The Invincible Precious Metal Bears

April 16, 2014

A year ago yesterday I saw one of the largest declines in COMEX gold and silver futures in the last several decades. For those who argued that an electronic futures market- where an entire year’s worth of silver production can be bought or sold in one day- would always and everywhere be able to shrug off strong physical demand and set prices however futures traders saw fit, last April was vindication. Coupled with a soaring stock market, the near destruction of the gold and silver bulls sent a powerful message to small savers: invest with Wall Street, or else.

Just last week, during an interview with Michael Lewis, author of "Flash Boys-" (a book about High Frequency Trading) a caller essentially told Lewis that retail investors have no other place to put their money than with Wall Street, and implied that Lewis' negative words for aspects of mainstream stock markets might further dent confidence in the markets and therefore decrease the value of that caller's stock portfolio. Once again, I saw in action the belief that it is not worth even trying to critique the financial sector, and that it is just not worth it to attempt "alternative" investing, since owning assets outside the system is only for suckers.

As you might imagine, that comment hit a nerve. The attitude that we are all in this together with the Titans of Finance, that our interests are aligned with Wall Street simply because they are powerful, and the notion that savers have no choice but to invest with the same crooks who got us into the 2008 mess, was a bit much for me.

As the gold- and especially- silver prices settle into oblivion, either loathed or ignored by most other investors seeking returns in "the only game in town" (i.e. conventional stocks), it is worth remembering the power of normalcy bias, and the power of the human herd instinct- not to mention the inability of average people to stand apart from powerful authoritarian figures who manipulate or distort reality for their own ends- even when it is actually in the average persons' interest to run, not walk, away from a casino run only for the well-connected.

I see that the gold/silver ratio has blown out to above 66. In theory, this is not a good sign, since the gold/silver ratio was generally rising over the course of the 1980s and 1990s. On the other hand, it may just be the case that the inverse correlation we are seeing between stocks and precious metals is temporary, and that the disastrous price performance of the 1980s and 1990s will not be revisited on this sector.

Here are some reasons for why this period is different from the secular bear market in precious metals seen roughly 20 years ago:

- Unlike twenty years ago, the US dollar is not rallying, but is at best treading water. Remember that in the 1980s, the dollar shot up by somewhere north of 50% at one point. It is difficult to imagine such a scenario occurring in a world where nations like Russia and China are openly calling for diversification away from the dollar.

- Unlike twenty years ago, savers are being stiffed with zero percent interest rates, accompanied with central bankers claiming that we need more -not less- inflation. A case can be made that real interest rates (nominal rate minus the rate of inflation) are negative as we speak, which is normally bullish for gold.

-Unlike twenty years ago, a growing middle class in the Middle East, India, and China could easily absorb all known gold and silver mine supply. That supply can only grow so fast. The price dump of last year only came about after Wall Street firms dumped hundreds of tonnes of ETF gold AND India cracked down on its gold market to defend the rupee. Indian elections are coming up shortly, and some of these draconian measures may be lifted. At any rate, the pace of the collapse of gold demand is the real unsustainable trend, even as many shell-shocked formal bullion bulls throw in the towel and are predicting ever-lower precious metal prices.

I could go on and on regarding the bank bail-in concept, concerns regarding the solvency of public pension funds, attempts being made by certain groups to establish alternative currencies (including but not limited to gold), in addition to the possibility of some sort of meaningful correction in the stock markets, as fundamental drivers for higher metal prices.

At the very least, you may want to recognize that prices do not go down forever, and that the most money is made in a market when everyone is on one side of the trade.

At the moment, the precious metals bears think they are invincible.

I'm not so sure.

University of San Diego Lecturer
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Gold is the official state mineral of Alaska.

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