Aug 21 2008
Odd Happenings in the Precious Metals Market
We’ve been monitoring offline the unusual developments in the precious metals markets in recent weeks, particularly in respect to gold and silver. While prices have plummeted a good deal from their highs (gold into the $700s for the first time since blowing through them a while back on its way to over $1000 earlier this year), amid that fall the physical market is experiencing exceptional delays in actually getting metal delivered. Folks we know are having a heck of a time getting delivery of the metal in large amounts of small denominations. So, unless you want 400 ounce bars, you’re waiting 30 days plus!
Meanwhile, the story broke big-time this a.m. when, as we and others suspected it would be forced to, the U.S. Mint ended a 20 year tradition by suspending issuance of its Silver Eagle coin Noted the Treasury, “Due to the unprecedented demand…our inventories have been depleted.. We are therefore temporarily suspending all sales of these coins.”
So what gives with the price plummeting while the actual physical metal is in short supply? Well, primarily it is the paper market — futures and ETFs — that have experienced a sharp sell off as major investors rolled into action across both precious metals and commodity sectors. Paper traders don’t want physical delivery, and generally it’s pledged against 400 ounce bars, while many paper investors, you must remember, are not in the game for the fundamental reasons others might be who have expectations of growing inflation, dollar deterioration, and worsening economic structural problems. Momentum and technical investors simply look at the charts to determine what’s hot, then hop on the bandwagon and hope to get off at a higher level before the heard vacates ahead of them and prices drop. And, they do so with lots of leverage. Combine that with record levels of shorts across the spectrum, well — after such a rapid rise in values over the prior 18-months, something had to give. And give it did.
Add this overdue correction issue to a far deeper problem, and suddenly you have an even deeper picture of the situation: many hedge funds have been bargain shopping in the financial sector over recent months, and doing so using leverage. Only problem is that the financial news is continuing to worsen as we’ve long said it would. That’s left many hedge funds wounded on trades as the crisis deepens. So when it comes to raising cash, they’re having a hell of a time finding it through means other than selling what they can at a profit to avoid locking in losses, especially if they’re holding lots of the toxic stuff that looks like it’ll have a half life of many years to come. Selling what they can at a profit means offloading the only profitable trades around recently, which have been tangibles: commodities, energy and precious metals.
But we are not a believer that the general commodities and metals trend is a burst bubble as mainstream pundits want you to believe. You know… that’s the same crew that couldn’t identify a housing and credit bubble and were then blindsided by both credit crisis as well as the permanence of the big run-up of inflation in the first place — as if they’re qualified to know what a bubble is! (This same crew previously said Oil would drop back to $35, $50, and $75, so please don’t hold your breath on their predictions.) We’d still not be surprised to see oil at $150 and gold well over $1000 by year end. Why? The economic fundamentals have not changed. All that’s changed is the crazy behavior on Wall Street.
As for Gold, it is a funny thing. The Pharaohs buried themselves with it; the conquistadors chased it around the new world; and up until 1972 it backed in some manner or another the U.S. dollar. In fact, the world’s currencies these days are purely fiat and fractional reserve (meaning, they’re backed by nothing other than thin air and/or debt, and the banking system has only a fraction of deposits on hand to cover withdrawals). In other words, our current monetary system where units of currency do not directly translate into a guaranteed fixed exchange rate with a precious metal is a relatively short, 36 year-long experiment.
The U.S. dollar, for example, once represented 1/20th an ounce of gold and was functionally a demand note, where someone showing up at the doors of whichever bank issued said dollar would be entitled to withdraw an ounce of gold for every $20 of notes presented in that bank’s name. Well, it was that way until Congress confiscated the right to private currency and handed it to a private banking cartel called The Federal Reserve in 1913. It took a mere 22 years before the U.S. defaulted on that smart idea; bestowed with a currency monopoly and the right to manufacture credit and money out of thin air, the Federal Reserve got to abuse the dollar at such a level that it supplied all necessary fuel for the great bubble that burst, leading into the Great Depression, which FDR then worsened with a massively destructive socialist economic policy that served only to exacerbate the already horrible dislocations enabled by the prior credit and money bubble. (Sound familiar?)
As part of the default, FDR changed gold to $35 an ounce while declaring gold illegal to hold for the common man (ahh, nothing like the “land of the free” when it comes to bailing out the mistakes of Wall Street bankers and their cohorts in Congress). Foreign central banks could do the exchange, but that only lasted until default #2 in 1972 , when the dollar finally fell completely. Congress and the Fed slowly choked the country to a point where teh world’s central banks were gladly willing to cash in the badly inflated and increasingly indebted dollar for real gold. This forced Nixon to slam shut the gold window or else U.S. gold reserves would have been exhausted,thus exposing the fraud that was a fractional reserve gold backed dollar. The inflation turmoil of the 1970s was partially a recalibration to this fraud revealed: the dollar lost lots of its value against most everything. Not at all coincidentally, without gold to tether the dollar printers at the Fed, broad money supply (M3) expanded at a far faster pace than ever before after 1972, increasing over five fold through 2006.
We suspect those lessons are being recalled at the moment, and that explains why so many people want the real thing in the face of falling paper demand. The 36 year experiment off the gold standard is being beaten around the face and neck by economic gravity, and the most sober out there have been seeking the currency of time immortal; the currency that cannot be simply printed out of thin air through the ease of a few strokes on a federal reserve member bank’s keyboard.
The illusion is slowly being revealed to those paying attention. Stay Vigilant and Think it Through!
