In the KWN weekly metals wrap, we’re looking at $1,440 as the new ceiling and perhaps $1,420 as the new floor for gold (yes, the dreaded ‘G’ word). Although last week was indeed a consolidation week, if we break through $1,440, then we’re up through $1,450 and a new ceiling at $1,460. With gold going through these $20 window breakpoints, silver appears to be going through the same logical process, but with $2 dollar breakpoints, as people abandon paper currency, particularly the paper dollar (which other paper money printers still treat as their reserve currency, even though the dollar has been backed by nothing since 1971). The new silver ceiling target is $38 dollars. Once we’re through that, then we’ll probably be up to $40 as the new immediate target:
James Turk, the proprietor of GoldMoney, is more bullish than the metals wrap commentators (as you might expect, of course). The major difference between silver and gold at the moment, is that silver is in backwardation (the future delivery prices are lower than the on-the-spot prices), which indicates that people prefer physical silver in the hand, to two birds bearing paper promises of silver in the bush. Mr Turk predicts that if gold goes into backwardation too (a highly unusual and usually extremely fleeting occurrence), then it’s all over for the dollar. Backwardation in both silver and gold will indicate a major flight of wealth into private metal (solidity) and away from government paper (junk). Turk still says he believes in $1,800 dollar gold this year, and $50 dollar silver:
[For financial markets newcomers, future delivery contracts for hard valuable commodities are usually more expensive than on-the-spot delivery contracts. This is called ‘Contango’, which is a sort of cod-latin for ‘I touch against’. The idea is this; I have two routes to holding a thousand ounces of silver, in one month from now. I can either buy hard physical silver today in the on-the-spot markets, and hold it for a month, or I can buy a promise from someone else to deliver me a thousand ounces of silver in a month. The problem with buying it today, however, and holding it for a month, is that you need to borrow money today to pay for it, then you need to store it in an expensive vault, and you also need to insure it from theft. These three costs of finance, storage, and insurance, are usually added on to the on-the-spot price to make it equal to the future delivery price. If this relationship is broken, then arbitrage theory might come into play. If the future delivery contract price is lower than the on-the-spot physical price, then you can sell all the silver you hold and save a month’s finance, storage, and insurance charges. To keep your silver portfolio filled, you simply buy a future delivery contract from a reputable firm, and take their delivery of silver in a month to refill your portfolio. Therefore, you’ll make a lot of money. For example, if physical silver is $36 dollars, and the total finance, storage, and insurance costs are $2 dollars, per month, per ounce, the futures contract for a thousand ounces should cost $38 dollars per ounce; this is sometimes known as the ‘fair value’ of the futures contract. However, if because of supply and demand the silver futures price for delivery in one month’s time is $35 dollars (i.e. it is in ‘backwardation’) and you hold one contract’s worth of silver, then you sell your thousand ounces of silver at $36 per ounce and buy a future for delivery of 1,000 ounces of silver, at a promise-to-pay of $35 per ounce; you then bank the $36,000 dollars you have just made, and start collecting interest on it. In one month’s time, you take $35,000 dollars out of your bank account, and pay that to the reputable firm to take delivery of your silver, at a ‘profit’ of $1,000 dollars (plus one month’s bank interest on the full $36,000). You also saved yourself $2 dollars per ounce in holding costs. So on a one month future contract, that’s $3,000 dollars of gain, plus interest. On a thousand contracts, that’s over $3 million dollars! When a market in a hard commodity like silver goes into backwardation, it indicates that there is a massive ‘convenience yield’ in holding physical silver right now, rather than waiting a month for someone else’s promise to deliver it to you. What this might indicate in these markets, is that people believe silver’s price rise is relentless, in terms of dollars and other unbacked paper monies, and that in a month’s time silver is going to be priced significantly higher and rising, therefore wiping out any ‘paper money’ gains in arbitrage, because you have lost your real silver, and are left holding nothing more than a paper promise to deliver it back from someone else, who might have gone bust in the meantime, or who has resorted to hiding behind complex smallprint in the original future delivery contract because they cannot cover themselves and cannot find the silver in the market that they promised to deliver to you, at the cut-price rate you promised to pay, and cannot afford to fund the difference. If they are speculators rather than silver miners, they will have only sold you the futures contract in the first place, because they believed or hoped the price of silver would fall, and this rise has really caught them short. For instance, if the demand price for physical silver has gone to $50 dollars an ounce, and they sold you a thousand fair value contracts to deliver at $38 dollars an ounce, a month earlier, they are down $12 million dollars. You therefore want to keep holding all the silver supply you have now. You do not want to let a single ounce go. And you want more silver, real silver, in the hand, at your convenience. Right now. You do not trust even reputable exchange organisations to be able to deliver real silver to you in a month’s time, without monkeying about with obfuscated exchange rules on paper money compensation in lieu of real physical delivery. You don’t want $50 miserable paper dollars delivered late by a recalcitrant, possibly even, bailed-out exchange; you want your ounces of silver right now, which could be rising by a dollar a day, at this point. For instance, you might believe you will receive $50 miserable paper dollars in contracted compensation for not receiving a promised and undelivered ounce of silver, but that silver itself might be over $55 dollars an ounce, and rising, by the time you are so compensated (with the finagling firm or even silver miner that sold you the futures contract keeping hold of your silver, that they should have delivered to you). Your faith in paper money is, as they say, crumbling. (You might wonder therefore who is selling silver futures at $35 dollars an ounce? Well, there’s lot of talk about that on the Internet, particularly if you stray anywhere near Max Keiser’s web site, but if we’re being generous, we’ll say it’s silver mining companies who are digging it out of the ground for $5 dollars an ounce, and who will be happy with a guaranteed $30 dollar profit on that in a month’s time. They just want a predictable market for their effort, and are prepared to forego any speculative profit to get that guaranteed money, plus, as silver miners, they should be able to honour their obligations in physical metal.) Therefore, if gold does go into backwardation for any sustainable period, then Mr Turk is probably right. If you could believe in futures markets and paper money, then buying gold futures in backwardation would make lots of sense, thereby pushing the price up of these futures contracts. It only makes sense for gold to go into backwardation if a large mass of gold buyers, including central banks, have given up on paper money. It probably really is all over for the dollar if gold goes into backwardation for any sustained kind of period. The Federal Reserve will therefore have done its assigned job in less than a century, since 1913, when it was formed. It will have completely destroyed the dollar and the wealth of every dollar holder in the world, and passed this wealth on to the U.S. government to waste on itself in a century of imperial ambition. Well done, Alan and Ben. Your mission will have been accomplished. A truly magnificent effort in the face of so much economic logic from the Austrian School, of which Alan Greenspan, in particular, was intimately aware. As for Ben, he’s really a confused cardboard cut-out character on sabbatical from ‘Hector’s House’, and so is to be pitied more than defiled.]
Ben Davies speaks about George Reisman’s book, Capitalism (freely available for PDF download), and government price controls. Davies predicts that no matter how stupid price controls are, in an economic sense, western governments are heading towards more price controls to miserably fail to smother the paper money inflation they are creating with their printing presses.
He also talks about how the silver price has been artificially controlled, which has led to a shortage in physical silver, and therefore the current price explosion in silver as those controls fall apart (as price controls always do). Davies predicts a consolidating top for silver, at $45 dollars an ounce. He believes once silver reaches that point, then gold will be where the action is, with a breakthrough ceiling of $1,440 dollars an ounce, and then nothing to stop it rising another $400 dollars on the upside, if it breaks through that price-controlled ceiling, to match Mr Turk’s $1,800 dollars by Christmas. Interesting:
Rob Arnott speaks about the general inflationary cycle, moral hazard, and the policy blunders of central banks; he is alarmed. He also predicts that if the U.S. government keeps going with its money-printing policies, then it is heading for a Greek-style collapse. Listen out for the line about the iPad:
The heroic honey-voiced Robin Griffiths strays a teensy-weensy bit into Bastiat broken window territory, but we’ll forgive him for this possible faux pas because of the kicking he then gives Helicopter Ben. He believes it is reasonable to expect gold to hit $3,000 dollars an ounce, at some point, without a specific timeframe, though even $8,000 dollars is a not unreasonable target, if Helicopter Ben really keeps going with his prodigious money printing programme. On silver, he thinks a reasonable resting position is somewhere between $40-45 dollars, but that it should double from there within some kind of short-term horizon: