FunnyMoney
12th September 2010, 10:37 PM
The case for 5-digit precious metals.
I was called crazy when I posted the case for 4-digit gold when we were still stuck in the middle of 3-digits. Posts came in that gold could not be eaten, that nobody really needed gold, that the big players trade in paper markets and anything that can't be exchanged entirely electronically was doomed to extinction. They pronounced that we had already gone through the "golden age", as well as the bronze, iron, copper and other ages - why should we return and embrace the barbarous relics of long past generations?
With eyes bigger than grapefruits I read the replies and listened to the analysis. But then when I turned to check the fundamentals and the historic monetary rules of money and wealth I found nothing to support their claims. Everything they said was either based around, "nothing goes up forever", "nobody cares about gold", or the govts and central banks of the world have always fixed things up in the past so they're bound to do so in the future."
This was at a time when an ounce of gold could still be purchased in the 500s. I told friends, family and co-workers but the topic was usually either a complete conversation killer, or they simply didn't think precious metals would continue to climb much in price.
To this I would respond, "you can buy gold under $1000, or you can buy it over $1000, but one way or the other you will buy."
Of course it's a lot better to keep a low profile, so when the crash of 2008 commenced I avoided all precious metal conversations. But today, here at GSUS, I will deliver a prediction every bit as controversial as was 4-digit gold then and even more so.
You may need to wait a dozen years, or then again you may see it happen in few dozen months, but I predict a monstrous increases in the cost of precious metals will happen and is approaching fast. Just as I said years ago, "4-digit gold is baked in," I say to you today: 5-digit gold is coming without any question.
The increases for a period of time may be controlled or slowed to some degree but they won't be stopped. The reasoning is simple. Inflation doesn't need to even by hyper, the fundamentals that will drive the coming big moves in precious metals are already baked in:
1. Fiat currency debacle.
Fiats won't go the way of the dinosaur, although they certainly deserve to. But to be clear, I believe that just because the 1913 dollar is now worth only 2 cents doesn't mean we're ready for a rebound. Numbers can be divided forever and currency debasement is going to continue and even speed up.
The secondary currencies (Argentina as one example) and the basket case fiats have all had their turns with collapse. But we will also see the major fiats take turns in their debasements as well, not going into complete collapse, but they will take turns in rotationary debasements against commodities and other currencies. In terms of purchasing power, and especially in terms of metal prices, this will result in smaller swings inside longer term trends. This is a process which will evolve over many months and likely many years, the Yen and the RMB for example are strong now, but give them a few years and let's see what worlwide inflation and the plethora of global problems (energy issues being at the top of a very long list of them) does to their value over the long run.
The biggest long term trend will be the eventually much higher prices for those items with relatively low supply and accumulation advantages. No inflationary protective vehicle has such an inflexible low supply and better accumulation advantages than does the precious metals. Precious metals contain a large amount of wealth in a small amount of space, they do not have an expiration date and are easily recognized and standardized. In addition, rising demand does not immediately translate into increasing supply - the supply is already low and the data suggest that it will continue to decline regardless of stengthening demand.
Once the major currencies have all gone through some rotation of pain, the public is going to learn (the hard way) a few macroeconomic lessons: first of which will be that "trust" when printed on a piece of paper is only worth at most the ability of some counter-party to meet some previously stated obligation - in simple terms, somebody will be left holding the bag. At this point investors and average peoples of the world are going realize they have lost huge quantities of wealth and they will search for hard asset protection from continued severe purchasing power declines for their remaining wealth, and the protection of choice will be as it always has been, precious metals.
2. Demand wiats for nobody.
While the huge demands mentioned above come much later on, a continued ongoing and increasingly stable and strong demand persists.
How often has demand for the metals actually declined throughout history? Almost never. This won't change. Institutional and central bank investment demand is going to come from huge pools of mainstream wealth. We now see this investment demand starting to pick up from all sources, funds, corporations, and even public and private pension funds. High net worth individuals, their funds, and mainstream funds of all varieties are going to try to pick up at least a 15% position in precious metals within the next 4 to 7 years. They will lower their cash and bond exposures to accomplish this and they will be the most stable and longest term positions for them. They will do this based on the fundamentals that preservation of capital is best held in core positions which can't be debased. Bonds have risk and can default, cash can be debased and faked, but precious metals have a finite limit to their supply when compared to bonds and cash and when held in physical form have no couter-party or inflationary liabilities.
Corporations which have large cash positions will follow along the same line of thinking. Smaller gov'ts, fearing the day when they might actually need to back their currencies with something other than blind trust in global reserve paper currencies and future taxes, will continue to stock up on precious metals. So what that they sold low and now buy high, after all, they create the money with which they buy, regardles of who's fiat currency you are talking about.
The increasing demand side of the equation is not going to wait for supply to appear, starving people don't wait till they're dead to find food, and wealth stored in bad money does not wait till it's worth zero prior to pushing out the good.
3. Hat Trick: Supply
There are other forces pushing precious metals higher: increasing wealth in developing nations, increasing interest in jewelry and industrial application demands for example. But there's really only a need to mention these three, especially since this third fundamental is so amazingly strong.
Falling supply is the hat trick, it is the fundamental to trump all other factors. Nothing is scheduled and nothing is planned for the looming precious metals supply problem. Actually, in terms of the soon to be drastic declines in precious metals supply, there's really nothing that can be done.
Sure, the miners and the explorers are going to work overtime. And sure, far reaching ideas like mining the sea floor or on the moon will be debated - but allow me to make these entirely clear: no matter what they do, the mining of precious metals is going to fall right off a cliff. By the end of this decade and possibly even much sooner, everybody is going to realize the very finite nature of these metals.
Silver will return to it former historic importance in the monetary world as it will be the first to jump off the cliff. The mining of silver is going to change drastically as by-product mining slows and near surface mines simply run dry. All this while both the investment and industrial demands on silver may actually explode.
Platinum supply is not due to run out in the way that silver is, but the mining of platinum is precarious to say the least. Two mines, not 2 mining companies, but actually only 2 physical mines produce 85% of all the platinum in the world. This supply is still only one-tenth the quantity of gold produced and close to all of this newly mined platinum is completely consumed by industry. The mining of platinum is one of the most difficult mining processes known to man. Precarious and dangerously at risk is this overly concentrated mining supply of platinum. I would not be suprised to wake up some morning in the not too distant future to find out that over 65% of the supply of platinum has been removed from the market for an indefinate period of time, once again. But what will happen to the price of platinum if the supply doesn't fully return at levels which the world demands? With investment and jewelry demand for platinum on the increase and with the critical military and industrial application of it so sensative, the supply of available platinum to the public can only go down from here.
The gold and palladium declining supply stories may play out over a longer period of time, but don't be fooled into thinking they have any better relief. They are each facing a set of complicated supply chain problems with again their finite nature being at the root. Peak gold has already been hit and on all counts: new finds for gold, their grades, the production costs and political risk factors are all lined up in the same fundamental way - the supply of gold to the market will decline and continue to do so year over year.
Maybe you still don't believe in 5-digit precious metals prices. Or maybe you think if we see such prices in the precious metals it will be because a loaf of bread, or a gallon of milk, or a movie ticket has reached 3-digits. But this is what they said about 4-digits also, and in less than a few years 4-digits fell. Of course only time will tell.
But one thing I do know is that everybody is going to want to own some precious metals and soon they will. They may buy in while we're in the 4 digits or maybe after we pass 5 digits, but one way or the other, they will buy in.
I was called crazy when I posted the case for 4-digit gold when we were still stuck in the middle of 3-digits. Posts came in that gold could not be eaten, that nobody really needed gold, that the big players trade in paper markets and anything that can't be exchanged entirely electronically was doomed to extinction. They pronounced that we had already gone through the "golden age", as well as the bronze, iron, copper and other ages - why should we return and embrace the barbarous relics of long past generations?
With eyes bigger than grapefruits I read the replies and listened to the analysis. But then when I turned to check the fundamentals and the historic monetary rules of money and wealth I found nothing to support their claims. Everything they said was either based around, "nothing goes up forever", "nobody cares about gold", or the govts and central banks of the world have always fixed things up in the past so they're bound to do so in the future."
This was at a time when an ounce of gold could still be purchased in the 500s. I told friends, family and co-workers but the topic was usually either a complete conversation killer, or they simply didn't think precious metals would continue to climb much in price.
To this I would respond, "you can buy gold under $1000, or you can buy it over $1000, but one way or the other you will buy."
Of course it's a lot better to keep a low profile, so when the crash of 2008 commenced I avoided all precious metal conversations. But today, here at GSUS, I will deliver a prediction every bit as controversial as was 4-digit gold then and even more so.
You may need to wait a dozen years, or then again you may see it happen in few dozen months, but I predict a monstrous increases in the cost of precious metals will happen and is approaching fast. Just as I said years ago, "4-digit gold is baked in," I say to you today: 5-digit gold is coming without any question.
The increases for a period of time may be controlled or slowed to some degree but they won't be stopped. The reasoning is simple. Inflation doesn't need to even by hyper, the fundamentals that will drive the coming big moves in precious metals are already baked in:
1. Fiat currency debacle.
Fiats won't go the way of the dinosaur, although they certainly deserve to. But to be clear, I believe that just because the 1913 dollar is now worth only 2 cents doesn't mean we're ready for a rebound. Numbers can be divided forever and currency debasement is going to continue and even speed up.
The secondary currencies (Argentina as one example) and the basket case fiats have all had their turns with collapse. But we will also see the major fiats take turns in their debasements as well, not going into complete collapse, but they will take turns in rotationary debasements against commodities and other currencies. In terms of purchasing power, and especially in terms of metal prices, this will result in smaller swings inside longer term trends. This is a process which will evolve over many months and likely many years, the Yen and the RMB for example are strong now, but give them a few years and let's see what worlwide inflation and the plethora of global problems (energy issues being at the top of a very long list of them) does to their value over the long run.
The biggest long term trend will be the eventually much higher prices for those items with relatively low supply and accumulation advantages. No inflationary protective vehicle has such an inflexible low supply and better accumulation advantages than does the precious metals. Precious metals contain a large amount of wealth in a small amount of space, they do not have an expiration date and are easily recognized and standardized. In addition, rising demand does not immediately translate into increasing supply - the supply is already low and the data suggest that it will continue to decline regardless of stengthening demand.
Once the major currencies have all gone through some rotation of pain, the public is going to learn (the hard way) a few macroeconomic lessons: first of which will be that "trust" when printed on a piece of paper is only worth at most the ability of some counter-party to meet some previously stated obligation - in simple terms, somebody will be left holding the bag. At this point investors and average peoples of the world are going realize they have lost huge quantities of wealth and they will search for hard asset protection from continued severe purchasing power declines for their remaining wealth, and the protection of choice will be as it always has been, precious metals.
2. Demand wiats for nobody.
While the huge demands mentioned above come much later on, a continued ongoing and increasingly stable and strong demand persists.
How often has demand for the metals actually declined throughout history? Almost never. This won't change. Institutional and central bank investment demand is going to come from huge pools of mainstream wealth. We now see this investment demand starting to pick up from all sources, funds, corporations, and even public and private pension funds. High net worth individuals, their funds, and mainstream funds of all varieties are going to try to pick up at least a 15% position in precious metals within the next 4 to 7 years. They will lower their cash and bond exposures to accomplish this and they will be the most stable and longest term positions for them. They will do this based on the fundamentals that preservation of capital is best held in core positions which can't be debased. Bonds have risk and can default, cash can be debased and faked, but precious metals have a finite limit to their supply when compared to bonds and cash and when held in physical form have no couter-party or inflationary liabilities.
Corporations which have large cash positions will follow along the same line of thinking. Smaller gov'ts, fearing the day when they might actually need to back their currencies with something other than blind trust in global reserve paper currencies and future taxes, will continue to stock up on precious metals. So what that they sold low and now buy high, after all, they create the money with which they buy, regardles of who's fiat currency you are talking about.
The increasing demand side of the equation is not going to wait for supply to appear, starving people don't wait till they're dead to find food, and wealth stored in bad money does not wait till it's worth zero prior to pushing out the good.
3. Hat Trick: Supply
There are other forces pushing precious metals higher: increasing wealth in developing nations, increasing interest in jewelry and industrial application demands for example. But there's really only a need to mention these three, especially since this third fundamental is so amazingly strong.
Falling supply is the hat trick, it is the fundamental to trump all other factors. Nothing is scheduled and nothing is planned for the looming precious metals supply problem. Actually, in terms of the soon to be drastic declines in precious metals supply, there's really nothing that can be done.
Sure, the miners and the explorers are going to work overtime. And sure, far reaching ideas like mining the sea floor or on the moon will be debated - but allow me to make these entirely clear: no matter what they do, the mining of precious metals is going to fall right off a cliff. By the end of this decade and possibly even much sooner, everybody is going to realize the very finite nature of these metals.
Silver will return to it former historic importance in the monetary world as it will be the first to jump off the cliff. The mining of silver is going to change drastically as by-product mining slows and near surface mines simply run dry. All this while both the investment and industrial demands on silver may actually explode.
Platinum supply is not due to run out in the way that silver is, but the mining of platinum is precarious to say the least. Two mines, not 2 mining companies, but actually only 2 physical mines produce 85% of all the platinum in the world. This supply is still only one-tenth the quantity of gold produced and close to all of this newly mined platinum is completely consumed by industry. The mining of platinum is one of the most difficult mining processes known to man. Precarious and dangerously at risk is this overly concentrated mining supply of platinum. I would not be suprised to wake up some morning in the not too distant future to find out that over 65% of the supply of platinum has been removed from the market for an indefinate period of time, once again. But what will happen to the price of platinum if the supply doesn't fully return at levels which the world demands? With investment and jewelry demand for platinum on the increase and with the critical military and industrial application of it so sensative, the supply of available platinum to the public can only go down from here.
The gold and palladium declining supply stories may play out over a longer period of time, but don't be fooled into thinking they have any better relief. They are each facing a set of complicated supply chain problems with again their finite nature being at the root. Peak gold has already been hit and on all counts: new finds for gold, their grades, the production costs and political risk factors are all lined up in the same fundamental way - the supply of gold to the market will decline and continue to do so year over year.
Maybe you still don't believe in 5-digit precious metals prices. Or maybe you think if we see such prices in the precious metals it will be because a loaf of bread, or a gallon of milk, or a movie ticket has reached 3-digits. But this is what they said about 4-digits also, and in less than a few years 4-digits fell. Of course only time will tell.
But one thing I do know is that everybody is going to want to own some precious metals and soon they will. They may buy in while we're in the 4 digits or maybe after we pass 5 digits, but one way or the other, they will buy in.