Tuesday, October 26, 2010

Lust for Silver Returning

Vultures (Got Gold Report subscribers) should catch a short, but important web log post by our good friend Eric King, of King World News.  We deem Eric’s interview with Mexican billionaire Hugo Salinas Price worthwhile and timely.  Readers can find it at this link.  If the link doesn’t operate correctly, please copy and paste the entire link below in your browser:

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2010/10/26_Hugo_Salinas_Price_-_Pushes_US_Gold_%26_Silver_Money.html   

Lust for Silver Returning   

Below is a small, condensed excerpt of a presentation we had intended to give at this week’s New Orleans Investment Conference but were instead bushwhacked with a temporary, but painful ailment causing us to cancel at the last minute.  Again our apologies for the last minute change and special apologies to my dear friend Brien Lundin, organizer of the conference.

We are on record as having said that the world is approaching the point where the public understanding of the actual scarcity of silver will rumble like an earthquake throughout a disbelieving population.  The reason?  Because for several generations people have been led to believe – by the price of silver – that silver is abundant and is no longer precious like its rarer sister gold.  

But silver wasn’t cheap because it was actually overabundant.  Silver was cheap because it was apparently overabundant, in other words for artificial reasons.  When that is the case then it is merely a question of time before the laws of economics reassert themselves. …

Silver became cheaper than it should have because of an artificial oversupply of the metal into the markets by governments.  … Freed from the shackles of hard money by the collapse of the Bretton Woods agreement, and believing that the world would continue to accept under-backed, grossly inflated fiat currencies forever, governments dishoarded accumulated strategic silver stockpiles they built up over two centuries. This “surplus metal” was a leftover remnant from when silver was actually used as money.… 

Continued…

In addition to the government surplus silver flooding the small silver market, in 1980 the price of silver collapsed following an attempted corner of the market by the Hunt brothers with Arab partners. …  Tens of thousands or perhaps millions of people had also bought into the rush into silver that peaked near $50 nominal in January, 1980.  

Nothing destroys demand for something more than a price collapse.  An entire generation of people grew up in a world following that silver collapse where silver was not only not in demand, the price collapse “proved” it had reached idiotic levels and it “proved” that people who bought into the silver rush then were dumb bubble buyers. Silver became about as unloved as a metal can be for twenty five years or more. … 

During that period of apparent silver oversupply the unrealistically low price discouraged new production at the same time that demand for the metal was ramping up in a world full of stuff that used it.  Computers, electronics, medicines, batteries … all kinds of uses that only require a tiny amount of silver per item, but the sheer volume of the stuff meant that demand for silver was rising and the world’s ability to supply new silver was greatly diminished. … For nearly two decades we have been in a silver supply deficit. Government dishoarding is over and so then is the “source” of silver that kept the price of silver artificially low.

Then (1980) vs Now (2010)

The world has a lot less silver sitting in vaults than it did 30 years ago.  The best estimates are there is less than half as much as there was then.

The world population is about 50% higher than it was in 1980.  The sheer number of people on the planet that could possibly want to own some silver is more than two billion higher than then, and in 1980 people in China were prohibited from owning silver bullion.  Today China’s 1.3 billion souls are actually being encouraged to own gold and silver in commercials on Chinese TV. …  

The number of people able to afford a small amount of silver metal is logarithmically higher than then.  There are literally hundreds of millions more people the world considers “middle class” than there was in the last great rush into silver – some of whom will seek to protect a portion of their wealth in hard assets like silver.  … The number of millionaires today compared to 1980 is exponentially higher – many of whom will seek to protect a portion of their wealth in metal.   

Since 1980 the various governments have increased world money supply by close to 1,000%.  There are literally three orders of magnitude more dollars, yen, euro, francs, pounds sterling, etc. than there was in 1980. Governments know few limits when it comes to printing money when they are no longer kept in check by the monetary policemen of gold and silver. …  

For several generations people have been led to believe (artificially) that silver was no longer precious, or at least as precious as it used to be.  For several generations government interference and manipulation of the money supply and the supply of actual metal gave people a reason to believe that silver was more abundant than it actually is. … 

For several generations the historic ratio of silver to gold was convoluted and overly high because of that interference.  By the 1940s and again in the 1990s the silver to gold ratio reached as high as an absurd 100:1 or 100 ounces of silver to “buy” an ounce of gold. …

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We think that there is a good reason that silver saw wide use as money in the world historically.  We think there was also good reason for the old, historic ratios of between 15 and 20 ounces of silver to one ounce of gold too.  We also think that silver became known as a “precious metal” for good and valid reasons.

We think that silver has begun its journey back from being despised and looked down upon, back to its proper position as the second most popular precious and monetary metal.  We do indeed think that silver is money.

Think of it for a moment. Today, versus the last great rush into silver in 1980, we have 50% more people globally using 1,000% more dollars, yen, euros, pounds, etc. to chase less than half as much physical silver metal in a world where one can buy silver instantly, with a mouse click, in one’s study … maybe even in one’s underwear while browsing the internet for the latest market moving developments.

This time when the world discovers what we have been saying since August of 1999 – that silver is cheap relative to gold – that silver is scarce relative to gold – that silver will not remain the bastard child of the precious metals forever, and so on … this time when the world discovers silver it will likely do so in the most extreme fashion ever.   We think this global rush into silver will make the first surge into silver in 1980 look like a little league warm up.  We also think that this Silver Express has finally begun to board.  It may actually be inching forward just a little.  We’ll see. …      

We cannot expect the average person to understand or to investigate the actual reasons for why silver was so beaten up and so hated for so long.  Nor can we expect the average person to grasp the coming clash of the tectonic forces of overwhelming demand versus actual relative scarcity.  All they will know is that the “lust for silver” has somehow returned, long after the train - long after this Silver Express has left the station…  AND THEY STILL WON’T BELIEVE IT! 

But since when are the markets ever geared for “average people? …”

That is all for now, but there is more to come.  

 


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The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter


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