Silver and Gold

A quick search turned up this site containing lyrics for the U2 song with the same name as today's post. From the 1990 Rattle and Hum CD/film, the following words may apply in some way to today's musing:

No sun in the daylight
Looks like it's chained to the ground
Chained to the ground
The warden said
The exit is sold
If you want a way out
Silver and gold

Maybe the sun is the metaphorical America that Benjamin Franklin pondered during the signing of the Constitution and the exit is retirement in the 21st century.

And, maybe not.

Commodity Bubbles

Three times in the last week the phrase "commodity bubble" has been seen or heard in the mainstream financial news media. In all cases, the reference occurred when the discussion turned to where money might flow, if equities fail to deliver in the coming months and real estate continues to cool.

Hmmm...

What has been building for six years is going mainstream and seems to be gathering pace.

Jim Cramer should certainly help the cause when it comes to silver. His loony, Mad Money CNBC gig seems to have a pretty devoted following of after-hours traders and perhaps an equal number of rubber necking channel surfers.

His recommendation for Pan American silver on Monday caused a seven percent spike at the open on Tuesday, with more follow through yesterday.


Having missed this episode (and every other one, for that matter), it is left to the imagination what it may have looked and sounded like as he uttered, "We can't crucify our portfolios on a cross of gold".

This is a reference to William Jennings Bryan's Cross of Gold speech delivered during a bid for the Democratic nomination for President in 1896, when the nation was torn between the gold standard and bimetallism. Backing the currency with inflationary silver favored farmers in repayment of their debt, whereas Republicans preferred deflationary gold.

Ironically, 29 years later William Jennings Bryan was one of the principals in the Scopes Monkey Trial, defending the prohibition against teaching theories in conflict with the Biblical story of the Divine Creation.

It's funny how a hundred years later, Bryan is relevant again on two subjects that most would have thought long since settled.

Silver has been rising nicely in anticipation of a silver ETF that is set to launch in the coming weeks. It looks like $10 an ounce, still a historically low price, is only a matter of time.


As you'll recall the announcement and launch of two gold ETFs over a year ago had a big impact on gold prices - the response to the silver ETF may prove to be even more pronounced for two reasons.

First, historically, silver is much more volatile than gold - it's a smaller market and is subject to much wider and dramatic swings.

Secondly, a silver ETF completely solves the storage problem, which as anyone who has ever purchased physical silver already knows, is a bit problematic.

Silver at $10 with the convenience of a mouse click should attract lots of buyers.

"Remonetisation of Gold: Start Hoarding"

That's the title of a new report (PDF) from Cheuvreux, the equity brokerage for Credit Agricole, a large French bank. This report has received lots of attention in the last day or two, particularly because it has endorsed many of the findings of GATA, the Gold Anti-Trust Action Committee.

Gold had been looking pretty good lately before this report came out.


The price action is really something to behold - not just the general trend but how, after brief sell-offs, buyers appear with little delay. Since November, when Ben Bernanke was nominated to replace Alan Greenspan and the announcement was made that reporting of the M3 monetary aggregate would cease in March, gold has risen almost 25 percent.

The Cheuvreux report is notable for many reasons, most importantly the first two major findings in the executive summary, though all these findings are pretty significant:

• We are raising our mid-cycle gold price estimate to USD900/oz from USD750/oz and see the possibility of a spike to USD2,000, or higher. Covert selling (via central bank lending) has artificially depressed the price for a decade.
  
  
• Central banks have 10–15k tonnes of gold less than their officially reported reserves of 31k. This gold has been lent to bullion banks and their counterparties and has already been sold for jewellery, etc. Non-gold producers account for most and may be unable to cover shorts without causing a spike in the gold price.
  
  
• There is a supply deficit in the gold market of around 1,300 tonnes p.a. before any central bank selling and perhaps 700 tonnes p.a. after "official" sales, but before covert selling. This compares with world gold mine output of only 2,500 tonnes p.a.. Some central banks, notably Russia, are starting to buy gold.
  
  
• Gold acts as an early warning of potential crisis such as rising inflationary/deflationary pressures and general confidence in paper currency, especially the USD. A strongly rising gold price could have severe consequences for US monetary policy and the USD. History suggests that gold always wins against an inflating paper currency (i.e. one subject to excessive supply growth).
  
  
• Gold and gold mining stocks are poised for an unprecedented rise in prices and profile. Investors in UK/European equities need to assess the implications for their portfolios. Global/hedge funds may be better placed to respond. Anglo American is the only large cap gold/precious metals play domiciled in Europe.

It's a long report, which has not been read carefully yet here, however, the following chart was hard to ignore, as it contains the M3 money supply plotted against the most widely used measure of inflation , the Consumer Price Index.

It's not clear what the timescale is, but that's probably not that important anyway.


Resource Investor, normally a GATA critic, has this story on the Cheuvreux findings and Mover Mike has a few comments as well, including some previous posts on activities on the Japanese commodity market (TOCOM) and the massive short positions of Goldman Sachs at the COMEX.

One thing is clear - momentum is building for commodities of all types and silver and gold seem to be getting a lot of attention lately.

Maybe too much attention actually, and perhaps from the wrong people if there is any truth to this story about Homeland Security and Safe Deposit boxes. Note the comments section where blogger Randy discussed the issue with the folks at his bank.