The Bullion Bull Is About To Run

Let’s cut to the chase.  Gold and silver are about to embark on a wonderful spree of new highs. I have never had a crystal ball, and do not like to irrationally speculate on the market unless there are fundamental reasons to support a change in price one way or another. 

However, my rational over the last little while has been altered by witnessing some of the most manufactured (in my opinion) price manipulation ever seen since being in the physical bullion/precious metals business.  Silver and gold, as you are probably aware, are recovering from what we call in the industry a “shakeout” or period of consolidation.  Basically this was a large scale shakeout taking the market down some 35 percent last year in silver and producing the first losing year in gold in the past 14 years; both stemming from the recent 2011 peaks where gold reached over $1900 per ounce while silver reached over $49 per ounce. 

The chart below was one showing silver pricing since 2002 and was in our Precious Metals Advisor newsletter back in November of 2013.  I wrote that you could “clearly see the peak and trough cycles of the marketplace…That periods of consolidation are followed by periods of tremendous gain.”  The last red circle closest to the right side of the chart shows what is the ultimate low of this trough period in the $18 per ounce range for silver. That low was hit back in June of last year and remains, as I have stated on “The Real Money Show”, a bottom which has not been retested and remains the launch point for a reversal of both sentiment and technical buying that will see the tides turn in the coming months.

In 2011 there was no real negative economic reasoning for the fall in pricing in both gold and silver other than very legitimate profit taking, which under normal circumstances is healthy in any bull market.  There has been plenty of condemning and censuring of the gold and silver market during these pull backs and plenty of expectations that have failed to materialize but truth be told we can speculate about what might have caused it, and in some cases we could be right, but I would much rather focus on the resolve of this movement and the coming new cycle.

Since last June both gold and silver have begun to slowly grind out higher highs and higher lows to the extent that both metals are now well supported above their ultimate lows of last year.  “Shakeouts” can and do occur on occasion prior to a move in the market upwards.  We have seen it in the past and although one never knows how high silver and gold will run, now would seem to be the most optimum buying time.

Consider the Facts

We have a continual, inelastic, demand and a shortening supply occurring in silver, in particular. This fundamentally increases the chances of a price movement upwards in the metal.  The US economy is not strengthening, and as noted on several occasions, inflationary pressures continue to mount. (Please see www.shadowstats.com)  

The high cost of oil, which is definitely here to stay, continues to be a threat to our otherwise expected standard of living. It also remains a threat to long term inflation as the results of these high prices have now more than begun to affect many industries such as transportation, clothing, food, and many other sectors which impact our normal everyday buying trends.

There is a continual lack of direction in the US economy despite a “so-called” recovery in the stock market and a subsequent lack of direction in the traditional markets as investors teeter back and forth from sector to sector wondering if the time is right to invest in stocks or to move elsewhere (Thank you Financial Media Spin Doctors). 

We have every indication that interest rates will not continue to rise, forcing other world economies to continue to follow suit, at least through the next year or so and this is happening despite economic logic telling us otherwise and the printing presses continuing full speed ahead. 

Starting this month, the US Federal Reserve will create $75 billion per month out of thin air, instead of the $85 billion per month we have seen over the last year. So instead of buying these debatably worthless assets at an annual pace of just over $1 trillion, now the pace will be $900 billion per year.

To put this in milieu, the total adjusted monetary base was around $800 billion in 2008 at the tail end of Bush and entry of Obama administration before the major economic kaput became evident. So the Fed will still be printing or creating more money on a yearly basis than all of the base money that was in existence just over five years ago which took hundreds of years to create!

This means that the Fed will carry on bailing out their good friends the banks (buying mortgage-backed securities) and will continue to help Congress fund the deficit (buying U.S. government debt-its own debt…which is very moronic). It will just be at a slightly slower pace.

Federal Funds Rate

In addition, the federal funds rate has been kept below .25 percent for about five years much to my and many other analysts chagrin. It is almost futile right now. Money printing at different pace through all the various quantitative easing it doesn’t matter what the Fed does with the monetary base. The federal funds rate stays about the same.

The federal funds rate is the overnight interest rate for banks to borrow money. But since the huge expansion of the monetary base in 2008, we have also seen a huge increase in excess reserves held by banks.

Since most banks have reserves far above their minimum requirements, they have little need to borrow money overnight. They already are way in excess of their reserve requirements. Since there is little demand for overnight borrowing, the rate stays low.  For that reason, I wouldn’t focus too much on the FOMC’s policy of keeping the federal funds rate low.

This fact has really become insignificant, but seemingly continues to make headlines. We could see the US federal funds rates stay low for longer than expected.  While this may seem like a big deal, it really isn’t at all.

Employment Numbers

In a recent article, I discussed employment numbers and data and how the numbers have been fudged.  The way that employment numbers are calculated have changed significantly since last time we experienced a bull market in precious metals back in the late 1970’s.  In fact, both inflation and unemployment calculations have changed drastically. 

Centring on unemployment, look at what has happened.  Employment growth has become derisory.  Those responsible for reporting data at the government level in the US have done some incredibly creative accounting in some cases adding jobs out of thin air nothing that they are there but not being able to show them.

According to authorized statistics once people drop off the unemployment list they are presumed to no longer want a job.  So it is assumed that they are no longer part of the workforce.  The rate of participation is now back to same level it was in the late 1970’s.  And the unemployment rate fell to 6.7 percent from 7 percent last month even though the economy in the US only generated 74,000 jobs, purportedly, and now nearly 92 million Americans are not in the workforce. 

 (CNN)

Jobs Created By Month Year-Over-Year

 (CNN)

If these numbers were to be treated the way they were back in the late 1970’s, John Williams (of www.shadowstats.com) says that the genuine unemployment rate would be nearly 20 percent.  My point is you can paint the term “economic recovery” however you want to but it won't change what it really is.

Americans essentially are now under employed.  There are countless workers that would like a job and don't have one.  There are countless who would like a better job.  There are also countless people who collect subsidies and don't want a job, their job is their subsidizations.  But, the problem remains that Americans, and Canadians for that matter also, have taken on increasingly larger amounts of debt and expanded fixed and guaranteed subsidies at the same time.  The ability to pay is no longer there.  You can mask these difficulties and or mislabel them but it will not change the truth. 

The US God Complex

The FEDS in the US are playing a game.  It is simply called a “God Complex” or their belief characterized by consistently inflated feelings of ability, privilege, or infallibility. It is also characterized by their refusal to admit the possibility of their error or failure even in the face of complex or obstinate problems.  They simply regard their personal opinions as unquestionably correct and as a result they no longer have to play by the rules.  You and I do but they do not, nor do their friends. This is indeed a divine-like attitude or perhaps more accurately an “Anti-God-like” insolence that I shan’t title.  

We are in for fascinating times ahead. Who knows if anything will change once Janet Yellen takes the helm as Federal Reserve Chairperson? We are living in unparalleled times and I don’t think the Fed nor the US Government really understand how to get out of the mess they have created.

I have often compared the 1970’s to the present when talking about the fundamentals in the precious metals bull markets and how history has repeated itself.  What does this add up to?  It is simply a wakeup call for those wishing to protect themselves against losses in other markets by hedging themselves with something that is tangible, has a track record and is still considered “Real Money” to this day and that is gold and silver bullion. 

However, I encourage you to do your own research.  Look at the last time the US headed for a breakdown in their economy in the tail end of the Carter era when Regan was about to take over.  They, and us for that matter, experienced a rather large recession, but prior to that recession taking place commodities experienced a movement that was unprecedented. Gold climbed to over $800 per oz. and silver reached $52 per oz. respectively.  It didn’t happen by accident.

This is happening again. We are heading for some major economic uncertainty. What is not known is how high silver and gold will ultimately go.  Everyone will have their own beliefs, and short-term goals in mind, but at the end of the day the price of gold and silver could reach multiples twice over of their current price and I do not think many people would be surprised.  But if a prediction is to be made then I would safely say that bullion, as many already know, will continue in a bull market for the foreseeable future.

Yours to the penny,

********

Darren V. Long is Senior Analyst with Guildhall Wealth Management Inc.  Darren is a speaker, writer and financial commentator on gold, silver and the economy. He can be heard weekly on “The Real Money Show” on 640 am radio in Toronto discussing all facets of the precious metals markets. Listen to replays of all shows on iTunes. 1.866.274.9570 www.guildhallwealth.com and www.guildhalldepository.com or email at: [email protected]