The NOT Wall Street Perspective

Hi guys,

I've tried to understand what you talk about on the thread "From a Wall Street Perspective." I really have. I don't consider myself to be a stupid person, but the lingo and the theories and the seemingly contradictory pieces of information have made my head swim. You traders have your own language.

Very clearly, and very simply, why did the spot price on silver rise as much as it did in the last two weeks? Also, very clearly and very simply what world / national / political / economic events triggered them? I'm going to try to start there and then catch up with you guys on the regular thread eventually.

Thanks in advance.

 

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There is no simple answer. Markets are complex. Bernanke said the unemployment situation is "grave" today so we got a bump in metals as the market interpreted that to mean QE3 is imminent and thus inflation is coming. We had a run up all week on anticipation QE3 would happen. The Euro is stronger because Draghi said he will do "whatever it takes" even though all he can do is monetize the debt with debt based money and impose austerity. As the Euro gets stronger and/or the dollar gets weaker things priced in the dollar get more expensive, since the dollar index is something like 60% compared to the Euro. QE3 doesn't even have to happen, as long as the promise is there then computer algorithms are in 'risk-on' mode and will pump the market with all the free money they get from the Fed knowing they will get bailed out if they lose it again. Total QE to date is $2.3 trillion, yet the Fed gave $16 trillion to the banks under the table during TARP. So QE is actually small potatoes in this financial system. It's more about reassuring the risk takers that they will not be penalized. I am not a trader by the way, but qsilver is and I recommend studying whatever he says that you want to get a better grasp on because he is on the pulse.

 

Being anonymous on the internet allows one to make statements of themselves and/or their actions, which may or may not be true. This is true for everyone on the site, including myself and you. The posts being referenced are sometimes like several investor/trader sites being stuck in a blender , and if you throw enough at the wall, some will stick. I am not taking issue with anyone personally, I am specifically talking about the content structure of the posts. IMO.

 

For years people have been predicting $50/0z silver and $2,000/Oz gold.
Could it be that silver and gold values went up recently because it was long overdue?

 

I don't know if time has anything to do with it. I understand gold and silver to behave like commodities (corn, hogs, etc.) and living where I do I know the environment as well as politics can affect prices on those much more than supply / demand. I guess my point in creating this thread is to filter out the "predictions" and just focus on the "predictors" - what to look at to make predictions, and how to interpret that data.

 

Gold and silver are treated as commodities, but they are not. They are elements. We cannot create any more of them than have already been deposited on our planet when the solar system was formed. So you can't breed them like hogs, or plant them like trees. What I use for my predictors are a number of factors that all point to higher silver prices.

1. Physical inventory of above ground available silver is the lowest it has been in over 700 years. There is no government stockpile anymore.

2. Silver was only deposited on the Earth by epithermal deposition, meaning at or near the surface of the crust. Gold was deposited by both epithermal and mesothermal deposition (deeper veins of metal). So there is no more Comstock Lode on the horizon for silver. As time goes on it will be increasingly risky and resource intensive to maintain current mining output barring a significant technological advance. Peak silver is underway.

3. The gold to silver ratio is outside of its historic norms prior to modern issuance of fiat currency. Silver was historically valued between 15 and 20 times less than gold based on mining supply. Today mining numbers are only 7 times in favor of gold over silver, but above ground available supply for silver is actually 15 times less (more rare) than gold. Some say more silver would be mined if it were more cost effective, but I don't buy that. Demand exceeds supply, met every year by existing scrap. That should be enough to warrant it.

4. Mines that used to be classified as primary silver mines are now classified as primary lead or zinc mines. This 'primary' distinction is based solely on revenue, not quantity. Silver, lead, and zinc supplies are typically consistent among these mines, so for them to change from silver mines to lead/zinc mines means that silver is undervalued compared to those metals. This has only happened in recent history.

5. The word silver literally translates to 'money' in many languages. The same word is used synonymously.

6. Negative real interest rates. Meaning that interest rates minus inflation rates are negative. This environment will always cause monetary metals to rise, as it means the dollar is being devalued. If positive real interest rates become the case then that fundamental is no longer in favor of metals, but rather to fiat currency. This can never actually be the case, since exponentially growing debt cannot be sustained by any other means than adding more compounding debt on the pile. For positive real interest rates to happen then intererst rates would have to exceed inflation, and there's no way they can catch up at this point without defaulting on the debt which is paid off by money printing.

7. If we were to return to a gold standard, the only way it could work is to peg the ratio of existing dollars (paper, digital, treasuries, etc.) to existing ounces of gold reserves. By today's supplies of each that would be over $30,000 USD, assuming Fort Knox has all of it's gold. If it doesn't, that number goes astronomical. There is no way around that other than either destroying dollars or buying more gold, since any sort of fractional gold standard would require a proxy for the gold and would repeat the mistakes that undermined it before. Destroying dollars is not possible due to the deflation it would cause and thus put big banks underwater due to their assets going down in value, thus either necessitating nationalization and/or money printing to bail them out as well as putting the derivatives market at risk which the whole system hinges upon. If gold is to go to $30,000, and the gold/silver ratio is to go back to 20:1, that's $1500 silver right there. I do not advocate selling silver at such a price since it would be indicative of a hyperinflation. Best to wait for a new currency if anything.

 

Although I agree with some of your comments, I disagree with your statement that gold and silver are not really commodities. Both commodities fit in the definition of a commodity. The metal, copper, is used as an example of a commodity in Wikipedia (for what that's worth), but it could just as easily be gold or silver.

The more specific meaning of the term commodity is applied to goods only. It is used to describe a class of goods for which there is demand, but which is supplied without qualitative differentiation across a market.[3] A commodity has full or partial fungibility; that is, the market treats it as equivalent or nearly so no matter who produces it. "From the taste of wheat it is not possible to tell who produced it, a Russian serf, a French peasant or an English capitalist."[4] Petroleum and copper are examples of such commodities.[5] The price of copper is universal, and fluctuates daily based on global supply and demand. Items such as stereo systems, on the other hand, have many aspects of product differentiation, such as the brand, the user interface, the perceived quality etc. And, the more valuable a stereo is perceived to be, the more it will cost.

 

summer is over and http://www.foxnews.com/world/2012/09/10/south-africa-labor-unrest-spreads-41200-miners-strike/

 

Gold fails these three tests for the simple reason. Governments hold gold as a monetary asset and thus it's value is defined by the government holding it. In the case of the United States, the official lawful money price of gold is $42.22/ounce. A significant amount of gold is being held by the USA with that official valuation and this valuation is directly used by the Federal Reserve as an asset on its balance sheet. No other commodity, not even silver, holds this distinction. Gold & Silver are so unique they trade on their own unique futures market, the Comex. No other metal, except copper, trades there. There are special rules that pertain to them in part because or their roles in coinage and as finance instruments.

 

You can safely ignore anything a trader says and not miss much or damage your own investment program in any way. I've also never been a believer in news-driven investing. It's an intellectually lazy way to invest.

 

For what it is worth, historically, September generally is a strong month for silver prices, last year probably being the only exception I can think of since I got back into collecting coins...

 

I am hoping silver will continue to climb though I am philosophical about the ups and downs.

I was talking to a fellow who used to spend a lot of time around gold traders. He said that the euphoria as the metal rose fed a preposterous competition for the hights it would eventually reach.

"I see gold hitting $2500 by end of year, the supply and demand and the breakdown of the dollar make this a given."

"Are you kidding me? With all the new investors and governments and even billionaires jumping on the gold and precious metals band wagon, and the certainty of QE3 we should use $3500 as a baseline for minimum end of year prices".

Trader 3: "You guys are completely unrealistic: this is a perfect storm of biblical proportions. By the time the financial breakdown has run its course, and we are just in phase 1, we should top $10K an ounce, but $4000 EOY is an absolute". In the intelligence community they call this "incestuous amplification".

 

I am just wondering what the context of this statement is. Are you saying, (which is the only context I believe this statement may be true), that raw silver fit for industrial production, is at its lowest level given monthly consumption? That statement may be true. However, if you are saying there is less physical silver above ground today than in any point in the last 700 years I simply do not believe, even if you are not counting all of the coins, silver sets, silverware, etc that can be melted at the drop of a hat.

 

I would just add that (1) a large portion of the silver sets, silverware, etc. was melted in the 1970s and never replaced, and (2) a lot of the coins were purchased at prices close to the current price and therefore would probably not be available for melt until the price is much much higher than today. So the silver might physically exist but not be available for industrial use or for settlement of contracts.

 

Well, my point would come from here:

http://www.silverinstitute.org/site/supply-demand/

Even if we assume industrial demand and photography demand were all totally lost forever, that is a combined industrial "usage" of 552.6 million ounces. Mine production for 2011 was 761.6 million ounces. Are we assuming jewelry, coins, inventory, etc are all lost forever? If not, this is all adding to "above ground ounces". So, I was asking the context and or source of Inflexion's comment.

Not trying to pick on you Inflexion, but you mention this frequently and it just doesn't make sense unless its a very limited, and therefor potentially misleading, statement.

 

We've discussed the reliability of silver institute reporting. They are practically the only ones churning out statistics, but that doesn't make them accurate. They are reporting a lot of numbers that are largely proprietary and not subject to public reporting. So where they obtain the data is anybody's guess.

 

Yes we have, but its a trade group so I doubt they have any real desire to make silver appear a lot more plentiful than it is. Since its the only source we have, its the one I use. To not use your only relatively unbiased source of data and instead succumb to the bullion salesmen blogs I believe would be foolish.

If this data, and you admit its the only real source of data available, is unreliable, what data source is Inflexion using to make the claim that there is less above ground silver today than in the last 700 years? This is why I asked what the source of that claim was.

 

If the numbers they published over the years were even close to accurate, it would be difficult to construct a scenario where the price of silver would be up 6X. It's nice to have numbers, but when the conflict with market action for many years, they are suspect.

 

I think he's getting his info from here:

http://www.rumormillnews.com/cgi-bin/archive.cgi?read=184374

Go down to 6. Too Much Money, Too Many People, Too Little Metal, in the first paragraph,

 

Simply?

Well, one of the 800 lbs gorillas in the room has been the European Union debt crisis. Last Thursday/Friday, the EU announced their bond buying plan (infusion of liquidity). Additionally, it looks like QE3 (the FED's third round of quantitative easing) is looking more likely. Whenever the the money supply expands, stocks and PMs rally. Why? ...because there is an expected shift in the supply/demand dynamic.

That's just my opinion...and as simple as I can express it.