Gold and Silver Fundamentals Have Changed

 

Both gold and silver have had attractive and improving supply and demand fundamentals for many years running. Demand for gold jewelry has exceeded mine supply with Central Bankers making up the shortfall with what is by far their most precious reserve asset. The stated reason was to achieve higher income while the real reason was to suppress the price. If you believe their stated reason then you also probably believe that the reason the Fed stopped reporting the M3 money supply numbers in 2006 was to save money as they explained. Silver, likewise, has lopsided supply and demand with the shortfall on the supply side. The total depletion of a 60 year US stockpile is bringing the situation to a head. These favorable supply demand statistics alone have been enough to ignite a precious metal bull market which is now in its seventh year.

The bull market has had little room for investment demand but that dilemma has been solved in several ways. We believe that most of these solutions involve substituting paper promises of gold and silver in the future rather than supplying the physical gold and silver right now. There is a running debate as to how these holders of paper silver and gold promises will fare. We believe the vast majority of the holders of paper promises will fare quite poorly. Futures players can be paid off in times of stress in paper dollars. What if they are paid during a time when the paper currency is losing a big chunk of its value in a single day? This has happened in countries like Brazil and Argentina yet few see the risk. Other paper promise holders could get nothing due to the default of their counter party. We have little doubt that there is not even close to the amount of physical gold and silver that is promised by the paper gold and silver crowd. We are especially suspect of the gold and silver ETFs due to their custodial and sub-custodial arrangements, and particularly due to their sponsorship by underwriters that are among the biggest short sellers and enemies of a free market in gold and silver. The day draws nearer when the paper holders of gold and silver awaken to a nasty surprise.

We believe that time is right upon us now and it is creating a new fundamental demand for gold and silver that can be differentiated from investment demand. We call that demand, demand for real money as opposed to investment demand. Investment demand buyers of gold and silver may be willing to buy gold and silver futures and ETFs and other forms of paper but real money demand buyers of gold and silver would not even consider it. That is because once real money demand really takes off there is no way to gauge how far it can go and what kind of panic may exist to get out of all paper. We clearly see that day on the horizon. Most people are totally oblivious to these possibilities and have no understanding why these gold and silver alternatives are just that – alternatives.

There are several important events over the past few years that have radically changed the landscape and the fundamentals of gold and silver. While the percentage of the population that has any understanding of gold and silver is miniscule, we believe the percentage of those that understand the importance of gold and silver and also the change in the landscape may be a similar percentage. We can point to four events in the last year and a half that can demonstrate this new acceleration in real money demand for gold and silver. The first one we would point out is the Federal Reserve announcing it would no longer release M3 money growth. While many immediately saw this as a sign that the Fed would be recklessly creating money at rates approaching hyperinflation, most accepted the lame explanation that it was being stopped to save money and ignored other implications. The second indication was when hyperinflationary annual rates of money growth worldwide were reported. Some of the more egregious examples are: Russia 51%, India 23%, China 20%, the UK 14%, the Euro zone 13%, and the US 14%. This helped delay the break of the dollar below very long term support of the 80 level until just recently. The third event was the incredible level of unlimited money injections in August several times to stabilize asset prices. The final indicator was Bernanke’s willingness to cut rates by 50 basis points after a long record of moving in small increments. These events each contributed to increasing levels of real money demand for gold and silver that is different from investment demand. It can best be explained that investment demand is recognition of favorable fundamentals and purchasing gold and silver or the alternatives to capture the rising prices that will accrue from the purchase. Real money demand is more from viewing the insanity of the above mentioned events and fearing a cascading contagion of losses in value of paper due to its rapid and unlimited expansion. In this scenario you don’t accept futures, you don’t accept ETFs, you don’t accept any paper promises; you only accept the real physical gold and silver in your possession. It may take more time for this to occur in the US, but overseas this IS occurring right now, particularly in the Far East and the Middle East. This is exactly what has been necessary to break the fraud and suppression of the gold and silver price that has kept them from reaching a fair free market value. It is happening as we speak.

One other thought to pass along to take this one step further. At this point everyone should be out of debt and have at least some gold and silver. There is an old fashioned bank run occurring in the UK on that nation’s fifth largest mortgage lender. People are lined up around the block waiting to get their money out. In the US so much money has been created that the total volume of money dwarfs the amount of money in physical form, (green Federal Reserve notes); if there were bank runs, on average less than 5% of depositors would get their money before the green cash ran out. The FDIC insurance of banks is certainly not designed to cover deposits if anywhere near 10% of banks went bankrupt and even if you were lucky enough to be among the early claimants you may not get your money for two years at which time that amount could have already been inflated away to worthlessness. The ceasing up of the sub prime mortgage market should be warning enough that if defaults and bankruptcies became prevalent the banks could easily cancel your credit cards, not have any of your cash on hand, and deny you access to your own assets. We don’t expect this worst case scenario to play out soon but then again we find it incredible how few are prepared; and it is a substantial risk. So again to play it safe: have some of that green funny money on hand, definitely have some gold and silver, and have a nice stockpile of canned foods on hand to deal with unexpected emergencies. Do it now! If these things come to pass don’t be surprised to see gold moving up hundreds of dollars per day.