Tag Archives: gold

Perfect Storm for silver

14 Sep

Usually this blog is a platform for my vexation at the Japanese government and the flaws within the system. However I thought I would turn to a subject that is near and dear to my heart which is that of precious metals and specifically silver

There are most certainly a lot of moving numbers in the calculations and quite a few relatively tweaked assumptions to work off including but certainly not limited to the GSR in the neighborhood of 16. I am unconvinced that we see anything close to that kind of ratio going forward or at least within our lifetimes but I will be happy to be wrong about that. Also one must remember that in addition to the somewhat murky total overall AG recycle numbers there is also the highly significant aspect of alternative methods of production or various alloys that can increase or decrease the industrial demand on silver. Its a bear of a calculation but I believe it worth at least a few minutes of careful consideration per day.

I too have preferred silver to gold mostly because I adore the color of it. Gold has a wonderful allure but silver is just so much more appealing to this stacker. Further I have heard the argument made that “since banks are collecting gold it is therefore the preferred method of maintaining buying power”. I think there are a number of positions one can take to this conclusion but lets stick to the topic at hand shall we ?

I try to keep everything within the perspective of history since it is a subject I enjoy doing in my spare time. It is also convenient for the GSR and precious metals discussions on boards such as this and so I present to you the historic Perfect Storm for silver. I would be prepared to argue that if such an instance occurred in the past there is a distinct possibility of it happening again in the future.

Silver production spiked after the “discovery” and mining of Potosi by the Spanish. There was also an interestingly comparative need for it in China at about the same time due a set of issues that were mostly political in nature. The Chinese were suffering from a series of paper fiat issuances which forced those who used the currency into a “spend it or lose it” situation every time the government changed hands. Chinese copper coins were being used as a measure of value but it was worth more as a medium of exchange than its base metal weight or value so there wasn’t much incentive in continuing the practice. Further the influx of silver into the European continent in such large amounts was causing a drop in its relative value. It was essentially a perfect convergence for silver further magnified by a lack of demand in the Chinese domestic market for European exports while there was a high demand for Chinese exports in European domestic markets which the Spanish had ample access to.

So at the risk of repeating myself, the Chinese wanted silver as a store of value in addition to needing an underlying metal with a relatively fixed rate of exchange to help alleviate their currency concerns. The Spanish in turn had an abundance of Potosi mined AG with a diminishing value going forward and a correspondingly high European markets demand for silk, porcelain and other Chinese goods. A market was established in Manila and the rest is history.


Continuing on the subject of precious metals and the financial situation part 2

15 Jan

So when we look at the size of the world derivatives market and then compare it with say the oil market or any other physical asset class the digits clearly outnumber the commodities. After all 639 trillion dollars is quite a lot wouldn’t you say ? Thus I think its a fair conclusion to state that IF one wanted to adjust prices then its only a question of how many digital currency units it takes to move the price to the preferred target.

One of the best examples I can find about this occurring is the case of Yasuo Hamanaka. Yes another Japanese connection 🙂 He is better known as Mr Copper as he worked for Sumitomo Corporation a huge Japanese multinational where he speculated in all kinds of commodities.

Copper as indeed all commodities are traded globally and thus subject to market conditions and fluctuations in prices. Spoilage and thus inventory is not a major issue other than storage costs when it comes to the Copper market.

Hamanaka was able to utilitize the vastly deep pockets of the Sumitomo corporation to move or keep the price of Copper within a fixed range for years. Obviously he had help but this example clearly indicates that prices can be engineered and indeed ARE done so. Even George Soros another deep pocketed investor apparently attempted to profit from challenging the Hamanaka fix without success.

A critic would be quick to point out that Hamanaka did eventually lose his corner on the market and thus caused large losses to his company. I think this may have more to do with the traders acceptance as a business as usual approach instead of accepting that at some point every ride must come to and end. Rather than move out of some losing positions Hamanaka tried to stay in and ride yet another Sumitomo backed wave of price “control”. This has more to do with a flaw in the traders working model than a failure to move prices in the way a deep pocketed investor wishes it to move.

So with the above mentioned example we can clearly see that under the right circumstances prices are subject to outside forces that are able to and indeed wish to attempt control of a commodity. Who is to say if a price is or isn’t subject to price-fixing ? I want to be careful about throwing out the word conspiracy because I think that while they do exist they are far less common than most who use the label think they are.

I simply want to point out that not only is it possible,but in fact probable under the right conditions. With ZIRP (zero interest rate policy) in effect those with the financing are able to access an unlimited amount of digital dollars. If approached with a proper working model or perhaps if you prefer having learned the lessons from Mr Copper why not seek to keep prices in a certain range ? If you or I can conceive of the idea, then I humbly submit that just about anyone can.

Manipulation is a term that is throw around a lot especially it seems when a price is knocked down, but I suspect it works both ways. Its a disturbing thought but I suppose we are along for the ride, hopefully it doesn’t get too bumpy.

Inflation, Deflation and precious metals part 1

13 Jan

Usually this blog discusses Japan and issues dealing with the Japanese. This is primarily because I have put in enough time here that I am comfortable making conclusions about the Japanese mindset. I feel fairly confident about the forecasting and issues discussed here about East Asia.

However I wanted to diverge from the familiar topic of how Japan is heading towards the rocks onto a different subject of Precious Metals and investing. As those of us who believe that the world’s political decision makers continue to choose the path of inflation I see a clear path towards saving my hard earned money. This is in two words, precious metals.

A major decision barrier for today’s educated contrarian investor is the inflation v deflation debate. I have toyed with this problem for awhile now and have come to the conclusion that it is in fact possible to have both existing simultaneously. I believe we will see the price of things needed for daily life increase and prices for things unnecessary to drop. So energy and food prices will rise while many manufactured goods such as sneakers, power tools and television sets will drop. Obviously this is a generalized conclusion based upon somewhat limited data but I believe that eventually we will see this dichotomy prevail in world markets.

What does it mean ? I think it means a drop in lifestyle for your average western consumer. I also think it means a rise in the living standards of the emerging world middle class who will want to consume the lower priced shoes, tools, and tv sets.

Assuming that most reading what I am writing are western consumers I am afraid to say that the facts speak for themselves. The USA is approximately 5% of the worlds population, but consumes about 25% of the worlds energy. Does anyone realistically believe this is a situation that can be maintained for any period of length without adjustment ?

As energy and food prices rise your average North American will continually be put into a position of scrimping on consumption in order to maintain the lifestyle choices. Simply put, heat your pool or buy the next semesters textbooks, go out to eat once a week or keep every family members wireless contacts paid. In an earlier time such as the 20th century Americans could choose both. I don’t think this is going to be rule going forward.

What can your average Joe do in order to keep his savings from inflating away ? I am certain that the answer is precious metals. Now within the metals community there are a number of different viewpoints on optimal decisions. For many gold is the one and only solution but frankly I find that mindset to be flawed. Gold has never been the only monetized metal and to ignore other possibilities seems somewhat foolhardy to me. I think that to a certain degree gold only folks are most likely in the elder generation and so have far more resources to fall back on. As of today an ounce of gold will cost you about $1650 dollars which is not something the average 20, 30 or even 40 year old can easily set aside to purchase.

However what I feel is a critical issue is how the precious metals have been “paperized” or “digitized”. Many investors buy an ETF or other digital representation of precious metals. Perhaps 90+% of all traded metals are in fact paper or digital. People invest in precious metals over the computer and receive a monthly statement telling them whether they have made or lost dollars or euros or whatever national currency they use.

This is a dangerous method of saving. If in fact that over 90% of the precious metals market is digital then in fact it is subject to the business of price controls. People normally would use the word “manipulation” but I want to avoid using this term as I believe control is a more accurate way of describing things.

Currently there are 67 trillion dollars in Forex derivatives traded annually, and over 639 trillion dollars in total derivative transactions through the first half of 2012. In comparison the US GDP total is 15 trillion. There is a lot of money slushing around the world and with record low interest rates it is easy for those in positions of wealth to borrow record amounts of cash.
With most precious metals transactions being done via digits and derivatives the market itself is subject to possible price control. I would like to get into details about this but again realize that I should probably call it a post here and hope to follow up on this at some point in the near future.

Thanks for reading