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The U.S. Dollar Index
has poked above the 80 level and that knocked gold down about $40, well below
its alleged critical support levels. Silver suffered another $1 drop as well
but that is par for the course during the current massacre. Yet these latest
drops were not commensurate with the rise in the dollar and that points to
market psychology more than anything. That psychology right now is pure fear:
fear of the dollar rally continuing ad infinitum; fear of what will happen if
and when oil breaks $100; fear of being wiped out by margin calls; fear of
these markets never coming back. These fears exist in some quarters but not
others. Unfortunately (or fortunately if you have a lot of cash on the
sidelines waiting to jump in), the fears are the biggest in the biggest
(paper) markets and that is where gold and silver prices are being
“discovered” as I write this.
Silver in particular.
At just slightly north of $10 now, silver has most likely gone below its
marginal cost of production (with zinc and lead prices around $0.80 per
pound). That means the development and production plans for many new mines
will be delayed if not mothballed. In previous resource booms mine supply was
able to expand substantially before prices fell. Not this time. Silver is now
up “only” 100% from its base level of $5 at the start of the bull
market in 2003. That hardly covers the increase in aggregate money supply
since then. In other words, on a real basis silver has been flat over the
past 5 years. For example, it took around 20,000 ounces of silver to buy the average U.S. home in 2003 and it would take right around the same 20,000 ounces today.
Someone rightfully
stated that around $10 per ounce, silver is probably the cheapest on a real
basis that it has ever been in the history of mankind. That’s
especially amazing given that we now have a plethora of hoarding instruments
like never before: the ETFs such as SLV and other investment vehicles like
Central Fund of Canada and BMG Bullion Fund that on a combined basis hold
over 300 million ounces of silver. By my estimate, that is at least 20% of
the worldwide silver inventory held in wholesale silver bullion form
(including private stashes). By comparison, the Hunt Brothers in 1980 never
owned even 10% of the wholesale bullion held in just the public stockpiles.
On a nominal basis,
silver is down over 50% from its bull market high reached 6 months ago. If
manipulation was responsible for at least a couple of dollars of
silver’s fall, I would say fear has been responsible for at least $5.
Fear is ignorance and
ignorance in silver is huge at this moment.
That ignorance out of
fear is our opportunity. Silver purchased today with cash on the barrel
(I’m including SLV and other forms in this declaration) stands to lose
in the absolutely worst case 50% (down to $5). The absolutely worst case
would be the Dollar Index heading back to 120, oil to $10, the banking system
and real estate markets fully recovering, the U.S. going from deficit to
surplus, a solution being found to the Social Security funding crisis,
Freddie Mac and Fannie Mae regaining their stature without further government
assistance, China and other emerging markets going back to the stone age,
etc., etc. OR, it is an utter and total collapse of the global financial
system and civilization as we know it. Will it happen? It may. And of course
a pig may naturally mutate to grow wings and fly. And then we’ll have
$5 silver again and everything will be alright with the world. Except bacon
prices will be much higher since flying pigs are much harder to slaughter.
And despite Nadler
and Hulbert dismissing the remaining bulls in the precious metals as
“gold bugs”, I actually detect an extreme level of fear in the
gold and silver circles where most of the gold and silver are actually
traded. These traders are NOT followers of Russell, Ruff,
Dines, etc., nor are they those of us who have been buying retail bullion on
the way down the past couple of months. I think it is a mistake to gauge
bullish and bearish sentiment in these circumstances by looking to the likes
of Russell, Ruff and Dines who are telling their readers to HOLD
(not trade). Nor should sentiment be gauged by reference to the physical
bullion market, where most of the evidence seems to point to healthy demand.
Instead, one should gauge sentiment by looking at the PAPER market in
precious metals. And in the paper markets I would say the fear is now as
palpable as mud.
Most importantly, SLV
and other ETF investors (including to a large extent GLD investors) are still
rolling with the punches. Indeed, as confirmed GSUL attendees/Founding
subscribers will later today see by checking my ETF basis post on this subject, SLV buying so far today
has been picking up. It appears that expecting fear out of these SLV
investors, even if silver is going to $5, would be the height of folly. It
also appears that the lack of substantial inventory at the retail level is
finally pushing physical buyers to consider SLV as a proxy. Some may see that
as a problem, but I consider it a solution.
Tom Szabo
Silveraxis.com
Tom Szabo was born in Hungary
during the Communist era and escaped to the West with his family, eventually
settling in California. After graduating from the University of California at Berkeley with a Bachelor’s Degree in Business Administration, he spent 8
years as a financial statement auditor with Deloitte & Touche, focusing
on financial institutions. He has co-founded several
precious metal related businesses and investment funds, invests for his own
account and runs the website at www.silveraxis.com. His specialty is
original, controversial, unpopular and contrarian thinking.
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