Common Sense Says…

November 27, 2002

All conspiracy theories aside, here are some interesting technical facts which flow from the following three monthly charts:

The $CRB (Commodities Index) has a descending trendline dating back to 1980, which HAS NOT YET BEEN PENETRATED ON THE UPSIDSE.

Source: DecisionPoint.com

The Silver Price Chart has a descending trendline dating back to 1983, which HAS NOT YET BEEN PENETRATED ON THE UPSIDSE

Source: Gold-Eagle.com

The Gold Price Chart has a descending trendline dating back to 1981, which WAS PENETRATED ON THE UPSIDE IN MARCH 2002.

Source: DecisionPoint.com

Further facts that can be gleaned from these charts are as follows, and I have arbitrarily used 1984 as my start date because prior to that date the data is contaminated by exogenous variables. (If I take the start date before 1984 the picture supports the conclusion even further, so I cannot be accused of manipulating the statistics)

Now, there are two conclusions that can be drawn from the above:

  1. Regardless of any arguments to the contrary, for prices to have fallen over the 18 year period, gross supply must have exceeded gross demand over the 18 year period.
  2. On a relative strength basis, Silver has severely under-performed both Commodities in general and Gold in particular by a factor exceeding 100%

Based on the time honoured methodology of "cutting your losses" and "riding your winners" it could be argued that Silver should be avoided like the plague. Alternatively, it could be argued that Silver may outperform both Commodities in general and Gold in particular in the years ahead.

So which is it?

In a previous article I demonstrated that the current price of SSRI is projecting a future silver price of around $10.35 (and this is reinforced by the price of PAAS). Using similar analytical techniques on some gold shares, I concluded that the current prices of those gold shares that I analysed are projecting a gold price of around $500 - $550/oz

It is a matter of objective fact that the share prices are reflecting the overall assumption that Silver is likely to outperform Gold by a factor of around 100% in the medium term.

Now this is very interesting, given that Gold is the only long term commodity chart that has actually broken up out of its downtrend.

Well, lets go back to the gold chart. The break "up" has really only been a break sideways, and so no compelling argument can yet be forcefully made that we have entered a new era.

HOWEVER,

The 235 level on the Commodities chart and the $4.80 level on the Silver chart represent breakout points which - if they are penetrated - are likely to give rise to a new long term Uptrend in both cases.

Yes, all the cheerleaders on this web site believe that both Gold and Silver (and commodities) are about to enter explosive uptrends, and I confess that I am inclined to be one such believer, but let's apply a bit of Common Sense.

If Silver were to jump in price to (say) $10.35, what would be the impact on industrial demand? Do we really think that people will continue to use as much photographic film if silver were to more than double in price? If gold were to jump to (say) $550, what would be the effect on demand in (say) India? Do we really think that Indian bridegrooms will continue to buy as much gold jewellery for their wives-to-be? The historical evidence is clear - at least in the case of India. Consumer demand for gold in India is highly elastic. When the price rises, demand collapses.

With this in mind, Common Sense tells us that there is only one justification for an "explosion" in the prices of gold, silver and/or commodities - "FEAR".

If people generally are afraid of a collapse in the value of their capital, then there will be a flight to hard assets - which, incidentally, may logically include real estate.

And "fear" is what the "Establishment' is fighting tooth and nail. Because fear - when it goes out of control - leads to panic; and panic is, by definition, unmanageable. Panic will very possibly lead to a collapse in the world's Financial Infrastructure.

Yes, we can pontificate that Sir Alan Greenspan has sold his soul to the Devil and is the architect of the current financial catastrophe-in-waiting; and we might even be right on the first count even if we are demonstrably wrong on the second count. The problem I have is that such arguments are not productive. They do not solve problems they just "use up oxygen". So what do we do about it?

Well, here are some practical suggestions:

  • Buy Silver as an Investment, and Gold as an Insurance Policy against financial catastrophe. Investing in Silver is a "no lose" proposition. If the world's financial infrastructure collapses it will likely (in its capacity as the "poor man's Gold) outperform Gold. Alternatively, if the world's financial infrastructure doesn't collapse, then industrial demand for silver will likely cause its price to rise relative to Gold anyway because there has been a chronic shortfall in Silver production relative to industrial demand, averaging around 90 million ounces per year for the past decade or so.
  • Become a lot more demanding of your political representatives in terms of their "integrity" as opposed to their "pork barrelling". If your elected representative behaves (or even talks) like a greasy politician then vote him/her out of office.
  • Don't fall for the disingenuous political "double talk" that is being sprouted by the political leaders of the Industrialised World. No matter what they say, there is no justification for War under any circumstances. When wars start (even pre-emptive wars), people on BOTH sides die in large numbers. Mankind has outgrown the need for war, and with the murderous technology that exists today, a war on a world-wide scale has the potential to wipe out Humanity as a species. George W Bush may occupy a position of power, but he is neither an intellectual giant nor a spiritual giant, and he should certainly not be blindly followed into the jaws of death (while he postures in his various childish - and obviously contrived - clothing "ensembles" for photographic PR shots).
  • Pay down your debts and start living within your means
  • Start focussing on the quality of your relationships as opposed to the number of your contacts.
  • Recognise that the only person who will be impressed if you own a Penthouse, a Porsche and a Picasso (or even a Mansion, a Mercedes and a Monet) is you. No one else of any consequence really gives a damn. In any event, in the near future, these vulgar displays of wealth are likely to cause more envy than admiration, and this could literally become more dangerous to life and limb than it is worth.
  • In short, live a balanced life with both modesty and dignity.

 

The Federal Reserve Bank of New York holds the world's largest accumulation of monetary gold.

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