Gold and Silver Recap: Silver Price to $50?

Another Precious Week

Usually we start this column with some guff about gold.  And then after talking mostly about gold we may hit the other metals.  Let’s face it, gold is usually the most exciting metal there is.  If the world collapses about us, we will be using gold as the currency that helps us rebuild civilization.  And after all, what could be more exciting than that.

But the real action has been in the silver market.  Not all up, it must be said as silver took a real pounding on some days, but there’s some real excitement that J.P. Morgan may be about to bite it on silver.

Gold-Silver Ratio: 47.77 (was 48.83)

First let’s look at some history.  Bunker Hunt and a few friends tried to corner the silver market by buying silver and buying silver futures.  They drove the silver price skywards, to a level that’s not been reached since.  Then the authorities did some dirty tricks with the silver futures contracts, the price of silver fell, and everyone brushed themselves off and got on with life.

Now J.P. Morgan has been accused of doing the same thing, but in reverse.  Instead of buying silver they are selling it short, that is they are selling it now to buy in six months time.  They have, it has been alleged, sold far more silver than they can possibly have.  This has meant that the rise in the silver price is going to kill them if we all buy physical silver.  You see, someone may want to see all this silver they’ve been sold, and then J.P. Morgan will have to buy it and up shoots the price.

The core idea here is that the gold silver ratio is ridiculously high.  Historically (going back to Biblical times) it has been 16:1, now it is around 48:1, although this week it fell quite fast.  A return to historical norms would mean that silver would get to $87 per ounce.

So there’s some correction that’s due.  Now, this doesn’t necessarily mean that silver has to go up.  There could be a new paradigm, or if not, the correction could be postponed for a very long time. If the correction does happen, then it could be that gold would go down to around $500 – where it was only a few years ago.

Gold could keep going down, but there’s enough uncertainty and inflation to suggest that it won’t get all the way to $500 per ounce.  The correction could be delayed by decades or muted, but the collection will come.  You could still lose money betting on it.

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Gold and Silver Recap: Has Gold Really Gone Up?

Another Precious Week in the Market

I know we’re among friends here and I know that saying that Gold isn’t going up is not only just short of insulting a person’s religion, and at the same time it’s pointing at the price just below this paragraph and saying that black is white.  Well, you’re thinking, good luck crossing the road with that attitude.

Precious Metals London Fix Prices

But here’s the thing, gold is going up in dollar terms.  And what’s the dollar been doing?  Weakening.  That’s right.  Gold is going up in relation to a weakening dollar.  A lot of things are doing that.  The price of cotton is going up against the weakening dollar.

So Kitco decided to do introduce an index which looked at a “weighted basket of currencies”.  Now there’s probably a lot wrong with their methodology (the prime point I’ll come to later) but the basic story is something that should make you sit up.  Their gold index has a 30 day graph and you see the price of gold going up against the dollar and marginally falling, yes falling, against the weighted basket of currencies.

It’s different over longer periods, where they basically follow the same direction, and this is a bit of an aberration.  But the aberration is what really matters.  The gold story in the last month, including its new records (which were reached this week) is really a dollar record.

But there’s still the killer flaw, and that is that the gold price is still being measured in comparison to fiat currencies.  And fiat currencies are being printed like there’s no tomorrow.  Competitive devaluation they call it in the fever swamps.

In the real world of precious metal, where you can’t simply print more of it, silver is the real winner.  Again.  Some of this is a catch up on gold, but a lot of it is because silver is seen as a clearer anti inflation play than gold at the moment – as all the wedding jewelery and end of the world types are creating so much white noise on the gold price.

One interesting fact about who’s selling gold is the gold mining companies are not selling gold.  Now that may sound like the second (really) stupid thing I’ve said in one post, but this is what’s happening.  One of the biggest gold miners, AngloGold Ashanti, has “eliminated its hedge book“.  Now this is the fact that they used to sell some of their gold in advance, before it came out of the ground.  This would go on to the futures market and Anglo would get the money, minus the pseudo-interest, early.  It kept them stable and less exposed to the turbulence of the spot markets.

Now Anglo’s going all-in.  No more future selling (which in itself meant a temporary shortage on the market as there’s less future gold being sold) and full exposure to the gold price.

Governments and Central Banks are being very quiet at the moment.  But Vietnam has started to allow some importing of gold, just in time for the wedding season.  In itself it will be a pinprick, but it’s a timely reminder of one vital support over the next few months.

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Gold and Silver Recap: Are We Peaking Yet? Silver Goes on a Tear

Another Precious Week in the Market

Last week I tried to explain the theory that gold wasn’t actually that high, the dollar was just weak.  So as to stop the hate mail, chair throwing, death threats and broken windows (how did you find my address?) I’d like to point out that this is not a reason for not holding gold.

Precious Metals London Fix Prices

In fact, it is one of the three reasons for holding gold. It is still not really that expensive, its just that paper money is getting progressively cheaper – as any trip to the supermarket or the gas pump will confirm.  The reason is that it’s still a minority taste, and if this is a bubble you’re safe to buy until the shoe shine boy is talking about it.  If you can’t find a shoe shine boy look for a project manager – when they start talking about gold coins then maybe it’s time to short gold.  The third reason is the optional one that we’re all doomed.  But we’ve been all doomed for the last forty years, so just concentrate on the first two.

And gold has done OK this week.  Ben Bernanke has talked about more easing and gold went up.  Towards the end of the week it dipped down again.  One of the interesting things is that the idea of currency wars has come into the open, where the large currencies all play beggar thy neighbor.  There has been no evidence of central government selling of gold.

However, gold is relatively subdued compared to silver.  Due to Nelson Bunker Hunt, it will be a long time before we can say “record highs”, but although second best may not sound so great these “30 year highs” are a big deal due to the fact that this is not some mad Texan billionaire with too much oil money.  These are diverse consumers worried about inflation.

Let’s put this in another way, silver has risen by 45.8% in dollar terms from the start of the year.  One thing that has been noticeable with silver this week has been the amount of articles from places like the Motley Fool.  Could be the chance to take a breather?  Silver has been priced weakly compared to gold in the last couple of years, but 9% in a week is looking essentially unsustainable.

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Gold and Silver Recap: Record Breaking Prices

Another Precious Week in the Market

Gold is breaking records ($1298) and silver has set a thirty year high ($21.35), in dollar terms at least, and we’re all on tenterhooks – or perhaps we shouldn’t be.  Precious metals will be around long after their latest price spike, and it’s all about storing value.

The main thing that’s been driving the gold and silver price recently has been the weak dollar.  You may not think that, but all the currencies are currently in a competitive printing championship.  The Federal Reserve, the Bank of Japan, and the Bank of England are all talking about more money printing to stave off (more) recession while the European Central Bank is making similar noises if you could hear them over the screeching of Portugal and Ireland, although the Euro has done quite well, in comparison.

There’s no new gold selling action from governments, yet.  The governments shot their bolt somewhat in the early part of the decade, but they still do have some gold that could seriously depress the market.  However at the moment a gold sale looks like it’s not on the cards. Governments are desperately trying not to increase the value of their currencies.

The action is in the buying.  Not so much governments.  Recent buyers like Russia, China and India are keeping quiet at the moment, but in Asia the wedding season is coming.  And that means retail buying of gold.  There’s usually an uptick in the gold price around now.  Despite what we’ve all seen with the floods in Pakistan the monsoon’s actually been good for most of the Indian sub-continent and the Chinese economy is still powering ahead, so there will still be sales.  Even George Soros is talking about buying gold, as is John Paulson.

There’s something more sinister.  Congress is talking about legislation to “protect” precious metals investors.  Like in 1933 when all the gold, apart from some collectible coins, was taken out of the hands of private investors?  We’ll have to keep an eye on that.

As for silver, this is a far straighter inflation hedge than gold – which also thrives on political instability.  At this price it’s likely that less than the often quoted 50% is used in industrial production.  It pays to remember that silver has gone up 27% since the start of the year, so it may be the Cinderella metal, but we all know what happened to her.

Platinum ($1645) and Palladium ($562) are, like silver, also climbing up due to the combination of industrial demand and inflation worries.

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Gold and Silver Recap: Falling Prices

Another Precious Week in the Market

So who’s buying on the dips then?  Gold, silver and platinum prices are all down – mainly from Friday.

But have thy really gone down?  After all, the reason that we’re being given is that the dollar’s not weakening any more.  So what’s really happening, gold going down or the dollar going up?  Temporarily up.

Precious Metals London Fix Prices

Gold is essentially a short on all the currencies in the world, so it does pay us to look at what those currencies are doing.  For a while it seemed that they were only agreed on one thing, they were going to get to the bottom first.  Even the British Conservative government, that relishes its tough spending talk, has said that it is monetarily expansive.

So gold can’t help but go up.  Let’s not treat it as some speculative metal that people hold when the entire world is going crazy (although it helps when the world is going crazy) but look at it as a currency among others, but one that can not be printed.

So gold is bound to get in a bit of trouble when the industrial countries decide to get serious about printing out money.  If competitive devaluation is really over then so is gold, for the next few years.  But who are we kidding?  Competitive devaluation will be there until inflation starts hitting.  Then it will be too late.  And the central banks will be buying gold as well.

Speaking of which, South Korea is starting to buy gold.  It’s all a bit odd, these Asian countries with massive foreign currency reserves (and South Korea is only the fifth largest) speaking about buying gold.  If China loses faith with the dollar, then it could get hairy.  The dollars prospects, that is, not China.

Silver has been the purer precious metal play and so almost doubled gold’s fall.  This is despite China suggesting that it will cut back on its exports by as much as 40%.  Jim Rogers, the man who first opened the eyes of many investors to commodities, has also come out as a big bull on silver.

So the dark horse is palladium, which declined the least of the metals this week.

Palladium is like platinum in that most of the production is in either the Russian Federation or South Africa. But unlike platinum, Russia has been in a price fixing operation, by buying stocks of the metal in lean times and has been offloading it.  Well these stocks are drying up.  Just like central bank stockpiles of gold started to about five years ago.  And we all know what happened then.

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Gold and Silver Recap: Gold Still Climbs

Another Precious Week in the Market

I know that this may be a bit of a shock for a few of you, but large governments aren’t concerned about inflation.  They are so scared that any move to seriously cut down inflation will kill their economies stone dead that inflation is allowed to run wild.

Precious Metals London Fix Prices

The Euro may be gaining on the dollar, but that’s not the real story.  The Euro and the Dollar are a see-saw at the moment, when one starts climbing against the other, then the other will start to panic and tell the market that they are a really bad buy and go down again.  The other large currencies are also playing around.  A governor of the Bank of England has told savers to do their patriotic duty and spend their savings, while the Japanese are selling off Yen to stop the currency climbing.

But this is all a sideshow.  Competitive devaluation just means that more paper gets printed.  Sure, it has different colors and pictures, but it is still paper.  It’s the barbarous relics of precious metals where the real action is.

And gold hit another dollar record, or we should say that the dollar hit another all time gold low, on Friday.  The interference that is happening with the comparative currency values is obscuring the fact that we are going through a general inflation, and when there’s inflation then it seems like the price of gold and silver rise, because the value of the dollar as it is objectively measured is falling.  This in turn means that people want gold in order to protect their wealth and the actual price of gold starts rising.  We’re nowhere near that stage yet.  After all, how many of your work colleagues hold gold?

There’s not been much to go on with the central banks, apart from a move by Iran to sell off gold to support their currency.  The Europeans seem to have also hit a temporary halt, according to the “Central Bank Gold Agreement”, something we’ll come to at another time.

Gold may not have been on the main street radar in the same way as buying rental property was, but it has been on many investors for a while.  Silver has been rather neglected.  But silver is starting to gather steam.  It’s ratio to the gold price has gone below 60 for the first time in the last year.  It is starting to hit thirty year highs, when that mad Texan billionaire Bunker Hunt almost cornered the silver market. It’s still less than half of that crazy price ($48.70).

And platinum and palladium are also joining this devaluation party, with palladium going to a two and a half year peak, having risen 45% since May.  These are seen as great catalytic converters, and the China market is often quoted, but in the end it looks like gold and, increasingly, silver are pulling the prices of these metals up.

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