quantity of PMs in the market at prices far higher than those they sold them at. In all likelihood this would realize massive losses which they would not be able to hide. It would also send the price of PMs spiraling upwards as we are talking about very large positions. In the mid Nineties, Alan Greenspan was questioned specifically about the danger of large short positions in PMs and the risk that they could endanger large banks. His reply was that “Central Banks stand ready to lease gold into the market to ensure the price doesn’t rise too far” (i.e. manipulate the price downwards). Central Banks don’t account for this leased gold separately in their accounts but mark it on a single line as “Gold and gold receivables”(leaving us to guess about how much is actually still in the vaults).
· Central Banks have swap agreements with other Central Banks. No one knows much about them as they are intensely secretive about all gold dealings. In fact you would get nuclear secrets out of a Government easier than the truth about their gold reserves. The question is, why would Central Banks swap gold? After all, one piece of gold is exactly the same as another (which is one of the properties which makes it useful as money). One possible explanation would be in order to hide sales of gold. Imagine if the US Fed swapped gold with Germany’s Bundesbank (Central Bank). If the Fed wanted to sell its gold, it would just need to call the Bundesbank and ask them to sell. This would allow them to sell gold without having to ever take it out of the vault. Of course the gold in the vault would now belong to the Germans and this would soon show up in the regular audits……….that is, if they had regular audits. The last time the US gold was audited was in the 1950’s when Eisenhower was president. The reason given by the Treasury, when pressed on this issue: “Because everyone knows the gold is there”. Try that one next time the taxman wants to audit you and see how it goes down.
Repatriation
Recently, people around the world have been putting pressure on their governments to provide details about how much gold they have and where they store it. Venezuelans were among the first to find out that their gold was stored in London. Hugo Chavez (wisely for once, I believe) insisted on taking delivery of this gold. Since then a rash of other countries as diverse as Mexico, Holland and even Germany, have found out that their gold is elsewhere (inevitably New York or London).
The German Central Bank, under pressure from the Parliament, has gone as far as asking the Americans to repatriate ten percent, or around 300 tonnes (and I think most Germans would like 100%) of their gold back from New York. Of course you can’t expect that the Americans would do an overnight delivery, but you would expect a reasonable delivery time to be in weeks or at most months. It should be as easy as loading it onto a German naval vessel and shipping it home.
Instead, the Germans have been told it will take seven years to get it (just 10% their gold) back. In the meantime they will not be allowed to audit this gold or even see it. Now you can call me a wild conspiracy theorist if you like, but this suggests to me that perhaps the gold might not be sitting on pallets waiting to go, as governments would have us believe.
If it turns out that the gold really isn’t there, expect a serious upward revision in price.
Reserve Currency
It is also possible that people might begin to rapidly lose faith in the US dollar, which is the world’s reserve currency. The only serious alternative would be a currency backed by a large amount of gold. Investment house QBAMCO calculates that if the US dollar was to be backed by gold in the same manner as it was from 1948 to 1971 the gold price would have to be around $10,000 per ounce. That is assuming that the US has as much gold as it claims to have. Make up your own mind on that one.
Silver
Here are a few brief facts about silver:
· Silver and gold occur in the earth’s crust at a ratio of around 15:1 which has been the trading ratio for much of human history.
· Currently miners are digging around nine ounces of silver out of the ground for every ounce of gold.
· Sales of physical silver and gold for investment are roughly equal in dollar terms in major outlets such as the US Mint bullion coin program or the Sprott physical PM exchange traded funds.
· More silver is used up in non-recyclable industrial uses than is being dug out of the ground right now.
· This situation has been going on for decades meaning most of the silver ever mined which was previously held as money (coins and bars) is now gone.
· The price of silver is so low that hardly any silver mines exist. Almost all silver is extracted as a byproduct from lead, zinc and gold mining.
· Silver is the world’s best electrical conductor, the world’s best reflector (mirrors) and an awesome germ killer. It is practically irreplaceable in thousands of vital products.
· There is now estimated to be less silver above ground than gold.
· The price of gold is currently 60 times higher than silver or four times its historic average.
Current Prices
As of time of writing the prices of PMs have dropped significantly. Someone, or some entity apparently sold the equivalent of 150-400 tonnes of gold on the Comex futures market in a matter of a few minutes in mid-April, causing a cascade of selling from panicked investors. This occurred during thin trading around a weekend. Considering that the US Government is taking seven years to cough up 300 tonnes of gold for Germany, you would have to ask, who has this much gold to sell. If you wished to sell this much gold at the highest price possible (as any sane person would) you would sell it in small lots over a period of time so as not to “spook” the market. Dumping it all in one go makes no financial sense unless you were trying to manipulate the market lower.
Huge Demand
Meanwhile, the market for physical metals is off the scale. As the prices have come down, buyers have been queuing up to buy and shortages are developing around the world. Sales of silver and gold coins from the US Mint have been off the charts and India and China have been buying everything they can get their hands on. Emerging market central banks have also been loading up on gold meaning that central banks are now officially net buyers instead of net sellers. China and Russia account for around one fifth of all gold produced and neither country exports any of that production.
Bull Market in Physical
The Western financial press has declared that the 12 year bull market in PMs is over and gold and silver are now in bear market territory. For those of you familiar with financial markets you would be aware that bull markets end when everyone has bought in, and there are no buyers left. This, combined with high prices which stimulate supply and destroy demand, mean that bull markets end with a glut of supply and a lack of ready buyers. Whilst paper promises for PMs may be suffering from this situation, physical gold and silver are experiencing the opposite. Many people around the world are seeing this as a “golden” opportunity to swap rapidly depreciating paper money for the only kind of money which has always held its value.
Money Printing Gone Mad
The bank of Japan is currently embarking on a program of money printing of historic proportions and the incoming head of the Bank of England is promising to do the same. Ben Bernanke, the head of the US central bank is famous for threatening to drop $100 bills from helicopters to prevent deflation and is currently printing US$85 Billion per month. Europe’s Central Bank has promised to do “whatever it takes” to prevent bond yields from spiking, in other words, buying government debt with freshly printed money to keep governments and banks solvent.
In the past this behavior has always led to hyperinflation and the destruction of currencies but who knows, maybe this time will be different. One thing which is different is the global scale of this phenomenon. When Zimbabwe destroyed its currency people could at least buy dollars or pounds to protect their wealth. With all these currencies in the same sinking boat, the only ones likely to survive in the long term are those which can’t be printed.
Paper Loses Value
In the end there is no such thing as a “risk free” investment. The only safe thing to do with money is to spend it straight away so no one can take it off you. If you do wish to save for the future you need to weigh up the risks of any given investment. In the short term PMs have the risk of price volatility, however in the long term, no other currency has held its value for thousands of years. All other attempts to use unbacked paper money have ended in total loss of value. The US dollar has been one of the strongest world currencies over the last 100 years. Since the creation of the Federal Reserve in 1913, the dollar has lost around 95% to 98% of its value. Put another way, a dollars’ worth of bread or milk or beer today, would have cost around 2 to 5 cents in 1913. Most of this loss of value has occurred since 1971 and all of it is attributable to theft by money printing.
I hate making financial recommendations so this is intended as information only. If you are interested in investing in precious metals do your own research and make your own decisions. This is only scratching the surface of the precious metals story.
Harry Richardson
harryyo@gmail.com
About the author
