ECONOMIC TRENDS & TRIGGERS
U.S. Republican Party and Democratic Party politicians currently have the same economic ideologies.
'Spend more, borrow more, tax more, confiscate more, and regulate more'
Some argue these two parties are opposite sides of a counterfeit coin
Continued practice of their economic ideologies will only cause the price of Gold and Silver
to go up faster than other investments in 2002 and 2003
The information contained within is not intended as a
recommendation to buy or sell anything!
Do your own Due Diligence
SUMMARY
The terms "trends" and "triggers" are defined. These terms are applied to economic markets. Then trends or triggers effecting the Gold and/or Silver Markets are identified. The price trends with some pull backs for both silver and gold is up until at least the end of 2003. Many triggers will come about that will increase the rate of price trends. Some of these triggers will affect more than gold and silver price trends.
In my opinion, I believe that gold and silver mining stocks and physical metals are like a space rocket launching. We have had ignition and a trend (metal and stock prices increasing) of take off has started. We are on the verge of lift off on to what appears to be a parabolic or exponential velocity trend (in prices).
The noise from the lift off is only now beginning to attract attention (from other investors and the media).
The acceleration phases (price increases) will be bumpy. No doubt, the rocket (gold & silver prices) will achieve outer space and orbit (at prices unbelievable today).
In the coming economic environment, precious metals is one of the few investment areas making established up-trends. Individuals, businesses, mutual funds, pension funds, hedge funds, and countries who would not dream of investing in metals may have few other rational investment choices.
ABOUT TRENDS
A TREND is defined as a general direction or movement. A trend is a prevailing tendency or inclination. Trend as used in this essay as the observation of a statistical detectable change of an economic related phenomena in the course of time.
A Economic Trend is similar to the physic law that states a body tends to remain in a particular motion until acted upon it by an outside force. In economic terms, an economic activity will continue in a direction until acted upon by some force which is called the trigger. Sometimes this trigger is a boundary condition.
Trends are usually expressed in rising or declining straight lines often called channels within there is oscillation or variances about a mean trend line. Sometimes trends have graph characteristics in exponential or parabolic form which are more akin to bubble market phenomena. The gold and silver markets have historically demonstrated both types of price chart trends. It might be noted that parabolic curves plot as
a straight line on log-log graph paper. Exponential curves plot as a straight line on semi log graph paper.
Yes I am optimistic. Better times are coming for those who can identify the ending of old trends and the beginning of new trends. The trends are your friend. The hard part is the taking advantages of the opportunities that present themselves.
Trends have a beginning Identification of early trends is useful. Identification helps to avoid fads, price chart noise, disinformation, illusions, and so forth. This allows capital to be used more productively elsewhere or avoid investment losses. Some sages suggest that investors who hold off until a trend is in place before entering the market do better than those who don't. Similarly, these investors are good at identifying the ending of a trend and exit the market.
Trends have an ending. Successful investors always have an investment exit strategy.
A trend may in time create new trends. Trends such as increased purchases (demand) of gold and silver in foreign countries will create a new trend of faster rising prices of gold and silver in the U.S. and globally.
9 Reasons to Watch and Study Trends:
Adapted from "The Futurist" magazine, March-April 2002,
by Cynthia G. Wagner. page 68
- Get investment ideas--and save money.
- Get early warnings: Take advantage of new opportunities and avoid approaching disasters.
- Get Confidence: This is needed for one to gain confidence to bet one's assets on an investment.
- Get an edge on the competition. Spotting trends (not fads) early and adapting financial portfolios before other investors see what is coming. You gain an advantage in a new market trend.
- Get at the heart of a trend: So it is with all trends; the challenge is understanding the inner meaning of the situation. Is this a true trend or a random fluctuation that has little precedence and little chance of continuing? This is why a history analysis is so important to understand the future using trend data.
- Get goals in balance: Paying attention to what might develop in the future is a healthy antidote to the profit-now, worry-later mentality. If you take a few minutes now and then to think about the future, you are more likely to balance short-term and long term goals."
- Get informed on forces affecting your fields. Trends in other fields may soon impact the forces acting in your field of interest.
- Get a glimpse of emerging futures. Trends can drive us, but only if we look at them and analyze them for what they are: After that, action is necessary to make that profit, build those roads, or cure that illness. Trends ignite opportunity if one dares to look.
- Get yourself ready for the future. If you are not prepared, then one tends to react instead of acting in a positive and beneficial manner.
Things you expect to happen usually take longer than expected:
But once underway, they tend to evolve much more quickly than you expected.
Doug Casey
ABOUT TRIGGERS
A TRIGGER is defined as an event or physical boundary condition which causes an economic trend to begin or end.
- Some triggers may effect only a small isolated economic activity for a short period of time.
- Other triggers cause a trend to change in which the new trend acts as a trigger to other economic activity trend changes.
- Triggers can cause a chain like reaction becoming a "domino effect."
- In some cases, multiple near simultaneous or time sequenced triggers will cause a completely different economic outcome than a single trigger.
- A single trigger may cause multiple different unrelated trends to occur.
Ten common sources of those forces of changes from which trigger(s) often originate are listed below.
|
| 1. Economics | 2. Politics | 3. Religion/spirituality | 4. Technology advances |
| 5. Law enforcement | 6. Conflict resolution | 7. Business | 8. Health care |
| 9. Education | 10. Natural disasters | | |
If there is one truism, that I could impart upon a novice trader in the markets,
it would be that bull markets ignore bad news and that bear markets ignore good news.
Financial markets are much more about psychology and momentum than facts, figures, and reality.
Leonard Kaplan, President of Prospector Asset Management.
CURRENT GOLD & SILVER MARKET TRENDS
For Silver, there is the trend of physical demand exceeding physical supplies since 1990 by an approximate average of 100 million oz/year to 150 million oz/year Current physical demand is near 900 million oz/year. This trend is about to reach a boundary condition (a trigger) whereby existing stockpiles now at less than 200 to 400 million oz. theoretically going to zero within two years.
For Gold, there is a trend of physical demand exceeding physical supplies. The mined supply is 2,490 tonnes/year (66 million oz) in 2001 which should start to shrink in coming years. Demand is about 3,014 tonnes/year (85 million oz). This leaves a difference of 714 tonnes/ year (19 million oz). This difference in gold is coming primarily from bank sales or bank leasing arrangements.
The Central banks are reported to have about 1,100 million oz of gold in reserves. A recent listing of the ounces held by various central banks can be found at "Not All Central Bank Activity Negative". Gold swaps and gold loans currently is reported at about 15,000 tonnes (480 million oz.) However, since leased gold is considered an asset by banks, the actual physical gold in banks has been estimated at 600 to 700 million oz..
There is a possibility of a corner on the gold market similar to a silver market corner possibility described in "Is a Silver Market Corner Underway?". Only 5% of the Japanese savings (10 trillion equivalent U.S. dollars) could buy all the gold (currently about $300 billion U.S. dollars) in central banks at current prices.
TRIGGERS & TRENDS THAT EFFECT GOLD AND/OR SILVER DEMAND
- When the STRONG U.S. DOLLAR falls (inflation) as expected, it will take more dollars to buy the equivalent amount of silver or gold from foreign producers.
- FOREIGN repatriation of a significant portion of their U.S. assets (2 trillion U.S. dollars) will effect not only stock markets, but also bond markets, and U.S. government debt paper. This asset built up resulted from reinvestment of trade deficits into U.S. economy. Currently there is an unsustainable trade deficit of 500 billion dollars projected in 2002. The end result will be a weaker dollar (INFLATION) and higher gold and silver prices.
- Any anxiety based crisis that comes along will boost demand. These crisis can include.
- Stock market major corrections/crashes. Greed turns to fear, and demand for hard assets to protect their value is the result. This is characterized by selling of most stocks and buying of gold/silver stocks or physical gold and silver or other hard assets to preserve capital. Major stock market corrections are linked to accompanying economic recessions, panics, high unemployment, high consumer debt (1.7 trillion U.S. dollars), high corporate debt (4.7 trillion U.S. dollars), and declining real estate values (14 trillion U.S. dollars)
- Banking defaults or other defaults. When banks fail or rumors abound, currency chaos and panic tends to cause nimble investors to convert paper into hard assets including gold and silver.
The U.S. financial derivatives problem (43 trillion U.S. dollars in notational value) This banking problem is well described by Alexander Hamilton at "The JPM Derivatives Monster" and "JPM Derivatives Monster Grows". World wide projections of derivative values exceed 100 trillion dollars.
Business and personal bankruptcies in 2002 will exceed the record year of 2001. www.abiworld.com has bankruptcy statistics.
The U.S. declares a bank bankrupt when it has 10% non performing loans. Japanese banks are reported as having 20% non performing loans. Japanese savers are said to have the equivalent of 10 trillion U.S. dollars in savings. Chinese major four banks are reported as having 20% to 40% non performing loans. Chinese savers have over 600 billion equiv. U.S. dollar savings in them. Argentina banking has defaulted on 110 billion U.S. and has experienced currency devaluation of 3 pesos for every old peso within the last six months. Venezuela is in a banking crisis with a currency devaluation underway.
- holy wars civil wars regional wars terrorism attacks civil unrest
Military Adventures & Terrorism are triggers for Gold and Silver prices due to uncertainties, disruptions, panics, and fears created in many economic activities. Governmental responses are increased government expenditures and laws which competes with and sidetracks many normal economic activities.
Historically all wars are inflationary which causes rising prices including gold and silver.
The terrorism trend in the U.S. in the U.S. media publicly began with the Ruby Ridge, and the Waco incidents by the federal government against U.S. citizens. The Oklahoma bombing, and September 11th events continue the terrorist trend except directed against the U.S. Federal Government.
In my opinion, the next terrorism event and/or expanded military adventure will coincide with the "Full Sturgeon Moon " of August 22nd, 2002.
I personally believe the one terrorist attack will use nuclear material or be a biological attack. These attacks will continue to be directed at important U.S. economic infrastructures and not related to military installations or memorials. The mail box pipe bomb incidence is not a major terrorist attack.
In August/September 2002, a military adventure by India vs. Pakistan involving nuclear weapons is likely. Other major military actions in 2002 will include U.S. vs. Iraq. This does not preclude possible adventures of North Korea vs. ?, or China vs Taiwan.
- The more taxes rise (The U.S. tax trend has been up for over 50 years) the more people will seek ways to keep the government out of their pockets. Silver and gold are two of the remaining alternatives left in this area. Note that the "U.S. tax freedom day" each year is 1 or 2 days later than the previous year. The article "They Never Go Back" by Don Stott describes some government trends and expected results.
- In a growing environment of envy & financial distress, the non reportability advantages of gold and silver will enhance demand.
- When gold and silver physical supplies are exhausted and prices skyrocket, government will be expected to "Do something". The usual government counter productive answer is to interfere and regulate. In economic circles, it is a well established fact that when you regulate anything, you get less of it. Countries in political or financial turmoil such as Argentina will have a preponderance to nationalize silver and gold mines and the metals in their country.
- In a free market, inflationary forces are unevenly manifest in different economic sectors. The long term price of silver and gold has gone nowhere for several years which seems to indicate that price inflation has not yet been properly priced into these commodities.
- Because of the INTERNET etc., the world will quickly be alerted to what is happening and why. Many will want their piece of the action. Thus investors should be prepared to "expect the unexpected at all times."
- Silver may be the most versatile metal of all. New uses are constantly being discovered in a very immense range of applications. Batteries, electrical transmission wires, medical, photography Digital Cameras will not have an impact in photography market because of high prices and for digital cameras. The existing film cameras will not be disposed of in the near future.
- A market corner attempt by a non U.S. player is a real possibility. See article "Silver Market Corner Underway?"
The basic theme also applies to the gold market even though it is much larger. In my Opinion, I have a gut feeling a gold market corner may be attempted within two years by China, Japan, and/or oil rich middle east countries.
- India which imports 1/3 of the world's mined gold has had favorable monsoons which translates into better crops and more jewelry buying. However, India is very price sensitive and tends to stop buying when gold prices rise. Should India and Pakistan go to war in 2002 or 2003, India's demand for gold is likely to increase despite rising gold prices due to war fears.
- Lower demand will be caused by higher prices. Potential buyers of jewelry, sterling ware and other artifacts will be priced out of the markets. End users will attempt to minimize usage of silver and/or gold by any means available including use of substitute materials.
- Lower industrial demand will be caused by perceptions of a recession or depression. Investment demand will exceed any declining industrial demand.
- Increasing media attention on gold is fueling demand for gold and indirectly silver. Recent examples include.
- World Gold Council www.gold.org embarking on advertising gold for jewelry purposes help increase demand and prices.
- Articles that the top performing mutual funds in past year had the word GOLD in them.
- Including GOLD prices in addition to DJIA, S&P and other indexes.
- Articles on derivative problem (hedging) with mining companies are appearing particularly in regard to Barrick mining.
- Articles on upsurge of buying of gold in Japan.
- CHINA this year is now allowing trading and ownership of gold and silver which will increase demand.
- Activities of Gold Anti Trust Action (GATA) and the Reginal Howe vs. Bank for International Settlements (BIS) lawsuit.
Spin Doctoring (formerly called propaganda) is the tactic of redefining "truth" as:
"TRUTH is whatever it takes to sell something."
The Media will demonstrate "Spin Doctoring" by reporting, by advertisements, or published press releases. Salesmen know the human emotion buttons to which people react and willingly push those buttons for their own ends. Politicians, and advertisers are no different.
Examples of emotional buttons pushed are
- Peer pressure (Are you keeping up with the Jones? & Are you a misfit?)
- If you aren't with me on everything I say, you must be against me.
- You are being denied, so you must have it now.
- Herd mentality (The majority can't be wrong!)
- It is the democratic or patriotic thing to do. (another term for mob rule)
One should be aware that not all current and future media news and advertisements about gold & silver are or will be truthful. Spin Doctored material may contain 50% truth, 25% omission of relevant information, 20% hype and 10% lies. In my opinion, every reader must do "due diligence."
Traders, big players, analysts, governments, and others will use disinformation at times for creating short term price distortions and manipulations. Chinese pronouncements of selling 60 million ounces of silver in 2002 is an example of this.
JPM Bank recent press releases advising selling of gold now may be an attempt by JPM to buy gold to cover gold derivatives with minimal losses.
Rising Prices for physical and stocks in mining companies is a new trend.
Gold metal prices have risen from $270 in September 2001 to currently near $310. Prices of many gold mining stocks which also produce significant amounts of silver are up 30% to near 70% in the same period. Volume of trading in many mining stocks has been increasing. Silver metal prices have risen from $4.10/oz to over $4.60 since September 2001. There are probably less than a dozen publicly traded mining stocks that are a pure play in silver. These are up 10% to 20% or more with rising trading volume.
Rising prices will trigger new trends which include:
- In a rapidly rising price environment, the process of metal coming to market will SLOW Why? A delayed shipment will stand an excellent change of being worth even more.
- The same professional dealers and insiders that have made so much and done so much structural damage on the downside will surely be positioned to capitalize on the upside. At the least, their personal accounts will be properly positioned. They will indirectly promote the precious metals within legal ways. BUMPS in the price trends will cause price pull backs or plateaus in the price rise. Most bumps will be engineered by traders causing 20% declines or less and will last from 3 days to 3 weeks.
- The practice of "just in time" or zero inventory technology techniques will give way to the old stocking-up mentality for distributors and end users. This will cause increased physical demand in the short term. Why? Survival and price protection.
- During most market conditions, astute investors do not try to pick bottoms. Rather, the preferred technique is to wait until an apparent bottom can be observed before big positions are initiated. With silver and gold fundamentals well known as they are, you can be assured that there are huge amounts of investment money poised to enter this arena once a technical turn around is apparent.
- A certain percentage of investors will be attracted to silver and/or gold for only one reason, because prices are going up. Like a moth attract to a light, these momentum (speculators & gamblers?) investors will want to jump on the bandwagon.
- In world markets, virtually all stocks and commodities go from under priced to being over priced and back again. There is no reason to believe that the POS or POG will stop rising when it reaches its equilibrium price. In sharp rising markets, many investors tend to act irrational due to greed. These investors have lost all fear.
- The total silver market is tiny. It would take perhaps 10 billion dollars to buy all the remaining physical silver mining stock and physical silver in the world at today's prices. The gold market is not all that big. The central banks hold 1,100 million oz @ $300/oz. and represents 330 billion U.S. dollars 330 billion dollars is equivalent to a 330 points change on the Dow Jones Industrial Average DJIA index
- Mutual funds and other institutional players are grossly under represented in ownership of precious metal stocks and physical. If and when these investors simply rebalance their portfolios to include silver and/or gold, it will result in a tidal wave of demand for the gold and silver.
- Virtually every world citizen already has a working knowledge of what silver and to lesser extent gold is. We're not talking semiconductors, megabytes, export quotas, or rocket science where the learning curve is extreme. When silver and/or gold begins to get world attention, this residual, in place knowledge, will grease the skids for the novice participation.
Rising gold and/or silver prices will not result in immediate mining output.
Output will not increase for months if not years due to: High prices will not automatically increased mined output immediately. There will be a lapse of 2 to 5 years before new mining output is available to reach the market.
A Factor that will not reduce gold and/or silver demand due to price rises.
- Silver or gold substitution is not always practical. Low prices for the past 20 years has not caused any significant research into substitutions. It can easily takes 1 to 4 years to find silver or gold substitutes if at all possible in many products.
Other Factors that will affect gold and/or silver supply
- A percentage of forward selling miners will repay their metal loans with physical silver and gold thus removing those ounces from the grasp of the market place and increasing the shortage.
- A percentage of UNDERWATER HEDGED MINERS may slow production, close down, or go bankrupt. Because they will owe so much while being denied the profit from higher prices. They will have little remaining incentive to produce silver or gold.
ABOUT METAL LEASING TRENDS
Metal leasing activities by banks is a trend that is in decline or has come to an end.
Metal leasing is an activity of an owner of metal leasing out the metal for a fee and an agreed upon return of the metal at some future date. The accounting practice in the past has allowed the leased out metal to be declared an asset even though the owner has no possession of the metal. This has been reported to have been done extensively by banks over the past decade or so to turn non performing assets of metals being held as banking reserves into a performing assets and not have storage costs.
Leasing rates have been in the range of 1 to 2% per annum of the value of the metal. What supposedly has been happening is that those leasing the metal have been selling the metal knowing this would depress the metal prices. Banks and/or leasers of the metal may have bought PUT options and selling CALL options before selling the metal to profit additionally from this knowledge. The money from the sale of the metal has been used for investments that have yielded much higher returns. Some of these investments may be very risky.
A recent report is that UBS of Switzerland has recently ceased silver leasing activities.
While there is much talk and written material about leasing, The following information is not readily publicly available.
- The time period of the leases.
- The names of banks making the metal available in leases.
- The names of companies or others who have taken delivery of the leases. Special (escape clauses) or other terms in the lease contract. I have yet to see a copy of a lease.
- The amounts of silver and/or gold metal being leased.
Associated with leasing are potential triggers which may include:
- Metal lease rates have averaged near historically low levels. A sustained period of rising lease rates will increase the incentive to return borrowed metal from an ever-shrinking physical pool.
- In most cases, there will be a legal and/or contractual obligation to RETURN LEASED Gold/silver to the lenders. This obligation will ADD to the DEMAND side of the DEMAND/SUPPLY of the equation.
- A huge PAPER SHORT POSITION has depressed metal prices. When prices begin to rise in earnest, many short sellers will switch to becoming buyers. To close out a short position, a short must deliver physical silver or buy out their contracts if so allowed.
- Presently the PAPER COMMODITY PRICE is determining physical silver price. A price jolt will occur when prices begin to be set by physical availability.
In my opinion, Some banks will not demand return of the physical silver or physical gold leased.
Instead, they will ask for payment in fiat equal to the current market price or demand higher interest rates with a roll over of the lease period. The fiat from the sale is then used to purchase fiat assets (treasury bills?) to retain or increase bank reserve requirements. By banks not demanding returned leased metal,
a crisis of physical shortages for delivery will temporarily be averted.
Gold and silver markets and other hard asset markets will soon be the only ones left with a price uptrend and that will preserve one's investment capital.
Wally Bently
wallybently@aol.com
May 24, 2002
I appreciate all e-mails, comments, questions, and flames on this essay.
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