Stockholm Syndrome is defined as “…a condition
that causes hostages to develop a psychological alliance with their captors as
a survival strategy during captivity.” While observers would expect kidnapping
victims to fear and loathe the gang who imprison and threaten them, the reality
is that some don’t.
There is a loose analogy between being held hostage and
being an investor in a regime of irredeemable paper currency and zero interest
rates. In both cases, the victim has little hope of escape and must seek to
somehow survive under malevolent conditions.
Key behaviors in Stockholm Syndrome are positive feelings
for their captors, a refusal to work with law enforcement afterwards, and even
a belief in the terrorist’s humanity.
Key behaviors of investors today show eerie parallels: a
desire to bid on dollars with their assets, a refusal to support the gold
standard, and even a belief that the dollar is money. This last always shows
when someone—even a gold bug—says gold is going up, or gold is the best
performing currency, or gold has good returns.
These words up, performance, and returns indicate that the
victim accepts the dollar as money, the dollar as the measure of value, the
dollar as the unit of account. The victim seeks to view gold in terms of his
captor’s paradigm. Much the way the kidnapping victim seeks to understand his
capture and even geopolitics in terms of his captor’s world view.
Many victims are so thoroughly in thrall, that they scoff at
the very idea of earning interest from a productive enterprise. They seek only
the latest bubble, wherein they can make a profit: more dollars. Or, if not
more dollars, at least more purchasing power. For years, they sought to do this
in the gold and especially silver markets. Some gold bugs go even farther, and
opposed a gold standard. Perhaps they don’t want sound money, they want gold to
go up which means something external that gold can go up against.
We watched bemused, as a speaker at the Metal Writers
Conference in Vancouver on May 29 told a standing-room-only crowd that bitcoin
would hit $1 million (it went up after that, but is now down about 15% from
that day). A 436X return would be nice, but of course the profits can only come
from later speculators. There is an ugly little word for schemes in which
profits come from those who buy in later. It is named for a gentleman who came
from Italy, promoting his scheme in Boston.
We blame the game, not the player. It is important to
emphasize this—don’t blame the players, blame the game—and we probably don’t do
it enough. The fault lies not with those who bet on gold or bitcoin or anything
else, nor even with those who regard betting as investing. The fault lies with
the Fed and the other central banks who have the hubris to think they can
centrally plan their way to prosperity. And the gun to force it on us, whether
we agree or not. And the madness to cause the interest rate to fall for 36
years and counting (the Fed is not going to push the interest up much farther
in this cycle, if they even dare one more hike). When freedom seems so remote
as to be hopeless, it may be natural (we leave this to psychologists to say) to
find a way to compromise, to get along to go along.
As to us, we will go on working towards that day of freedom,
a big part of which is helping people see the monetary system for what it is:
the current implementation of the fifth plank proposed by Karl Marx. Another
part is to pay interest on gold…
…
Last week, we said:
“Peak hype, peak desperation, all
selling in the streets with little buying… we are not technicians and do not
focus on sentiment… but this description sounds like the definition of
capitulation.
…
Also, we would add something
important. Even if this is a capitulation low, that does
not necessarily a mean a moonshot to $5,000 or even $2,000. We don’t expect that, and won’t expect it
without evidence of a much more serious shift in the fundamentals. We would
expect a normal trading bounce within the range and perhaps a few bucks over
$1,300.”
This week, the prices of the metals bounced somewhat, within
the trading range. Gold closed last week at $1212, and this week at $1229. In
silver, last week’s close was $15.56, and this’s week was $15.96.
Will the bounce continue? Have the fundamentals firmed up?
We will show graphs of the true measure of the fundamentals.
But first charts of their prices and the gold-silver ratio.
Next, this is a graph of the gold price measured in silver,
otherwise known as the gold to silver ratio. The ratio moved down this week.
In this graph, we show
both bid and offer prices for the gold-silver ratio. If you were to sell gold
on the bid and buy silver at the ask, that is the lower bid price. Conversely,
if you sold silver on the bid and bought gold at the offer, that is the higher
offer price.
For each metal, we
will look at a graph of the basis and cobasis overlaid with the price of the
dollar in terms of the respective metal. It will make it easier to provide
brief commentary. The dollar will be represented in green, the basis in blue
and cobasis in red.
Here is the gold graph.
The dollar fell a bit this week (the mirror image of the rising
price of gold). Now it is the dollar hostages who use gold as their preferred
hostage-bargaining chip to feel a bit better. One ounce of this commodity now
fetches 17 more of the kidnapper’s paper scrip than it did a week ago.
As the dollar fell, the cobasis fell (especially in
farther-out contracts). The August cobasis is still above zero (i.e. temporary
backwardation).
Our calculated gold fundamental price is not much changed,
still above the market price by a goodly margin (
chart
here
).
Now let’s look at silver.
As the dollar has dropped (i.e. silver trades for more
gang-scrip than last week), the cobasis has come down. But it’s still higher
than gold’s cobasis, and this is the September contract, a month further from
expiry than the August gold contract.
Our calculated silver fundamental is rising again, also a
healthy margin above the market price.
We thought it would be worth addressing the question: “is
there a shortage in silver?” Let’s do it with a device that’s famously worth
1,000 words. This picture shows the term structure of the silver futures
market.
What we see is what Sherlock Holmes observed that people
heard in the night in the story Silver Blaze. There are no interesting
features. Other than the temporary backwardation in the September contract, we
see a rising basis and falling cobasis as we look out to December 2018. The rising
basis looks a lot like the yield curve in the dollar, though slightly lower
(6-month LIBOR is 1.5%).
If a real shortage developed in silver, the above curve
would look quite different. And we would be publishing pictures of it.
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Keith Weiner is CEO of Monetary Metals, a precious metals fund company in Scottsdale, Arizona. He is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. He is founder of DiamondWare, a software company sold to Nortel in 2008, and he currently serves as president of the Gold Standard Institute USA.
Weiner attended university at Rensselaer Polytechnic Institute, and earned his PhD at the New Austrian School of Economics. He blogs about gold and the dollar, and his articles appear on Zero Hedge, Kitco, and other leading sites. As a leading authority and advocate for rational monetary policy, he has appeared on financial television, The Peter Schiff Show and as a speaker at FreedomFest. He lives with his wife near Phoenix, Arizona.
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The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
