This week market movement was relatively uneventful. So we took this opportunity to take a step back and look at exactly where we are in the gold and silver market.
This week we discuss why silver and gold fell and the inconsistent communication of the Federal Reserve. We also discuss why silver and gold did not fall to the bottom of the natural channel.
Last year Utah took a historical step and made gold and silver legal tender in their state. This was the first step of its kind and showed how Utah has lost faith in the dollar.
This week South Carolina took a huge step towards doing the exact same thing. The House Judiciary Committee passed the bill on in the legislative process. The bill in its current form would make the use of gold and silver as currency an option, but would not force business to accept gold and silver. Effectively what the bill does is allow individuals who want to protect their wealth to effectively go back on the gold standard by actually using gold and silver as currency. They also eliminate sales tax on these particular coins.
This major move started by Utah is spreading across the US and over 12 states are considering similar legislation at this time. At the end of the day E. Ray Moore, Jr., a member of the S.C. Money Committee, said it best, “It’s basically a form of discipline, so we can anchor our South Carolina economy in a time of great difficulty if the dollar continues to erode and inflation increases, which it inevitably will. So South Carolina could have a stable economy with this legislation. It would anchor our economy and gives us a stable currency.”
Silver currently stands at $32.38 and gold is at $1669. The question every investor is asking is where is the bottom and what is a good target price to buy at. These are important question that we discuss this week.
One of the ways that the silver price is manipulated is through the paper exchanges themselves. There are far more silver paper contracts that there are physical ounces. Despite this many investors ask, “Isn’t it normal to have such a disparity between the paper contracts of an asset and the actual supply of the physical asset?” To answer this question two different charts have to examined.
|Commodity||Daily Paper Volume Traded||Units||Exchanges||Daily Physical Production*||Trading Volume / Production Volume|
|Oil||1,122,369,441||Barrels||ICE, NYMEX, ICE Brent||78,000,000||14.3 X|
|Aluminum||7,234,954,585||Pounds||Shanghai, LME||154,440,000||46.8 X|
|Copper||7,242,499,591||Pounds||Shanghai, Comex, LME, MCI||96,400,000||75.1 X|
|Silver||286,120,771||Ounces||Comex, MCI, Tocom||2,000,000||143.0 X|
Source: Barclays, Sprott Research
Notice several things regarding the silver column. First, notice the physical daily production and the daily paper volume trade. The amount of paper silver traded each day is enormous in comparison to the actual supply mined each day. Second, notice the trading volume/production volume is 143. This is multiple times higher than any of the other examined assets.
In the last few months we have seen many examples of the manipulation that takes place. As an example, on February 29th over a ten minute period roughly 1.8 million ounces or $3 Billion, which caused a $40 drop in gold. At the end of the day, these charts are amazing because despite oil and most of the other assets being used as much or more as silver, silver is traded more than any of the other assets. In fact if you add the trading volume of all four other assets together they are only slightly higher than silver.
In 2008, it was the subprime mortgage sector that unleashed the financial crisis. With the stock market at nearly the same level as it was in 2008, many investors question whether it can continue to rise so swiftly. Undeniably most of the rise that has occurred as a result of the QE that has taken place over the last four years. So the question is what event will set of the next 2008?
One potential option is student loans. Last year the student debt rose to over $1 Trillion. That’s right $1 Trillion. This is 1/15 the size of the US economy. Student debt is rising at a rate of about $40-$50 Billion per month right now. What makes this ticking time bomb even more dangerous is that roughly 27% or $270 billion of all student loans are 30 days past due. Fitch made this information public recently in the following statement:
“Fitch believes most student loan asset-backed securities (ABS) transactions remain well protected due to the government guarantee on Family Federal Education Program (FFELP) loans. The Federal Reserve Bank of New York recently reported that as many as 27% of all student loan borrowers are more than 30 days past due. Recent estimates mark outstanding student loans at $900 billion- $1 trillion. Fitch believes that the recent increase in past-due and defaulted student loans presents a risk to investors in private student loan ABS, but not those in ABS trusts backed by FFELP loans.”
So right now many students are struggling to pay back their student loans and what is scary is that this number does not include individuals who are barely making it right now or are using other forms of debt like credit cards in order to continue to pay their student loans.
On top of all this, unemployment amongst this particular groups of individuals is at an all time high. Look at the two charts below. There are so many individuals in this particular group that are unemployed and many more graduating from college every year and are not able to find a job or are under employed. This simply means they are working less hours than they want or are making less money than they normally would given their work experience and education.
At the end of the day, student loans are a massive stack of dynamite with more stick being added to the pile each month. Investors will need to keep an eye on this dangerous minefield.
This morning both gold and silver took a pretty major jump as the dollar took a dive. Why did the dollar dive? Ben Bernanke spoke at a National Association for Business Economics meeting this morning in which he made the following statements:
“To the extent that this reversal has been completed, further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.“
He later said: “I will argue today that, while both cyclical and structural forces have doubtless contributed to the increase in long-term unemployment, the continued weakness in aggregate demand is likely the predominant factor. Consequently, the Federal Reserve’s accommodative monetary policies, by providing support for demand and for the recovery, should help, over time, to reduce long-term unemployment as well.”
There are two main reasons for the silver price having so much volatility at the beginning of this year. First, there has been some major market manipulation taking place. Second, Ben Bernanke has made so many different contradictory statements in regards to Quantitative Easing or Accommodative Policies that investor buy or sell multiple times based on what he says.
However, we do know several things for a fact. First, this year is an election year and the powers that be have every intention of making sure that the year remain stable or get better in the short-term in order to make sure that the elections go smoothly. Second, every time a round of QE finishes it is a matter of a few weeks, not months before the next round gets rolled out. After each round of QE the stock market takes a dip only to be stopped by the next round of QE. Take a look at the chart below where the S&P 500 is overlapped with the different rounds of QE.
Operation Twist, the latest quasi QE will be ending on June 1st of this year. Therefore it is extremely likely that we will see the next dose of QE come between now and July of this year. Most economists believe that the QE will be at least another $500-$750 Billion. However, one thing that we have to remember is that like a drug each time QE is taken it becomes less effective and larger and larger doses have to be taken in order to attain the same result. Be watching for an announcement by the Fed sometime between now and June of this year. Whenever QE has been introduced by the Fed, gold and silver have made major moves to the upside. The dollar right now is in a major technical pattern called a flag as seen below.
Typically when an asset gets to the end of the flag it makes a major move either down or up. Watch the dollar very carefully over the next couple of weeks to see if it gets below the 78 mark or above or the 80.5 mark. Both moves would be extremely significant for both gold and silver.
How would a war with Iran affect the gold and silver price? Find out by watching the video blog. We also discuss the probability of such a war actually occurring and discuss the impacts on the economy as a whole.
While Ben Bernanke may think gold is not money nearly every other country says otherwise by either their words or actions. This week Turkey was one of those countries. Right now Turkey is in a huge financial scrape. They are currently running a 10% deficit as a country and now they are trying to persuade Turkish nationals to transfer their vast personal holdings of gold and other wealth back into the country’s banking system
For those who don’t know, Turkey has a history of economic volatility. As a result of this history many Turks choose to store their wealth in banks outside the country. The new initiative by domestic banks will try to create large incentives for natives to bring their gold back home. One idea that was discussed was a new interest-yielding gold-deposit accounts that would allow savers to withdraw gold bars from specially designed automated teller machines.
While Turkey is not on the gold standard, some economists believe that because of the vast gold ownership by individuals it has effectively created a defacto gold standard. As a result of this these same economists also believe the Turkey could be setting the stage for a gold confiscation order similar to what FDR executed in 1933.
In any event, it is obvious that Turkey recognizes gold to be money and it is important that Americans do as well if they are going to protect their wealth.
This is question many investors have considered when deciding what kind of silver to purchase. At Lone Star Bullion, we believe it is critical that investors consider their financial goals and reasons for investing in gold and silver to determine which kind of gold or silver to purchase.
Many coin shop and online dealers heavily push junk silver, emphasizing how cheap the junk silver is. Of course what most dealers never tells clients is what the resale value on junk silver is. While many investors can pick up junk silver at a cost very close to spot and sometimes slightly below spot, when it comes time to sell junk silver, most dealers will not buy junk silver back at anything above $2 below spot and many companies will pay as low as $4 or $5 below spot. This effectively means that an investor takes an automatic 6-14% hit depending on whom they sell their junk silver to. So why do coin shops and online dealers push junk silver? The answer is the commission is usually two to three times higher than any other silver bullion product out there and while some dealers may have good intentions, they have not evaluated the client’s goals.
It is always important for gold and silver investors to consider the real cost principle. They must ask both how much does it cost to buy the silver and how much will I lose when I sell it back.
Some investors believe that junk silver would make a good means of exchange in the event of an economic collapse. They emphasize the small denominations as the key factor. There are several problems with this line of thinking. First, junk silver is not an easy denomination to use. How many ounces of silver are in $1 of junk silver. 99 out of 100 people don’t have a clue or answer incorrectly and one of the first things a form transaction must have is easy to use and recognized denominations. $1 of junk silver is .715 ounces and this simply is not a form many individuals can use well because of the odd fractional value. Second, most forms of junk silver are far to small to be used in transactions. How many people do you see carrying around thousands of dollars in $1 bills? It’s just not a viable form for transactions. Even the largest form of junk silver is less than ¾ of an ounce. At the end of the day, junk silver has a horrible resell value and simply is not practicable for any form of exchange← Older posts Newer posts →