$5,000 Gold and $300
Silver are Credible Numbers
Q: What do CNBC, George Soros, Warren Buffet and every
other mainstream investment commentator on the price of gold have in
common for the last ten years?
A: They are all wrong.
All the time, every year, ten out of ten years in a row.
If you continue to pay attention to such disinformation, you will
lose money. Definitely. No question. Guaranteed.
Each and every year, their vapid comments on the future
gold price prove to be complete bollocks, yet year after year, and day
after day, millions of readers watchers and listeners tune in for another
dose of horribly incorrect information.
These days, the number of perpetually inaccurate
predictions forecasting an end to the gold boom are thoroughly drowned out
by the now multitudinous voices screaming from the rooftops for gold to
go much higher. About 90 percent of that is the herd mentality at work.
Early predictions for $1,000 gold, which seemed extreme and outlandish
just two years ago, turned out to be very conservative. So its easy now
to lay claim to being “the one who predicted the gold bull
Bandwagon riders aside, there are compelling reasons to
support a much higher gold price, and more importantly, a narrowing of the
ratio between the gold price and the silver price. One year ago, the
silver to gold ratio was 63 ounces of silver for every ounce of gold.
Today that ratio is 35:1. Its fallen by nearly half in one year.
In terms of pure performance, whereas gold has delivered
a solid gain of 26.51% in the course of the last year, silver has outshone
gold spectacularly, turning in a gain of 123.55%, making it the commodity
trade of the year by far. The effect of that performance is to
dramatically alter the perception of investors in terms of its
desirability as a precious metal. Its long been a psychological barrier
to silver’s progress, in my opinion, that a precious metal could be
had so cheap.
But as the prices of both monetary metals grows, and
their price differentials narrow, investors want an idea of where the
future is heading in terms of these prices. Can they continue to grow so
dramatically in price, or is there a point at which their price
appreciation curve will level out and become more incremental? Or, is
there a point at this the upward price curves will plunge steeply
downward? And at what point, if every, will the price curves of silver
and gold converge? What exactly is the appropriate ratio of gold versus
silver? Do we buy bullion, coins, ETF’s, Gold Funds, Senior Miners
or Junior Explorers? Which is safest? Which is riskiest?
First lets consider the ratio question. If the ratio
suggested in the title were to become reality, that would mean a ratio of
only ten ounces of silver to buy one ounce of gold. If the ratio curve
were to continue climbing in favour silver at the present rate, it would
approach 10:1 within another year.
But if the ratio were to reflect numbers pegged to
certain fundamental realities, then perhaps we could deduce a more
rational price differential with better certainty. According to John
Stephenson’s Little Book of Commodity Investing, there is 16 times
more silver in the earth’s crust than gold.
So on that basis alone, the correct price ratio is
arguably 16:1. Silver bulls like to point out that silver is unique among
monetary metals because of its wide ranging industrial applications, as
well as in photography and jewelry. As the silver price continues to
consolidate its price differential with gold, it is likely that process
modification and substitution will occur wherever possible in the
manufacturing supply chain to replace silver, which will dampen
industrial demand. Thanks to silver’s unique chemical attributes,
however, that effect will be muted.
2009 statistics from the Silver Institute show that
global supply of silver was more or less equal to the global demand for
silver from all classes including manufacturing and bullion minting.
Government stocks of silver are estimated to have fallen by 13.7 million
ounces over the course of 2009, to reach their lowest levels in more than
a decade. Russia again accounted for the bulk of government sales, with
China and India essentially absent from the market in 2009. Regarding
China, Gold Fields Mineral Services states that after years of heavy
sales, its silver stocks have been reduced significantly.
If the silver ratio is heading to 16:1, that implies a
near term price range of $90 - $100 per ounce.
If gold goes to $5,000 an ounce, and the silver/gold price
ratio remains 16:1, there’s silver at $312.50 per ounce.
And what, pray tell, is coming down the pike to support a
gold price of $5,000?
First and foremost, the United States dollar.
The whole global financial system is trapped in a
situation whereby we have no choice but to permit the United States to
continue counterfeiting money. There is no single political force or
voice or even prospect with the knowledge and the power to put a stop to
the insanity into which we continue to spiral on a daily basis. That
means, despite the unanimous chorus from the financial media mainstream,
which anesthetizes the human race in an effort to thwart violent protest
by design, the fabrication of electronic dollars will continue apace. For
In terms of strict nominal value, that implies a
proportional increase in the prices of, well, everything. Inflation is the
direct outcome of monetary expansion in the absence of economic growth.
Therefore, gold and silver will be direct beneficiaries of such
At the same time, sovereign and large capital pool (LCP)
investors in U.S. debt are seeking to exit their holdings of U.S. dollars,
The world’s largest bond fund, PIMCO, and its acerbic chief Bill
Gross, are now shorting the U.S. dollar. China has stated repeatedly that
it will reduce its holdings of U.S. debt. This is sending a signal to the
rest of the sovereign wealth and LCPs that the U.S. dollar should be
abandoned. That means, when the convulsions that seize the global
financial system, such as that of 2008, manifest themselves, investors
will flee less and less to the U.S. dollar, and more and more to other
currencies – especially gold and silver.
So not only does the price of gold appreciate in strictly
nominal terms, but demand for it is growing even as it grows exponentially
in price. That’s why, given this illogical yet nevertheless
existing stupidity, the more expensive gold and silver get, the greater
will be their demand as a replacement for U.S. dollar denominated safe
haven asset classes.
The third major factor that is going to drive gold to
$5,000 and silver through $300 is related to the first two. Governments,
always reactive and never proactive, will eventually start to ratify gold
and silver as official currency alternatives as a result of public
April 19, 2011
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