The best reason to own silver is based upon underlying market
fundamentals. However, most of the markets today aren’t being valued by
fundamentals, but rather on Fed and Central Bank interventions. This
has destroyed the ability for investors and markets to properly value most
assets.
I, as well as many precious metals analysts have received some ridicule
for getting it wrong on the price movements of gold and silver since
2012. Of course, no one was complaining when the silver price moved up
from an average $6.67 in 2004 to $35.12 in 2011.
Sure, we precious metals analysts deserve some criticism for not
foreseeing how much monetary printing the Fed and Central Banks would do as
well as the massive corruption and deceit conducted by the top banks in the
world. For example the recent announcement that Deutsche
Bank Confirms Silver Market Manipulation In Legal Settlement, Agrees To
Expose Other Banks. And… this is just what we know
about. How about the stuff we don’t know about?
People need to realize the financial markets and global economies are in
serious trouble. When I took a drive to a major city this weekend, I
noticed that Nissan is financing cars for 0% for 84 months. I imagine
there are plenty of other auto dealers doing the same thing.
When I was a youngster, the normal financing for vehicles was for
24-48 months. Anyone financing a car or truck for 60 months was a real
REAL LOSER. Today, you are a LOSER if you ask the car salesmen
for a 24 month plan. The last new vehicle I purchased, I put down 60%
of the settled price and financed the remainder for 24 months. I gather
I was a LOSER back then too because they said that sort of payment plan was
rare (most put very little down and finance it as long as they could)… and
this was only a little more than ten years ago.
I don’t buy new cars anymore. I drive an old beat-up Ford
ranger. Oh sure, I could go buy a brand new car for cash, but
why?? I’d rather own physical precious metals and drive a beat-up old
car.
Anyhow, my point is this…. the majority of Americans are living a
very highly leveraged pay-for-it-later-&-later lifestyle that isn’t sustainable.
The U.S. economy has been propped by one bubble after another for the past 3+
decades. However, the present bubble since 2008 is much worse.
It’s a bubble being propped up by extreme leverage by getting Americans to
buy things they can’t afford for nothing down with longer and longer payment
plans. This has DISASTER written all over it.
So, it’s extremely hard today to forecast what the market will do based on
fundamentals when most Americans have thrown sound financial planning out the
window. That being said, we can look at some underlying fundamentals
that offer the precious metals investor some important clues.
World Silver Bar & Coin Demand Explodes Since 2008
One of the fundamentals that tells us something just isn’t right
in the financial markets is the explosion of Silver Bar & Coin demand
since 2008. As we all remember, 2008 was the year the engine
stopped and the wheels came off the economy. This was due to the
mortgage-backed housing bubble that allowed many Americans to buy houses they
couldn’t afford. Furthermore, if Americans weren’t buying homes they
couldn’t afford they were using their homes as an ATM machine.
Basically, they were extracting the supposed equity from their home to buy
more garbage they didn’t need.
So, to keep the U.S. and world economy from imploding and entering into a
new Great Depression, the Fed and Central Banks starting the digital printing
presses and pushed Trillions of Dollars (liquidity) into the system.
This had a profound impact on the value of most assets… such as silver.
The price of silver jumped from $13 in 2007 to a high of $49 in 2011.
Savvy investors realizing the Central Banks were insane, starting to
purchase record amounts of physical silver. If we look at the chart
below, we can see the difference between the two periods:
From 2000 to 2007, total world Silver Bar & Coin demand was an
estimated 375 million oz (Moz). However, from 2008 to 2015 it
nearly quadrupled to 1,422 Moz or 1.42 billion oz. The World
Silver Survey only provided Silver Bar & Coin demand since 2004.
So, I had to estimate the figures for 2000-2003 as they only provide Official
Coin sales.
Regardless, this is one of the fundamentals that gets better every year……
just like a gift that KEEPS ON GIVING. Even though the price of
silver has declined from a high of $49 in April 2011 to $17 currently, demand
for physical Silver Bar & Coin continues to be in record territory.
For example, Silver Eagle sales will likely reach 19 Moz by the end of April
compared to only 15.9 Moz during the same period last year.
That being said, many investors are more concerned about the short-term
silver price movement than its long-term fundamentals. We can see this
from the conflicting analysis:
Silver
Commitments of Traders – Halloween is Arriving Early This Year
The
Chances of a Comex Default…..
Silver
Bulls Should Beware Metal’s Spreading Tarnish
Silver
Price Forecast: Silver Rally Will Bring Bond Market Collapse
Silver’s
On Fire
…. and so on and so forth.
In one article, Dan Norcini is stating that the record Commercial shorts
on silver will be like a Halloween Horror show. Then we have Bill
Holter discussing the reasons for a Comex Silver Default. In
another silver article it explains the metal may “Tarnish” due to more base
metal supply coming on the market which supplies more by-product silver
destroying the annual deficits. One of the remaining articles explains
why the coming surge in the silver price will cause a bond market collapse.
Of course, someone could add my past articles on silver to that
list. However, I like to focus on how the fundamentals will impact the
value of silver over the mid-long run. My analysis on the future value
of silver is based on energy. This is much different from the forecasts
by most of the precious metals analysts.
U.S. Economy In Serious Trouble As Domestic Oil Supply Declines
U.S. domestic oil production from the top four Shale Oil fields is
forecasted to decline to 4.6 million barrels per day (mbd) in May 2016.
This is down nearly 700,000 barrels per day from its peak of 5.3 mbd in April
2015:
Some analysts believe the decline in U.S. Shale Oil production is due to
the lower price. This is only partially true. Several oil
analysts that I follow were forecasting a peak in Bakken and Eagle Ford shale
oil production by 2016 even with high oil prices. This is due to the
limited number of sweet spots available to be drilled in the fields.
Once these are exploited, then the companies have to move outside to the less
productive areas.
One analysts that provides sobering estimates for the Bakken and Eagle
Ford shale oil production is Tad Patzek. Mr Patzek wrote an article on
his blog titled, Is
U.S. Shale Oil Production Peaking? Part II: Oil Production.In
the article he published the following charts:
Tad has received criticism from some official sources because his
forecasts are not as positive or ROSY as theirs. Tad Patzek is
Professor of Petroleum and Chemical Engineering, currently teaching at the
Earth Sciences Division and Director of the Upstream Petroleum Engineering
Center in KAUST, Saudi Arabia. Before that (2008-2014) he was the
Leadership Professor and Chairman ofPetroleum and Geosystems Engineering
Department at The University of Texas at Austin.
In the second article on Peak
U.S. Shale Gas Production, here was the criticism by an EIA,
U.S. Energy Information Agency official:
Here
is the letter signed by Mr. Howard Gruenspecht, Deputy
Administrator of the U.S. Energy Information Administration. In
that letter I was called a relatively minor player in the definitive UT BEG
Shale Study and, much worse, President of ASPO, the Association for
the Study of Peak Oil.
Never mind that the BEG study used this model of shale gas production
in all of their calculations. Our model was published in the
Proceedings of the U.S. National Academy of Sciences (NAS) and was awarded by
NAS the 2013 Cozzarelli Prize for best paper in
engineering. And never mind that in early 2011, I made an accurate
prediction of gas production from the Barnett shale, based on the model
originally proposed by Dr. M. King Hubbert, who was the original pre-ASPO
researcher. Of course, early on, in 1956, Hubbert was called a lunatic
and idiot. But I wrote on this subject many times, see here and here and
several other posts, and do not want to repeat myself.
As we can see from the quote above, Tad Patzek’s work speaks for
itself. If Tad’s forecasts of the Bakken and Eagle Ford are correct,
shale oil production from these two fields will be down 80+% by 2020…. that’s
only four years away.
If U.S. oil production declines in a big way by 2020 and then is
down 70-80% by 2025, Americans are going to be in a world of hurt.
I highly doubt we will be able to trade U.S. Dollars for oil at this time.
This is the most important fundamental reason to own physical
silver. I believe the value of most paper assets will implode over the
next several years. Sure, we could see a hyperinflation bout, but that
wont last long. Without cheap and available domestic oil production,
the United States will disintegrate into a much smaller economy. Or
worse yet, a third world Banana Republic.
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