Silver Action a Reminder of the Risks of the Paper Market

By: Jeff Berwick | Fri, May 13, 2011
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Gold and silver are strange things. They have been used for centuries as money and only in the last 40 years have they been shoved aside by the financial communists - yet they still exist as a free market monetary asset despite the force of all the government's guns.

The strange thing about gold & silver, however, is that while they are the last vestige of a money that is not in and of itself able to be manipulated by the political criminal class many people still trade instruments in gold and silver which are easily manipulated by the aforementioned.

We can't speak for the marketplace but we, here at The Dollar Vigilante, buy gold and silver as a way to protect ourselves from the easily foreseeable collapse of the current non-free market monetary system. To us, to try to protect ourselves from the collapse of the monetary system by buying instruments (futures) which are a part & parcel with the current monetary system makes as much sense as buying shares of Enron in late 2001 because you had inside knowledge it was a fraud.

We suppose at this point there are probably two types of precious metals investors. Those that are blissfully unaware of the reasons to own the metals and are just bandwagon jumping the bull market and those that understand what is going on and who are buying gold and silver as protection and a way of preserving their assets through TEOMSAWKI (The End Of The Monetary System As We Know It) to come.

We live in a literal financial house of cards. It is all paper. That house of cards has been in the process of collapsing since 2008. Astute market participants realize this and are buying bullion, one of the only financial assets with no counterparty risk, as a way to protect themselves from the coming storm.

Those who think this is just a bull market to trade likely buy highly leveraged futures that have little or no direct connection to actual gold or silver bullion.

So, what happened with silver? It more than doubled since Ben Bernanke began his high level terrorist attacks against the US dollar with "Quantitative Easing II" announced in August of last year, rising from $18 to just below $50.

Silver 3-Year Chart

The rise in gold and silver was likely making Bernanke feel a bit uncomfortable about his "there is no inflation" story and a phone call was likely put into the COMEX. Five margin increases in rapid succession later and the COMEX had increased initial margin requirements by a substantial 84%.

Anyone who had bought silver futures using leverage and without a substantial cash holding was forced to immediately sell their silver futures. The result was a drop in silver futures prices from near $49 to below $34 in a matter of hours.

So, what's the first moral of the story? If you are buying gold and silver to distance yourself from the highly manipulated and rapidly failing monetary system then don't buy gold and silver in forms that are under the control of the central planners.


Silver Bubble?

The action in silver has most of the world saying that silver was in a bubble and now that bubble has popped. Those who say this don't know what a bubble is and have been blinded by the inflated dollar nominal prices.

If you look at the silver price in US dollar terms it does look like quite a parabolic, bubble-like rise. However, when you just discount the silver price by the US Government's own CPI Index - which they say is a proxy for inflation - the silver price looks like it has not done much at all. And when you take Shadowstats.com's CPI - which just calculates the Government's CPI the way they used to calculate it in the 1980s before they learned how to hedonistically remove the inflation - silver has been in a long bear market since 1979.

Silver Price in Nominal USD Terms 1970-2010

This jives with the following chart as well, taken from the May issue of The Dollar Vigilante, where we looked at the price of a number of disparate items in 1980 and in 2010. Can you spot which one of these items is in a bubble?

US Nominal Price Changes 1980-2010

What's the second moral of the story? You take your investment life into your own hands if you pay attention to the price of your investments in US dollar terms. In nominal dollar terms silver looks like it has been on a ludicrous rocket ride. When looked at discounted to 'inflation' as defined by the US Government's CPI or when compared to other assets over the last thirty years, silver has been a long bear market and has done relatively nothing compared to any other assets.

And compared to the growth in US Federal Government debt, silver has underperformed by a factor of five. One bubble is about to pop... and it isn't silver.

 


Subscribe to The Dollar Vigilante today, where we publish research and data like this regularly to subscribers to help them avoid the mirages and misinformation often repeated throughout the mainstream media about the true state of affairs in the economy.

 


 

Jeff Berwick

Author: Jeff Berwick

Jeff Berwick
Chief Editor
The Dollar Vigilante

Jeff Berwick

Anarcho-Capitalist. Libertarian. Freedom fighter against mankind's two biggest enemies, the State and the Central Banks. Jeff Berwick is the founder of The Dollar Vigilante, CEO of TDV Media & Services and host of the popular video podcast, Anarchast. Jeff is a prominent speaker at many of the world's freedom, investment and gold conferences as well as regularly in the media including CNBC, CNN and Fox Business.

Jeff's background in the financial markets dates back to his founding of Canada's largest financial website, Stockhouse.com, in 1994. In the late '90s the company expanded worldwide into 8 different countries and had 250 employees and a market capitalization of $240 million USD at the peak of the "tech bubble". To this day more than a million investors use Stockhouse.com for investment information every month.

Jeff was the CEO from 1994 until 2002 when he sold the company and still continued on as a director afterwards until 2007. Afterwards, Berwick went forth to live on and travel the world by sailboat but after one year of sailing his boat sank in a storm off the coast of El Salvador. After being saved clinging to his surfboard with nothing but a pair of surfing shorts left of all his material possessions he decided to "live nowhere" and travel the world as spontaneously as possible with one overarching goal: See and understand the world with his own eyes, not through the lens of the media.

He went on to visit nearly 100 countries over four years and did and saw things that no education could ever teach. He met and spoke with a plethora of amazing people, from self-made billionaires to some of the brightest minds in finance - as well as entrepreneurs from a broad range of backgrounds and locations from tech companies in southern China to resource developers in Mongolia, Thailand, Russia and Chile. He also read everything he could find on how the world really works... politically and financially. A pursuit he continues to this day.

He expatriated, long ago from his country of birth, Canada, and considers himself a citizen of the world. He has lived in numerous locales since including Los Angeles, Hong Kong, Bangkok and currently lives in Acapulco, Mexico and is building a home in Cafayate, Argentina. In essence, everything he writes about here for TDV he has done or is doing.

As well, during his travels, both real and virtual (through the internet), he met some amazing people who have a similar shared vision of what is currently going on in the world and enticed them to come aboard TDV and provide their own brand of analysis.

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TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/