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The Invincible Precious Metal Bears

By: Ryan Jordan | Tuesday, April 15, 2014

A year ago today saw one of the largest declines in COMEX gold and silver futures in the last several decades. For those who argued that an electronic futures market- where an entire years worth of silver production can be bought or sold in one day- would always and everywhere be able to shrug off strong physical demand and set prices however futures traders saw fit, last April was vindication. Coupled with a soaring stock market, the near destruction of the gold and silver bulls sent a powerful message to small savers: invest with Wall Street, or else.

Just last week, during an interview with Michael Lewis, author of "Flash Boys-" (a book about High Frequency Trading) a caller essentially told Lewis that retail investors have no other place to put their money than with Wall Street, and implied that Lewis' negative words for aspects of mainstream stock markets might further dent confidence in the markets and therefore decrease the value of that caller's stock portfolio. Once again, I saw in action the belief that it is not worth even trying to critique the financial sector, and that it is just not worth it to attempt "alternative" investing, since owning assets outside the system is only for suckers.

As you might imagine, that comment hit a nerve. The attitude that we are all in this together with the Titans of Finance, that our interests are aligned with Wall Street simply because they are powerful, and the notion that savers have no choice but to invest with the same crooks who got us into the 2008 mess, was a bit much for me.

As the gold- and especially- silver prices settle into oblivion, either loathed or ignored by most other investors seeking returns in "the only game in town" (i.e. conventional stocks), it is worth remembering the power of normalcy bias, and the power of the human herd instinct- not to mention the inability of average people to stand apart from powerful authoritarian figures who manipulate or distort reality for their own ends- even when it is actually in the average persons' interest to run, not walk, away from a casino run only for the well-connected.

I see that the gold/silver ratio has blown out to above 66. In theory, this is not a good sign, since the gold/silver ratio was generally rising over the course of the 1980s and 1990s. On the other hand, it may just be the case that the inverse correlation we are seeing between stocks and precious metals is temporary, and that the disastrous price performance of the 1980s and 1990s will not be revisited on this sector.

Here are some reasons for why this period is different from the secular bear market in precious metals seen roughly 20 years ago:

- Unlike twenty years ago, the US dollar is not rallying, but is at best treading water. Remember that in the 1980s, the dollar shot up by somewhere north of 50% at one point. It is difficult to imagine such a scenario occurring in a world where nations like Russia and China are openly calling for diversification away from the dollar.

- Unlike twenty years ago, savers are being stiffed with zero percent interest rates, accompanied with central bankers claiming that we need more -not less- inflation. A case can be made that real interest rates (nominal rate minus the rate of inflation) are negative as we speak, which is normally bullish for gold.

-Unlike twenty years ago, a growing middle class in the Middle East, India, and China could easily absorb all known gold and silver mine supply. That supply can only grow so fast. The price dump of last year only came about after Wall Street firms dumped hundreds of tonnes of ETF gold AND India cracked down on its gold market to defend the rupee. Indian elections are coming up shortly, and some of these draconian measures may be lifted. At any rate, the pace of the collapse of gold demand is the real unsustainable trend, even as many shell-shocked formal bullion bulls throw in the towel and are predicting ever-lower precious metal prices.

I could go on and on regarding the bank bail-in concept, concerns regarding the solvency of public pension funds, attempts being made by certain groups to establish alternative currencies (including but not limited to gold), in addition to the possibility of some sort of meaningful correction in the stock markets, as fundamental drivers for higher metal prices.

At the very least, you may want to recognize that prices do not go down forever, and that the most money is made in a market when everyone is on one side of the trade.

At the moment, the precious metals bears think they are invincible.

I'm not so sure.

 

Author: Ryan Jordan

Ryan Jordan
Silver News Blog

Ryan Jordan

Ryan Jordan has been blogging about the precious metals since 2010. However, his interest in the precious metals markets spans nearly 20 years as both a coin collector and private trader. Ryan believes there is a lack of serious discussion of how undervalued precious metals like silver are, and he aims to explain the many reasons why people should take silver investing seriously without relying on hype, sensationalism, or scare-tactics. Ryan Jordan recognizes that assets like silver serve a dual function: one, as a real asset that can provide portfolio insurance as a non- correlated investment, and two, silver can appreciate significantly in a short period of time. Silver could be the best performing asset you could own, with or without a significant crash in the dollar, or other financial mishap. Ryan Jordan's articles have appeared at financialsense.com, gold-eagle.com, investing.com, jessescrossroadscafe.com, silverbearcafe.com, silverstrategies.com, wallstreetformainstreet.com and numerous other sites.

Ryan Jordan believes a historical perspective is absolutely essential for anyone trying to navigate today's financial markets. It is this unique historical perspective that he tries to work into his analysis of the silver market. Ryan received a B.A in History from the University of California- Los Angeles in 1998, a M.A. in History from Princeton University in 2001, and the Ph.D in History from Princeton University in 2004. His professional research involves the history of social movements, religion, and freedom of speech in American history. His two most recent academic books include: Slavery and the Meetinghouse: The Quakers and the Abolitionist Dilemma (1820-1865) and Church, State ,and Race: The Discourse of American Religious Liberty (1750-1900). As a peer-reviewed historian, his articles have appeared in The Journal of the Early Republic and Civil War History. Ryan has taught US history at all levels, ranging from undergraduate to graduate students, at Princeton University, Lafayette College, the University of California-San Diego, Mesa College and Palomar College. Currently he teaches at the University of San Diego and National University, in La Jolla, CA.

Copyright © 2013-2014 Ryan Jordan