1oz Silver = 1oz Gold in future

Gold and Silver Market Suppression failures flash BUY signal

http://www.thedropshadow.com/?p=891

I am writing this in a 5-part series. The first three parts will document in as much detail as space allows the methods and actors involved in the historic and current price suppression of the gold market.

The fourth piece will tell you how to profit from gold, and the fifth from silver. These last two parts are really how to survive it first, and then profit from it. I say this because the gold market is an economic signal that cannot be ignored, no matter how much the powers that be (TPTB) want you to. If TPTB are trying this hard to suppress this invaluable economic signal, then this is one ominous sign that we are in for a large economic ‘adjustment’ period.

Each piece will be released on consecutive days. Please be patient as the story is gradually told. I endeavored to put as much information here as to make this a solid basis for gold (and silver) market investment analysis, and not just a typical ‘one-off’ chart and recommendation piece.

Part I: Banks Collude the Market

Gold market analysts have exposed to attempts to collude in suppressing the gold market. The first involves price fixing. The gold market is the only commodity market I know of where the major players get together to overtly fix the price of the commodity. Gold is fixed twice daily by the five members of The London Gold Market Fixing Ltd. Previously the members would meet in private to fix the price of gold. Now they do it over conference call. How 90’s of them! You know, we have this thing called email.

Adrian Douglas, from GATA.org, has provided a mathematical correlation showing that the twice daily gold price fix action could not possibly be random actions of markets, and therefore manipulation must exist. From his report entitled The Gold Market is Not Fixed, it is Rigged.


Table 2: UP & DOWN Days for Intraday & Overnight

Table 2 shows the total number of up days and down days for both the intraday and the overnight trading from 2001 to 2010. There is a striking contrast. In fact there is almost a mirror image where the number of up days overnight is very similar to the number of down days intraday. The probability of getting this contrasting result at two different times in the same 24 hour period, in the same commodity market, and over a 9 year period is approximately one in 2.6 x 1031. In other words it is practically impossible for such a divergence of data to occur by chance, let alone for the divergence to have a nearly perfect correlation.


The inescapable conclusion is that some entity or entities are deliberately suppressing the gold price between the AM Fix and the PM Fix and that this suppression is calculated to proportionately counter the cumulative gains in price achieved in the Asian markets that trade at some time in the period after the prior day PM Fix until the following AM Fix. Such a consistent manipulative effort would necessarily involve entities with access to large amounts of gold; this implicates central banks as they are the only entities with large hoards of gold and furthermore they have a motive for suppressing the price of gold which is to hide their mismanagement and debasement of their national currencies….



Much more analysis on the article linked above. I encourage you to read it.



London Gold Pool



The London Gold Pool was a secret agreement by governments to keep the price down at a time when currencies were still on the gold exchange standard.

Fearing a relapse, the international bankers of the BIS and the FED-US Treasury secretly formed the London Gold Pool. Each member of the Pool would pledge some of their gold to keep the London market suppressed. The Bank of England would dump their gold on the London market whenever necessary, and at the end of each month the other members would reimburse the BoE in accordance with the percentage of the pool they owned. The members were:



* 50% – United States of America with $135 million, or 120 metric tons
* 11% – Germany with $30 million, or 27 metric tons
* 9% – England with $25 million, or 22 metric tons
* 9% – Italy with $25 million, or 22 metric tons
* 9% – France with $25 million, or 22 metric tons
* 4% – Switzerland with $10 million, or 9 metric tons
* 4% – Netherlands with $10 million, or 9 metric tons
* 4% – Belgium with $10 million, or 9 metric tons
*

By acting in secret, the governments hoped to stagnate the [gold] market and keep potential buyers away.



The article notes that excerpts from page 3-4 of the Fed Meeting Minutes (1967) explain the scheme:

“The announcement on Thursday, December 7, of a $475 million drop [422 metric tons - auth] in the Treasury’s gold stock seemed to have been accepted by the markets as about in line with prior expectations of the costs of the gold rush following sterling’s devaluation. What the market did not know, of course, was that only a $250 million purchase of gold from the United Kingdom saved the United States from a still larger loss in the face of some foreign central bank buying… The logistical acrobatics of providing sufficient gold in London were performed with a minimum of mishaps, although the accounting niceties were still being ironed out.

“Of greater concern, however, was the fact that the drain on the pool was accelerating again… the measures taken by the Swiss commercial banks and by some other continental banks to impede private demand for gold worked quite well, although it was clear from the start that such measures could serve only as a stop-gap until some fundamental change was agreed upon. Persistent newspaper leaks–mainly from Paris–about current discussions on this subject and their reflection in gold market activity Monday and today pointed up the need for speed in reaching a decision. ”



Further reference to gold market manipulation and the London Gold Pool on page 12 of the Fed Meeting minutes linked above:

“Although the German case was the most striking example of central bank operations following the meeting in Frankfurt, the availability of forward cover into guilders and Belgian francs at reasonable rates had also helped to reassure the [gold] market.”



Under Secretary [of Treasury] Deming, who had led the U.S. delegation to Frankfurt, made the necessary arrangements, and the group met with him in Basle yesterday. Meanwhile, representatives of the countries in the gold pool met in Washington last week to make a preliminary review of possible additional measures to keep the gold market situation under control. Not unexpectedly, the gold pool also was the main topic of conversation at the regular Basle [Switzerland, the home of the BIS - auth.] meeting on Saturday and Sunday, and it was discussed in detail by the governors on Sunday evening.”



Page 15 of the Fed meeting minutes goes on to note that Italy and Belgium may have to leave the pool due to substantial losses, and that the pool would need to divert demand away from London which could not keep up the suppression forever.

Nolan Charts goes on to note:

Following these minutes, on Sunday, March 17, 1968, the London Gold Pool collapsed and the global gold markets were closed for several weeks. The central bankers then decreed a “two-tier” gold price for “monetary” gold at $35/oz. and “non-monetary” gold. This system remains in place to this day, although it is clearly just an accounting sham.



After the failure of the LGP, that a Smithsonian Agreement was signed but it did not survive the gold price of $90. The markets had overwhelmed and beaten the early collusion attempts of the central banks. This is an important fact we will come back to later.

Washington Agreement



The Washington Agreement was signed into place by 11 member central banks. The agreement stipulated that no more than 400 tons of gold per year would be sold for 5 years starting in 1999 through 2004.

Given the sheer amount of gold that is (1/6 of yearly peak production), that’s sort of like Tiger Woods graciously ‘limiting’ his affairs to 15 women at a time from the pool of hundreds.

GATA’s analysis of the Washington Agreement(s) state that the Washington agreement is a fraud because central banks are agreeing to sell gold they have already leased out (and never expected back anyway).

Item 3 in the agreement is the red herring. It is a smokescreen behind which the banks are, as Chris Powell said, “writing off as sold their leased gold, gold that is long out of the vault and already sold into the market and a dangerous liability for the bullion banks that borrowed it. Such ‘sales’ don’t add to the gold supply in the market; they help avert a short squeeze by expropriating national assets in favor of influential private interests.”



Since the Washington Agreement was signed over four years ago, more than 4,000 tonnes of gold have left central bank vaults to fill the gap between mine supply (plus scrap) and physical demand. Another thousand plus tonnes will leave central bank vaults during 2004 as well. The central banks are being bled white.



Note in the above paragraph that demand outpaces supply, and the Washington Agreement is used to cover up the leasing that has taken place to supply that 1400 yearly tons of gold shortage and keep the market price from succumbing to even higher price increases.

How do we know the Central Banks rig the gold market? We know because they tell us so.

On July 24, 1998, Greenspan told the House Banking Committee: “Central banks stand ready to lease gold in increasing quantities should the price rise.”

The Central Bank of Australia commented in their 2003 Annual Report:

“Foreign currency reserve assets and gold are held primarily to support intervention in the foreign exchange market. In investing these assets, priority is therefore given to liquidity and security, in order to ensure that the assets are always available for their intended policy purposes.”



And finally, GATA has documented that head of BIS monetary and economic department, William White, stated in a speech titled Past and Future of Central Bank Cooperation:

“The intermediate objectives of central bank cooperation are more varied.”First, better joint decisions, in the relatively rare circumstances where such coordinated action is called for.



“Second, a clear understanding of the policy issues as they affect central banks. Hopefully this would reflect common beliefs, but even a clear understanding of differences of views can sometimes be useful.

“Third, the development of robust and effective networks of contacts.



“Fourth, the efficient international dissemination of both ideas and information that can improve national policy making.



“And last, the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful.”

GATA’s ‘Gold Rush 21’ conference is available on DVD and can be previewed at the link provided. I highly recommend this DVD for information on gold market analysis.



The next installment of the series will delve into some additional examples of gold and silver suppression schemes.

Gold and Silver Market Suppression failures flash BUY signal, Part 2

In Part 1 of this 5-part series, we discussed two agreements that Central Banks used to suppress the price of gold in the marketplace. Please read Part I before proceeding with this article.

So do the Central Banks still have gold?



A nice quote from the GATA article regarding availability of Canadian central bank gold:

When I published my essay “When Irish Eyes are Smiling: the story of Brian Mulroney and Canada’s gold,” the good folks at the Bank of Canada told me that there had been no physical gold in the bank vaults for years. To quote my essay directly: “They advised me (early in 2002) that Canada does not really own this gold at all (at the time we were supposed to have about 40 tonnes). What was left of it had been leased out to various bullion banks years ago …and yes, it (was) being accounted for as requested by International Monetary Fund accounting rules regarding leased gold. Canada’s gold cupboard is bare … not a 400-oz. good-delivery bar in sight.”



What about the US gold stocks?

In a book written by Chris Weber and summarized on Lew Rockwell’s site, we noted that in the one audit of Fort Knox:

The shocking admission Ft Knox holds very little good delivery gold was made to Mr. Durell by the chief official of the General Accounting Office (GAO).



By February 1975 Saxbe was Ambassador to India, so Durell communicated his displeasure through his local Virginia congressman.



As a result of this, the GAO sent four men to Durell’s Virginia farm to try to convince him of the validity of their accounting practices. In charge was Hyman Krieger, the GAO’s Washington regional manager.


The one concrete piece of information to emerge from this meeting was a bombshell. Krieger admitted that only a small part – 24.4 million ounces – of the official gold was of a quality of .995 or better. In other words, less than 10% of the 264 million ounce held by the Treasury could be considered good delivery gold.



Krieger confirmed this in a letter to Durell of April 11, 1975:



“We analyzed, as agreed, the gold bar schedules for Fort Knox and found that fine gold in good delivery form (.995 or better) at Fort Knox totaled 24,411,140 ounces.”



Note that an audit of Fort Knox has not been allowed since. Well, where did all this central bank-owned gold go? There are several ways to dispose of it, including selling, leasing, and swapping it.

Gold Sales



The first example comes from the Bank of England. The BoE, in June 1999, auctioned off gold reserves to the lowest bidder. In the linked announcement you will find the following:

“Under the single price format, valid bids will be ranked in descending order of price, and allotments will be made in multiples of 400 ounces to bidders whose bids are at or above the lowest price at which the Bank of England decides that any bid should be accepted (the “lowest accepted price ”). Applicants whose bids are accepted will be allotted ounces of gold at the lowest accepted price. Bids above the lowest accepted price will be allotted in full at the lowest accepted price.”



So, um.. I give you the lowest price for your gold and I win? Man, if only people on Ebay would follow this logic. I’d win every auction!

It is a matter of historical record that the BoE received a horrible deal, as prices have risen to 6 times those auction sales. I guess the brilliant English politicos didn’t act in the people’s best interest to preserve the country’s wealth. Oops!

So what does Bank of England Governor Eddie George have to say about gold price suppression?



In front of 3 witnesses, Bank of England Governor Eddie George spoke to Nicholas J. Morrell (CEO of Lonmin Plc) after the Washington Agreement gold price explosion in Sept/Oct 1999: George said “We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K.”



Leases and Swaps



Central banks are engaging in leases and swaps to flood the physical gold markets. Leases and swaps are types of loans for gold. In a lease, the bank gives physical possession to someone in exchange for ‘rent’ noted as a lease rate. In a swap, the bank exchanges the gold for currency as a loan with collateral, and at some point in time is supposed to get the gold back. Supposedly, banks gold-rich and cash-poor may do this to improve ‘liquidity’.

One of the issues with swaps is that they are counted as reserves on the books of the bank even though they do not retain possession of the gold. To wit: an excerpt from the bank of the Philippines on IMF guidelines.



“Beginning January 2000, in compliance with the requirements of the IMF’s reserves and foreign currency liquidity template under the Special Data Dissemination Standard (SDDS), gold swaps undertaken by the BSP with non-central banks shall be treated as collateralized loan. Thus, gold under the swap arrangement remains to be part of reserves and a liability is deemed incurred corresponding to the proceeds of the swap.”

And here:

The European Central Bank (ECB) also made it clear that the IMF policy is to include swaps and loans as reserves. The ECB responded to GATA: “Following the recommendations set out in the IMF operational guidelines of the ‘Data Template on International Reserve and Foreign Currency Liquidity,’ which were developed in 1999, all reversible gold transactions, including gold swaps, are recorded as collateralized loans in balance of payments and international investment-position statistics. This treatment implies that the gold account would remain unchanged on the balance sheet.” The Bank of Finland and the Bank of Portugal also confirmed in writing that the swapped gold remains a reserve asset under IMF regulations.

Fabulous!

And for a specific example, GATA demonstrates how German and US banks performed a swap of gold and muddled up the reserves count for both banks to the point we cannot tell who owns what. Yay!

The German Bundesbank (the secret “swapper” of gold with US) lists “Gold and Gold Receivables (loans)” as a one line item on its balance sheet. This approach is in direct conflict with Generally Accepted Accounting Principles (GAAP), and thus German banking law. So, from their published financial statements there is no way to determine how much gold Germany holds in its vaults. The refusal of the Bundesbank to provide a breakdown between physical gold and gold receivables belies any notion of market transparency.


Clearly deceptive accounting, countenanced by the IMF has allowed official sector gold to hit the market without a corresponding drawdown on the balance sheets of central banks. This has made it impossible for analysts to ascertain the exact size of official sector gold loans, swaps and deposits. The unwillingness of central banks to provide even a minimum level of transparency suggests that total gold receivables are substantially larger than the accepted industry figure of ~5,000 tonnes.



So here’s the accounting. The U.S. government swaps gold with the Bundesbank, which now owns the gold at West Point. “Further, to secure this transaction, the Bundesbank receives SDR Certificates, which solves “The Mystery of the Disappearing SDR Certificates” (Freemarket Gold and Money Report Letter No. 289, August 13, 2001). The ESF gets the gold in the Bundesbank’s vault, which it then lends to the bullion banks in an off-balance sheet transaction.

Further, we have a GATA commentary that gold suppression is public policy and public record, not conspiracy.

Talk of gold price suppression has also made public airwaves, where it is not usually taken seriously by TV pundits.

Ben Hinde at Hinde Capital talks openly with CNBC about suppression.

http://www.cnbc.com/id/15840232/?video=1552984313&play=1

Tyche Group talks about gold price manipulation.

http://www.cnbc.com/id/15840232/?video=1565354860&play=1

In the next article I will attack paper options on gold and silver, and then make recommendations.

Gold and Silver Market Suppression Failures Flash Buy Signal, Part 3

This is Part 3 of a 5-part series on gold and silver price suppression. Please read Parts 1 and 2 before proceeding to read this article as each article in the series builds upon the last.

It has been well documented that central banks were net sellers of gold until very recently, when the trend reversed in Asia, Russia, India, and others. Now while central banks are buying back gold in fear of paper currency collapse, they use other methods to keep gold’s price down.

In this part, I will quickly talk about gold and silver derivatives. This is where it gets really fun.

Here is a chart, courtesy of the BIS.

The sheer size of the derivatives monster should be enough to show people that whatever piece of paper you are holding that says it is backed by gold, the reality is that you have about a snowball’s chance in hell of getting the gold that the paper is based upon. There just isn’t enough of it. Or to look at it another way, there is enough gold, but the current price at which people buy these paper options is severely depressed which allows a proliferation of worthless paper options which wouldn’t exist if gold and silver were properly valued. This excess speculation in paper forms a second market level over the physical and keeps the real price of gold subdued.

If you are in it to just trade gold’s price movements, you are ok until the paper and physical markets diverge, which they will. That’s a tightrope that I don’t recommend anyone walk unless you are using purely discretionary ‘gambling’ money and can afford to lose it all.

There are several paper options you can take to own gold and silver, which are ETFs, options, and certificates. ETFs are a fund based upon an index. Certificates are paper claims to allocated or unallocated gold holdings of the issuer. Options are plays on short term price movements.

Be careful when purchasing an ETF. Your share is a claim on the bullion that is supposed to be in storage. But it is unlikely, given the amount of metals ETF trading that is done, that actual holdings in ETFs can cover all outstanding shares (claims). Unless the ETFs have been hoarding more metals than are currently known to be in circulation, it is quite possible that there will be very little metal backing them.

Conveniently, Bill Murphy of GATA has testified to the CFTC that the solvency of ETFs is in serious question due to ‘fractional reserving’ of paper on top of actual gold.

http://www.youtube.com/watch?v=9wIMpe9SjfQ

http://www.youtube.com/watch?v=e9bU0r6JP4s

Hinde Capital as noted on Financial Times Website:

“Hinde [Capital] says precious metals ETFs “should not be owned by serious professional investors” and in a highly provocative paper argues that double counting of gold holdings is “endemic” in the global financial system. “

“Hinde notes that central banks who lease or loan gold to commercial banks continue to report this bullion as part of their official reserves under international accounting standards.

But as the banks are allowed to sell the (leased or loaned) bullion into the global financial system, this has led to multiple counting of the gold.”

We know options are a short term gamble, and there is zero chance that there is enough gold in COMEX to support the options. Ed Steer of Casey Research and Harvey Organ have interesting commentaries on the shorting of gold and silver by a few banks, which also happen to violate CFTC position limits rules.

Harvey Organ letter to CFTC

Ed Steer’s Gold and Silver Daily

And here is a nice chart, courtesy of Sharlynx, showing that relatively few players have concentrated positions in shorting gold and silver as compared to other commodities. The main gold and silver shorter is JP Morgan, which holds most of the derivative risk in gold and silver by itself.

The CFTC has recently announced they will enforce position limits on gold and silver, which has led JP Morgan in particular to start withdrawing their short positions which is noted in COMEX reports. You can follow daily movements at at Ed Steer’s Gold and Silver Daily . This particular method of suppressing gold and silver using paper options has already started to unravel.

CFTC whistleblower Andrew Maguire walks the CFTC through a silver manipulation scheme he has been seeing. A selected quote from this piece. The whole piece is worth reading.

It is common knowledge here in London among the metals traders that it is JPM’s intent to flush out and cover as many shorts as possible prior to any discussion in March about position limits. I feel sorry for all those not in this loop. A serious amount of money was made and lost today and in my opinion as a result of the CFTC’s allowing by your own definition an illegal concentrated and manipulative position to continue.

Lastly, we have certificates which are a claim on bullion stored at a vault. Of course, Reuters reported in a June 12, 2007 article titled Morgan Stanley to Settle Class Action Lawsuit that MS settled out of court for $4.4 million on allegations they did not have the gold to back up their certificates. The easy question here is why, for $4.4 million that the settlement cost them, did they not just open up their vaults to auditors? It would have been cheaper, and it would have answered the question of their gold backing once and for all.

Things that make you go, hmmmm ….

GATA recently was forwarded a private report from Royal Bank of Canada addressed to some clients. The report is available here and it contains a confirmation of GATA’s views that the precious metals markets are being manipulated. Because of Royal Bank of Canada’s status as a major bank, this evidence is particulary damning.
So with the 3 part analysis of market manipulation complete, we next turn to savings and investment recommendations in Parts 4 and 5, the last of the series.

Gold and Silver Market Suppression Failures Flash Buy Signal, Part 4

This is Part 4 of a 5-part series on gold and silver price analysis. Please read Parts 1, 2, and 3 before proceeding to read this article as each article in the series builds upon the last.

Those who have been following precious metals manipulation in the market have been waiting a long time for the explosion in prices. Since gold is hovering around $1200 now and silver broke $19 very recently, it seems as though the breakout has occurred.

However, I would like to submit to you, in the following analysis, that the breakout we have already seen is simply one stage of price explosion, and that subsequent larger stages are forthcoming. The reason for this is that gold is money and paper dollars are measured in gold, and not vice versa. That is why banks must use gold and gold derivatives to suppress the price of gold. And despite their best efforts, the market is beginning to win.

Gold as Money?

For evidence on whether gold is money, we submit some current examples. Historically, gold has performed as the best money. An examination of gold as money can be found in Murray Rothbard’s History of Money and Banking in the United States, Edward G. Griffin’s The Creature from Jekyll Island: A Second Look at the Federal Reserve, and Charles Goyette’s The Dollar Meltdown. Please check out these works.

Currently, Malaysia has adopted a gold and silver money system to free them from ‘Western hegemony’. Goldsilver.com has a video of a Malaysian explaining why he avoids paper money issued by banks, and retains his buying power by using gold money. The video is entitled An Ironic Reflection.

What is Western hegemony? Murray Rothboard, in the above book History of Money and Banking in the United States, chronicles how the US has used the paper dollar to rob real wealth from many other countries. It is no wonder why other nations are trying so hard to extricate themselves from its use.

There has been a report from a Michigan news outlet that Mid-Michiganers are increasingly turning to commodity money and barter, as their use preserves wealth and does not lead to inflation.

The Liberty Dollar was perhaps the biggest US experiment in hard money, spanning some 13 states. The founder’s office was raided and pending charges against have been filed. Most hard money advocates believe that the Liberty Dollar is not unlawful, and certainly not unconstitutional, but that the government and central bankers cannot allow successful alternate money to take hold in America. This would destroy their ability to tax the people stealthily through inflation.

And because JP Morgan (JPM) thinks gold is only money, we do too.

“Gold Is Money, and Nothing Else.”

- JP Morgan, testifying under oath to Congress before the Pujo Commission, 1913

Ok, so why do we believe the value of money relative to paper dollars will continue to increase? As noted in Parts 1-3, the price suppression schemes have held commodity money down in dollar terms. This means when you buy the physical form of it with paper dollars, you are getting a huge discount. We do not believe $1200 and $19 are the final stops for gold and silver, respectively.

Gold Price Targets

There are several ways to look at it. First, if you take M3, the broadest measure of money, and divide it by supposed US gold holdings, then you could say that gold in the US may roughly be valued at

$14,000,000,000,000 (M3) / 8000 (tons of gold) = $54,000 per ounce

Since all currencies (debt) are intertwined now, that is not the correct number. We would have to calculate the value of all currently issued paper currencies and divide it by all gold known to exist (most of historically mined quantities). Since we only need ballpark figures on this one, we’ll try alternative methods.

Previous Highs

What if we take the high in 1980 of $850 and adjust for CPI inflation? That gives us a $2300 price target. But since we know government numbers are gimmicked, Shadowstats inflation numbers estimate a target closer to $6000 in dollar terms.

Another alternative is that we could measure gold against other commodities and see where we land.

Comparing Commodities

In an article posted on my blog The Drop Shadow, entitled Asset Cycle Investing in a Deflationary Environment, I created a couple of rudimentary charts to show where gold is in relation to housing, the DOW, and oil.

click to enlarge
The first chart above shows how many ounces of gold it would take to purchase an average sized house. The historical average leading up through the turn of the century was 100 ounces. Since we are currently near 190 ounces of gold needed to purchase a house, it is clear that to reach historical equilibrium we need gold to rise and housing to fall in some combination so that 100 ounces of gold will once again purchase an average size home.Next we chart housing, the DOW, and oil against gold. The chart compares relative value changes in each item to measure scale. (We removed paper money as an index because paper has no intrinsic value and therefore cannot be used to measure real wealth.)

You can note that commodities are severely undervalued compared to the two bubble assets of this decade, stocks and real estate. Even with two recessions and bubble pops, the prices of housing and stocks are still overvalued relative to commodities. Also note in the chart above that while oil, housing, and stocks have reacted negatively to the bad economy, gold continues to march straight up.This is the main reason we feel gold has a long way to go before the price reaches equilibrium. As I noted in article Is the Housing Market in Recovery (thanks Reggie), the already begun Alt-A crisis will cause real estate to devalue further and we cannot make up for it with regulatory ‘patches’. The markets always win in the end.

Based upon the charts above, it would not surprise me to see gold rise at least an additional 25% of current price before gold and housing reach equilibrium. Target = $1500.

And based upon my studies of asset cycle investing, housing will move through equilibrium to some bottom level, while gold will shoot through equilibrium and go into some level of bubble value. Along the way, the failure of paper currencies will cause people to panic and go back to monetary metals, which will cause a temporary excess rise in the value of gold relative to all else. Henry Hazlitt in his book, The Inflation Crisis and How to Resolve It, noted such behavior in Germany.

Deflation Value

Lastly, we look at what in a gold standard (not gold exchange standard) should be increasing purchasing power due to technology improvements. As noted in my book, The Drop Shadow, deflation caused an increase in the standard of living, despite periodic wars, until the point at which the Fed brought paper money to stay. The rate of deflation, or increases in purchasing power, amounted to roughly 34% increase in the standard of living from 1800 to 1913, with the largest gains coming between 1820 – 1860 and 1870 – 1913. If not for the Civil War, the nation’s prosperity would have exploded even more. Source: Minneapolis Federal Reserve.
Antal Fekete has the following to say (.pdf) about the prosperous times before the paper money standard of today.



This allegation is just the opposite of the truth. The heyday of the gold standard was the 100-year period between 1815 (the end of the Napoleonic wars) and 1914 (the start of World War I). This was the age of transcontinental railways, intercontinental shipping This was the time when all the key inventions were made that ushered in the age of electricity and electronics, the age of the internal combustion engine, the age of aviation, the age of wireless telecommunication, the age of the X-ray, radium, and the ultrasound, etc. Financing these discoveries and their applications in production, transportation,telecommunication, and therapeutics wouldn’t have been possible without the gold standard and the accumulation of capital that it facilitated.

To backup this view, Murray Rothbard noted that the decades of the 1870s – 1880s were the nation’s most prosperous in terms of living standard, in this book History of Money and Banking in the United States.

So if we take 34% noted above, and apply it to the value of goods gold can buy, we would see a dollar ‘price increase’ of gold 34% before the bubble in gold begins. That is assuming the pace of technological advance is the same today, which I believe it is much faster than the 1800s and that 34% number may be substantially higher because of that. That would give us a very conservative price of target of $1600 per ounce.

Conclusions

So set your gold target very conservatively to $1500-$1600, to $2300 in government-reported inflation terms, and most likely to $6000 in the event of a paper currency crisis (real world inflation terms), before the bubble phase of gold begins.

At that point, the bubble cycle of gold will begin as the paper currency crisis takes hold. Gold will continue to march upward to some atmospheric value before peaking; whereby it will come back towards equilibrium.

Tomorrow, in Part 5 of the series, we look at Silver.


Gold and Silver Market Suppression Failures Flash Buy Signal, Part 5

Gold and silver, like other commodities, have an intrinsic value, which is not arbitrary, but is dependent on their scarcity, the quantity of labour bestowed in procuring them, and the value of the capital employed in the mines which produce them.

David Ricardo

This is Part 5 of a 5-part series on gold and silver price analysis. Please read Parts 1, 2, 3, and 4 before proceeding to read this article as each article in the series builds upon the last.

Silver has been money for as long as gold. Therefore, we could have just included silver into the gold argument of Part 4 and left it at that. But unlike gold, silver is also a heavily used industrial commodity due to the following unique properties:

- Highest thermal conductivity of all metals
- Highest electrical conductivity of all metals
- Highest reflectivity of all metals
- Chemical and anti-bacterial properties that make it attractive in medical
implements

Silver is used in medical equipment, consumer electronics, photography, batteries, and jewelry. In most applications, silver is ‘used up’ and most of silver applied is not recovered in scrap. The fact that silver gets scarcer over time is what makes silver a special metal. It suffices as both money and as a highly sought after commodity.

Therefore, we have to add an analysis of silver scarcity and market demand to our previous discussion of gold as money to get a read on silver’s potential future value.


Silver Scarcity


What’s unique to silver is that it has been in a deficit consumption pattern for more than sixty years, with very low prices over most of that time. That would be impossible for any commodity, except that it has actually occurred in silver. But the very reason it has occurred in silver is the reason I think silver is the best thing to own.

Ted Butler


According to a 2005 Jensen Strategic report, we know that the world inventories of silver have fallen about 95% since 1950. That means that demand for silver increases, the overall amount of silver inventory as a whole number has declined from 10 billion ounces to 340 million ounces in 2005 and has continued to fall. That is about 4 months worth of world-wide demand for silver.
70% of silver is a byproduct of other metal mining, meaning to increase silver production would require large capital expenditure on less profitable metal mines to get silver as a byproduct. And because silver’s price is so far depressed by suppression schemes, it is not profitable to develop hard-to-find silver-only mines. And because mines take years to pass permitting processes, even as silver’s price rises, current production will lag demand for quite some time.

Mine production is therefore said to be inelastic. This presents an extremely interesting opportunity for those wishing to store their wealth in precious metals.


There has never been a situation in any commodity where such conditions have failed to cause a dramatic price increase.

Hinde Capital
In an excellent analysis of silver, Seeking Alpha contributor Jeff Nielson explains in a 3-part series why silver’s price can stretch very high with little change in demand. If you have not read Nielson’s work at BullionBullsCanada.com, I recommend it very highly. His pieces are very well researched and in-depth.
Ratio to Gold

In addition to supply and demand, we can look at silver from a ratio to gold perspective. Because silver’s price has been suppressed more than gold’s, this is useful in determining the relative leap in value silver will take compared to gold as demand for silver as money increases.

The historic relationship of silver to gold during history has usually been sixteen to one, owing to mined quantities. From 1900 to 1980, the ratio was in the mid-30s. Since then, it has risen to a high of ninety-four in 1990 to the current ratio of sixty-three. Therefore, if the ratios come back to historical levels, silver may be more undervalued in terms of dollars and may have a much higher upside percentage-wise per ounce than gold does.

To bring supply and demand factors into this argument: while through most of recorded history silver was in greater abundance than gold, the industrial demand for silver has left it in significantly short supply compared to available gold stocks.

So not only will the price ratios need to move back to historical equilibrium (16 ounces of silver to 1 ounce of gold), but they will likely invert. At some point in time, perhaps in the next 10 years as economies begin to collapse under the weight of debt and currency failures, the value and therefore the price of an ounce of silver should equal and exceed the price of an ounce of gold.

If this relationship plays out as it should, silver may have 63 times the upside of gold and more. The final upside number will be determined by many factors including amount of private silver hoards being brought to market, rate of fiat currency collapse and alternative currency arrangements being made, and rate of change in world-wide GDP affecting industrial demand for silver during these events.


But one thing is for sure. Silver’s potential is the most powerful investment opportunity I have ever seen. It may offer a legitimate chance for people over leveraged in stocks and real estate to recoup some of the wealth they will lose in coming years. Silver, in this instance, may become an equalizer for at least some people.
When?

We noted in previous Parts in this series of articles that gold and silver suppression schemes are already starting to unravel. I don’t think it will happen ‘overnight’ unless hyperinflation and paper currency collapse comes swiftly. Currency collapse all depends on how many more tricks central banks have up their sleeves for extending the elasticity of the current fiat dollar that we have not seen yet, and whether people believe them.

But it should begin to happen during the next 5-10 years in earnest. And considering how crappy your 401k is doing, that is not a bad timeframe at all. That gives you time to deleverage out of our existing credit cards, cars, and homes and into something that will maintain and grow in value in the future.

The choice of whether to invest in precious metals is simply in your corner.
The Tragedy of the Opportunity

Why did I write this series? Contrary to what you may think, it’s not so that we can all become stinking rich. That’s not a bad thing, but given current and future economic chaos, I would settle for people avoiding poverty and having a decent quality of life moving forward using an honest money system.

In one way, taking advantage of price suppression schemes by investing in gold and silver puts you on the opposite side of the incredible destruction of wealth that is coming when the paper collapse happens. That is nothing to brag about as many other people will suffer because of it.

And in reality, not everyone can take advantage of this opportunity at the same level. Demand for precious metals will overwhelm market suppression and quickly drive the price up. Therefore, as more and more people realize the opportunity, the same opportunity will become less available for everyone else. They simply will not be able to afford it as metals prices surge to equilibrium points and beyond.

If we all had remembered the lessons of our parents’ past, we could have all invested in real precious metals over time (or used them as money). This is what makes the central bank suppression schemes so ‘barbarous’.

Regardless of how many people hear this message, some large group of formerly middle class citizens is going to have their wealth stolen by the elites of our society that have access to the best insider information. And that is not conducive to a politically and financially democratic society.

That, in my opinion, will be the great tragedy of our generations. That tragedy is that we lost the vision of our forefathers and allowed our society to once again become the rich and the poor, with little in between.


It is not too late for everyone. Please do not hold this information to yourself. Help as many as you can by spreading the information here and through all of the other information sources quoted in these articles.