By David Morgan and David H. Smith
For over four years, gold and silver have been in a cyclical bear market, within a larger secular bull trend. A number of times since silver's May 2011 high at just below $50, they have swooned, built a base that should have held, yet dropped again. With silver at this writing, printing the lowest close since 2009, the few remaining bulls can be excused - as we often say - for "either being scared out or worn out".
The best way to make significant money with defined risk is to spot an investment vehicle that is out of favor, trading below production cost, moving into longer term deficit, yet needed and desired by people around the globe. A vehicle like silver.
Our premise is that silver today is like dry kindling. Even as global demand drivers India and China massively import, as Canadian Maple and American Silver Eagles notch record sales, even as producers at best make bleak profits - silver slumbers.
In the harsh climate of Patagonia, where every variety of shrub is festooned with spines, the neneo plant goes one better. In summer it can dry out and lose color, which might lead you to assume that it's...dead. But you would be wrong!
A gold and silver short-covering rally in the offing. Counter-intuitively as silver prices have declined, physical buying and premiums on bars and bullion coins have increased . So, what's really going on?
In the short term, silver's "market price" is set by paper futures contract trading on the COMEX. Currently, gold and silver short sales are sitting at record levels, betting that prices will continue to decline. But at some point, those contracts have to be closed out. This is done by (reverse) offsetting . A short seller closes by going long (purchasing) an equal number of futures contracts. Remember, though, that adding contracts contributes to supply! Just as in the early days of the goldsmiths, when perhaps only ten percent of the people ever requested their gold, in futures markets, less than one percent actually stand for delivery!
The recent Commitment of Traders (COT) Report shows a record 179,000 gold-futures contracts have been sold short. Silver short sales rose to record levels too. When the piper is finally paid, short offsets combined with new buyers going long more contracts have the potential to position silver and gold for an explosive rally.
The mining sector is an additional pile of tinder for this volatile mix. The best producers have been beaten down 70 - 80% from their 2011 highs. Even exploration stocks with a viable resource estimate have been eviscerated by 90 - 95%. Several primary silver miners with additional working mines and mills over the last few years are producing near break-even at today's prices, yet trade at a fraction of 5 year ago levels. One stunning example - A Yukon producer having some of the world's richest silver grades - with operations in hiatus pending a silver price above $20 - sells right now for $US 0.34. This same company with one less mine a few years ago, sold for over $10, yet has cash in the bank and earns several million dollars a year from a subsidiary performing mining site restoration work.
In mid-July, the Canadian TSX Venture Exchange (TSX.V), home to hundreds of miners, closed under 630, beneath the low posted at the height of the 2009 global meltdown. (In 2011 it traded near 2,500, and in 2007 challenged 3,500.)
What's interesting though are the number of quality miners still trading 15 - 30% above their early 2015 lows - does the "smart money" know something most others do not? Adam Hamilton, looking at the landscape, concludes that,
Radically-greater upside exists in the beaten-down gold and silver miners! This week, their leading index slumped to an astounding 12.1-year low. The last time gold and silver stocks traded at these dismal price levels, gold and silver were near $350 and $5! These miners are priced at fundamentally absurd levels today with gold and silver 3.3x and 3.0x higher - adding great leverage to the metals’ gains.
By some calculations, gold sentiment is lower today than it was in 2001 - when gold was at $275/ounce. The Morgan Report published an in-depth study this year showing that $15 silver in inflation-adjusted dollars is as cheap now as it was at the beginning of the current secular bull run around 2002.
Bullish straws in the wind:
* Silver is inflation sensitive - The new $15 minimum wage sweeping the country will elicit similar demands by workers higher up the food chain.
* Silver prices "look ahead" - Silver anticipated QE2, which was in part responsible for causing it to surge from the $26 level to almost $50 the ounce.
* The 'Grexit' issue remains unresolved - with other wannabe' countries waiting in the wings to air their insoluble financial concerns to the ECB.
* The "Dollar flight to safety" is merely a stop - on the way towards a flight from the dollar. The Exeter inverted financial Pyramid demonstrates that the next and last financial instrument rotation of this cycle will be into precious metals.
*1980 was a "limited in scope" precious metals' bull market. This time around, it will be a global phenomenon, with literally billions of new players/gamblers - all able to trade metals' ETFs and mining stocks at the touch of a mouse - accessing instantaneous communications across the world in markets that never sleep - a run that could end up being one for the record books.
* Alternate and Social Media bring increasing clarity - to what has long been an opaque trading process involving derivatives, re-hypothecation, High-Frequency Trading, central bank manipulation, pricing collusion, and more.
Don't expect your bank to "ring a bell" at the next financial crisis. Even as the Greek financial "disease" heads toward our shores, U.S. banks have placed agreement language into your accounts, restrictions on cash withdrawals, "bail-in" terms which would force you to help pay for their mismanagement with a "hair cut", ATM limits, and deposit box access restrictions - as well as what you can keep in it.
Stu Thomson understands what motivates "the government" and how they regard gold. Hint: It's not what's in your best interest. He writes:
"In the fear trade, gold functions as an alarm. More importantly, if used as money, even in a limited way, it functions to limit government power from growing. That's why governments hate gold more than they hate anything else; it stops their insatiable lust to grow bigger. Obviously, as the debt crisis arrives in America and other Western countries, YOU don't want to be standing outside an ATM machine for hours every day, like everyone else will be doing. Hold some cash, some gold, some physical stock certs and book-entry stock certs, some bitcoin, and keep a rotating supply of things like powdered milk, water, vitamins, and a generator. American G-men are less likely than Greek G-men to give US citizens any advance notice of bank closures. Keep that in mind."
Other "straws in the wind" support the contention that the metals are priced well below where they "should" be. But given that today's metals' market is currently in a "show me" mode, it will turn when and where if feels like doing so.
But there is one thing we're pretty sure of. When gold and silver decide it's time to head North on a sustained, multiple-year basis, the biggest, lowest-risk profits are going to accrue to those investors who picked up some physical metal at modest premiums priced around current levels, a few carefully-chosen producers and streamers, and perhaps a "speculative" exploration play. If necessary, add scale down in tranches, with powder left over to pick up a crazy-cheap miner that gets knocked to the mat as the last of the "perma-bulls" coughs up the position.
In hindsight the precious metals bulls were correct for 11 consecutive years, the bears for 4 years. But the ball game is not over, so you might check the score and prepare for the end of the game. Based on trends already in place, this outlook gives every indication of becoming the End Game of all end games.
Yogi Berra supposedly said - "Predictions are difficult, especially about the future." But there's one thing we're pretty sure of. In a few years, we'll be hearing from many of the people reading this report, and from a whole lot more - at the top.
David Morgan, The Silver Guru, is Editor of The Morgan Report: Money, Metals and Mining. He presents frequently at conferences in North America, Europe and Asia, and is a regular on financial talk shows across the U.S. and Canada. You can learn more about his service at http://www.silver-investor.com/ and follow his perspectives at http://www.youtube.com/user/silverguru David H. Smith is Senior Analyst for The Morgan Report and a contributor to moneymetals.com. He investigates and writes about precious metals mines and exploration sites in Argentina, Chile, Mexico, Bolivia, China, Canada, and the U.S.
© 2017 Stock News Now
Supported by Superior Web Solutions