There is an eerie calm in the precious metals market as investors continue
to pile into the broader stock indexes. Precious metals sentiment that
was flying high last year when the Dow Jones Index fell 2,000 points, is now
at an all-time low. Investors who are highly fickle, have no idea that
they will lose a great deal of their “supposed” paper wealth.
The word out on the street, as it pertains the precious metals retail
sales market, is that investors are no longer waiting on the price of
silver to fall to start buying, rather they are now waiting to see what
happens to the broader markets. Speculation, is that if Trump
is able to get the corporate tax cuts passed, then the Dow Jones will head up
towards 25,000 or higher.
While this is a possibility, investors should realize the market is
already seriously overextended. Sure, it could continue to move up, but
the correct way to invest in precious metals is not to make a perfectly timed
purchase when the rest of the market is crashing, rather it should be done on
an ongoing basis. Investors should be purchasing metals over a
period of time, not one large amount due to the timing of a market collapse.
If we look at the Dow Jones Index versus the Silver Price, we can see a
very interesting trend that took place when the Fed announced QE3 back at the
end of 2012:
At the end of 2012, the price of silver really started to decline as the
Dow Jones Index continued higher and higher. Some precious metals
investors are worried that the next time the stock market crashes, so with
the price of silver, as it did in 2008. However, this time will be
different because the silver price fell by more than 70% from its high in
2011, whereas the Dow Jones Index has surged toward the heavens.
As I mentioned in my interview on Crush The Street, there
was a near record GOLD ETF Inflow (364 metric tons) when the Dow Jones Index
fell 2,000 points during the first quarter of 2016. The only other
large Gold ETF inflow surge (450 metric tons) was during the first quarter of
2009, when the Dow Jones Index was crashing into the toilet to a low of 6,700
points.
What is going to happen when investors really get spooked as the Dow Jones
corrects 5,000 points or more??
Well, I can tell you that we will see record flows in the Gold and Silver
ETFs. However, I don’t believe it is wise to go from one paper asset
into another. And, I am not the only one to believe this. If we
look at silver investment demand in physical bar and coin compared to ETF’s
since 2007, this is the result:
From 2007 to 2011, total physical silver bar and coin demand was 687
million oz (Moz) versus 419 Moz for the net silver ETF (and similar products)
inventory builds. But, look what happened from 2012 to 2016. Physical
silver bar and coin demand nearly doubled to 1,152 Moz, while the net build
in silver ETF inventories only increased 112 Moz.
Which means, investors put ten times the amount of money in physical
silver than into paper silver ETFs. Of course, when the markets finally
crack, mainstream investors will move into the silver ETFs because they don’t
know any better. However, it will be the precious metals investors who
will be buying physical silver hand over fist.
Unfortunately, trying to time the market crash and purchase silver when
the situation gets really ugly will likely not work out as many expect.
Rather, I see a silver market that is totally overwhelmed with very little
available physical silver.
It is impossible to forecast when the broader markets will finally correct
and likely crash. But, I would not try to time this market to get into
physical silver. I am not giving out advice, but instead stating what
is sound logical reasoning.
Lastly, it is not a matter of “IF”, but a matter of “WHEN” the stock and
bond markets are going to crack. Yes, the Fed and Central Banks have
defied gravity for nearly a decade by propping a market that died in 2008,
but time is not on their side.
Mark my words.
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