What’s REALLY Happening To Gold & Silver?

It’s been a strange few days on the precious metals markets.

If, like me, you’re invested in gold and silver, you may have choked on your corn flakes at the declines on Friday and yesterday. If you’ve been thinking of getting on board the precious metals train, you might be rejoicing that you procrastinated.

So let me try to unpick what’s been happening and tell you how it’s going to impact my strategy going forward. The first act of this ugly play starts with the playground bullies in Brussels and Bonn. They ordered little Cyprus Junior to sell his gold reserves to contribute to the bail-out plan. That meant $400 million of gold being dumped on the market putting immediate downward pressure on prices. Gold fell nearly $100 in a day. Silver is highly correlated to gold so it also started a downward movement.


But then a weird thing started to happen. Looking at the volume of transactions taking place on the market revealed some skulduggery from banks and hedge funds. They went ballistic with ‘naked shorts’.  No, not see through underpants but selling ‘paper’ gold and silver they don’t own in order to drive the price down then buying physical gold and silver at the new, lower price.

The main ‘paper’ markets are exchange traded funds or ETFs. The main ETF for sliver is SLV, controlled by JP Morgan Bank. The main ETF for gold is GLD, controlled by HSBC. If either of these banks wants to manipulate the price of the metal, they simply need to issue ‘sell’ instructions on millions, even billions of ounces of this paper metal. One known example of this happened in September 2011 when JP Morgan sold 2 billion ounces of silver, equivalent to two full years of physical production, in a single day. The price crashed from just below €45 to below €30. But volumes last Friday were more than four times what happened on that day....

At the same time as all these paper ‘sell’ instructions hit the market, more than 4 million ounces of real, physical silver was withdrawn from inventory at the COMEX commodities exchange.  Physical silver is selling like crazy, to the extent that there are global shortages. The U.S. and Canadian mints have run out. The London Mint is talking about delivery delays.

So the real insight is the complete disconnect between what’s happening in the physical and paper markets for precious metals. Let’s not forget some fundamentals, especially when it comes to silver:

  •  95% is used in industrial processes so there’s very little being hoarded in inventories
  •  The economically mine-able supplies are due to run out in less than a decade
  • The price would have to increase by 300-400% to make these reserves economic to extract

It’s also worth remembering that silver in particular has always been a volatile commodity. In the very recent past it’s been as high as $50 and as low as $8. So you need to hold your nerve and play the long game here. I’m not a gold or silver ‘bug’, determined to hang on because of any emotional connection.

My heart is telling me that these prices are going to decline further and making me feel uncomfortable about taking further paper losses. But my head is telling me that this is portfolio insurance and the premium just got cheaper. Would we object at paying less for our car insurance or home contents insurance?   

The practical investment lesson is to follow the advice given by trading guru  Marcus de Maria when he writes in my WealthWatch newsletter – pound cost averaging by investing a set amount each month so you buy more when prices are low and less when prices are high. In fact this is a great time to get into the Silver Saver plan as you’ll be getting in at some of the lowest prices for a few years. Just click here to find out more.

The vital investment lesson is to steer clear of the heavily controlled (abused?) paper markets for gold and silver, specifically GLD and SLV. One report that I saw in the U.S. anticipates multiple class action law suits when there’s a massive demand to take delivery of metal and the lack of any specific allocated reserves for each investor becomes apparent. The only gold and silver worth owning is physical stuff, either bullion allocated in your name in a vault or coins stored securely in or near your home.

The reality is that physical bullion is in greater demand than at any time in history. Governments and wealthy individuals are starting to accumulate gold and silver again. HSBC secretly acquired $876 million in silver in 2012 from a supplier in Poland. China bought the London Metals Exchange last year as part of the ‘undeclared war’ it’s waging to garner the world’s physical resources.   

So my strategy is two fold. I’ll continue saving a set amount on a monthly basis to average out the volatility inherent in the silver price with a continuing bias towards silver due to its supply/demand fundamentals. But I’ll also keep a close eye on the markets to see when these falls bottom out. At that point I may look to place a lump sum investment to catch the inevitable upswing.

All markets swing from greed to fear and back again. Many people will cash out of gold and silver because of two bad days in the market. If you posses the rectal fortitude to read my material, I’m guessing you won’t join the mediocre majority in this sucker’s sell-off.

Until next time.

Warm regards.

Graham

 

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