By David Morgan, The Morgan Report
I have often discussed the concept of the “Paper Paradigm versus the Physical Reality” of the precious metals. A sea change in the ongoing disconnect between the price (and availability) of physical gold and silver in relation to the increasingly theoretical “price discovery” of the paper markets – futures, leased gold, ‘hypothecated’ gold, etc. is currently underway.
I have long stated that “the day of reckoning” is when the physical market begins to seize up– we’re not quite there yet, but the signs are becoming more pronounced. Mark my words, before the end of this year – 2014 - the crowd of disbelievers is going to be a lot smaller than it is right now.
The disconnect started coming to people’s attention last year when Germany’s Central Bank requested the return of a relatively small amount (about 300 tonnes) of the reported 1,500 tonnes of gold the U.S. Federal Reserve had supposedly been storing for them for the last 50 years. The time frame reported is seven years to return this gold. Some imply Germany knew it would take this long due to swap and lease agreements, but others say—are you kidding?
Soon thereafter, Switzerland began considering whether or not its foreign-held gold should be returned. Austria has asked for an audit. Is this a “repatriation trend” in the making?
Confidence – Backbone of the Central Banks’ Playbook
The Powers that Be absolutely need the public to retain confidence in their pronouncements. Whether it’s reporting on the unemployment rate, housing starts, the inflation rate - or their supposed gold holdings, “confidence” (belief/trust) is everything. The Internet’s global reach “force multiplier” has placed everything governments say and do - or don’t do - under a microscope. Discrepancies get out more quickly than ever before. And it’s only going to get worse – for them.
Don’t forget that the term “confidence” contains the term “con” – in this case the possibility of a “scam”, “confidence” or “con game”. Are the increased levels of precious metals’ buying by the public due to a decreasing amount of confidence in what the authorities are saying? Could this be connected to the spreading belief, that the ‘banksters’ are running a confidence game – at the public’s expense?
In 2013 and so far in 2014, record sales of American Silver Eagles
Last year, sales of American Silver Eagles, and Canadian Gold and Silver Maple Leafs in the West set annual records. Bears, long arguing that precious metals are in a “bubble” have a difficult time explaining why, if this is so, people continue to buy more at a fast clip even as prices decline. Though North Americans as a group are scooping up record numbers, it is unlikely that more than a small percentage of us hold any precious metals at all. Much of what little the average person did have – in the form of jewelry - has found its way into the hands of the “We Buy Gold and Silver Here!” operators. However, I believe the time is now approaching when this outlook will change – dramatically.
India made a pivot from gold to silver
Last year after India, in an effort to restore its balance of payments and strengthen its currency, imposed a severe tax on gold imports, silver imports went through the roof. In the first 5 months, at least 2,400 tonnes – equivalent to 10% of global silver production, found its way onto India’s shores. (This March, India’s custom’s department DGCIS, reported that total silver imports for 2013 came to 6,125 tonnes - up 189% over the previous year.) How many tea leaves like this does a person have to read in order to get the picture?
What fully confirms the return of the secular bull market trend?
While signs abound that the lows for gold, silver and many of the quality mining stocks were printed in late June, 2013, there are still caution flags flying which should temper investors’ desire to bet the farm and go “all in”. As this is being written, silver prices are probing earlier lows around $18, and gold is acting weak as well. Frankly I expected to see more strength in this area, even though early summer tends to be seasonally soft for the metals.
It’s important to understand however that much of what is now going on involves “chart painting” by the so-called “Flash Boys” – High Frequency Traders using computer-generated algorithms to move the markets back and forth. One insidious tactic is to submit a large series of small orders staccato fashion, soaking up the bids and hammering a stock lower. Another questionable approach involves placing a large order – which spooks other participants into selling – and then withdrawing that same order before it’s actually filled.
As GATA’s Chris Powell has so famously said on a number of occasions, “There are no longer markets, only manipulations.” So while charts are still important to watch, they should be regarded as only one factor in the decision-making process. Focus your eyes on the bigger, longer-term picture. Keep accumulating physical metal on a regular basis. 3 billion people in Asia continue to do so…
One still needs to be patient, because even after the summer price support testing season finishes, a series of layers above current gold and silver price levels need to be successfully challenged and penetrated – I’d like to see at least three days on a closing basis above each one – in order to let us know with some authority that we are correct in our bigger picture analysis. The most crucial “ceilings” to be taken out decisively are the areas around $1,450 - $1,550 gold and $26 - $28 silver. How vigorously this is done will determine when the so-called “golden cross” of the 50 Day Moving Average rising above the 200 Day MA – which many traders see as proof of a major trend change – comes about.
Above these levels are resistance layers - spot silver charts show them up into $42.50), where tired, old longs now underwater on their positions, as well as new short sellers, can be counted on to do some active trading. Then the price can move up the proverbial “wall of worry” as it attempts to surpass $1900 gold and $48 - $50 silver. Thereafter, on a thrust into new all-time nominal high ground, I fully expect to see the public mania we’ve all been anticipating, to begin shifting into high gear.
Don’t wait for solutions outside of yourself…
In one of my recent media interviews, I stated the following:
We’re going to see more and more people wake up to the reality, that regardless of what spin-doctors in the mainstream financial press say, things are not really better – there really isn’t a recovery going on – so what’s the solution?
The solution starts with a change that you can make on a personal basis. For most people, this means acquiring hard assets that are totally outside the banking system.
While there is still time – with the price, premiums and availability of physical silver at reasonable levels – empower yourself by trading some of those “paper promises” in your wallet for a nice stack of “physical reality”. Hold in your hand “money”, which can serve as both insurance and assurance against the ravages of government-induced inflation. If things really start coming unglued, you’ll be able to spend a portion of your stash, keeping your financial ship from capsizing during the increasingly rough economic waters building on the horizon.
We’ve witnessed a base-building/extension run in the better miners from the “sold-out” levels prevailing as December closed the year. Prices decline begrudgingly and bounce back on the smallest excuse into a new uptrend on good volume – supporting the idea that accumulation by deep pocket players is taking place - just the kind of market action we want to see.
Mining companies offer the opportunity of substantial capital gains for sophisticated investors. The leverage of these equities is often two to three times that of the metals. This means that a ten percent move up in gold translates to a 30% move in a good quality gold stock. At The Morgan Report we divide our Asset Allocation table into Top Tier, Mid Tier, and Speculations (small cap) sections, in an effort to help you sort out those choices.
While risk is highest with small cap companies, rewards can be tremendous. Many of our earlier picks in this sector went on to become mines and the rewards for shareholders were tenfold or greater. We have had quite a number of successful picks, and frankly a few companies that now cease to exist. But if the balanced approach stated in “How to use The Morgan Report” is followed, our subscribers should find that the winners more than make up for the losers!
Stop looking at things in the rear view mirror and turn your eyes, thoughts and behavior forward. Get some metal into your possession. Research the mining sector in selective segments like we do at The Morgan Report. As we move deeper into 2014, my strongly considered opinion is that you’re going to be very happy you did.
David Morgan is a widely recognized analyst in the precious metals industry and consults for hedge funds, high net worth investors, mining companies, depositories and bullion dealers. He is publisher of The Morgan Report and is a featured speaker at investment conferences in North America, Europe and Asia. Go to www.TheMorganReport.com for more information.
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