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The European turmoil is roiling global markets as
counterparties increasingly distrust each other’s collateral leading to
the liquidation
of pretty much everything. The mantra must be, “If there is a bid then
hit it.” This daily
noise has opened up some tremendous buying opportunities. Chief
among those opportunities is silver.
THE 200 DAY MOVING AVERAGE
On 19 Sep 2011 I wrote about gold and silver
consolidating, “The real value seems to be in palladium which is
trading at an extreme discount of 0.9224x its 200 day moving average.”
This was because statistically speaking palladium was extremely outside the
standard deviations of its usual trading ranges relative to its 200 day
moving average. The 200 day moving averages acts
like gravity to filter out the daily machinations of the market.
In a secular bull
market, like the precious metals are currently in, when silver
moves below 0.95x the 200 day moving average then a buying opportunity presents
itself where the probability of
a gain on the position relative to the numeraire is much more
likely. On 23 Sep 2011 the price of silver is $30.45 and the 200 day moving
average is $35.76 which yields a relative price between the two of 0.8516x.
THE LEHMAN BROTHERS COLLAPSE
This ratio has never been lower in the past decade except shortly after Lehman
brothers collapsed. Within a year the price had doubled. Within three years
the price had gone up five-fold. The current correction and ensuing
consolidation is setting the stage for a triple digit FRN$ silver price.
THE PROPER NUMERAIRE
But the savvy investor may ask, “But is not gold the proper numeraire?” Yes. Sure, this chart is showing silver
through the FRN$ lens. The gold to silver ratio, currently around 48 ounces
of silver per ounce of gold, does tell a different story. Silver is not
nearly as cheap today as it was in the early part of the decade when the
ratio was over 100. But as this secular
bull market progresses the ratio should continue declining.
It will likely reach 16:1 and may even overshoot to 8:1 or as some
rather bombastic commentators have made the case it may even go to parity, 1:1, or it may actually take more
than one ounce of gold to purchase one ounce of silver. While it may seem
unbelievable and in my opinion a low probability I do not think it is a
completely unrealistic scenario.
Currently it takes less than one ounce of gold to buy one ounce of
platinum. Platinum is much scarcer than gold, there is less platinum produced
per year.
Since the Lehman Brothers collapse the gold to silver ratio has moved
from about 80 to 40-45. While gold is the better numeraire;
silver has been the superior speculative currency. Remember, you make money
when you buy not when you sell.
GOLD PRICE SUPPRESSION SCHEME
Six years ago South African gold market analyst Peter George said at GATA’s Gold Rush 21 conference in Dawson
City, ”In the last 10 years the central banks have effectively
shown that when there’s a real crisis, gold actually goes down, and it’s
so blatant, it’s a joke.” The central bank script has not
changed.
But we do know that price controls lead to shortages. Last time silver
got this cheap there was silver backwardation for
weeks while the price clawed higher to clear the market.
Remember, you make money when you buy not when you sell.
http://www.youtube.com/watch?feature=player_e...p;v=06fa20Y_cXg
CONCLUSION
Following provident living
principles I like to accumulate the precious metals on a regular basis
usually in proportion to excess free cash flow. Like Rick Rule I am a fear investor regarding
them and rarely do I move into them based on the greedy speculative component. There are other
less manipulated assets for that purpose.
But in this case the markets have been in major liquidation mode and
silver has not been spared. This has opened up a tremendous buying
opportunity. But due to the large amounts of manipulation in these markets I
would caution against the use of leverage. This is just the latest step in a
long staircase of The Great Credit Contraction.
DISCLOSURES: Long physical gold, silver and
platinum with no interest in DOW, S&P 500, the problematic SLV ETF, gold ETF or the platinum ETFs.
Trace
Mayer
RuntoGold.com
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