Whether you have been watching the trends as they have followed and exceeded the trail of my expectations recently or are just taking notice of the possibilities that have gone so far as to surpass my optimism, there’s no question that the metals market is in a class by itself. Now, let’s take a look at the reality of what lies ahead for those who are interested in this volatile market that continues to bear remark and amazement. In my opinion, the first eight days of this December have been nothing short of the best case scenario for the future of the precious metals trend in terms of the consolidation in the commodity prices during this time.
You must bear in mind, however, that the recent consolation was fueled by what I believe was an attempt by the U.S. government to encourage a sense of improvement in consumer confidence. As many brace for what could be a weaker holiday spending season than last, the consequences of short cuts by the “powers that be” will prove more detrimental in the long run, particularly to their agenda. This does not completely delete the strength of the consolidation but as with any government PR tactics, there are long reaching considerations which extend well beyond the current season. Some of which may come to bear upon the very consolidation efforts made recently in a direct way.
How Is This Possible?
First, let’s take a look at the sudden trend of unemployment that has reversed a 14-month course. Would I say it is due to the “Green Jobs” that the Recovery Act has produced? Hardly. Upon closer observation, you’ll have to agree there haven’t been any noticeable highway development projects with ribbon cutting ceremonies lately. I’ve yet to witness any of this “retro fitting” of old government buildings or seen wind/solar power plants being constructed. I haven’t noticed any conspicuous job creation either.
Second, Bank of America is being touted as the poster child of the “Big banks on the path to a solid recovery”, because they are “returning the $45 Billion in TARP funds”. Let’s keep it real here. This sentiment assumes that we, the people who pass our life savings through these channels regularly, do not know or understand the fractional reserve banking system. The system the banks have abused and which has thrust us unwillingly as a nation into the Great American Banking Calamity. Who really knows how much money they were they able to fractionally create before returning the token $45B? One has but to barely look beneath the surface of this gesture by Bank of America to see that the undercurrent of misappropriation is still flowing strong.
Have we suddenly taken leave of our understanding of the definition of “inflation”? It certainly is not when a gallon of milk cost $2 more. It is when the amount of dollars (USD) in circulation is increased, whether it is paper money or the ones and zeros on a computer screen. The rise in consumer prices is simply a symptom of inflation. The Federal Reserve is banking on this misconception to run interference while they walk a high wire trying to minimize the damage. This could easily be the “early 80’s 2.0” on steroids as silver counteracts inflation again and is positioned to break all previously set records as prices continue to climb.
While “Helicopter Ben” is being grilled on Capitol Hill about the Recovery Act, he is telling the world that a weaker dollar policy is good for the foreseeable future as it will cheapen our exports and aid in the recovery. But who can speak with any certainty on what exactly we export anymore, other than debt and factory jobs? The last time I checked, we were about out of factory jobs so I guess it’s just down to exporting debt? This rhetoric has exacerbated the descent of the USD against all currencies which has made the tangible commodity markets more appealing. Most specifically, Gold and Silver.
Media Obsession
The media’s sudden obsession with the direction and strength of precious metals has brought a lot of fresh blood to the precious metals market and rightfully so. The success story of gold rising from the mid $800 range to the low $1200’s has been a recession-defying beacon of stability and intrinsic value. While Silver has increased from the low $9 range just 12 months ago to the mid $19 range last week. In an economic environment where roughly half of American’s retirements have disappeared in the fourth quarter of 2008, getting back to basics with wealth preservation tools that truly embody financial stability with real intrinsic value seems to be the most logical move to make. The Mints are unable to keep production online to match the demand, miners are scrambling to reopen shoots that may produce enough metal to satisfy the insatiable global demand and every channel you turn to has 50 commercials a day encouraging you to turn in your “broken or unwanted gold for cash”. If you can’t see the handwriting on the wall, take a closer look now. We seem to have exhausted the credit fueled race for materialistic acquisitions and not a moment too soon.
Be sure to look at your economic calendar, as this week is a RECORD week for treasury auctions in an attempt to raise capital to cover our equally record deficits. It seems a little bizarre to me that the Dubai default was magically recognized on Thursday, November 26; the same day of Thanksgiving! They didn’t know with any forewarning that a default was brewing and just happened to discover this development and release the news to the world on a day that US markets were closed and subsequently would cause an exodus to the USD as a safe haven trade? With most traders taking a 4-day holiday weekend at the time and little or no retaliation to refute the USD’s rise it seems more than a little fishy. Then, add on the curiously better unemployment data of the following week and you have a propped up USD and still a weak T-Bill auction.
With a staggering 19 million unoccupied, foreclosed homes in this country, why are only 9 million, less than half, listed for sale? The answer is simple but unpleasant; banks are sandbagging 10 million homes in hopes of artificially stabilizing housing prices which, if successful (and it is a huge IF), would trick the media into reporting that the recovery is in full effect. There are upwards of another 20 million plus mortgages with 5 yr ARMs set to adjust in the first quarter of 2010. It doesn’t take a rocket scientist to tell you how this will affect the banks. Roughly $1.8 trillion in unpaid credit card debt leaving Americans with the choice to pay the AMEX bill or feeding their kids, again, how will this affect the banks? The FED is due to start shuffling the “Toxic Assets” back to the banks in the 1st quarter also. Hedging yourself from these issues will only prove to be sound logic when the banks have their hands out again in January and the government is ALL TOO WILLING to print and hand out more future tax money to these banks while they give Billions in bonuses to themselves.
In conclusion, I believe that this current consolidation is in fact the best course of action for the true health and trend of precious metals as they continue their ascent to their inflation-adjusted prices, which are long overdue. The new money that has flocked to the metals at the behest of the media’s newfound story de jour has piled on a little heavily and a little too late in this leg of the rally in Gold. It’s time for a consolidation and a cleansing of the late comer scared money toters looking for a quick buck. A general rule of thumb is “once the media tells you to invest somewhere, the money has been made”. Once we shake out the scared money, we will regroup and mount the charge towards the $23 range by year’s end in Silver and Gold above $1200. Next year, we may very well see Silver charging towards $30 and Gold towards $1500 as Central Banks around the world rush to shore up their asset base by acquiring as much Gold and Silver as possible before it becomes unaffordable.
Written by: Jim Purnell, Lloyds Asset Management
