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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.
Richard J. Greene
Managing Partner, Portfolio
Manager
Thunder Capital Management
More articles by the author can be accessed by the
"Research Articles" choice at: www.thundercapital.com
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