This article was first posted at GoldMoney
Gold and silver price shakeout
2012-FEB-04
The
consolidation of gold’s bull phase from October 2008 to
the peak last September was a classic three-leg
correction: an initial slide, rally, and final sell-off.
Silver followed a similar but more violent pattern. The
psychology was there too, with the final sell-off
convincing many investors the game was finally over.
Those who sold will most probably be kicking themselves.
Consolidations that break established trends, such as
200-day moving averages, shake out weak holders who will
buy again higher up when they are more confident. The
big traders in the futures market know this: your losses
are simply their gains. And as a result both gold and
silver are on a far sounder footing with these weak
holders out of the way. It is lethal for your savings to
play this game. Instead it is more sensible to
understand what is happening in simple economic terms.
To do this you must turn your normal thinking upside
down, and realise that what is happening to precious
metals prices is only a reflection of what is actually
happening to paper money.
Put simply, governments all over the world are debasing
their paper monies at an accelerating rate. Printing
euros to rescue the banks has been in the headlines, but
this process has only just begun. America, which has to
be the focus of monetary attention, is committed to zero
interest rates for the next three years, which is
unprecedented. The result is that the price of gold has
been left behind by exceptional monetary events. You can
see this clearly in the chart below.
This chart shows US dollar True Money Supply (cash,
instant deposits and checking accounts plus a few other
minor cash balances) expressed in official gold reserves
held at the US Treasury. This has soared over the years,
and we can expect it to accelerate further from
December’s figure of $31,600 per ounce of gold.
Meanwhile, the percentage of TMS actually backed by gold
stood at 4.8% at the year-end, and this is shown by the
blue line.
The chart clearly shows that while gold has risen
dramatically over the last decade in nominal dollar
terms, adjusted for the extra money in the system it has
only risen 150%. Amazingly, the price of gold measured
in these TMS terms has only risen to where it was in
late 1991, when the nominal price was $360. Gold’s
valuation is therefore still at exceptionally low
levels.
The sense of perspective charts like this imparts is
vital for understanding the dangers from the tsunami of
paper money and debt. Conventional portfolio managers
have missed this point entirely, being hampered by the
legacies of portfolio management theory and Keynesian
economics. But there is a growing band of private
individuals around the world who do get it and are
accumulating physical gold and silver. They are
beginning to understand that paper money is falling
rather than gold and silver rising.
The message is if you think like an investor, you will
probably lose your investment. Be aware of what is
happening to paper money and you probably won’t.
