Posts Tagged ‘How to buy gold’
Interview by James Turk
The Gold Report
November 7, 2011
A war-mongering U.S. government could be less than 18 months away from decimating the last 5% of value left in the dollar, says Richard Maybury, the author of the U.S. & World Early Warning Report. Until some new exchange-traded-fund-like basket of natural resources provides a store of value, this “juris naturalist” has some advice about how to protect your wealth during the coming collapse.
The Gold Report: Richard, last month, you made a presentation at the Casey Research/Sprott Inc. “When Money Dies” Summit entitled “The War that Will Kill the Dollar.” You explained that the corrupting influence of power had sent our country’s leaders shopping for war, disregarding Westphalian respect for sovereignty and hastening the collapse of society. What are the signs that we are reaching a critical point? And, is there any way we can change course?
Richard Maybury: You can see the signs very clearly in the Middle East and North Africa. The Federal government is involved in several wars there that have nothing to do with America. One of the best examples is Libya. U.S. officials are taking credit for Moammar Gadhafi’s death just a year after they were bragging about having tamed the threat. Now Libya is a mess. It will very likely be taken over by some sort of Islamic government that isn’t going to be very friendly to America.
TGR: Why do we, as a country, do this? If it’s not going to end well for us, what’s the economic or political reason to get involved?
RM: The U.S. government gets into wars in far corners of the world that have nothing to do with America because the leaders like getting into wars. That is how presidents achieve greatness in the history books. A president has no prayer of going down in history as great unless he has won a war. Look at Mount Rushmore. All four presidents featured there won wars. That seems to be the number one criteria historians use for deciding whether someone is a great president. It constitutes an automatic incentive to go out looking for wars.
TGR: What is the incentive for the American people to go war shopping?
RM: Nothing. It’s absurd. During the First Gulf War, people had a tremendous good feeling about going to war with Iraq. They would come home from work, order a pizza, sit in front of their TV sets and watch the war like it was a football game. War became a form of entertainment.
TGR: Is there anything we could do to incentivize our presidents to act peacefully?
RM: I doubt it very much. People go into politics because they seek political power. Once they get the power, they naturally want to use it on somebody. What is the point of having power if you can’t use it? So, no matter what kinds of controls you put on, future presidents will find a way around it.
The ideal situation would be one where war is used as a last resort. Westphalian sovereignty, a set of agreements dating back in the 1600s, established the precedent that the European powers would only go to war in self-defense. You had to have a clear and present danger before you could go to war. And, even then, it was supposed to be the last resort. That was the basis of international law up until this year. That isn’t to say that the Westphalia treaties weren’t violated a lot of times, but they helped. After Iraq, Serbia and now Libya, it is pretty clear that the policy is we can just go out and hit anybody we want for any reason we want as long as we believe the other guy is up to no good.
TGR: If this is the new reality, then let’s talk about some of the economics around it. War is expensive. You have pointed out that since the Federal Reserve was created in 1913, the dollar has lost 95% of its buying power. You said, “War destroys currencies.” It usually leads to governments printing more dollars to pay for guns and tanks. How much debt and overprinting can the country take before the velocity of economics, which is something that you also talked about in association with how quickly dollars are exchanged, catches up with reality and the dollar loses that last 5% of its value?
RM: Velocity refers to the speed at which money changes hands, and it is a measure of money demand. When people don’t really want the money, they start trading it away faster, trying to get their hands on things they do want, things that have value that they trust. The cost of this war in the Islamic world will continue going up. At some point, it’s going to be a major contributor to people losing what confidence is left in the dollar and people all over the world will start dumping it. This is a psychological thing. It’s about emotions, so it is hard to pinpoint when they will lose all confidence in the dollar.
TGR: What would it look like if that last 5% were gone? Are we talking about hyperinflation? Are we talking about banks collapsing? Are we talking about bartering? What would it look like?
RM: We are talking about all of that. It would be chaos. We saw it in Zimbabwe when the Zimbabwean dollar became worthless because the government printed so many that people wouldn’t accept them anymore. The country experienced enormous runaway inflation where prices were rising 50% a day before the Zimbabwe dollar collapsed.
It would probably start with someone somewhere in the world selling off his dollars and begin trading them for whatever it was he had confidence in. The foreign exchange value of the dollar would fall. Other people would notice; they would get scared and start selling their dollars. The foreign exchange value of the dollar would drop more. This process would continue until you have panic around the world to get out of dollars. Americans would be the last ones to get involved. We are always the last to know what is happening to America. Suddenly Americans would wake up one morning and find that a gallon of milk that cost $4 the day before costs $6 today. The next day they would find that it costs $12. And the next day they would find that it costs $36. That is when Americans would realize that they are in deep trouble; their dollars are about to become worthless.
TGR: Of course the Fed wants to avoid that scenario. You describe yourself as a follower of Austrian economics made famous by the Nobel laureates Friedrich Hayek and Ludwig von Mises. They describe financial systems as complex processes run by billions of constantly changing individuals rather than something that can be manipulated from a central point, which seems to be what is being attempted right now. If that is the case, what will be the outcome if the central government tries to force a more Keynesian control of the flow of money?
RM: They will mess it up even worse than they already have. The world has been living under Keynesian economics since 1971 when Nixon took the dollar off the gold standard. John Maynard Keynes was a semi-socialist. He believed that the way to fix the economy was to print a whole bunch of dollars and dump them out there. This has been standard procedure for the past 40 years. All currencies have been dropping in value during that time. Another round of quantitative easing (QE) could further speed the rate at which the money circulates, something that has the same effect as increasing the supply of dollars, creating a larger demand for goods and services and having an inflationary effect. I think Fed officials are dropping hints about the next QE because they are trying to cause velocity to rise, a secret QE if you will.
TGR: What if the stealth QE campaign doesn’t work? What form might a real QE3 take?
RM: It is hard to tell what they will do. One of the myths that everyone is taught is that the government has some sort of tremendous understanding of economics and the ability to make adjustments to economic activity. The term fine-tuning is used sometimes. Actually, we are talking about a group of human beings who don’t know much more about real economics than anybody else. They think they do, but they don’t. They just bounce around from one attempt to control things to the next, making a mess of the country. The economy is not a machine. It is people, human beings. It is a biological system, not a mechanical system. But, the government treats it like a mechanical system, so they are always making mistakes.
TGR: If war and hyperinflation are the inevitable future, how can investors survive or maybe even thrive during a time like this? What are the opportunities? Natural resources? Commodity equities? Where can we be safe other than putting that $100 bill under the bed?
RM: Well, I wouldn’t put $100 under the mattress, at least not for very long, because it will soon become worthless. But commodities, stocks of raw materials firms, gold and silver and platinum coins have value. Generally, I try to see the world in terms of two kinds of investments: dollars and non-dollars. You definitely want non-dollars, things that do not have their value tied to the value of the dollar. An example of a dollar asset is something like a bond or bank CD. Their values are tied directly to the value of the dollar. If the dollar falls, then their values fall.
Gold is a non-dollar asset. When the dollar falls, usually gold rises. The same is true with silver and oil. All of these things have values that are not tied to the dollar. My advice is to invest in non-dollar assets. Gold would be at the top of the list, silver and platinum and then oil.
TGR: In your Early Warning Report Newsletter, you predicted that gold will top $3,000/ounce (oz), silver will hit $50/oz and oil will exceed $300/barrel. Gasoline will go to $9/gallon. When will we see these rises? And what will be the catalysts that take them there?
RM: The next QE, which I expect to come along no later than March, could set off a flight from dollars. Then we could see those predictions realized within 18 months.
TGR: You said that once we have had this loss of the entire value of the dollar and people are looking for another way to trade, money could be based on some collection of metals with currency acting as a receipt for the tangible gold, silver, platinum and whatever else happens to be in that basket. What would that transition look like? How painful would that be? How would it be orchestrated?
RM: It doesn’t have to be painful. The markets are moving in that direction. People trade exchange-traded funds (ETFs) for practically everything now. I can envision a mutual fund or an ETF that is a collection of various things. It could be gold, silver and platinum. It could have oil in there. It might include Swiss francs. It could even have various patches of real estate. The ETF itself would then become a currency, not because anybody has it planned that way, but because the markets will see that there will be a demand for something that is a non-dollar asset that is easily tradable and seen as a store of value. There would probably be hundreds of these baskets of assets at the start. Some would work better than others would; the less workable ones would shake out. You might wind up with maybe a half dozen ETFs or mutual funds that are baskets of various assets circulating in the world. They would essentially become the currencies.
TGR: Would investing in ETFs now be a good way to prepare?
RM: No. I don’t know of any that are arranged that way. It may be a while until somebody catches the idea and decides to give it a try.
TGR: What about the precious metal equities? Would that be a good way to prepare?
RM: Yes. There are lots of good precious metal stocks. I own quite a few. That is another way to protect yourself. However, be sure to deal with a broker who really knows natural resources. You have to have some skill in picking those stocks. It’s not like going down and buying a gold coin where you just walk into the coin dealer and tell him I want a handful of American Eagles or Canadian Maple Leaves. You really have to know what you are doing when you are buying gold stocks.
TGR: Any final thoughts you want to leave with The Gold Report readers?
RM: The world has changed. When you look at the news and you say to yourself, “My God, America isn’t what it was; the world isn’t what it was,” have the confidence to know you are right. We are probably not going back to what America or the world was anytime in my lifetime. Therefore, you want to start learning everything you possibly can about this new condition and adapt to it.
TGR: Thank you for sharing your thoughts.
RM: Thank you, JT. I appreciate being here.
BY STEVE ST. ANGELO
The world is about to peak in global silver production. This will not occur due to a lack of silver to mine, but rather as a result of the peaking of world energy resources, declining ore grades, and a falling Energy Returned On Invested – EROI. The information below will describe a future world that very few have forecasted and even less are prepared. This is an update to my previous article Peak Silver and Mining by a Falling EROI. In my first article I stated that global silver production may peak in 2009 if we were to enter a worldwide depression. We did not have the global depression as massive central bank printing and bailouts have thus far postponed the inevitable.
The world has entered a plateau of global oil production over the past 5-6 years. A higher oil price has not brought on more supply to offset depletion rates from existing fields. From the graphs above we see a correlation between global silver supply and oil production, especially in the latter part of the 20th century. Up until the late 1800’s and early 1900’s the majority of energy used in mining silver came from human and animal labor. It is truly amazing just how much silver was produced in the United States at this time without the use of oil and modern mining practices (information provided later in the article). This all changed as global oil production as well as the technique of open-pit mining increased.
The 3 Big Energy Game Changers for Silver Mining
There are a number of some very large open-pit mining projects supplying silver that are forecasted to go into production within the next several years as well as others by the end of the decade. It is astounding to see these 25-45 year extended forecasts by these mining companies without any consideration of what the energy environment will be like in 2015-2020 or later. It seems like everyone in the sector assumes there will be ample supplies of energy at commercially viable prices.
This is where the trouble begins. There are three negative energy game changers that will impact the mining industry going forward. They are: (1) the Peaking of global oil production, (2) the Land Export Model and (3) the falling EROI – Energy Returned On Invested. Of the three, I believe the falling EROI will be the most devastating. Before explaining why this is the case, let’s take a look at each.
Peak Global Oil Production
According to JODI’s global oil production figures represented HERE in a post on theOilDrum.com, it looks like the global peak of convention crude/condensate and natural gas liquids took place in 2006:
Global oil production has increased steadily since the early 1980’s and has now been in a bumpy plateau for the past 5-6 years even with much higher oil prices. It is true that there are more projects and oil fields slated to come online in the next several years, but much of the increase will be offset by depletion in existing fields. To add insult to injury, the majority of oil that is exported throughout the world is being supplied by countries that are also increasing their own domestic oil consumption. This is a double-edged sword for dependent oil importing nations— which leads us to the Export Land Model.
Export Land Model
The Export Land Model developed by geologist Jeffery Brown and others shows how oil- exporting countries suffer higher declines of exports due to increased domestic consumption. As the nation increases its own oil consumption for their expanding economy, this causes exports to fall even greater than declines in oil production alone. This becomes apparent when we look at what is taking place in Saudi Arabia.
In 1980, Saudi Arabia produced approximately the same amount of oil it is presently. However the kingdom is exporting 2+ mbd (million barrels a day) less oil. The right side graph above reveals that as domestic consumption has increased (black line), exports have declined. By 2020, Saudi Arabia’s domestic consumption is forecasted to reach 5.9 mbd of oil equivalent, including natural gas, which will decrease the country’s exports even further (Jadwa Investment’s “Saudi Arabia’s coming oil and Fiscal Challenge”).
If we add up all the other exporting oil countries and consider what the future percentage loss from this model might be, the drop in oil exports will be significant indeed. Here we can see that the peaking of global oil production, plus the declining oil exports described above by the Export Land Model, puts a serious dent in the ability for future growth in the world economies. If the world economies are unable to grow, neither will the supply of base metals and silver.
These two energy constraints are in themselves bad enough news for the global economy and the mining industry. Unfortunately the third is by far the most devastating. The falling EROI measures what amount of that oil will be available for market. It is also described as the net energy that remains after production costs are considered.
The Falling EROI: Energy Returned on Invested
In my opinion, the EROI —Energy Returned On Invested— is by far the most important aspect confronting our economy, society and world at large. Ironically, the EROI of oil and natural gas has been falling ever since man drilled his first well.
According to work done by Cutler Cleveland of Boston University, the EROI of U.S. oil andgas was 100/1 in 1930. It fell to 30/1 by 1970, and hit 11/1 by 2000. Oil was so abundant during the 30’s in the States that it only took the cost of 1 barrel of oil to produce 100 barrels for market. By 2000, it has declined nearly tenfold.
The graph on the right side shows the falling Global oil and gas EROI (by Gagnon, Hall & Brinker) to be 18/1 in 2006. They plot with a solid black line that a possible 1:1 EROI projection may be by the mid 2030 decade. As this EROI ratio continues to decline, it puts a huge stress on the world economies by increased energy costs while providing less net energy for the market.
There has been so much misinformation put out by different organizations as to the amount of oil and natural gas reserves that it is has totally confused the investing community and the public. Whenever I get into a debate about peak oil or oil reserves there is always someone who brings up the notion that the United States is sitting on trillions of barrels of shale oil. This is the subject of a whole other article, but to get to the point, shale oil as a savior of the inevitable United States (or World) Energy Crisis is a pipe dream. Here are the three biggest lies propagated in the U.S. energy industry:
- 1950’s – Nuclear energy…..too cheap to meter.
- 2000’s – Shale Oil trillion+ barrels of U.S. reserves
- 2000’s – Shale Gas 100 years worth of U.S. supply
To explain why there is a great deal of hype in shale oil and gas, take a look at the graph below.
Shale oil is much more expensive to extract than light sweet crude in Saudi Arabia. Many say that increased technology will bring more oil to the market, but it does so at a lower EROI. The lower the EROI, the less net energy is available for market. With less net energy, there is less growth.
Furthermore the depletion rates of a typical shale well in the North Dakota Bakken Field are 75-80% by the second year. Shale gas depletion is even worse, with fields reported from the Texas Barnett Field declining 60% in the first year. The notion that the U.S. will be able to increase oil production significantly with shale oil turns out to be a red herring when you figure that these severe depletion rates make it impossible to do so.
Another nail in the coffin for shale oil is its low EROI. The figures on the right side of the graph above show the different EROI ratios for conventional and nonconventional energy sources. The only thing worse on the EROI scale than shale oil (5:1) is tar sands (2-4:1). Why are these EROI ratios so important and ultimately devastating to the world economy and silver mining? The next graph provides the answer.
As we can see from the left side of the global oil peak, everything is rosy; high EROI ratios with a majority of net energy already consumed by the world economies. Once we slide over to the other side, the picture gets downright scary. Even though there is a great deal of oil on the downward side of the peak, the majority of it gets consumed in the production of the energy itself. Once it costs more to produce a barrel than you get in return, the game is over.
Unfortunately, there is more to it than that. There is a minimum EROI that a modern society needs to sustain itself. All the EROI ratios listed above are figured from the point the oil & gas comes out of the well. We have to remember the oil & gas has to be transported and refined and the interstate-highway system and infrastructure has to been maintained. All of these are costs that are subtracted out of that EROI ratio. This is explained in detail by Charles Hall & David Murphy HERE. The bare minimum a modern society needs is an EROI of 3:1….but if you want the luxuries of art, entertainment, medicine, education or etc; the ratio has to be higher still.
The graph above is one possible forecast of net energy. The creator of the graph has produced another showing a more gradual slope of net energy. I have had several conversations and email exchanges with other geologists and engineers who believe the graph presented above is a more realistic representation than the second. I agree.
Peak Oil is Here Whether You Believe it or Not
Before we get into the silver part of the article, there is one more topic on energy that needs to be discussed. There is continued debate about the Abiotic Theory of Oil as well as the blocking of oil drilling in certain areas of the United States by environmentalists. The Abiotic Oil Theory states that oil fields are continuously being refilled, so there will be no peak oil. Even though this might be true in some small cases as it pertains to methane, the amount is infinitesimal.
The list of countries presently past peak is long. If we consider a good portion of these countries are in areas of the world that do not have much in the way of regulations or environmentalists, peak oil still took place. It is true that there is still some oil in the U.S. being kept from the market by environmentalists and the government, but in the end….it doesn’t change the overall picture all that much.
Lastly, for those of you who believe the information above is controlled by the Illuminati, Bilderbergs or whomever and there is still plenty of oil in wells capped all over the country, there is nothing that can be written or said to change your mind. As illustrated by the data, peak oil is here whether you believe it or not.
As the world is currently peaking in oil production, the United States passed its peak forty years ago in 1971. The same can be said for overall silver production. The U.S. extracted the majority of its high grade silver by the middle of the 20th century. Today, the U.S. has to resort to mining a great deal more total ore to produce the same or less silver than it did years ago. This process is occurring throughout the world. In my first article (link provided at the top of this article) most of the information on ore grades came from Gavin Mudd and his work on the Australian mining industry as well as data on declining global gold ore grades. To continue to understand this ongoing process, I choose to focus on the United States as the USGS – U.S. Geological Survey – has kept some very detailed records of historical mining activity in the States.
CASE STUDY: United States Past Silver Production and Falling Ore Grades
In the early days, miners and investors sought out the best quality and highest ore grades they could find. The higher the ore grade, the higher the profit. Today, there is a great deal of excitement when mining companies release drill results with higher ore grades than expected. Yet, these same ore grades would have been embarrassing to the prospector and investor just 100 years ago. How the passage of time makes us forget what life was like just a short while ago…
The majority of the top eight silver ore-producing states in the country peaked in annual silver production before the 1940’s. Only Idaho and Nevada had higher peaks after 1950.
Colorado had the highest annual silver production of all 50 states with 25.8 million ounces produced in 1893, almost 120 years ago. New Mexico peaked in 1885, Montana in 1892, California in 1921, Utah in 1925, and Arizona in 1937. Even though Idaho had its true peak in 1966 at 19.8 million ounces, it surpassed its previous record by only 200,000 ounces, which occurred in 1937. Nevada peaked late in the game due to two factors: 1) it has recently become the largest gold producer in the country currently, providing nearly 75% of nation’s gold. (with gold mining comes by-product silver), and 2) due to the McCoy/Cove Mine, which single-handedly mined 11 of the 27.4 million ounces Nevada produced at its all time peak in 1997.
Not only did the McCoy/Cove Mine help Nevada to become the second-highest silver producer in U.S. history, it also accounted for 35% of all silver extracted from the state between 1987 and 2003.
The record silver production in Nevada as well as the McCoy/Cove mine are now gone. In its last recorded year of production, the McCoy/Cove Mine produced 596 oz of silver in 2006. That’s correct, a mere 596 oz (that year it was still producing some gold). According to theMajor Mines of Nevada 2010 publication just released, Nevada only produced 7.3 million ounces of silver in 2010…a 70% decline in just 13 years from its peak.
From the late 1800’s to 1950’s the same eight states listed above produced the lion’s share of silver in the country. Very few people who are asked will know which state was the largest producer at this time. Most when asked will say Idaho, Utah or Colorado. I was quite surprised to find out that Montana outperformed them all by producing 775 million ounces by 1950.
Montana produced the most silver in the country at this time due to the richness of copper in the state, where silver was a by-product. According to the MONTANA MINING NEWS MINING JOURNAL dated 8/30/1930:
Anaconda Copper Mining Company is confining work at the Flathead Mine, near Kalispell, Montana, to development, because of the present metal prices, according to a reported statement by Jack Dugan, superintendent. Thirty men are employed in extracting 40 tons daily, of ore, said to average 50 ounces of silver, per ton.
This is an example of the kind of high grade ores they were pulling out of Montana back in 1930. Impressive as it was, this was not the average. To give you an idea of the difference of 75 years, Montana produced 9.3 million ounces of silver in 1935 at an average ore grade of 3.45 oz/ton. In 2010 there were only two mines producing silver as a by-product of copper. The larger producer is the only publicly traded company in Montana and it produced a little more than 1 million ounces of silver at an average ore grade of 0.87 oz/ton or a 75% decline.
The USGS provides Mineral Yearbooks for the states back until 1932. One can imagine what the ore grades must have been in 1892 when Montana produced its most silver in one year at 19 million ounces.
Idaho: the Largest Silver Producer in the Country’s History
The one state that sticks out like a sore thumb in the graph above is Idaho. It is the only state that has produced over a billion ounces silver by 1990 with the majority of it after 1950. Even with this significant production, Idaho wasn’t able to escape the negative aspects of falling ore grades.
In the late 1800’s and early 1900’s a larger percentage of silver came from a grade called “Dry and Siliceous Ore”. During this time, between 40-50% of silver produced in the country came from this type of ore. To give you an example in 1922, 46.8% of silver in the U.S. came from dry and siliceous ore. The percentage dropped over the next decade— falling some years into the teens (especially during the 1930’s depression). By 1935, it climbed back to 40%.
This is the sort of ore that primary silver mines are made of as it contains the most silver per ton. Idaho had some of the richest dry and siliceous ore grades in the country. The graph below represents how much this sort of ore grade has declined since the 1940’s.
The reason why this graph only shows data up until 1980 for Idaho and 1989 for the U.S. is due to the fact that information was withheld from the USGS due to proprietary reasons by the mining companies. Furthermore, this is also true for individual state reporting of detailed silver statistics after 1990. In the early days the states provided the USGS with so much information on gold and silver that many of the gold-silver reports were over 200-300 pages. Today the Silver Yearbooks barely fill 15 pages.
To bridge the gap to the present day, we can look at what has taken place in the largest publicly traded mining company in the state. Hecla’s Lucky Friday Mine in Idaho produced 3.3 million ounces in 2010 at an average ore grade of 10.25 oz per ton. The chart below compares the difference from the same mine in 1965.
Here we can see that Hecla has only produced a little more than 100,000 ounces of silver than it did in 1965 but has to process almost double the amount of total ore. This insidious decline of silver ore grades over the years seems subtle to the mining industry that is focused on quarterly results, but becomes an increasingly difficult problem now that the world suffers from peak oil and a falling EROI.
The United States: Produced 25% of all Global Silver 1900-1950
When the U.S. was the Saudi Arabia of the world in oil production at the early and middle part of the 20th century, it was also the second-largest silver producer in the world behind Mexico. Of the 10.5 billion ounces of silver produced by the world from 1900-1950, the United States accounted for 2.7 billion (or 26%) of the total amount.
This historical graph is relevant due to the fact that in next 60 years from 1951-2010 the U.S. only produced 2.58 billion ounces of silver… with significantly falling ore grades shown below.
The chart above represents total ore from mining gold, silver, copper, lead and zinc. The majority of silver comes from base metal mining in which zinc/lead provides the highest percentage compared to copper and gold. In 75 years, the total ore grade of silver has fallen nearly 92% while actual production has remained basically flat. This is due to the fact that all base metal ore grades in the U.S. are falling as well.
For example, copper has shown a huge decrease in ore grade since the early 1900’s. In 1906 the average ore grade for copper was 2.5%. By 1935 the average copper ore grade had fallen to 1.89% and in 2009 the United States produced copper at 0.43% a ton. This is a decline of 77%.
The Falling EROI and Declining Ore Grades
On top of declining ore grades and adding insult to injury, is the falling EROI of energy. When the U.S. and the world were tapping into high quality concentrated ore grades in the early years, they did so with the majority of human and animal labor. This kind of labor was not only very efficient but it also utilizing a higher EROI. The open-pit mining practices employed today are in fact quite the opposite….extracting metal at a much lower EROI.
For example, people today have this misguided opinion that modern farming is very efficient. They see one farmer on a huge tractor working hundreds or thousands of acres of agricultural land. They do not factor in all the energy it costs to plant, fertilize, harvest and process the crop. This does not include all the energy and technology it takes to develop hybrid seeds, the manufacturing of the tractor and equipment as well as many other aspects that go into modern farming. In reality, the pre-industrial farmer with horse and plow was extremely more efficient that his modern counterpart.
Hunter Gatherer = 10/1
Pre-Industrial farmer = 10/1
Modern high-tech farmer = 1/10
The pre-industrial farmer with horse and plow was able to produce 10 calories (of food) for market for every 1 calorie of energy (food) consumed by the operation. Today, the modern farmer needs to consume 10 calories of energy to provide only 1 calorie of food for market. If we consider this ratio, the modern farmer is 98.8% less efficient than the simple farmer with horse and plow.
The only reason why modern farming practices have been successful at this horrible rate of efficiency is due to the high EROI of energy over the past 100 years. Now that the EROI is falling considerably, it is putting severe pressure on the agricultural industry. This will also be true for the mining industry.
Base metals are extracted by either open-pit or underground mining. Of the two, open-pit mines account for the larger percentage of metal produced in the world. (Surface Mining Methods and Equipment) The technique of open-pit mining utilizes huge excavators and large haul trucks to move the ore from the mine. There is a great deal of energy consumed in the development, manufacturing, maintenance and operation of these huge earth moving machines in the mining industry.
It is difficult to estimate an EROI ratio for open pit mining as the end product is metal and not energy. That being said, a simple rule of thumb can be assumed if we take the negative EROI of modern farming as an example. The larger and more complex the machine used in industry, the more inefficient its production as it pertains to the EROI.
Now that we understand the past and present EROI ratios in the agricultural sector, we can see why the early miners and prospectors were much more efficient in producing silver than the huge open-pit mining operations of today when we consider all the energy involved. As the world’s energy sources start to decline in the future and the falling EROI destroys an ever increasing portion of the net energy available for market, the number of open-pit mines will decline as well. As this process takes place, the peak in global mining will occur due the fact that human or animal labor cannot equal the extraction rate of diesel powered earth-moving machines. What is taking place in the mining industry today is the WORST OF BOTH WORLDS… declining ore grades on top of a falling EROI of energy.
The Coming Global Depression: Another Nail in the Coffin for Peak Silver
The world hasn’t suffered an economic depression for almost 80 years. The Kondratieff-Wave analysts who study business cycles say we are now overdue for a depression. Even though this is true, they are correct for the wrong reasons. Business cycles have occurred because humans were able to constantly grow and expand their economies. It was due to the 10/1 EROI of the pre-industrial farmers that enabled the rest of the economy to grow and flourish. After several generations of booms, we had the busts.
As we moved into the modern-industrial economy cheap energy with a high EROI allowed the world economies to grow exponentially—allowing these business cycles to continue. Today we are at the top Boom part of the cycle. The big Bust and depression have been postponed due to the ability of central banks to print money and financial institutions to invent hundreds of trillions of dollars worth of derivatives to hedge overly inflated assets. When the global depression finally arrives, we will never return to anything like we enjoyed before. This bust will be the depression that ends all global depressions.
If we consider what took place during the last depression, base metal & silver mining activity fell off a cliff. The interesting thing to note in the next two graphs below as global silver production declined, gold production actually increased.
Global silver production declined 38% from 1929 to 1932, whereas gold production actually increased 24% in these three years. It took eight years before the world was able to increase silver production over its 1929 figure. Gold on the other hand, increased its global production a staggering 80% during the same time.
This time will truly be different. The world will not be able to increase its gold production anywhere near the percentage it did in the 1930’s. There is a good chance that actual global gold production will decline as the supply chains break down disrupting the highly technical method of refining and processing gold. Another reason may be due to its dependence on copper production as part of its supply. When economies collapse, so does the demand for base metals such as copper, zinc and lead. This is the reason why silver production suffers greater during a depression than gold.
Here we see just how much difference there is in the base metal mining percentage between gold and silver. Zinc & Lead account for the larger portion of the base metal percentage of silver mining, whereas copper production provided 15% of all the gold produced in the world in 2010….or 75% of the base metal pie.
When the world’s central banks are unable to continue to prop up the global economies with money printing, economic growth will drop considerably. China is starting to show signs of an economy heading into a brick wall. Base metal production will decline significantly in the following years cutting back the production of silver as well. If history is a good reference, the future global supply of silver can decline between 20-40%.
A Brief look at World Silver Production
Over the past decade global silver production has increased on average between 2-3% per year. In 2010, according to the World Silver Survey, global silver production reached 735 million ounces of silver. In the first half of 2011 some of the top silver-producing countries have increased their production while others have seen declines. The top producing silver mine in the world, BHP Billiton’s Cannington, has seen its production decrease from 18.9 million oz in the first half of 2010 to only 15.5 million ounces in the first half of 2011 (an 18% decline). Cannington — like all mines— suffers from falling ore grades.
In 2000, Canningtion mined 1.6 million tons of ore and produced 30 million ounces of silver at an average ore grade of 636 g/t. By 2011, it mined 3.1 million tons of ore (or 92% more) just to produce an additional 5 million ounces than it did eleven years ago. What is occurring at Cannington is typical of mines throughout the world.
If we take a look at global silver supply, only a handful of countries have increased their production significantly over the past several decades. Out of all the countries listed in the graph below since 1985, China has had the largest percentage increase. China increased its estimated production from only 2.5 million ounces in 1985 to 99 million oz (or +3,850%) by 2010. The other countries that have increased their production in order of highest percentage are, Bolivia from 3.6 mil oz to 41 mil oz (+1,039%), Argentina from 2.1 mil oz to 20.6 mil oz (+880%), Chile from 16.6 mil oz to 41 mil oz (+147%), Peru from 58.2 mil oz to 116.1 mil oz (+100%), and finally Mexico from 73.2 mil oz to 128 mil oz (+75%), in the same time period. Even though Mexico is the number one silver producer in the world, it had the lowest percentage increase of all six countries. These countries account for 61% of all global silver supply.
Australia was not included in the graph for two reasons. First, even though its production has increased 71% since 1985, its future growth is not forecasted to improve as much as the nations listed above. Secondly, because of Australia’s western form of capitalistic government, it is least likely to deal with issues of political instability, threats of nationalization or protectionist policies such as those in South America, Mexico and China.
Argentina, Bolivia, Chile and Peru— which are located in South America— may suffer from the same type of policies that have plagued the resource industry in Venezuela. Not only are Venezuela’s oil fields nationalized, in August of this year, President Hugo Chavez has also ordered the same for the gold mining industry.
In Mexico, billionaire Hugo Salinas Price has gained significant support in the country to reintroduce the Silver Libertad as legal tender to compete with the Peso for the Mexican people. If this policy were to pass, a large percentage of Mexico’s silver production would be consumed by its own people to protect them from continued inflation. Furthermore, the country suffers from a great deal of upheaval and violence from the drug wars which could lead to political instability possibly threatening the mining industry.
Lastly, over the past several years the world has felt the ramifications of China’s cutback of rare earth mineral exports. China currently produces between 95-97% of the 17 rare earth minerals in the world. Not only have prices of rare earth minerals increased substantially due to this monopolistic policy, it is also forcing foreign companies to move their facilities that manufacture end-user products in China. These companies are also being requested by China to transfer valuable technology to other domestic companies so they can benefit from the knowledge.
This may also occur in exports of Chinese silver. As global tensions increase due the continued disintegration of the world fiat currency system, China may decide to put a total ban on silver exports. Even though Chinese exports have declined substantially (from 3,000 metric tons in 2005 to only 1,575 metric tons in 2009), there is a good possibility that they may turn off the silver spigot completely.
The countries listed above are enjoying the best records of increased silver production, but at the same time are some of the worst candidates for dependable future global supply.
Final Remarks and Conclusion
The world produced a record amount of silver in 2010. Many analysts are forecasting a continued increase in global production for the next decade. There are several factors that show why this will not be possible.
As the world peaks in global oil production and the net energy available for market continues to shrink due to the falling EROI (Energy Returned On Invested), of oil and natural gas, global economic growth will come to a screeching halt. The falling EROI of energy is a one way street to the bottom. Unconventional energy sources such as shale oil, shale gas and tar sands will not be able to stop this decline.
As global economic growth disintegrates so will the demand for base metals – which 70% of silver is a by-product. On top of that, silver ore grades are relentlessly falling in mines throughout the world which takes an increasing amount of energy just to keep production flat. If the mining industry tries to incorporate more human and animal labor to offset declining oil based energy in the future, it will do so only at much lower rates of production than today. This is due to the fact that human or animal labor cannot match the extraction rate of diesel powered excavators or huge dump trucks when it comes to mining silver.
Then there is the negative effect of a global depression on the production of silver. Presently the world has entered into tremendous chaos and economic turmoil. Conditions are ripe for a complete disintegration of the financial markets, thus pushing the world over the edge into a new dark age of hyperinflationary depression. In this sort of atmosphere, countries may resort to the nationalization of mines as well as other protectionist’s policies.
When the nails of the peak silver coffin are added up, the death of increasing future supply is close at hand. The CEO’s and analysts in the mining industry are for the most part oblivious to these factors that will destroy their ability to make viable forecasts of future projects. It amazes me to see professionals plan a huge open-pit mine with a 25-45 year economic plan without any consideration of what the energy environment will be like at that time. For some strange reason, there is this false assumption that “If we build it, the energy will come.”
If the world enters a depression within the next year or two, this will certainly guarantee the global peak of silver production. Why? It won’t matter if the global economy recovers in the next decade, because the peaking of oil and the falling EROI of energy will have destroyed enough net energy to kill any attempt to bring global silver production back to the level it was before.
Lastly, anyone who is good at connecting the dots will realize the ramifications of this article go way beyond just the peaking of silver. The falling EROI of energy will not only be a destroyer of precious net energy, but will also help bring down the largest empire in the world. This will be the subject of a future article.
Read the entire article HERE.
When Faith In U.S. Dollars And U.S. Debt Is Dead The Game Is Over – And That Day Is Closer Than You May Think
May 27th, 2011
A day is coming when the rest of the world will decide that it no longer has faith in U.S. dollars or in U.S. debt. When that day arrives, the game will be over. Traditionally, two of the biggest things that the U.S. economy has had going for it were the U.S. dollar and U.S. Treasuries. The U.S. dollar has been the default reserve currency of the world for decades. All over the globe it was seen as a strong, stable currency that was desirable for international trade. U.S. government debt has long been considered the “safest debt” in the entire world. Whenever there was a major crisis, investors would flock to U.S. Treasuries because they were considered a rock. Sadly, all of this is now changing. Today the rest of the world is losing faith in the U.S. financial system. In fact, even the United Nations is now warning of the collapse of the dollar. But if the U.S. dollar and U.S. Treasuries collapse, that will be an absolute nightmare for the U.S. economy. If the rest of the world does not want our dollars someday, then what are we going to give them in exchange for all of the oil and all of the cheap imported goods they send us? If the rest of the world does not want our debt someday, then how in the world are we going to be able to continue to consume far, far more wealth than we produce?
The rest of the world is watching the U.S. government run up record-setting budget deficits and they are watching the Federal Reserve print money like there is no tomorrow and they realize that the U.S. financial system is slowly imploding.
As mentioned above, now even the United Nations is warning that the U.S. dollar could collapse. The following is a brief excerpt from a recent news report put out by Reuters….
The United Nations warned on Wednesday of a possible crisis of confidence in, and even a “collapse” of, the U.S. dollar if its value against other currencies continued to decline.
In a mid-year review of the world economy, the UN economic division said such a development, stemming from the falling value of foreign dollar holdings, would imperil the global financial system.
But it is not just the United Nations that is concerned about the U.S. dollar.
On April 18th, Standard & Poor’s altered its outlook on U.S. government debt from “stable” to “negative” and warned that the U.S. could soon lose its prized AAA rating.
At one time, it would have been unthinkable for Standard & Poor’s to do such a thing.
But today it is amazing that it has taken them so long to make such a move. U.S. government finances are falling apart.
When the credit rating of U.S. government debt starts declining, interest rates will go up. Just ask the government of Greece how painful that can be. Today, Greece is paying over 16 percent on 10 year bonds.
The following is what John Williams of Shadow Government Statistics recently had to say about why Standard & Poor’s issued such a warning about U.S. government debt….
S&P is noting the U.S. government’s long-range fiscal problems. Generally, you’ll find that the accounting for unfunded liabilities for Social Security, Medicare and other programs on a net-present-value (NPV) basis indicates total federal debt and obligations of about $75 trillion. That’s 15 times the gross domestic product (GDP). The debt and obligations are increasing at a pace of about $5 trillion a year, which is neither sustainable nor containable. If the U.S. was a corporation on a parallel basis, it would be headed into bankruptcy rather quickly.
Look, the rest of the world is not stupid. They know that the U.S. government is hurtling towards financial disaster. The appetite among foreigners for U.S. government debt is decreasing rapidly.
In fact, according to Zero Hedge, foreigners are dumping U.S. debt at a very rapid pace right now.
In addition, the cost to insure U.S. debt has risen sharply in recent days.
Right now, the Federal Reserve has been buying up most new U.S. government debt with dollars that it has created out of thin air. This is a giant Ponzi scheme, and it is a major contributing factor to the decline of faith in the U.S. dollar.
The dollar has fallen by 17 percent compared to other major national currencies since 2009. What makes that fact even sadder is that all major currencies have been rapidly losing value compared to hard assets over that time period. The dollar is just sliding faster than almost all of the other global currencies that are constantly losing value as well.
Anyone with half a brain could have seen that this would be the end result of reckless government borrowing, but unfortunately our politicians have been ignoring this problem for decades.
Now a day or reckoning is fast approaching and it is going to be very painful.
The U.S. government has piled up the biggest mountain of debt in the history of the world. Just consider a few shocking facts about this unprecedented debt….
*If the U.S. national debt (more than 14 trillion dollars) was reduced to a stack of 5 dollar bills, it would reach three quarters of the way to the moon.
*The U.S. government borrows about 168 million dollars every single hour.
*If Bill Gates gave every penny of his fortune to the U.S. government, it would only cover the U.S. budget deficit for 15 days.
*It is now being projected that by the year 2021, interest payments on the national debt will amount to $1.1 trillion dollars a year.
In a previous article on The American Dream, I detailed some more absolutely horrifying statistics about U.S. government debt….
#1 If you divide the national debt up equally among all U.S. households, each one owes a staggering $125,475.18.
#2 The federal government has borrowed 29,660 more dollars per household since Barack Obama signed the economic stimulus law two years ago.
#3 During Barack Obama’s first two years in office, the U.S. government added more to the U.S. national debt than the first 100 U.S. Congresses combined.
#4 In the new budget that the Obama administration has proposed, the U.S. government would spend 3.7 trillion dollars in 2012 and by 2021 the U.S. government would be spending a whopping 5.6 trillion dollars per year.
#5 The U.S. government currently has to borrow approximately 41 cents of every single dollar that it spends.
#6 The total compensation that the federal government workforce earned last year came to a grand total of approximately 447 billion dollars.
#7 The U.S. national debt is currently rising by well over 4 billion dollars every single day.
#8 The U.S. government is borrowing over 2 million more dollars every single minute.
#9 The U.S. national debt is over 14 times larger than it was just 30 years ago.
#10 Unfunded liabilities for entitlement programs such as Social Security and Medicare are estimated to be well over $100 trillion, and nobody in the U.S. government seems to have any idea how we are actually even going to come close to meeting all of those obligations.
#11 If you were alive when Christ was born and you spent one million dollars every single day since that point, you still would not have spent one trillion dollars by now. But this year alone the U.S. government is going to go about 1.6 trillion dollars more into debt.
#12 If the federal government began right at this moment to repay the U.S. national debt at a rate of one dollar per second, it would take over 440,000 years to pay off the national debt.
So have our politicians learned anything from the mistakes of the past?
The U.S. government continues to spend money on some of the most ridiculous things imaginable. For example, the Department of Health and Human Services has just announced a brand new $500 million program that will, among other things, seek to solve the problem of 5-year-old children that “can’t sit still” in a kindergarten classroom.
Isn’t it good to see the government investing our hard-earned tax dollars so wisely?
Of course if our kids weren’t being constantly fed foods packed with sugar, high fructose corn syrup and aspartame we wouldn’t have to spend 500 million dollars to deal with this problem.
When it comes to government waste, nobody seems to do it any better than the U.S. government.
Our politicians continue to assume that the rest of the world will always want our dollars and our debt, but that is simply not the case.
Over the past couple of years, global leader after global leader has publicly talked about the need for a new world reserve currency.
In fact, globalist institutions such as the IMF and the World Bank have been very busy discussing what the world is going to use as a global reserve currency after the death of the dollar.
The rest of the world is not sitting around waiting to see if the U.S. financial system is going to recover. They are already making plans for the demise of the dollar. They are increasingly using other currencies to trade with. They are becoming more hesitant to buy more of our debt. They are realizing that the days of U.S. dominance are coming to an end.
So what is that going to mean for us?
It is going to be a complete and total disaster.
Right now, we live far, far beyond our means. We borrow gigantic piles of money to make up the difference between what we produce and what we consume. We are absolutely dependent on the fact that the rest of the world will take our dollars in exchange for the things that we need.
The current situation is not sustainable.
It will come to an end.
When it does, our standard of living is going to feel like it has changed overnight.
Read the entire article HERE.
Road To Hyperinflation: James Turk
By Frank Tang and Aaron Pressman
Mon May 16, 2011 7:31pm EDT
Famed gold bull John Paulson held his ground, but Soros was joined in the retreat by several other big names, including
Eric Mindich and Paul Touradji, according to 13-F filings with the U.S. Securities and Exchange Commission that provide the best insight into where hedge funds are placing their bets.
Soros, who has been bullish on gold in the past several years, cut his holdings in the SPDR Gold Trust (GLD.P) to just $6.9 million by the end of first quarter, compared with $655 million in December, becoming the most high-profile investors to turn his back on one of the market’s best-performing assets.
He also liquidated a 5 million share stake in the iShares Gold Trust (IAU.P), the filings showed. His total holdings in gold-backed ETFs was $774 million as of December.
Gold rose for a tenth consecutive quarter in the three months to March, hitting record highs above $1,400 an ounce, buoyed by political turmoil in the Middle East and North Africa and lingering worries about indebted European countries.
The gains accelerated in April, but peaked at the start of this month, reaching a record $1,575 an ounce on May 2.
Prices have since fallen more than 5 percent amid the biggest commodities slump since late 2008, a move partly triggered by a Wall Street Journal report that Soros’ $28 billion fund was selling precious metals — and felling fears other big funds were also seeing a peak.
Eric Mindich, who runs the Eton Park Capital Management, nearly halved his stake in the SPDR gold trust to $326 million for the first quarter, a filing showed on Monday.
Mindich’s fund also owned $839 million worth of call options by the end of first quarter, compared with $1.1 billion worth of put options at the end of the fourth quarter.
Touradji Capital Management, one of the world’s largest commodities-oriented hedge funds run by Paul Touradji sold 173,000 shares in the SPDR Gold Trust during the quarter. Those shares would be worth about $25 million at current prices.
But John Paulson, who notched the industry’s biggest ever payout last year, kept his 31.5 million share or $4.4 billion stake in the SPDR fund, remaining the biggest shareholder of the world’s largest gold-backed exchange traded fund for the quarter, according to regulatory filings.
DEFLATION THREAT RECEDES
The sales make sense given that Soros said he had bought gold because he was worried about deflation, said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Pittsburgh.
“It’s pretty hard to make the case for deflation right now so if that was a reason you were buying gold, you should take this signal from Soros,” he said.
Inflation is now the greater concern, Luschini said. So most investors should still keep about 3 percent to 5 percent of their assets in gold to protect against inflation and possible further problems in the world financial system.
Soros also slashed stakes in gold and silver mining companies during the first quarter. The firm owned 1.4 million shares of Kinross Gold (K.TO) at the end of the quarter, down from 4 million shares three months earlier. Holdings in Novagold Resources (NG.TO) dropped to 3.5 million shares from 12.9 million.
Gold ended the first quarter little changed, as the spot gold prices were only $10 higher to end at $1,430 an ounce on March 31, and the SPDR Gold Trust was up 1.3 percent.
In the second quarter, gold hit a record high $1,575.79 an ounce on May 2 fueled by the outlook of low U.S. interest rates.
So far in the second quarter, SPDR Gold Trust’s bullion holdings gained only about 1 percent to 1,229 tonnes as of Friday, well below its record high at 1,320.436 tonnes set on June 29 last year.
Institutional investment managers are required to file form 13-F with the SEC within 45 days after the end of each quarter.
Read the entire article HERE.
May 9, 2011
As we warned our readers on May 1, 2011, when silver had clawed its way back to about $48 per ounce: “We expect another massive price attack in the next few days.”
We came to this conclusion based upon a number of factors, including the impending opening of the Hong Kong Merchantile Exchange, which will be controlled by many of the same international players who control NYMEX. Like clockwork, a vicious attack, perhaps the most ferocious one ever mounted in the history of precious metals, began on Monday, May 2, 2011. We knew it was coming, but to be honest, we didn’t expect the level of ferocity. Following our own suggestions, when silver had tanked by about 18%, we entered into a small speculative long position, using the SIVR silver trust. The price punched right through the minor support level we had chosen, and continued down.
Had we realized the depth of the silver short seller despair, we would have played the game a bit differently. We would have waited longer, bought a lot more later on, and created a much longer term position. As it is, we have lost nearly nothing, and will do it anyway. Nevertheless, as irrational as this kind of thinking is, and as much as we warn people against it, human beings are human beings and we are not happy about putting on a little bet, no matter how small, that fails to catch the bottom of a dip.
The level of despair among short sellers, which is motivating this attack, is growing. Anything could happen at this point. They could give up entirely, or the attack could become more ferocious. We don’t know. What we do know is that the short sellers’ predicament has just grown worse. They will eventually become even more desperate than they are now as weeks and months pass by. We will explain why shortly.
New and ever larger performance bond deposit requirements are being announced by the NYMEX so-called “clearing house risk committee” (performance bond committee) almost every other day. On top of these substantial increases, the individual clearing members are often making even bigger demands and hiking up performance bond requirements even higher.
We cannot help but wonder if some of these clearing members are themselves short silver, or if they are deathly afraid that other clearing members will default, leaving them footing the bill? Or are they trying to help attack their own customers? To the extent that a clearing member is raising performance bonds above the level of the exchange, customers should say goodbye and never do business with them again.
According the official spokesperson for CME Group, which owns NYMEX, the performance bond increases are designed to address “increased risk”. If this were so, however, such changes would apply only to short sellers and new long buyers who purchased up in the higher price ranges. Most of the older long buyers were sitting on huge profits from the upward movement of silver, when the new bond requirements were imposed in the $49 range. They posed no greater risk at all than they did back when they made their purchases at $18, $20, $25 per ounce, etc.
But the exchange and its dealers don’t play the game that way. Instead, they apply these changes to everyone, even people who may have bought when silver was down near $18 per ounce, even though these older position holders pose no greater risk of defaulting than before. The exchange committee members are quite expert at all this, and are well aware that the net effect of what they were doing would be to throw people involuntarily out of positions. The effect is carefully calculated and thought out, and is part of the overall process used to artificially control silver prices.
Coupled with the sudden increased performance in bonds, there has been an all-out media effort to convince people that a “bubble is bursting” even though, as we will shortly explain, anyone who is worth his salt as an analyst knows it isn’t true. There has NEVER been any bubble in silver in 2011, and therefore, it cannot possibly “burst”. There has simply been an unwinding of a grossly underpriced asset that has been subject to a multi-year price suppression effort.
Be that as it may, this downturn provides, for the first time in a long time, more than mere gambling opportunities. Highly leveraged and undercapitalized speculators have been kicked out of their positions, and they had pushed the price of silver up very fast. It would have gone to the same levels, anyway, and beyond, but the process would have been slower and steadier if the market had been limited to cash buyers and well-capitalized investors.
We have been carefully observing the methods used in this attack and have reached some conclusions. The attack is not sophisticated. It is NOT rocket science. The method is so simple that it is astounding that so few people see it for what it is. Regulators could put an end to it any time they want to. They simply don’t want to. That means, of course, that they are essentially complicit. There are genuine folks over at CFTC, like Commissioner Bart Chilton, but they are operating at an agency which is structurally corrupted, with a revolving door swapping employees to and from the regulator and those who are supposed to be regulated.
The current price attack involves an overwhelming creation of transient short positions that last less than one day. This is expensive to do in terms of upfront cash. But it isn’t quite as expensive as it may seem at first glance. Each day, except on Friday, May 6th, more than 10,000 short positions appeared to be transiently created, closed and recreated during the trading day. This must have required posting at least $180 million in performance bonds. However, to give credit to the ingenuity of the manipulators, most cash is recouped by the end of the trading day. With access to Federal Reserve loan windows, putting up an infinite amount of upfront fiat cash in the morning of a trading day is no deterrent.
From what we can see, this is what they are doing, in a highly coordinated fashion:
1) Either using control over the exchange committee system to induce sudden hikes in performance bond requirements, or opportunistically using such hikes. The hikes soften up the market by causing an initial destabilization of accounts of overleveraged long position holders. Some of the big clearing members of NYMEX have enhanced this effect by raising their own requirements higher than the exchange committee, and thereby softening up their own customers more substantially;
2) Using analysts to make extensive commentary to the mass media to the effect that the “silver bubble has burst” in the hope of inducing fear in the marketplace, further softening it up, in preparation for step 3.
3) Using trading “bots” to transiently create thousands and, sometimes, tens of thousands of intra-day short positions, designed to soak up opportunistic buying by better capitalized long side oriented investors. The flooding of the market with this paper supply of imaginary “silver” prevents futures based prices from rising and triggers stop-loss orders among leveraged customers.
4) Closing most intra-day positions into the mass of involuntary liquidations. Sometimes, “artillery” is left on the battlefield by the close of the day. This happens when transient short positions cannot be fully unloaded. In other words, the bots are competing with heavy buying from well-capitalized buyers who now want to pay the “bargain” prices created by the bots, and taking over those positions before the bots have the opportunity to buy them back. This shows up as a net increase in the “open interest” in silver, even as the price is falling. That aberrant result is impossible if a bubble were really “bursting”, because we would have run out of such buyers by now;
5) Rinsing and repeating the same process the next day, and on various days after that, allowing for a few “up” days centered around points of natural technical support, in order to preserve plausible deniability.
Again, CME officials claim that the sudden margin changes are motivated by “high volatility”, and that their actions are not a cause for the recent crash of silver prices. That is disingenuous at best. The changes are not “motivated” by high volatility — they are the initial cause of the volatility. They knowingly destabilized the accounts of highly leveraged buyers. Those buyers were highly leveraged because the exchange previously encouraged high leverage by marking down performance bond requirements. Sudden upward adjustment of performance bonds creates an opening for trading “bots” to move in, and helps make the manipulation less costly.
If performance bonds were never set in the first place, at ridiculous ultra-low levels, then suddenly raised, then suddenly lowered, over and over again – which is exactly what the exchange has done for years – prices would be stable. Substantial performance bonds, kept the same at ALL times, would mean no “pie-in-the-sky” undercapitalized long buyers drawn into the market. The ability of the manipulators to flush them out, collect their performance bonds, and periodically crash commodity prices would end.
In that scenario, silver and gold would transform back to their 10,000 year old role as the most stable stores of value that exist, and conservative investors would convert their fiat cash, stocks and bonds into precious metals. That is a nightmare scenario for western central bankers, because it is a severe threat to the long term profits of the commercial casino-banks they service, whose tight control over the world economy facilitates the sale of derivatives and control over the contingencies that trigger such derivatives. This tight control cannot exist in an honest money gold/silver base monetary system, and is based primarily upon control of paper and electronic money printing presses
But, in spite of the incredible power of the central banks standing behind them, short sellers are losing this war. Their surface “success” is an illusion. Instead of escaping from liability, their liability is growing. In spite of the propaganda machine, the attack by clearing members against their own customers, and the trading bots, buying interest has remained incredibly high. This is exemplified by the fact that not all of the tens of thousands of transient intra-day short contracts have been closed by the end of the trading day. That is NOT a sign of a bursting bubble but, rather, of just the opposite.
In a normal market, the cost of a relatively fixed supply of goods will always result in rising prices when the number of purchase contracts rise. This is because demand has increased while supply has stayed roughly the same. But, not in our corrupted futures markets. On Tuesday, May 3, 2011, CME Group records show that the silver bars underlying 23 contracts were delivered. That should have reduced “open interest” contracts by 23. Instead, there was a net INCREASE that day of “same-month” positions by 10 contracts. In other words, short sellers will now need to deliver 165,000 additional ounces of silver this month.
On Friday, May 6, 2011, the short sellers must have been proud of themselves. They were able to deliver 243 contracts, or 1.2 million ounces of silver, which is a huge amount. But, the open interest for May delivery only declined by 13 contracts, which means that the artificially cheap prices attracted 230 new long contract buyers who paid cash. The new contracts will need to be delivered this month. As hard as it must have been to find the silver for May 6th delivery, they are now forced to find another 1.15 million ounces somewhere.
The so-called “spot” price is now largely irrelevant, but short sellers have still not acknowledged that fact to themselves. Intense physical silver demand continues. This is amply illustrated by continued backwardation. Dealers at COMEX and the LBMA may create fake prices at will, but the cash market is their achilles’ heel. Short sellers have put paper silver on a fire sale at the futures exchanges. Yet they have not improved their position by doing so. They have, instead, insured a worse problem. Cash buyers put the fear of God in the hearts of silver manipulators. Cash buyers can put them into bankruptcy, destroy their power over the market, and discredit the futures markets, LBMA and the central bankers by inducing multiple defaults.
New “urban” myths about mysterious eastern billionaires buying up silver have spread quickly. On April 28, 2011, silver was selling for a high of $49 per ounce. The open interest had fallen to as low as 129,711 as short sellers slowly capitulated, and serious cash buyers took the bait. Allowing higher and higher fiat prices was effective in allowing open short positions to be closed, which is what short sellers must do before it is too late. On one day, for example, in early Asian trading, prices rose temporarily by over 10%. Asian short sellers were breaking ranks and buying back positions at any price. Then the bull-headed spirit of their European and American comrades awoke, and the current attack on silver prices began.
The market is NOT becoming dispirited or shell-shocked, as would have once been the case under similar conditions. Instead, we are seeing heavy buying by well capitalized long buyers who have probably read Andrew McGuire’s emails. They now know the score. They know that this is simply a manipulation event. As of May 5, 2011, the open interest had already risen to 134,804. The evil “Empire” is facing 5,093 new long positions. Two hundred sixty six of those are “same-month” positions, bought with a 100% cash, and need to be delivered this month.
Tens of thousands of other positions have changed hands. The trading “bots” managed to close most of their intra-day shorts into margin calls and stop loss orders, but have not accomplished much in terms of the level of open interest. Tens of thousands of existing contracts plus 5,093 additional hard long positions were unintentionally created by the trading bots, and all of these are now transferred from undercapitalized longs who would never have taken delivery, into much stronger hands.
The percentage of contracts, going forward, that will be forced into delivery as the months pass, will rise as a result of the transfer from weak to strong hands, and the silver short sellers’ problem is now bigger. New buyers have streamed in and bought at lower prices. That is the natural response of any bull market to a major manipulation event like this one. Silver is in a secular bull market. That has not changed as a result of a manipulation event. In fact, nothing has changed, except the unfavorable position of the silver short side manipulators, who are facing a much worse picture now than they did before they started this manipulation.
They have collected performance bond “candy” from undercapitalized investment “babies”. But, they need much more. Short sellers need to create the type of dispirited shell-shocked market they managed to create in late 2008. The effort, back then, made use of the demise of Lehman Brothers to offload hundreds of billions of dollars worth of short positions in all the precious metals in the OTC derivatives market. So far, however, this manipulation event isn’t working very well. The only way to bring the number of positions down is to allow the price to rise substantially.
If they abandon the effort now, as Friday’s action implies they might, it will be impossible for them to shift their short term price reduction into a longer term situation of altered market perceptions, which is their end goal. The Federal Reserve can give them as much cash as they need to mount as many paper-based attacks as they want, but it can’t give them physical silver. Short sellers will need to “put up” or “shut up”. They need to pay the price for their misconduct over many years.
Short sellers have proven to be so bull-headed that one has to doubt whether they will do the smart thing. The next move might be to flood physical markets with newly “cashed out” baskets of silver bars from the SLV silver trust stockpile. That might dampen pressure from increasing demand, and might even meet the immediate need for physical delivery in the OTC cash markets. Over the long run, however, assuming that the price remains discounted, the bars will quickly disappear and as they raid the stockpile, others will buy SLV shares and also raid the stockpile. SLV may end up stripped of its silver.
Does SLV really have the full amount of silver claimed? It does have a solid-seeming inspection report that says it does. If it doesn’t, we may be finding out soon enough. If those who have been dismissed as paranoid people end up being right, and there is not enough silver in the stockpile to cover claims, jail cells will be waiting. The CME Group clearing house risk committee can raise performance bonds to 100% of the amount that long buyers paid for their positions in silver. They can even raise it higher than that, but only at the risk of jail cells, and/or triple damages that cannot be discharged in bankruptcy for its individual members. Meanwhile, manipulators can continue to flood the market with bidding-bots and intra-day transient short positions. They can theoretically absorb all the buying pressure if they are stubborn enough.
They can continue to raid the SLV stockpile to make deliveries, and spin those withdrawals to the media as the “public getting out of silver”. But this is not 1980. No one remotely similar to Nelson Bunker Hunt is relying on bank financing to corner the silver market using leveraged positioning. Price pressure is from the cash physical market, not derivatives. COMEX is relatively irrelevant. Nothing the manipulators can do in derivatives markets will relieve the physical market pressure.
Short sellers have replaced weak hands with strong ones who are much more likely to take delivery. This manipulation episode will dramatically unwind, just as it dramatically began, when silver short sellers capitulate, as they must. Prices will shoot far beyond the recent high levels. “Bottom picking”, therefore, may be nice but it isn’t absolutely necessary. The prospective price appreciation over the next few months or years should overwhelm any differences in price right now. It won’t matter whether you bought at $50, $40, $35, $20 etc. In a few months, the price will likely be back up, and, in a few years, the price will be many multiples of all those numbers.
Technical support levels still have meaning because manipulators want it to be so. Cash fueled trading “bots”, filled to the brim with Federal Reserve funny money, can be programmed to open as many transient intra-day short positions as needed to punch right through any support levels. But manipulators must preserve an illusion of natural market movement. We can expect loose adherence to chart patterns, allowing bounces where appropriate, and then, punch-throughs.
The only way a psychologically depressed market could now be achieved is by crash prices beneath the long-term trend line, which is around $22.50 per ounce. This would require hundreds of millions of additional trading bot dollars to do. They might try it, at some point, but more likely, they will give up for the moment and return to a slow capitulation. Even if they do push prices down below $22.50, we doubt it would work for very long. Such a battering would cause heavy technical damage, but as noted, this market is not being driven by technical trends.
If they don’t achieve the sub-$22.50 level, even most technical analysts relied upon by the big non-manipulation-involved hedge funds and other big players will assume that the silver bull market is still running and that this is merely a deep correction. They will buy back in and run the price back up. In other words, if the manipulators do not achieve a sustainable self-perpetuating shell-shocked market, as was achieved in late 2008, the manipulators will not be able to close short positions without great losses.
It may be possible to use technical analysis to make intra-day, or multi-day gambles on bounces. We would not feel comfortable, however, with recommending that this be done with substantial capital, because the manipulators could suddenly attack again at any time. If they decide to punch through the strong technical support level at $33-34, they will do so with everything they’ve got. They will need to take down the price very quickly because they need to get it done before so much of the month has passed that they will be impaired in their ability to gather silver to make delivery in the OTC market.
You must think long term now before entering this silver market, because you may well get stuck with a silver position for a longer term than you may expect. But if the manipulators do press the price down below the $22.50 level, you should buy with every dollar you have available, because even though things will look bleak by then, with every media outlet heralding the “bursting of the silver bubble”, a few months later, the price will be back to way above $50 again. Prefacing the big fall will probably be a huge technical rally in the U.S. dollar, and a big fall in the stock market. These events may not happen until the end of QE-2 in late June.
On the other hand, if you don’t buy now, and, instead rely on the forlorn hope that manipulators will push hard enough to take prices into $20-22 level, you may well lose the excellent opportunities that now exist. There is no way to know, in a manipulated market, whether the manipulators will decide to punch through a particular support level. As we have stated in previous articles, the better way to deal with this is to pick a reasonable price level acceptable to your pocketbook, put in a buy order, and wait. If your buy order is successful, and the price turns up immediately, great. If not, be secure in knowing that you have a long term view, and a position in an asset destined for much more appreciation than we’ve ever seen before, over the next few years.
In short, it is time to stop thinking about short term gambling, because no metric you use is safe against the depredations of a manipulation that regulators refuse to stop. Buy with the long term in mind and wait for the market to punish the manipulators, which it will. Take physical delivery if you buy at the futures markets. Remember, the primary value of precious metals is NOT in making “big money” from gambling in the banker-controlled gambling casinos. We have always strongly suggested that only very small gambles like those you would make in Las Vegas should be made on a speculative basis. But buying on big dips, like this one, is not a speculative undertaking. It is long-term investing. The long term power of silver, like gold and platinum, is to preserve the buying power you’ve worked for all your life.
The powers-that-be want the U.S. dollar and all other paper fiat currencies to lose value every year. In fact, 2% inflation is their openly stated goal. If you consider compounding, that is an inflation rate that destroys the value of money very rapidly. But the true inflation rate in America is already closer to 6%, not anywhere near the low official numbers that the government likes to report to the media. With a huge increase in the amount of circulating funny-money liquidity around the world, including but not limited to the U.S. dollar, inflation is likely to rise much more sharply from here forward all over the world, not just in the U.S.A. The willingness to tackle this inflation, on the part of policy-makers, is very limited because serious efforts involve a lot of pain to powerful constituencies.
Investing in precious metals means converting U.S. dollars, pounds, euros, etc., into hard “money” that can be manipulated in price, but which cannot be debased. Manipulation has its limits, and since it appears to have been happening in the gold and silver markets for decades, in one form or another, the unwinding that is now beginning will just get more intense with time. No matter what technical support levels they target and take out, the short sellers are not going to extricate themselves without paying big bucks. Knowledge of how the price suppression scheme operates is in the public domain, and it is highly unlikely that manipulators will succeed in shell-shocking markets with their shenanigans, nor suppressing prices, for any significant period of time.
The next step to control prices for several more months will be borrowing enough money from the Fed’s loan windows to keep their trading bots active whenever some type of opportunity presents itself, and to become even more aggressive using control of exchange mechanisms to continue sudden increases in performance bonds. Because SLV shareholders tend to be unaware of the fact that they are dealing in a manipulated market, they continue to buy and sell the trust at whatever the spot price may be manipulated to. Thus, short sellers can use opportunistic futures markets attacks to raid SLV silver stockpiles “on the cheap”.
This should allow them to obtain enough silver to meet physical delivery demands, and even to periodically flood physical markets. Meanwhile, the reduction in the stockpiles will be spun into a claim that the “bubble is bursting” as “big players” “sell” SLV shares. In fact, they are not selling at all but, rather, cashing shares for silver to meet delivery demands. We doubt, for this reason, that the speculations about impending COMEX defaults have any basis in fact.
Silver investors should understand that the ride is going to be a roller coaster, as it always has been. Going forward, the intensity of that thrill ride is likely to increase proportionally to the desperation of short sellers. The biggest threat to silver prices will be the supposed end of QE-2. Short sellers are likely to view it as another opportunity to attack. But July is also a big delivery month in silver, and the delivery demand will be considerably higher than now, as a result of this price attack and the replacement of weak hands with strong ones.
If the manipulators had strong faith that the cessation of QE will save them, they wouldn’t have launched the ongoing attack we are now suffering through. The most likely outcome of the end of quantitative …
Read the entire article HERE.
The world of institutional investors received a stark message over the weekend regarding the legitimacy of gold as an asset class. The University of Texas Investment Management Company, which manages the endowment for the Texas teachers pension fund, has placed 5% of its assets in gold bullion. This represents a purchase of $1 billion of gold bullion; in excess of 650,000 ounces at today’s prices.
Of note was the fact that the entity chose to place its investment not in gold ETFs, but rather in physical bullion due concerns regarding counter party risk. The request to take physical delivery from the COMEX also casts light on risks of a COMEX default since gold in COMEX vaults only amounts to approximately 5% of the outstanding gold contracts.
In the 1970s, asset allocation recommendations from U.S. brokerage houses and European banks routinely included a 5-10% allocation to gold. Despite gold’s rise, the yellow metal still represents sub 1% of the global market cap of all assets. The news of this $1 billion purchase over the weekend sends another strong message about gold’s re-emergence as a legitimate asset class.
It is somewhat ironic that these events are occurring after a nearly six-fold rise off gold’s $250 per ounce low at the turn of the millennium. Investors will be watching closely to see if this move triggers similar reallocations among other large pension funds.
Read the entire article HERE.
April 15, 2011
Silver futures surged today to a new 31-year high of $42.80 per ounce. Silver is up 146% since NIA declared silver the best investment for the next decade on December 11th, 2009, at $17.40 per ounce. All we need is for silver to rise by another 15.5% and silver will reach its all time high set in 1980 of $49.45 per ounce.
Keep in mind, silver’s high of $49.45 per ounce in 1980 would equal about $140 per ounce in today’s dollars adjusted to the consumer price index and about $400 per ounce in today’s dollars adjusted to the real rate of price inflation. Despite silver’s huge gains in recent months, we have yet to see silver rise by $2 or more in a single day. When we start to see a true “silver mania” with investors around the world rushing out of their U.S. dollars and panic buying silver, we expect to see silver gain by $5 to $10 in a single day on more than one occasion.
Back in February of last year when silver dipped to below $15 per ounce, we sent out an alert saying, “NIA believes this is a once in a lifetime entry point for those wishing to go long silver at a bargain basement price”. NIA suggested silver call options in February of last year that ended up gaining over 1,000%. NIA’s latest silver stock suggestion is currently up 175% from our profile price.
In NIA’s top 10 predictions for 2010, we predicted a major decline in the gold/silver ratio, which was 64 at the time. The gold/silver ratio declined in 2010 down to 46, and in our top 10 predictions for 2011, we predicted another major decline in the gold/silver ratio and projected for it to decline this year to 38. NIA has been the most bullish organization in the world on silver, yet recent gains in the price of silver have surpassed even our short-term expectations. The gold/silver ratio is now down to 35 and we believe it will decline to at least 16 this decade, and possibly as low as 10.
The artificially high gold/silver ratio of the past century will be looked back at as an anomaly caused by the silver price suppression scheme of the Federal Reserve, which was in cahoots with Bear Stearns and now JP Morgan. NIA’s President Gerard Adams exposed this scheme in NIA’s critically acclaimed documentary ‘Meltup’, which has now been viewed by over 1 million people with an overwhelming 96% of its viewers giving it a thumbs up, a world record for an economic documentary. According to Mr. Adams, the Federal Reserve chose to bail out Bear Stearns and not Lehman Brothers, because Bear Stearns was the holder of a massive naked short position in silver that they were on the verge of being forced to cover.
It is not a coincidence that Bear Stearns failed on the very day silver reached its then multi-decade high of $21 per ounce. Bear Stearns was on the verge of being forced to cover their naked short position, which could have sent silver from $21 per ounce to $50 per ounce overnight. By bailing out Bear Stearns and allowing JP Morgan to acquire Bear Stearns’ assets with the promise to cover any losses derived from them, JP Morgan was able to continue managing the silver short position and orchestrate a manipulative take down in 2008 from $21 per ounce down to $8 per ounce.
Only ten times more silver has been produced in world history than gold and from the years 1000 to 1873, a period of 873 years, the gold/silver ratio remained between 10 and 16. In fact, the Coinage Act of 1834 defined a gold/silver ratio of 16. The gold/silver ratio started to rise after silver was demonetized in 1873. Despite silver being demonetized, we saw the gold/silver ratio return to 16 on three occasions during the past century: in 1919, 1968, and 1980.
It was only ten months ago in June of 2010 that the gold/silver ratio was 70. With the gold/silver ratio now at 35, it means that silver investors have seen their purchasing power double over the past ten months, while those with their savings in U.S. dollars have seen their purchasing power decline by 20%. That’s right, forget about NIA’s silver call option that gained over 1,000% and forget about NIA’s most recent silver stock suggestion that is currently up 175%; the simple act of following NIA’s most basic suggestion of getting rid of your U.S. dollars and buying physical silver means that over the past ten months, your purchasing power has doubled while non-NIA members with U.S. dollars lost 1/5 of their real wealth.
The Federal Reserve can claim all they want that there is no inflation, but as we write this article we are eating Ben & Jerry’s ice cream that we just bought at Quick Chek for $5 a pint. Three years ago, the same pint of Ben & Jerry’s ice cream at Quick Chek cost us $3. Three years ago, one ounce of gold would have bought 295 pints of Ben & Jerry’s ice cream and it still buys 295 pints of Ben & Jerry’s ice cream today. Three years ago, one ounce of silver would have bought 5.7 pints of Ben & Jerry’s ice cream and today it buys 8.5 pints of Ben & Jerry’s ice cream.
Americans with their savings in U.S. dollars can today only afford 3/5ths of the ice cream that they could have bought three years ago, but those with their savings in gold have maintained their purchasing power, and those with their savings in silver have greatly increased their purchasing power. NIA is 100% sure that the gold/silver ratio will decline to at least 16 within the next few years, and that will mean those with silver will once again more than double their purchasing power. Considering that the gold/silver ratio overshot to the upside and was as high as 100 in 1991, we fully expect it to overcorrect to the downside and possibly reach a low of 10 this decade. That would mean a more than tripling of ones purchasing power from the current ratio of 35.
When silver rose to $49.45 per ounce in 1980, the government said that the rise was due to the Hunt brothers “cornering” the silver market. The truth is, silver reached $49.45 in 1980 due to the massive inflation that was created by the U.S. government during the 1970s, and the Hunt brothers were used as a scapegoat. The Hunt brothers were accumulating silver in order to protect themselves from a collapsing U.S. dollar, just like NIA has been encouraging its members to do in a countless number of articles and videos over the past two years.
When the Hunt brothers were accused by the U.S. government of “cornering” the silver market and trying to manipulate silver prices higher, they only owned a concentrated long position of approximately 100 million ounces of silver. JP Morgan today has a concentrated naked short position in silver of approximately 122.5 million ounces, but the U.S. government doesn’t seem to have any problem with it.
The problem with the Hunt brothers’ strategy of accumulating such a large concentrated long position in silver is that after silver prices rose, their position was simply too large for them to ever sell without causing silver prices to crash. With silver reaching $49.45 per ounce in early 1980, the world was about to lose confidence in the U.S. dollar, which would have caused an outbreak of hyperinflation. In a desperate attempt to save the U.S. dollar and prevent hyperinflation, the CBOT raised margin requirements and limited traders’ positions to only 3 million ounces of silver futures. The COMEX also limited traders’ positions to 10 million ounces of silver futures. Not only that, but the COMEX and CBOT only had a total of 120 million ounces of silver in inventory, and the COMEX was likely going to default from futures contract holders requesting physical delivery. The COMEX was forced to go into “liquidation only” mode, ending al l silver futures contract buying.
Combined with the Federal Reserve rapidly rising interest rates, silver prices began to plunge and the Hunt brothers were hit with massive margin calls. On one single day in March of 1980 when the Hunt brothers were forced to liquidate a large part of their position, silver lost 1/3 of its value, declining by over $5 to $10.80 per ounce. That represented a total decline of 78% from its high two months earlier.
NIA has been receiving a countless number of emails asking if now is the time to sell silver, and if silver could crash by 78% once again like it did in 1980. The fact is, while the Hunt brothers’ 100 million ounce concentrated silver position was on the long side, JP Morgan’s 122.5 million ounce concentrated silver position is on the short side.
While the Hunt brothers’ long position was impossible to sell without causing silver prices to crash, JP Morgan’s naked short position is impossible to cover without causing silver prices to explode to the upside. Being that the CFTC was so quick in 1980 to support the position limits that were then imposed by the CBOT and COMEX, NIA believes it would only be fair for the CFTC to mandate similar position limits today. This is unlikely to occur because the U.S. government believes JP Morgan’s silver manipulation to be a good thing, since it is giving the phony appearance that the U.S. dollar still has purchasing power. The free market will ultimately win in the end and silver prices will soar through the roof to where they belong based on supply and demand fundamentals.
Read the entire article HERE.
By Michael Pento
Monday, April 4, 2011
For years the Federal Reserve has told us that in order to detect inflation in the economy it is important to separate “signal from noise” by focusing on “core” inflation statistics, which exclude changes in food and energy prices. Because food and energy figure so prominently into consumer spending, this maneuver is not without controversy. But the Fed counters the criticism by pointing to the apparent volatility of the broader “headline” inflation figure, which includes food and energy. The Fed tells us that the danger lies in making a monetary policy mistake based on unreliable statistics. Being more stable (they tell us), the core is their preferred guide. Sounds reasonable…but it isn’t.
If it were truly just a question of volatility the Fed may have a point. But for headline inflation to be considered truly volatile, it must be evenly volatile both above and below the core rate of inflation over time. If such were the case, throwing out the high and the low could be a good idea. However, we have found that for more than a decade headline inflation has been consistently higher than core inflation. Once you understand this, it becomes much more plausible to argue that the Fed excludes food and energy not because those prices are volatile, but because they are rising.
If you talk about the grand sweep of Fed policy, it’s fairly easy to fix the onset of our current monetary period with the onset of the dot.com recession of 2000. To prevent the economy from going further into recession at that time, the Fed began cutting interest rates farther and faster than at any other time in our history. During the ensuing 11 years, interest rates have been held consistently below the rate of inflation. Even when the economy was seemingly robust in the mid years of the last decade, monetary policy was widely considered accommodative.
Over that time annual headline Consumer Price Index (CPI) data has been higher than the Core CPI 9 out of 11 years, or 81% of the time. Looking at the data another way, over that time frame, the U.S. dollar has lost 20% of its purchasing power if depreciated year by year using core inflation, and 24% if depreciated annually with headline inflation. The same pattern held during the inflationary period between 1977 thru 1980, when the Fed’s massive money printing sent the headline inflation rate well above the core reading. The empirical evidence is abundantly clear. When the Fed is debasing the dollar, headline inflation rises faster than core. The reason for this is clear. Food and energy prices are closely exposed to commodity prices which have a strong negative correlation to the falling dollar that is created by expansionary policies.
Data we have seen thus far in 2011 underscores the need to focus on headline inflation and to avoid the trap of relying on the relatively benign core. The difference between the core rate and headline rate of inflation was .6 percent in January and a full percentage point in February. If annualized those relatively small monthly disparities will become enormous.
It is shocking how few Americans, even those with economic degrees and press credentials, fully appreciate the Fed’s vested interest in reporting low inflation. With benign data in hand, Fed policy makers are given a free hand in adopting stimulative policies. Central bankers who shower liquidity on the economy earn the gratitude of their peers and the thanks of their political patrons. But once a central bank goes down the expansionary path to fight recession it is much easier to keep pumping money than to reverse course when inflation starts to bite into purchasing power.
The sad truth is that the Fed’s record low interest rates are once again causing food and energy prices to rise much faster than core items. Bernanke is focusing on the core just as we need him to focus on the headline. It’s time for the Fed to stop hiding behind flimsy statistical juggling and to start protecting the value of our dollar, which unfortunately is in free fall no matter what statistics one chooses to use.
Read the original article HERE.
By Garry White, and Rowena Mason
6:02PM BST 27 Mar 2011
Certainly, the fundamentals are sound. Declining mine production has resulted in a tight supply as demand continues to rise.
Investors are still keen on silver because of currency and geopolitical concerns. Holdings in the iShares Silver Trust, the largest silver exchange-traded fund (ETF) in the world, increased by 179 tonnes to 11,140 tonnes in the week to March 24. Gold holdings in ETFs fell over the same time period.
“The psychologically important mark of $40 a troy ounce is meanwhile within a reachable proximity,” Commerzbank said on examining the ETF figures.
The fact that investors are keen on silver means that ETFs take supply out of the market, which can mean price rises become a self-fulfilling prophecy.
Silver is also an industrial metal, so demand for it is rising as the global economy recovers. Although it is no longer used much in photography, as the industry switches to digital applications, its use in electronics sectors, especially in semiconductor production, is increasing. There are also new applications for the metal emerging, such as silver oxide batteries.
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Both gold and silver hit significant highs on Thursday last week. Gold futures jumped to an all-time high of $1,448.60 following the turmoil in Libya and further protests around the Middle East. Silver prices reached $38.18 on the same day, the highest in 31 years. Silver prices jumped almost 6pc last week after more than doubling over the last year.
The main argument that silver bulls use relates to the gold/silver ratio, which is simply the price of gold divided by the price of silver in the spot market.
When gold and silver were used as currency, it was decided that 16 ounces of silver had the same degree of purchasing power as one ounce of gold. The silver/gold ratio therefore stood at 16:1.The last time that the ratio reached 16:1 was in the 1980 precious metals spike following the energy crisis.
At the start of October last year, when this column last talked about silver, the gold/silver ratio stood at just under 60. Today the ratio stands at 38.3, having fallen sharply over the last month. At the start of February the ratio was at 49.5. There is definitely a trend that silver is increasing in value relative to gold.
The fact the ratio is below 40 is itself a reason for caution. The long-term average is about 40, so today’s ratio could be about right. Most analysts did not expect the price to rise so sharply this year, so the price could be ahead of itself – especially if there is a quick resolution to the current turmoil in the Arab world.
There are other downside risks, too. Any strengthening of the dollar is likely to cause a dip in commodity prices, as they are priced in the US currency. There has been some brighter economic data from across the Atlantic of late causing some to ask the Federal Reserve to stop its second bout of quantitative easing early.
“The economy is looking pretty good,” James Bullard, president of the Federal Reserve Bank of St Louis said on Saturday. “It is still reasonable to review QE2 in the coming meetings, especially this April meeting, and see if we want to decide to finish the programme or to stop a little bit short.”
Printing money is expected to weaken the dollar over the long term, so any early cessation could cause the US currency to rise. As commodities are priced in dollars, any strengthening makes them more expensive in other currencies causing a weakening of demand.
After such a bull run, any correction in silver prices could come hard and fast, so it may be wise to wait and see if it appears, especially since silver equities now appear to be very richly rated.
However, the US debt is enormous and, at some point, policy makers may decide that inflating away the debt is their only option, prompting the dollar to devalue. This means silver will remain attractive over the long term. But now does not look like a good time to buy.
Read the entire article HERE.
by Glenda Kwek
March 22, 2011
The Sydney Morning Herald
Libyan leader Muammer Gaddafi is reportedly sitting on a 143.8-tonne $6.4-billion pot of gold – enough to pay mercenaries to fight for him for years.
The gold bullion – held by the Libyan central bank and controlled by Colonel Gaddafi – is among the 25 largest reserves in the world, the Financial Times reported, citing the International Monetary Fund.
They provide the 68-year-old Libyan strongman a lifeline after billions of assets held offshore were frozen by the United States and the 27 member states of the European Union.
The gold reserves are believed to have been moved from the central bank in the capital, Tripoli, to another city such as Sebha in the south, which is near Libya’s African neighbours Chad and Niger, after fighting broke out, the Times reported.
While bankers told the Times that international banks or trading houses were unlikely to buy any gold believed to be from Libya, Colonel Gaddafi may find buyers in Chad or Niger.
“If a country like Libya wants to make their gold liquid it would probably be in the form of a swap – whether for arms, food or cash,” Walter de Wet, the head of commodities research at Standard Bank, told the Times.
The price of gold has risen recently, fuelled by growing instability in the Middle East and North Africa.
“If the dollar remains weak and we get further unrest in the Middle East, there is a very reasonable chance for gold to test the record high,” Darren Heathcote, head of trading at Investec Australia, told Reuters.
Ousted Egyptian dictator Hosni Mubarak reportedly used the 18 days of protests against his rule to move his fortune – estimated at up to $64 billion – to untraceable accounts in Western countries.
Other countries buying large amounts of gold include Iran, China, Russia and India, the Times said.
The United States holds the world’s biggest gold reserves – 8965.6 tonnes, according to the World Gold Council.
Other countries with massive stockpiles include Germany with 3749.8 tonnes, China with 1161.9 tonnes, India with 614.8 tonnes and Venezuela with 401.1 tonnes.
Read the entire article HERE.