MIKE

Posts Tagged ‘Silver’

by Michael Maloney
December 19, 2011
WealthCycles.com

Just last week we wrote about the dangers that MF Global revealed in the global banking system. The basic idea is that MF Global and probably every other Wall Street bank is gambling with their clients’ wealth. What’s clearly a fact is that these firms’ fiduciary responsibility is to themselves and their shareholders—it’s their clients that are the ones being taken out back for slaughter.

A Barron’s article today, published in Yahoo! Finance, proves many of those clients’ worst fears—that lost assets including cash, stocks, commodities, futures, and gold and silver will be commingled by MF Global’s trustee, and losses will be shared amongst all of MF Global’s creditors. But the holders of gold and silver had warehouse receipts identifying individual bars and coins that the clients believed were theirs. These clients, of course, assumed that their metals were safe and sound in the custody of MF Global, but as we have talked about before, when a bank goes under, anyone storing metals becomes an unsecured creditor—and in that case you are at the whim of the bank—or more accurately the bank’s bankruptcy trustee.

When we wrote this in July of 2010, many thought we were crazy. Ownership is ownership, they claimed, and it didn’t matter if you owned gold in ETF format, pooled account, or with a bullion bank.

Just as when you deposit your currency at a bank, the bank doesn’t keep your dollars separate from everyone else’s dollars; the bank simply tells you in your bank statements how much it owes you. But, legally, when you buy into a gold pool or certificate program, the bank becomes the owner of the gold.

If the bank gets into financial trouble (gasp!) it can sell your gold to maintain its assets at a level where it won’t get shut down and where it will avoid a run on the bank. In that instance, you won’t be paid back in gold, but rather in currency—less currency than the value of the gold the bank owed you—because logically a bank in trouble almost certainly would be forced to sell assets at fire-sale prices. If you live in a country with some kind of bank deposit protection (such as the Federal Deposit Insurance Corporation in the United States or Financial Services Compensation Scheme in the U.K.), your gold will not be covered. That’s because deposit insurance only applies to currency—meaning that, in the event of a bank crash, currency deposits are safer than unallocated gold.

When we first heard the story of Jason Fane of Ithaca, NY, having his precious metals held from transfer by the bankruptcy trustee, we smelled something fishy, and assumed that something more sinister was going on.

Today’s Barron’s article proves exactly those fears—that precious metals owners who seemingly owned their metals outright will actually lose a portion of the value of their precious metals. Barron’s says this:

That has investors fuming. “Warehouse receipts, like gold bars, are our property, 100%,” contends John Roe, a partner in BTR Trading, a Chicago futures-trading firm. He personally lost several hundred thousand dollars in investments via MF Global; his clients lost even more. “We are a unique class, and instead, the trustee is doing a radical redistribution of property,” he says.

But a redistribution of property is exactly what is planned—with “owners” of precious metals held by the former-MF Global being forced to take a 28% haircut on the value of their metals. But it gets worse:

So the big secret is out in the open now—and maybe, people won’t think we are crazy any more. As Mike Maloney has said for years: “If you can’t hold it, you don’t own it.”

 

Read the entire article HERE.

BY STEVE ST. ANGELO
10/10/2011
Financial Sense

 

 

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:

 

1. 1950’s – Nuclear energy…..too cheap to meter.
2. 2000’s – Shale Oil trillion+ barrels of U.S. reserves
3. 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.

 

FOOD EROI’s

 

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.
 

 

 

 

 

 

 

 

 

 

 

 

by Michael Maloney
Wealth Cycles
August 3, 2011

A recent white paper released by the World Gold Council confirms to a large extent what we at WealthCycles.com have been saying all along—that in just about any imaginable economic scenario, gold stands to outperform all other assets.

The report, The Impact of Inflation and Deflation on the Case for Gold, prepared for the Council by Oxford Economics, differs from our own analysis primarily in degree—we don’t think it puts nearly enough emphasis on the “perfect storm” of global economic and monetary factors brewing on the not-so-distant horizon—conditions we believe are converging to produce the greatest wealth transfer in history.

The study examines gold and its past performance under certain conditions such as high oil prices, positive or negative real interest rates, the strength of the dollar, inflation or deflation. Based on the historic analysis of gold’s performance, the study creates formulas with which to forecast gold’s future performance. As WealthCycles.com did in its own article, The Road Ahead, the study then postulates how gold will do under four potential future scenarios. The only scenario under which, according to the study, gold does not shine is its “Baseline scenario”:
Steady economic recovery in major economies supported by strong emerging market growth
Easing of financial stress and repair of banking

Read the entire article HERE.

RACHEL METZ
August 14, 2011
Associated Press

SAN FRANCISCO (AP) – For gold sellers on eBay, the recent stock market turmoil has been a boon for business. Gold and silver sales on eBay had already been rising steadily over the past several years – so much so that eBay Inc. created a special area in May to make it easier for buyers to find sellers.

Now, activity on that part of the site, the Bullion Center, is intensifying as consumers unnerved by the economic uncertainty flock to gold in hopes it will be a stable investment.

“When people are coming down to the question, ‘Do they want to have cash in the bank or gold in their hands?’ the answer is they’d rather have gold or silver,” said Jacob Chandler, CEO of Great Southern Coins, the largest seller of precious metals on eBay.

The stock market just ended one of its most volatile weeks in years, prompted in part by a downgrade in the nation’s credit rating and fears of another recession. The Dow Jones industrial average fell nearly 6 percent on Monday, its worst one-day drop since December 2008. Then the index rose Tuesday, fell Wednesday and rose Thursday and Friday to end the week 2 percent lower than a week ago.

Through most of last week, the average selling price increased for gold bullion – bars or coins stamped with their weight and level of purity.

According to the most recent data available from eBay, sales of 1-ounce gold American Eagle coins and 1-ounce gold Pamp Suisse bars rose steadily from Aug. 5 to Wednesday, before dipping slightly on Thursday.

On Aug. 5, when Standard & Poor’s lowered the nation’s credit rating, American Eagle coins were selling for an average of $1,800 among eBay’s featured sellers. The average price of the coins, produced by the U.S. Mint, rose more than 8 percent to $1,952 on Wednesday, before dropping to $1,915 on Thursday.

The Pamp Suisse brand of gold bars sold for an average of $1,787 on Aug. 5 and climbed nearly 8 percent to $1,927 by Wednesday. On Thursday, the bars dropped slightly to $1,890.

Even before last week’s market turbulence, investors were cautious because economic signals in the U.S. and overseas pointed toward trouble.

The Dow index fell 6 percent in the week ending Aug. 6. That week, the number of gold buyers on eBay rose 11 percent compared with the year’s weekly average. The number of gold sellers rose 14 percent. EBay would not provide the total number of buyers and sellers.

“With all the turmoil in the markets, this is seen as a way to diversify,” said Anthony Delvecchio, eBay’s vice president of business management and strategy for eBay’s North America business.

EBay, which is based in San Jose, Calif., does not impose minimum purchase amounts for bullion. Sellers offer gold both through auctions and “Buy It Now” fixed-price sales.

The increased popularity of gold on eBay echoes what’s happening in the broader gold market, where prices have spiked during the past two years.

Gold traded at about $900 per ounce in the summer of 2008, before the financial crisis unfolded that year. It passed $1,600 in late May and briefly rose above $1,800 for the first time on Wednesday before pulling back to $1,784. On Friday, gold fell to $1,740.60 per ounce, still nearly twice the summer 2008 prices.

Great Southern Coins has benefited from this uptick. Chandler said the company is selling more gold lately, and its silver sales remain strong, too. Chandler estimated his business has nearly quadrupled in the past 45 days, and he said it appeared to be up about five or six times during the past week, with most of this growth coming from sales on eBay.

Daniel Hirsch, a New York-based statistician who recently purchased more than a dozen gold coins on eBay from Great Southern Coins, said he started buying gold less than a year ago in an effort to expand his investment portfolio.

“It’s kind of a safe haven and a hedge against low interest rates,” he said.

Read the entire article HERE.

In this GoldMoney segment, James Turk, Director of The GoldMoney Foundation, talks to Jim Sinclair, host of JSMineSet.com, about his successful gold price predictions, US debt problems, how to ride the trend and the second phase of the gold bull.

Jim Sinclair talks about a formula/theory that Jesse Lauriston Livermore used called “the square of the numbers.” Jim Sinclair’s father, Bert Seligman was a business partner of the famous Stock Operator Jesse Lauriston Livermore.

Sinclair discusses a barrier, whether psychological or not, of the price in gold at $1764. This key theoretical price is the price that which confidence is lost in the markets and growth in gold price can go exponential. James Turk continues on to discuss the fundamentals of gold, the debt ceiling, the dollar, euro, fiat currency, sound money, the banking system and markets.

July 29, 2011
ProActive Investors UK

Jim welcomes Eric Sprott, Founder of Sprott Asset Management back to Financial Sense Newshour and discusses silver manipulation, and why he sees silver as the investment for the next decade.

Eric has accumulated 35 years of experience in the investment industry. After earning his designation as a chartered accountant, Eric entered the investment industry as a research analyst at Merrill Lynch. In 1981, he founded Sprott Securities (now called Cormark Securities Inc.), which today is one of Canada’s largest independently owned securities firms. After establishing Sprott Asset Management Inc. in December 2001 as a separate entity, Eric divested his entire ownership of Sprott Securities to its employees.

Audio Link HERE.

by Tyler Durden
07/26/2011 18:01 -0400
ZeroHedge

Morgan Stanley has released its comprehensive quarterly metals outlook update for Q3, which while traditionally furiously wrong in its price targets for the assorted metals under consideration, represents one of the best reference materials for the underlying fundamentals behind each hard asset including base and precious metals, steel and bulk commodities, mined energy, rare earths, even such arcania as zircon and titanium dioxide. We suggest readers avoid the conclusion by Morgan Stanley which ultimately will be based on the firm’s prop trading bias, and instead focus on the key supply/demand mechanics in any given product. For the sake of reference, we break down MS’ outlook on gold, silver due to the special place these hold in the modern geo-political and voodoo economic discussions.

Gold

Investment demand is strengthening again…

• Identified and implied investment has become the main driver of demand in the gold market over the past decade and has become essential to absorb the fundamental surplus resulting from mine production, secondary supply, any net sales from central banks and producer hedging, and the long-term decline in jewellery fabrication demand.
• As the transparency of reporting of bar hoarding demand has increased along with the growth in physically backed ETF demand, the depth and structure of the physical investment market has become more visible. In our view, assessing the sustainability of this investment flow has become critical to the gold price outlook.
• According to GFMS, total identifiable investment demand for gold reached a record 1,514t in 2011, or 1,675t if implied investment demand is included, for a new annual record of US$66bn.
• More dramatic growth in investment demand for gold can be pinpointed to 2008-09 and the global financial crisis, which raised serious concerns about a debt deflationary spiral and the long-term purchasing power of the world’s major fiat currencies, especially the US dollar and the Japanese yen.

…as sovereign debt concerns highlight fiat currency risks

• More recently, a sharp rise in inflationary pressures partially driven by a surge in oil prices since February 2011 and the growing risk of sovereign debt default in peripheral countries of the Eurozone have given added impetus to investment demand growth as the fear of sovereign debt contagion has also raised questions over the long-term future of the euro.
• Even more recently, the impending threat of technical default by the US government if the government debt ceiling is breached, and the associated risk of a sovereign debt rating downgrade if a satisfactory long-term debt reduction program is not established have added to investor concerns about the long-term outlook for US treasuries and “risk-free assets.”
• In these circumstances, we expect the long-running bull market in gold will receive further impetus, even if there is no return to QE in the US. However, QE3 is a potential further upside risk to prices in the current environment.
• A further illustration of the growing quasi-monetary role of gold in the current global financial environment has been the persistent trend in official sector sales from net selling to net buying, a trend that we expect to continue, especially now that the sale of the IMF gold tranche has been completed.
• We have increased our annual gold price forecasts by 8%, 22% and 24% for 2011, 2012 and 2013 respectively to US$1,511/oz, US$1,624/0z and US$1,550/oz.

Global supply / demand

Silver

May 2011 correction has reduced risks of demand destruction…

• As GFMS observed in the 2011 World Silver Survey published for the Silver Institute, silver’s “hybrid” precious and industrial nature leads to links with gold, copper, and the CRB index, which can vary greatly.
• In the course of 2011, silver’s precious metal status and therefore its links with gold have been strongly reinforced by investors’ preference to hedge systemic financial risk, rising inflationary pressures, and resurgent political risk in MENA through a cheaper vehicle with characteristics similar to gold as a store of value.
• Driven by a spectacular rally between late March and May led by retail investors, the gold:silver ratio narrowed sharply, reaching its lowest point since October 1980 in early May 2011 at 30:1.
• Closing prices for silver at the peak of the rally in late April 2011 at US$48.70/oz came within 1.5% of the all time high established in January 1980 during the Hunt brothers’ squeeze. Successive increases in the Comex margin requirements then saw prices trade between US$33 and US$36/oz and the gold:silver ratio stabilize around 40 to 44:1.

…helping sustain investment demand going into 2012

• In our view, the 2,000t outflow of silver from ETF funds that has followed this correction is likely to be temporary, as all of the drivers for the initial 3,500t surge in ETF inflows between September 2010 and late April 2011 are still in place.
• Furthermore, the lower trading range for prices since the crash in early May should be an incentive for investors to return to the physical investment market now that the impact of the violent correction has largely been discounted.
• Investor sentiment should also be encouraged by evidence of strongly rising fabrication demand, especially in the brazing alloy/solder and jewellery markets, which are forecast to grow by 8.2% and 3.7%, respectively, in 2011.
• As a result, we have made significant upgrades to prices throughout the forecast period. For 2011, we now expect an average price of US$36.21/oz, up 15% from our previous forecast, and in 2012 we see prices averaging US$36.90/oz, 30% higher than our previous estimate.
• For 2013, we have raised our forecast 32% to US$32.98/oz.

Global supply / demand

MS Q3 Metals

 

 

MS Q3 Metals

Read the entire article HERE.

by Jason Folkmanis
Bloomberg News
Jul 22, 2011 8:47 PM PT

Vietnamese inflation accelerated for an 11th month in July after the central bank cut a key interest rate even as the nation faces the fastest price gains in Asia.

Consumer prices rose 22.16 percent from a year earlier, compared with June’s 20.82 percent pace, data released by the General Statistics Office in Hanoi showed today. Prices climbed 1.17 percent from June.

The central bank reduced its repurchase rate to 14 percent from 15 percent on July 4 after a spate of increases since November to fight inflation, leading the International Monetary Fund to say the cut may confuse investors. The benchmark VN Index of stocks is down 16 percent this year, on concern price gains will hurt the economy.

“The markets were very surprised by the easing,” Prakriti Sofat, a Singapore-based economist at Barclays Capital, said before the release. “It’s too early to go into a full-blown easing cycle given that inflation and inflation expectations remain elevated.”

Vietnam will find it “very difficult” to slow inflation to 17 percent by the end of 2011, Ha Van Hien, head of the National Assembly’s Economic Committee, told the opening of the body in Hanoi on July 21. It may peak as high as 23 percent in August before slowing to 18 percent by year-end, Sofat said.

The VN Index fell 0.9 percent yesterday to 409.2, while the dong weakened 0.1 percent, according to data compiled by Bloomberg. The currency was devalued by about 7 percent in February, the most since at least 1993, risking costlier imports.

Food, Transport Costs

Food, transport and construction-material prices have stoked consumer-price growth, according to Australia & New Zealand Banking Group Ltd. Transport prices rose 21.7 percent from a year earlier in July, today’s data showed. July’s annual inflation rate is the highest in a basket of 17 Asian economies tracked by Bloomberg.

Prime Minister Nguyen Tan Dung in February cut the credit- growth target and ordered a tighter monetary policy to try to tame inflation, revive confidence in the economy and prevent another credit-rating downgrade. This month’s rate cut wasn’t a “policy signal,” the central bank said in a July 8 statement.

“We assume policymakers are again demonstrating their low tolerance for slower growth,” Christian de Guzman, a Singapore- based assistant vice president at Moody’s Investors Service, said in a note on July 11.

The nation’s economy expanded 5.6 percent from a year earlier in the first half of 2011. Moody’s said that a “tight” monetary policy would threaten the government’s full-year target of 6 percent.

‘A Bit Concerned’

“We are a bit concerned that the cut in rates will confuse the market about the government’s commitment to sustaining the stabilization effort under Resolution 11,” Benedict Bingham, the IMF’s senior resident representative in Vietnam, said this month. Resolution 11 refers to the steps Dung took in February.

“A strong commitment to sustaining this effort is essential to re-establishing confidence in the dong and restoring macro-economic stability more generally,” Bingham said.

The State Bank of Vietnam had increased the repurchase rate for the seven-day term from 7 percent at the start of November 2010 before this month’s cut. It appears to have become the benchmark for monetary policy, according to JPMorgan Chase & Co.

 

Read the entire article HERE.

by Ben Traynor
BullionVault
7/22/11

“How the U.S. and Euro debt crises are making the gold price rise. . .”

 

Europe and Washington’s debt ceiling squabble has seen the gold price breach $1600 per ounce and €36,500 per kilo.

The financial media’s standard line is that investors are scared and gold represents a “safe haven.” But how? What are investors scared of that’s led some of them to bid the gold price.

First off, a little context. Over the last decade, U.S. national debt has more than doubled, rising 138% in Dollar terms. That doesn’t account for inflation, however—and as we’ll see below, inflation is viewed by some as part of the ‘solution’ to the debt problem.

Yet measured in terms of gold bullion—the nemisis of Uncle Sam’s debt, apparently—U.S. national debt has actually fallen for the last ten years:

 

Put another way, the average annual Dollar gold price has risen faster than Uncle Sam has been able to write his IOUs. Which is no mean feat!

The U.S. now only owes the equivalent of 340,000 tons of gold—still more than the total sum of gold ever mined (twice as much, in fact, according to best estimates) and way above the 8,113.5 tons the United States Treasury says it holds between Fort Knox and the New York Fed.

But why would gold demand rise—pushing the gold price higher—in response to the growth of national debt?

Like money itself, debt—whether a personal loan or the kind racked up on our behalf by our elected representatives—represents a claim on resources, otherwise known as wealth. At some point in the future, the debtor is expected to hand some wealth back to his or her creditor, ideally the principal plus some level of profit. Trouble is, debtors don’t always follow the script.

Now, when it comes to resolving its national debt, the U.S. government has five options:

#1. Economic growth—The economy produces more real wealth. The government, through taxes, takes a slice of this growing pie, and pays back the bondholders from whom it has borrowed in the past;

#2. Raise taxes—The economic pie doesn’t need to grow. Uncle Sam could simply raise the rate of taxation, and use that bigger sum of cash to repay its debt;

#3. More borrowing—As interest or debt repayments fall due, the Treasury simply goes back to the bond market and borrows from Peter to pay Paul;

#4. Default—Just don’t pay. Tell the creditors to get lost;

#5. Pretend to pay—The U.S. Dollar is the world’s No.1 reserve currency, giving foreign central banks (especially in fast-growing Asia) little choice for where they might store their burgeoning savings. The U.S. Treasury borrows in Dollars. The Federal Reserve has the power to create Dollars. The more Dollars there are, the less each one is worth—but when you’re handing them over to someone else, who cares?

The first option tends to be the one creditors bank on, in order to get back what they lend. Right now, however, the prospects for strong growth look bleak. Check out these scary numbers:

• The Congressional Budget Office reckons this year’s deficit will be $1.5 trillion;
• U.S. national debt was U.S. national debt was an estimated $13.4 trillion in 2010;
• This implies a growth rate for debt of around 11% per year.

Economists may quibble at the margins about the data, the methodology, and so on. But a stark fact remains—the U.S. will need to post some stellar growth rates just to stand still. Unless, that is, its government picks one of the other four options. Besides the highly contentious Option 2 of raising taxes, in fact, this is exactly what America’s been doing for years.

Option 3, more borrowing, has been exceedingly popular, leading to accusations that Washington is running a Ponzi scheme. The problem with a Ponzi scheme comes when you run out of new schmucks to help pay profits (or simply repay the principal) to early investors.

Is $14.3 trillion that point? Clearly not—the debt ceiling is an artificial, political construction, not a reflection of any financial reality. Investors remain willing to hold U.S. sovereign debt, as shown by—and despite—the appalling rates of return it offers. (Bond yields fall when prices rise, and U.S. debt has never paid so little in interest.) This may not always be the case, though, especially if creditors start to fear that Option 4 is on the table and a true default is looming.

One thing the debt ceiling squabble has achieved is to make the once notional concept of a U.S. default frighteningly real. Ratings agencies—never the quickest on the draw, as the subprime disaster proved—have repeatedly issued warnings that they might strip America of its AAA status, the “triple-A rating” which signals no risk of default. Standard & Poor’s even went so far as to say there is a 50-50 chance this downgrade will happen before the end of October.

Newspapers meanwhile have been full of stories of what will happen if the debt ceiling isn’t raised. Will the Treasury refuse to pay bondholders or veterans? Social Security claimants or military contractors? Suddenly we have a much clearer vision of what an America that can’t pay its debts might look like.

The artificial “debt ceiling” aside, a true U.S. default still seems unlikely, at least for now. But bondholders should have perhaps taken fright, and nor should they forget this scare too soon. The fact that they keep backing Uncle Sam—paying such high prices to buy his debt that Washington is paying them record-low interest rates—is nothing unusual, however.

Complacency is the bondholder’s biggest risk, but also his most common trait. August 1914 “came like a bolt from the blue” to Europe’s creditors, despite the loud and clear warnings of war. From 1979, when U.S. price-inflation breached double-digits, it took another two years for 10-year U.S. bond yields to catch up.

Today, several leading U.S. economists repeatedly (and rightly) ask “Where are the bond vigilantes?” The answer is Europe, where they’re driving up bond yields at their own expense by pushing bond prices lower, causing a rise in refinancing costs which will force a change of debt policy—or at least force the issue—in the increasingly less “peripheral” Eurozone states.

Two-year Greek government bond yields this week reached 39% as prices cratered once more. But again, bondholders were late to the game, as yields only began rising 18 months ago, first rising from a decade-long average below 3.5% in January 2010. Athens had long been subject to “special measures” from the European Commission, aimed at forcing it to reduce its annual deficits. Perhaps the fact that virtually every other European state was also in breach of the 3% deficit, 60% total-debt-to-GDP ratios meant Greece’s problems looked unexceptional. But the absence of rising bond yields to date does not mean that there’s nothing to fear in U.S. debt. It simply means, just as in 1914 and 1979, that bondholders haven’t got scared yet.

How long before America’s creditors start insisting on higher interest rates to compensate for the risks that come with lending to the States? If they do, Option 3—more borrowing—may become prohibitively expensive. And Option 5, meantime, is already happening. Lend the United States government $100 today, and you’ll get $100 back when your government bond matures. You’ll also pick up interest in the meantime. Unfortunately, though, at current interest rates this won’t compensate you for inflation in the cost of living.

Official consumer price inflation for June was running at 3.6% for June. Unofficially it could be much higher, as John Williams of ShadowStats suggests. The yield on a 5-Year U.S. Treasury bond, meanwhile, is currently around 1.5%. So the $100 plus interest you get back over five years will buy you less than your original $100 would have if you hadn’t lent it to the government. The purchasing power of your wealth has been eroded—with Uncle Sam enjoying the profitable side of the deal.

The U.S. government’s plan—if you can call it a plan—for dealing with its debt mountain is thus a combination of Option 3 and Option 5. Keep on borrowing, while devaluing the money you plan to pay back. Option 1 is still needed, therefore. Because the burden is not shrinking, and won’t shrink, without the economic growth which the U.S. so clearly lacks.

Which brings us back to the gold price. Ten years or so back, a handful of investors started to realize that U.S. debt was simply getting too big. It could not be paid off via the conventional method (Option 1) of growing real wealth. Option 2 (raising taxes) was then, as now, too hot to handle (indeed, by not cutting spending, Bush’s tax cuts made debt-growth very much worse). But Option 3, many of these gold buyers felt, could not last forever—there comes a time when investors wise up, and even a sovereign nation printing the world’s number one reserve currency loses its access to cheap credit.

This is exactly what is happening right now in Europe, and why bond buyers are demanding higher interest rates for lending to Greece, Ireland, Portugal and even Italy and Spain, the Eurozone’s third and fourth largest economies.

So with Options 1 out of commission, Option 2 at an impasse, and Option 3 looking increasingly shaky, only default and devaluation remain. And gold has traditionally been an excellent hedge against both.

Let’s take default first. For one, gold simply can’t default—you own it. It’s not a promise to pay you, it’s a possession.

Secondly, a U.S. default would be a highly deflationary event. It would introduce unprecedented levels of uncertainty to the credit markets. We saw how they seized up in 2007 as the subprime bubble burst. Any signal from the world’s most powerful nation that it’s okay to not pay your debts would cause immeasurably more damage. And as credit markets seize up, default sucks money out of an economy, lowering prices of everything from labor (wages) to a carton of milk.

In his seminal book of the mid-1970s, The Golden Constant, Professor Roy Jastram—looking at 350 years of economic data—showed that gold has historically gained purchasing power in periods of deflation. This makes gold an attractive portfolio hedge for anyone who fears a U.S. default may one day become too clear a threat to be dismissed as a media scare story.

More likely—and the one the Treasury and the Fed have gone with so far—is the inflationary Option 5, eroding the value of the Dollar. Gold has a historical advantage here too. It has been a recognized store of value for most of human history—not something that can be said for any paper currency. It also can’t be created, and is naturally in limited supply.

So investors looking to preserve what they’ve earned see gold as a convenient, proven way to store their wealth.

Recent analysis by British economic consultancy Oxford Economics, commissioned by our friends at the World Gold Council, suggests that gold would perform well in both deflationary and inflationary scenarios. Today’s national debt problem, just like every other (only more so, since it’s trans-Atlantic) threatens both.

And now the political theater has drawn attention to the gargantuan size of America’s debt, more investors are opting to take money out of the firing line—pushing the gold price to this week’s new record highs.

The fact that gold has risen more than national debt is good news for U.S. investors. Because while you don’t have a say in how big that debt gets, that doesn’t mean you and your children won’t have to pay it. The rising gold price means that those who bought gold will have something left after they’ve picked up the tab.

 

Read the entire article HERE.