Friday, June 11, 2010

Is The Perfect Storm Brewing For Gold And Silver?

The truth is incontrovertible: malice may attack it, ignorance may
deride it, but in the end, there it is.   Winston S. Churchill

Retail sales plunged 1.2% for the month of May, which came as a complete surprise to the herd of cattle on Wall Street's cattle ranch, which was looking for more gains. We also saw a surprise increase in unemployment claims yesterday and housing purchase mortgage applications have been in freefall since the home purchase tax credit expired at the end of April. I also made the case earlier this week that we should start to see auto sales start dropping hard again, as the number of people who are taking advantage of the Government subsidized lease financing for GM and Chrysler begins to taper off, like it did with the cash for clunkers program. And I have yet to see any of the above-mentioned cattle discuss or try to quantify the GDP effect of the Gulf oil catastrophe on the economy.

George Soros was in the news today with speech he gave in Vienna yesterday in which he states that "Stage 2" of the financial crisis is starting:
we have just entered Act II of the crisis as Europe’s fiscal woes worsen and governments are pressured to curb budget deficits that may push the global economy back into recession...The collapse of the financial system as we know it is real, and the crisis is far from over LINK
While Mr. Soros refers to Europe in his comments, I would suggest that his view applies even more strongly to the United States. In fact, I think it can be strongly argued that several disasterous events are unfolding which are making Obama's Presidency completely unmanageable (not that anyone else would fare any better, but Obama is not handling this well and has absolutely no experience running anything bigger than a community activist organization).

My view is that, in the event that Bernanke does not want to see an economic collapse this year, the Fed will be forced to implement a second Quantitative Easing program which will be a couple multiples larger than the last one ($1.25 trillion in mortgage monetization + $300 billion of direct Treasury purchases + $200 billion in agency paper - FRE/FNM/GNMA). Bernanke can use the oil disaster plus the melt-down in Europe as his cover story and excuse for cranking up the printing press like this again. When you think about it, he pretty much has no choice unless he wants to see a new President elected by a landslide, in which case the first decision that happens is Bernanke would be sacked - probably the first phone call made after the inauguration ceremony.

If my view is correct, look for gold/silver to start making a big move higher as NFL training camps approach. The metals are holding up extremely well in the context of gold's typical seasonal weakness right now;  China/Russia seem to be persistingly buying up the yellow dog with inexorable demand; and all indicators are pointing toward a growing shortage of actual deliverable bars which are unemcumbered by multiple paper claims, like leases, futures and forwards (please see these comments from Eric Sprott, one of the most highly respected participants in the gold investing community: Deliverable Gold Shortage Brewing).

If gold/silver start to move higher like I expect, the mining shares - which have been lagging gold and are plagued by some of the worst investor sentiment I have seen bull-market-to-date - will make a move to new all time highs.


  1. Don't forget the $200B in agency debt he bought - the 1.25T was just MBS.

    I realize 200B seems like small change these days...

  2. This is, at least for me, one of the great questions going forward. Will there be, as a number of commentators have strongly suggested-Bob Janjuah, being one- yet another, even bigger and more audacious round of QE? Folks like Soros, who should never be trusted, seem to serve the purpose, among other purposes, of paving the ground in the MSM for acceptance of just such operations.

    At the same time as the strong suggestion exists in the MSM that such a course should occur, and is all but ordained, there seems to be a potential schism developing where Germany and GB are backing away from continuing down the QE path.. It remains to be seen if other nations are actually going to throw in the towel on fighting the forces of deflation, or not.

    Frankly, GB and The Euro can kiss both their currencies goodbye if they embark on more QE, and the U.S will be, in my view, far closer to a currency debacle than most believe if it decides to give the finger to countries that embark on a different course than the one everyone in the west has heretofore been on.

  3. thanks for the heads up anonymous - the post stands duly amended LOL

  4. Edwardo, I believe Germany is playing poker with its population. Every other country has a population that expects a free lunch from the Govt but the Germans, while expecting to get to suck from Mama Govt's tit, also has vivid memories of the 1920's. Imagine what will happen when it is discovered that Germany's remaining gold has been leased out by the U.S.

    Unless the western Govts want to see what happens if they let this thing collapse, which it will anyway, I bet we get something along the lines that Janjuah is calling for, although it will have some kind of fancy packaging on it...

  5. Dave, is it your contention that Germany's gold has been leased away by the U.S.? My best guess is that, at least where collapse is concerned, we are seeing collapse occur in multiple arenas. Basically, we had a financial collapse first. It is, of course, ongoing. The economic collapse followed after. It, too, is in process.
    Next up will be political collapse. What is happening in The Gulf seems destined to play a large part in that process. Because we are in the midst of a grand cyclical turn-at least that's my view-I think we are experiencing collapse on other, greater, levels as well, namely ecological-which brings us back to The Gulf- and geo-politically. Suffice it to say that we live, unfortunately, as per The Chinese curse, in interesting times.

  6. Dave,

    Do you consider the 2X silver ETF AGQ to be a "paper claim" on silver, or more of an option call on the physical. I.e.: in the much ballyhooed scenario wherein the JPM silver manipulation gets discovered and settled and the realization hits the markets that there is a lack of the physical metal to settle paper claims, and the price of physical silver appreciates dramatically, would holders of AGQ realize federal reserve note monetary gains, or would they be left holding the bag as could be the case with the holders of the ETF SLV?

    Thanks for your thoughts!

  7. QE 2.0 is coming, but I think the fall, right before mid term elections, will be the timing. Last night I wrote:
    "I think the summer will be all about "laying the groundwork" and then the fall will bring the noise. Right before the mid term elections. This is dangerous politically because you have to hope more people will like handouts and vote for you than people will hate wasting money and vote against you. Money handed out tends to get the handee voters to go to the polls though."
    Whenever it comes, it is coming. Agree 100%

  8. Edwardo, what you just laid out in terms of financial collapse, economic collapse, political collapse is exactly what I've been thinking would happen starting about 8 years ago. Every thing you said has validity and seems to be playing. I've also said that gold/silver is the only way to weather what is coming, assuming you want to see what the other side looks like. It could get ugly if/when the Govt collapses.

    Obama is a really weak leader with no real deep inside ties, and he's extraordinarily arrogant. This is the first time he's had any kind of power or leadership position of ANY kind. I bet he panics and does something really stupid/destructive.

  9. RE: AGQ - great question. AGQ is pure 2x leveraged paper that indexes silver based on the London fix. So if SLV turns out to lay an egg, AGQ is actually not a bad way to play that because of the leverage and the fact that the physical price of silver will go a lot higer.

  10. GYC the bubble you talk about on your blog actually manifests itself in the absurdly low yields we have in the Treasury curve, the stock market and soon in gold/silver!

  11. re: Edwardo
    during the last G20 meeting save one, in London I believe, it was rumored that the ECB sold 37 tons of gold to an unnamed buyer. At the time the recipient of the gold was generally though to be the flagship German bank Deutchebank which was caught in a massive short squeeze involving banks in Dubai demanding delivery. This incident provides an insight into the extremely tenuous position of the supposedly unassailable position of the German banking system. There is presently much speculation as to the solvency of Hypo Bank and Deutchbank itself as well as the Royal Bank of Scotland. Recent stress tests conducted by the ECB's Lucas Papademos have indicated massive insolvency with a derivatives to cash ratio of over 95 /1. If the pattern holds true in this smoke and mirrors accounting fraud you can assume that stated German gold reserves along with those of the IMF are extremely questionable.

  12. As to default conditions the LBMA will call force majeure due to scarcity and suspend the the London fix. The AGQ will pay out on 2* a suspended price.

    The COMEX will allow physical delivery against SLV which will be written against a suspended price.

    The new market in silver, perhaps 30 days after the suspension, will start at a premium to the physical market perhaps $125 or $500 per oz to draw in the actual physical bullion to form the base for the new fractional silver system. Thereafter the metal will be sold down, as per normal, until 2016 when it will rise due to ïndustrial demand".

    If you have any doubts about how Germany is going to react to the loss of its gold listen to Benjamin Freedman's speech at the Willard Hotel in 1960 because Ben saw it all. You can download this speech at your favourite search engine.

  13. I enjoy reading yours and Jesse's commentary. I benefit from that U of Chicago education you received. I am also still in the game though who in the heck would have ever, ever thought we'd still be at these price levels after 6-7 years. I'm overweight silver and pray everyday JPM can't get out of bed. Thanks for all you share.

  14. Dave,

    Thanks for your opinion on AGQ. While I have the lion's share of my portfolio in physical PM's, I still maintain a stock trading presence and play AGQ, at least until silver miners like SLW come down a bit on the coat tails of a market reset.

    Thanks again!

  15. Hey unc, thanks for the feedback. I appreciate it! For the record, I always pull for the Tar Heels when they play Duke. I hope Roy Williams can pull together a good team this year!

  16. yardfarmer - great color. RBS is completely insolvent, propped up by the BOE. Same with Hypo/Bundesbank. Deutsche Bank is likely in trouble with its derivatives. People forget but I don't because I was there when it happened: DB acquired Bankers Trust back in 1999, mainly for BT's derivatives capabilities. BT was one of the pioneers of derivatives and, not coincidentally, the first to get in trouble with them back in like 1993 (sued by PG and lost, costing the CEO/Chairman his job).

    DB is a complete derivatives nuclear meltdown waiting to happen. I knew a lot of the derivatives guys at BT and some at DB - they are the types that would sell their mother for a commission.

  17. Anonymous re: AGQ/LBMA - I agree is AGQ were completely tethered to the London fix, but it does move with silver after the fix. It will be interesting to see how it plays out in the event of a force majeur event.

    I had read an essay back in like late 2001/early 2002 (I wish I had saved it and can't find it now), that laid out the case in which the author argued that most of Germany's gold had been leased out thru Deutsche Bank. We'll never know until we know, for sure, but I do remember distictly last year in May, I believe, there was concerns of gold default on Comex and it was rumored that Deutsche Bank shipped enough gold to the Comex to prevent a problem.

    There's no question the stresses in the physical market are starting to take effect.

  18. Hello Dave,

    I am from India & I am invested in PM for last 1 year due to all the reasons you discussed here. Traditionally we are fond of Gold in jewelery form but despite all this we have here no awareness about roll of silver & gold as true money. There is no eye opening demand for both PM for investment purpose. During conversation among my groups people laughing at me when I try to tell them about overall debt situation & Banking cartel price suppression in western world.In this part of the world where today demand is average due to lack of awareness but when reality bites demand from this part of the world will be plentiful.

  19. Hi India. Thanks for that color on gold from your country. I did not know that was that was attitude with regard to gold/silver there and - as you point out - when reality about the global situation hits the mainstream in India, it will be another source of "rocket fuel" for the price of gold.

    Thanks for your input and don't hesitate to share any thoughts/experiences/views anytime.

  20. Well, one possibility is that the Fed, when confronted with the fact that paper silver "owners" have been defrauded into buying nonexistent silver, could print fiat money for the cheated parties.

    I've always felt that the whole debt problem culd be solved in 3 easy steps.

    1.) Have the mint print fiat coins numbered in every denomination from the trillions on down by powers of 10. (100B, 10B, etc.)

    Pay off the Fed with those coins (declare them to be legal tender by fiat). Forbid them from buying anything with that money (declare a Fed bank holiday week).

    Change the currency one day later so that only 10M in cash is redeemable in the new currency.

    Start to massively and progressively tax asset ownership for any party/company owning more than 100M in assets. Tax the next 100M at 40%, the next 100M at 80%. etc.