Paper money eventually returns to its intrinsic value – ZERO - Voltaire 1729
Thursday, April 22, 2010
Got Gold Get Silver - The Coming Short Squeeze in Silver
One way to measure the potential investment upside of silver is to measure it against gold. Right now the gold/silver ratio is around 63.5. In the last couple years years it's been in the 80's and as low as 48. At the peak of the last precious metals bull market in 1980, the ratio touched down around 17. I fully expect that the gold/silver ratio will once again go at least as low as 16, which is a long term historical norm (i.e. 100's of years). In Rome before The Fall, gold and silver were exchangeable at a ratio of 8.
Why is this you might ask? Silver is poor man's gold, making it the 2nd best ultimate form of currency. When gold is over $2000/oz, it will be unaffordable for most people to buy much gold to protect themselves. But at that point if the gold/silver ratio is still around 60, the price of silver will be a much more affordable $33/oz. I suspect that the ratio will be a lot lower by then. Furthermore, because the relative price of silver is much lower than gold, it is more "fungible," meaning it's more practical as a currency for everyday mundane use.
The chart below - inspired by DC from NJ - is another way of measuring the relative strength of silver vs. gold. As you can see, silver has been in a steady climb in price relative to gold and is currently chewing thru a lot of "resistance," as defined by the two horizontal black lines. Hedge funds currently like to "game" the gold/silver ratio, which may slow down the ultimate price movement of silver against gold. However, given that the total market value of all the available silver in the world is small compared to gold, when the "poor man's gold" effect really takes hold, expect the price of silver to really rocket higher. Eventually that ratio will decline to a level that is much more consistent with the ratio that held for centuries.
Here's two charts to add some historical perspective:
One other thought to keep in mind. The Big Wall Street Banks are short paper silver in an unbelievably insane amount. For instance, look JUST at the silver futures short position on the Comex, most of which is held by JP Morgan. As of last week, the total net short position reported by the "commercial" category - largely a handful of NY banks - was 58,235 contracts. This represents 291 million ounces of silver. Against this, as of today, the Comex has 50 million ounces of deliverable silver. If a little less than 20% of those holding long positions ask for delivery, the Comex will default. The price of silver will do a moonshot.
Now think about the ramifications if what the Comex reports as inventory is really part of the fractional bullion system in place that has been verified by lawsuits, GATA and even LBMA operators...I'll leave the rest up to you. Suffice it to say that the last two times my fund took delivery of Comex silver, we had to wait several weeks before the bars showed up.
Posted by Dave in Denver at 8:53 AM 6 comments
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Wednesday, April 21, 2010
Russia and China Are Selling Treasuries and Buying Gold...
Fred Hickey of the High Tech Strategist newsletter fame gave a brutally honest interview with The Wall Street Cheat Sheet about the financial/economic condition of the United States and how China and Russia, two of the largest financiers of our Government, are protecting themselves from the reckless policies of Obama and Bernanke. Here's is a quote:
No one seems to be talking about this, but in a recent US Treasury foreign holdings report I saw a flat line where the mainland Chinese were not buying our treasuries anymore. Their position was holding; meaning, they were buying just enough to offset the maturing bonds. Now we’re seeing outright declines. This has gone on for several months and now it’s an outright decline...The Russians are also reducing their positions. They reduced $10 billion in December and it’s dropped from a $140 billion almost to $118 billion over the last few months.
Here is a link to the interview and a must-read: Sell Paper - Buy Gold. Here's another insightful snippet:
I never loose sleep with my big gold position, but I do loose sleep when I have a big dollar position. I always see pullbacks in gold as buying opportunities because what I’ve discussed are the big forces really moving things. There are very few people on this planet that understand the big macro picture behind the movement to gold. We’re now in a 10 year bull market in gold. We ran a twenty year bear market, so it might be a twenty year bull market. We may be only halfway through.
We know that China is voraciously accumulating a lot of gold. Recently a senior researcher recommended that China buy a lot more gold in order to raise its gold holdings up to at least 10% of its foreign reserves. They have 1000's of tonnes to buy in order to accomplish this. Here is what Russia is doing, chart courstesy of Richard Nachbar:
(click on chart to enlarge)
Large Central Banks, big institutions and wealthy individuals are just now beginning to direct paper money flows into physical gold and silver. Liberty Coins, a very large coin dealer, reported its 2nd biggest day in silver sales and 5th largest day in gold sales in 30 years of business last Friday after gold and silver were taken down in price on the Goldman/SEC news. This is direct evidence that more people are beginning to understand the golden truth.
The ECB has barely sold any gold so far this year - the first time the last 10 years that European Central Banks have not unloaded a steady supply onto the market. Politicians, Wall Street and CNBC can blow all the smoke they want up our collective ass, but they CAN'T hide the growing movement of funds from fraudulent paper money into gold and silver - honest money for 5,000 years.
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