Silver: The Noise is Deafening!

By: GE Christenson | Wed, Aug 7, 2013
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Silver Bars

"Beam me up, Scotty!"

"I can't Captain, the signal is weak and there is too much noise." (My apologies to you Trekkies....)

That conversation (which did not happen) describes the problem with the silver and gold markets now. There is so much noise, false information and lack of clarity - and not enough signal - real data and understanding.

I turned bullish on silver back in 2003. I knew it was too high in April 2011 and due to correct. I thought the correction low occurred in June 2012 at about $26. Oops - it happens. When elephants fight, the grass gets trampled. When the bullion banks, central banks, the Powers-That-Be, and politicians pursue an agenda (such as levitating the S&P and pushing gold lower) the rest of us can be crushed.

More signal, less noise! Look at the B-I-G Picture!
(approximate prices and ratios - for perspective)
  Since August of 1971 Exponential Increase -
42 year Annual Average
Silver up a factor of 14 6.5% *
Gold up a factor of 32 8.6%
Crude Oil up a factor of 29 8.4%
M2 Money Supply up a factor of 14 6.5%
Cigarettes up a factor of 16 6.8%
U. S. National Debt up a factor of 42 9.3%
US Govt. Spending up a factor of 18 7.1%
* The price of silver is currently (August 2013) less than $20 so its annualized increase since 1971 is low, particularly compared to the increases for gold, government spending and the National Debt.

Yes, I know correlation is NOT causality. But if you think it through (using this highly simplified and more or less correct analogy), increasing the money supply is one important CAUSE of higher prices. Suppose you live on a desert island where the price of coconuts is $1 and the money supply normally increases only when the population increases. But unexpectedly the money supply doubles in a few months with no other changes on the desert island. Fairly soon the price of coconuts will rise to about $2. Prices are indeed affected by the total money supply in circulation.

In WWII it was considered an act of sabotage to counterfeit an enemy's paper currency to create inflation in the enemy country. Now it is considered "quantitative easing," or "stimulus," or "beneficial monetary policy." Worse, QE might be utterly necessary to prevent an economic implosion.

Since 1971 M2 is up an average of 6.5% per year, while national debt is up 9.3% per year. Subtract a bit for population growth and compare to gold - up 8.6% per year, silver - up 6.5%, cigarettes - up 6.8%, and crude - up 8.4%. In the big picture (42 years of unbacked paper currency) prices increased similarly to the increase in M2.

When the 1971 money supply (M2) was about $683 Billion in the US, cigarettes cost about $0.39 per pack. Now that M2 is about $9,600 Billion, cigarettes cost (on average) about $6.20 per pack. Certainly there are other factors, but increasing the money supply increases prices.

Medical services and college tuition increased even more rapidly during the past 42 years. Milk and bread increased less rapidly. It averages out. As M2 goes up, prices for wheat, cigarettes, health insurance, gasoline, "penny candy," coffee, silver, gold and most things we need go up.

Current Considerations

Correct! The data signal is clear - more inflation, higher prices, and:

The weak prices for silver and gold during the past three years are a correction to the massive run-up in prices from October 2008 - mid 2011. During that time silver increased from a low of $8.53 to a high of nearly $50. Gold increased from a low under $700 to a high over $1,900. They have been correcting since then. The correction is, I expect, over - FINALLY.

Ignore the noise! The signal is clear: M2 will continue to increase and consequently so will prices for most everything you NEED.

CAVEAT: If our leaders take us (accidentally or otherwise) into a deflationary post-apocalyptic "Mad Max" world, then M2 probably will decrease. I'll bet the "powers-that-be" want to retain power and wealth and will do ANYTHING to avoid a deflationary collapse.

Are you stacking silver and gold and feeling secure? Or are you expecting central banks and politicians will take care of you with unbacked paper money, promises and more promises?



GE Christenson

Author: GE Christenson

GE Christenson aka Deviant Investor

GE Christenson

I am a retired accountant and business manager who has 30 years of experience studying markets, investing, and trading futures and stocks. I have made and lost money during my investing career, and those successes and losses have taught me about timing markets, risk management, government created inflation, and market crashes. I currently invest for the long term, and I swing trade (in a trade from one to four weeks) stocks and ETFs using both fundamental and technical analysis. I offer opinions and commentary, but not investment advice.

Years ago I did graduate work in physics (all but dissertation) so I strongly believe in analysis, objective facts, and rational decisions based on hard data. I currently live in Texas with my wife. Previously, I spent 20 years in Barrow, Alaska, the northernmost community in the United States, 330 miles north of the Arctic Circle.

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Source: The Contrarian Take