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Silver’s Smoking Guns, Part II: Investment Paradox

Silver Commentary

The world of investing is ruled by a single principle: “buy low, sell high” – or at least it should be. In order to squeeze as much money as possible out of the Chumps (i.e. small retail investors); the predatory Corporate Media has turned these “investors” into momentum-chasing traders, and the principles of investing have been thrown out the window.

Nowhere is this more apparent than through an examination of the silver market, and the perverse parameters of investment in this sector. In order to put the Golden Rule of buy low/sell high into action, we need to know how to determine when we are buying low – because once we have bought low, selling high is simply a matter of patience.

This presumes (of course) that as an investor we have done our “due diligence” in researching companies/sectors; and identified an investment opportunity with strong (future) fundamentals. We would not have been following the Golden Rule had we bought shares in Kodak as the world was in the process of switching from camera film to digital photography. We would have been buying low and (eventually) selling lower; or in relative terms buying high and selling low.

Conversely, referring back to Part I of this series; we have already ascertained that silver has large/growing demand, and it was conclusively demonstrated that silver is priced well below its fair-market value. On this basis alone, the silver sector would seem like a good destination for one’s investment dollars, but we have not completed our due diligence.

That still only covers demand and price parameters of this market. To get a more clear/complete picture of fundamentals we also need to focus on supply. Again referring to the first installment, we learned that silver is alone among major commercial/industrial metals in that the majority of supply is produced not via “primary mining” but as a byproduct of other metals mining.

As I also explained in that previous piece, that fact alone provides a near-conclusive argument that silver is under-produced. Unequivocal empirical evidence that silver is grossly under-produced can be found merely by looking at the total collapse in inventories. As I have frequently pointed out in previous commentaries, between 1990 – 2005 alone; silver inventories plummeted by 90%. Since 2005, inventory numbers have been falsified through a transparent, record-keeping sham, presumably to cover-up even further erosion of inventories.

Those who have any understanding of markets will realize that this alone is further proof of the long-term/severe under-pricing of silver, since price is the only mechanism which can restore equilibrium between supply and demand.

We have a second way of demonstrating that silver is under-produced apart from the collapse in inventories. Also mentioned in the first part of this series is the fact that gold and silver exist in the Earth’s crust in roughly a 17:1 ratio to each other. This suggests we should also see these metals mined in similar ratios.

However, if we obtain supply numbers for silver (from the Silver Institute) and for gold (from the World Gold Council), we see that over the past decade silver has only been mined at roughly a 7:1 ratio versus gold. This would indicate that silver is currently being mined at less than half the rate it would be mined if the metal was priced at its fair-market value.

 

Silver’s Smoking Guns, Part I: Mining Paradox

Silver Commentary

When a reader (and fellow silver-mining investor) recently expressed his frustrations on our Forum regarding the absurd valuations which most of these miners currently exhibit, I decided it was once again time to try to shed some light (and sanity?) on this subject.

When I began investing in these silver miners many years ago; one of the first anomalies to which I was introduced was that the vast majority of silver produced in the world (more than 75% at that time) was produced as a “byproduct” of other mining. While I immediately recognized that this was an extremely important factoid, at that time I lacked the level of understanding necessary to glean its true significance.

Since that time, the ramifications of these incredible parameters in silver mining are now apparent to me. Sadly, however, this important analytical point does not seem to be as apparent to others. While I’ve covered this subject matter once already in a prior commentary, the lack of general awareness in this area clearly merits repetition of this analysis.

The basic parameters for the mining of metals on our planet are simple and clear. With nearly every commercially-produced metal on the planet, the vast majority of that metal is produced via “primary” mining – mines which “primarily” produce that particular metal. The reason for this should be obvious.

At the large scale at which the modern, global economy operates; the need develops to secure large supplies of these metals. For purposes of both efficiency and a secure supply-chain; it is natural/preferable to seek to develop “copper mines” to meet copper demand, “zinc mines” to meet zinc demand, etc.

We would thus expect all of these commercially/industrially consumed metals to have production models where the vast majority of supply came from primary mining, with the metal which was produced as a “byproduct” (through the primary mining of other metals) being merely incremental to supply.

Indeed, with any/every metal for which there is this commercial/industrial demand, there are only two market paradigms where we would not expect the majority of (new) supply to come from primary mining, but rather as a byproduct of other mining:

a) Metals with a low level of demand, and/or only limited or specialized uses;

b) Metals which are found in either such small quantities or trace amounts that “primary” mining is not commercially feasible.

It is abundantly obvious that silver doesn’t come close to meeting either of those two conditions. With respect to its level of demand and its multitude of commercial/industrial applications; silver is literally in a class by itself.

With its aesthetic appeal (it’s the brightest of all metals) and malleability, it is (along with gold) the world’s best and oldest form of real “money”. On that basis alone there is significant investor demand for silver. Meanwhile, with new patents for silver-based industrial applications outnumbering those of any other metal; industrial demand for silver is large, strong, and growing.

The demand parameters are unequivocal: the majority of silver mined in the world should come from primary silver mining. This leaves the issue of supply. Is silver so rare in quantity and/or purity that primary silver mining is not feasible? Absolutely not.

 

ECB Bond-Buying: The Rape of Europe Continues

International Commentary

In the summer of 2011, I wrote a four-part series entitled Economic Rape of Europe Nearly Complete”. In that extended piece; I detailed how the combination of three malevolent forces was decimating the economies of Europe one-by-one.

Through the relentless fraud/manipulation in Euro debt markets, sadistic “austerity”, and so-called “bail-outs” which just bury these insolvent economies even deeper in debt; the Western banking cabal is systematically looting these nations.

The manipulation of European debt markets was (is) accomplished through the fraudulent rigging of the credit default swap markets; combined with the complicity of the Big Three ratings agencies and the West’s media Oligarchs.

The bankers manipulate credit default swap prices higher, simply by piling-on massive bets that a particular Euro-zone nation will default. The propaganda machine immediately shrieks that “risk” has now increased for this debt market, and then the accomplices in the ratings agencies comply with a ratings downgrade – immediately driving interest rates higher.

With the massive debts being carried by these economies, any increase in interest rates automatically makes the economy significantly less solvent, turning this tag-team of fraud into a self-fulfilling prophesy. With the banksters literally capable of manipulating Euro zone interest rates to any number they desire, as a matter of simple arithmetic it is impossible to “bail out” any of these nations – by lending them more money.

The moment more bail-out dollars are released, the banksters immediately drive interest rates even higher. Thus all the bail-out dollars are siphoned-out of the economy in the form of higher interest payments to the Bond Parasites, meaning all that each “bail out” accomplishes is to pointlessly pile on more debt.

Meanwhile, as more and more of every revenue-dollar is sucked out of these economies by the debt-market fraud, Austerity is literally nothing less than economic suicide. In economies already starved for capital, Austerity is the precise equivalent of a doctor putting a severely anorexic patient on a diet.

The empirical evidence is overwhelming. In every European economy which has inflicted Austerity on its population, the rate of economic contraction has accelerated, and the size of the budget deficits has grown larger instead of smaller. Since the entire raison d’etre of Austerity is to (supposedly) shrink these deficits, it is nothing less than deliberate suicide to continue this policy, and serves no purpose except to free-up more dollars to be paid out as interest payments to the Bond Parasites.

With these European governments having no viable plans for excavating their economies from debt, and with the bankers capable of instantly sabotaging any plan with more debt-market fraud (even if there was a plan); lending these economies more money (and calling that a “bail out”) is still more suicidal insanity. All that is accomplished is to increase the size of these debts – and interest payments on those debts – still further.

This systematic looting can only possibly result in the complete bankruptcy and total destruction of each of these economies, as has almost been completed with Greece. Now these Financial Fascists want to both accelerate their economic rape, and to tighten the choke-chains of debt around the throats of these governments.

   

Mining Companies: Why Smaller Is Better

Gold Commentary

Having invested in mining companies for quite a few years now; one of the first lessons I learned was to never touch the large-cap miners. However, before I explain my own reasoning, I want to quote a Bloomberg article from this morning which attempted to cover the same subject:

New Gold Inc. (HGD) Executive Chairman Randall Oliphaunt, who helped build Barrick Gold Corp. into the world’s largest producer of the precious metal, says he prefers running a smaller gold miner than a big one.

Companies that produce fewer than 2 million ounces annually have more opportunities to increase output, said Oliphaunt, who was chief executive officer of Toronto-based Barrick from 1999 to 2003 and joined Vancouver-based New Gold six years later. It’s “very challenging” to expand a large, established gold company, he said…

The problem with this Bloomberg article is that while it goes to great lengths to document the fact that large-cap gold miners are gross under-achievers while the junior and mid-cap gold miners have  provided very attractive rates of return, it never explains why.

Why do smaller gold miners “have more opportunities to increase output”? Why is it “very challenging” for the senior gold miners to grow? It’s very simple: because large-cap gold miners (and large mining companies, in general) have the world’s most-idiotic business model.

All large-cap mining companies have a very simple “rule” they live by: they only want to develop/produce large mining projects. Let’s assume that it is not purely the egos of the suit-stuffers who run these companies which prevents them from getting involved in smaller projects. Why are most large-cap mining companies not interested in developing smaller mining projects – no matter how high the profit margins will be?

There can only be one answer to this question: they focus purely on larger projects in order to have the greatest total output while managing the fewest number of mines. This, in turn, implies a corresponding belief: that the more mines these large-cap miners have to manage, the more things which can go wrong.

The rebuttal of shareholders to this attitude should be automatic: “if you can’t stand the heat, get out of the kitchen.” These companies chose to be large-cap corporations. It’s especially easy for mining corporations to spin-off mines – either through outright sales, or simply setting up independent operations. When a corporation decides to become very large, this presumes administrative competence. A competent management team should not tremble in fear at the idea of running twenty, small, very profitable mines rather than five, huge inefficient ones.

This leads us to yet another question: why do smaller mining operations tend to be more profitable and/or efficient? We can answer this question simply by taking a closer look at the development of the mining mega-projects which these large-cap miners covet/demand.

It’s certainly true in mining (as in any other business) that the more outlets you operate, the more things which can go wrong. However, more unique to mining is the reality that as these projects grow in size individually, the number of things “which can go wrong” increases nearly exponentially.

 

U.S. Election 2012: Binary Insanity

US Commentary

Do they replace Tweedle-Dee with Tweedle-Dum; or does Tweedle-Dee get one more chance? This is the eternal question which confronts the binary minds of American voters every election, in their two-party political system which masquerades as a “democracy”.

While we can quibble over semantics, most people would agree that a democracy must demonstrate two qualities in order to be worthy of that term:

a) A government chosen by the people;

b) Whose actions reflect the will of the people.

It is abundantly clear that the United States political system fails both of those tests. Undoubtedly, most readers will reject this assertion. They will point to the voting process, and simplistically suggest that the mere act of voting means that whatever government emerges from the process was “their choice.” I disagree.

The 2012 U.S. election provides us the perfect opportunity to analyze the flaws of the U.S. political system because the two candidates are virtual clones of each other (skin colour notwithstanding). In Mitt Romney and Barack Obama; Americans have been given the “choice” between two of the most shameless flip-floppers to ever contaminate the political process.

The sci-fi cartoon comedy “Futurama” took this argument to its literal extreme: an episode featuring an election (in the future) between two actual clones – in a two-party system. The very pertinent point it made was this: if voters’ only choice is between two exact duplicates, in practical terms this clearly represents no “choice” at all.

However, even if this U.S. election was not a contest between two candidates who behaved as virtual replicas of each other, there is another extremely strong argument that the U.S. political system denies the U.S. voter any true “choice”: money.

One of the many unique “qualities”(?) of the U.S. political system is that during (and prior to) election campaigns, the U.S. media spends just as much time covering the race to raise money by the two parties as it does covering poll results. And it spends more time covering both those topics than it does in covering the actual campaign issues.

This in itself is highly revealing. What election “coverage” in the U.S. is now really all about is showing those who are stuffing money into campaign coffers whether they are getting their money’s worth – as evidenced by the poll results. This begs the question: who is stuffing these $billions into the bribe-receptacles of the two political parties? Simply put: the billionaires.

   

Renminbi Relentlessly Replacing Dollar As Reserve Currency

International Commentary

It is no secret that China is replacing the U.S. dollar with its own currency in more and more of its bilateral trading. It’s apparent to all that the renminbi will soon have (at least) a co-equal status with the dollar as the global “reserve currency”. Yet what is rarely if ever discussed in the mainstream media are the enormous economic repercussions of a world suddenly awash with a massive glut of surplus dollars.

In most respects economics mirrors one of the basic principles of physics: for every action there is an equal-and-opposite reaction. If farmers produce a bumper-crop of wheat and supply soars, then the price falls. Similarly, if (for some reason) the demand for wheat suddenly collapsed, the price would also fall – as both a jump in supply and/or a plunge in demand result in the same state: abundant/excessive supply. And the consequence of excessive supply is always a fall in price.

This economic “physics” applies in an identical manner to the world of currencies…eventually. In a global economy ever more corrupted by serial market-rigging; nowhere is this manipulation more blatant than in the world’s forex markets. Indeed, the world’s nations have openly declared that they are all competitively engaged in currency-manipulation; as denoted by the euphemistic term “competitive devaluation.”

For new readers, let me quickly summarize the (for lack of a better word) “principle” behind competitive devaluation. Through destroying the value of one’s own currency, the wages of workers (in real dollars) are driven steadily toward zero, and so (supposedly) this will allow a nation to under-cut its trade partners and export more goods.

The sick joke here is that with all nations destroying the value of their currencies (and the wages of their workers) simultaneously, no nation gains any “advantage” and the wages of workers are being destroyed for no reason whatsoever. This does, however, produce the paradigm of all currencies simultaneously falling in value, only the rate of decline of this paper-destruction varies.

This is why any time we see some talking-head refer to a currency as “rising in value”, it is an implicit admission that the person has no understanding of the global economy. If two people jump off the roof of a 100-storey building at the same time, and (while on the way down) one individual climbs on top of the shoulders of the other; that person hasn’t “risen”, he will merely go “splat” on the pavement a millisecond later.

The collapse in value of our paper currencies is accomplished through our morally/intellectually bankrupt central banks flooding the world with this (un-backed) paper. In other words, the entire global economy is already drowning in an ocean of these paper currencies. It is thus little surprise that these same central banks are now swapping their own paper for gold at the fastest rate on record.

It is in this context that we see a shift taking place where the U.S. dollar as (current) reserve currency is being steadily replaced by the renminbi. Some numbers here are in order. A recent article in China Daily noted that for much of Asia the renminbi is already the reserve currency.

A “renminbi bloc” has been formed in East Asia, as nations in the region abandon the U.S. dollar and peg their currency to the Chinese yuan…

And now seven out of 10 economies in the region – including South Korea, Indonesia, Malaysia, Singapore and Thailand – track the renminbi more closely than they do the U.S. dollar…

According to the latest report by the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, renminbi-denominated trade accounted for 10 percent of China’s total foreign trade in July. The figure was zero just two years ago.

From July 1 to August 31, global payments in the renminbi rose 15.6 percent, according to Swift as payment in other currencies fell 0.9 percent on the average[emphasis mine]

 

Prosperity Index Shows Capitalism Kills

International Commentary

The Legatum Institute recently released their 2012 “prosperity index”, its annual ranking of the well-being of the world’s nations. One might argue that mere economic prosperity is a very simplistic benchmark by which to rank nations, which is why it’s notable that this index is a much broader gauge than mere economic factors.

The Institute states that it’s rankings are derived from eight, separate categories of sub-rankings:

1) Economy

2) Education

3) Social capital

4) Safety and security

5) Opportunity

6) Personal freedom

7) Health

8) Governance

This makes this assessment both more interesting and more useful/meaningful. The term “prosperity index” clearly understates the scope of this ranking, and referring to it as a “quality of life index” might be more accurate (if slightly more cumbersome). Perhaps more importantly, as the Legatum Institute points out itself; these rankings provide an excellent insight into which nations are most likely to prosper tomorrow.

Categories like education, social capital, opportunity, and governance are especially forward-looking, in that nations which currently excel in these categories today are almost certain to outperform their peers going forward. Because of this, perhaps the most important aspect to these rankings is to look for nations which are either rising or falling in the rankings.

Not surprisingly, the rankings tend to be very stable; it’s not easy to rise in the rankings, nor is it easy to fall – as political/social/economic inertia tends to carry nations along a similar path year-to-year. For example, Norway has ranked #1 for the past 4 years. Denmark has ranked #2 over that same period.

Changes in a single year (either up or down) by more than one spot are unusual, and no nation in the top-20 rankings has risen or fallen by more than three spots in a single year. For example, the combination tsunami and Fukushima-holocaust only caused Japan’s annual ranking to fall by three positions, from 18th to 21st.

In this respect, the decline by the United States from 10th position to 12th position in 2012 says a lot of things. Let’s start with the “U.S. economic recovery.” For three years we have been forced to listen to the absurd hype about the U.S.’s mythical “economic recovery”, where it has supposedly been outperforming all the economies of the Western world – with a vast array of government “statistics” supporting this claim.

   

The Great Gold Scam

Gold Commentary

A recent question from an inquisitive reader on gold “leasing” got my mind focused upon that topic again, as the question involved the actual mechanics of these transactions, and my answer dealt with issues of legal title to that gold. This, in turn, led me to consider to what purpose/use all of this leased gold has been dedicated.

Many commentators (including myself) have generally assumed that the gold being leased by undisclosed entities was being funneled to traders to be shorted onto the market – as part of the general manipulation operations of the bullion banks. We know that vast amounts of gold are being ‘leaked’ out of gold stockpiles in this manner, since lease rates are always near-zero, and frequently negative. This encourages those desiring legal possession (but not title) of gold to lease heavily.

But what if all this leased gold is not being used as simple collateral to back trading positions? Could there be another (nefarious) purpose in these gold-leasing operations?

We know there isn’t any other legitimate purpose for all this leasing, since (apart from using it in trading) there are no legitimate business reasons for wanting mere temporary possession of gold bullion. As the gold-bashers themselves frequently observe, gold “generates no income” itself; so this leased gold must be used (for something) or there would be no purpose at all to these transactions.

Until recently, it would have been hard to conceive of even any other nefarious uses for all this leased gold, since there simply are not a lot of ways to capitalize on mere temporary possession of gold bullion. This all changed , however, in 2009. That was the year that the world’s central banks flip-flopped from being (massive) net-sellers of gold to net-buyers.

As of 2012, the world’s central banks are now massive, net buyers of gold; on pace to add more gold to their reserves than any other year in history. GFMS Ltd (formerly Gold Fields Mineral Services), the quasi-official record-keeper for the gold industry estimates that total purchases will approach 500 tons this year alone.

This begs an obvious question. Where is all this gold coming from?

It’s not coming from the gold miners. Currently, global mine supply is roughly 2,800 tonnes of gold per year. However, of that annual total 2,000 tonnes is already committed to the wholesalers who supply the global jewelry industry. With demand for gold by investors surging; more than 1,500 tonnes per year is siphoned out of the gold market by investors.

Note that by itself this already creates a large supply-deficit in the gold market, one which can only be addressed by (supposed) “recycling”. The mainstream media would have us believe that there is virtually an inexhaustible supply of gold waiting to be recycled each year. This myth is fueled by the record-keeping of GFMS, itself.

In the fantasy-world in which GFMS operates, supply perfectly matches demand every year – right down to the ounce. Gold inventories never change. If there is a supply-deficit of 1,700 tonnes in 2011, presto!, 1,700 tonnes of “recycled gold” appears in the marketplace to balance all the ledgers. You don’t have to be a cynic (like myself) to note that the only “gold” which can be instantly/magically conjured up to meet any level of demand is the “paper gold” which banks like Morgan Stanley have been known to sell to their Chumps.

 

The Road To Bullion Default: Part II

Gold Commentary

In Part I, readers were reminded yet again of the totally unsustainable parameters in the gold and silver markets. To be specific, manipulating gold and silver prices lower (for several decades) is resulting in the collapse of inventories – with the only possible long-term outcome being the collapse of the bankers’ fraudulent paper-bullion markets.

As with any other item, the collapse in inventories (and the increasing scarcity that implies) means that gold and silver prices must concurrently soar as the banksters’ paper-bullion scams collapse. Putting these two factors together, readers will soon see that the final rupturing of the paper-bullion markets does not necessarily have to result from any sort of formal default event.

Indeed, with the Banking Oligarchs in total control of both our crooked markets and our even more crooked market ‘regulators’, it seems highly unlikely that a formal default would be allowed to occur. Much more likely, as bullion inventories (most likely in the silver market) reach zero the servant-regulators will simply declare an indefinite suspension of trading in the paper markets.

If plummeting inventories are leading toward a default-event, yet formal default would not/will not be allowed to occur; what other mechanism could produce the inevitable rupture of these inventory-depleted markets? I hinted at the answer at the end of Part I: decoupling.

Certainly most readers could deduce for themselves what I was implying: a decoupling of prices between the (legitimate) “physical” bullion market and the corrupt, paper-bullion markets controlled by the bullion banks. However, while the bottom-line may be quite obvious, the path taking us to that final endpoint is likely not nearly as apparent.

In part, this is due to the fact that such a decoupling could be caused by a multitude of factors, including parameters which have nothing to do with the bullion market (directly) at all. For example, as the Crash of ’08 intensified and insurance behemoth AIG teetered on bankruptcy; the bullion funds for which it was guarantor briefly plunged in value. Obviously, had AIG not received its $180 billion in emergency hand-outs from the U.S. government and had been allowed to go bankrupt (like Lehman Brothers); then those bullion funds could have collapsed.

This may not seem like an especially dire event, especially if the funds involved were smaller, and thus had a lower profile than some of the mega-bullion funds in the marketplace. However, consider the inevitable human reaction whenever something bad happens to an investment very similar to one of our own.

All holders of bullion funds (and bullion-ETF’s) would immediately take a much harder look at their own holdings; to see if their own investments faced similar (or different) vulnerabilities. Here is where some seemingly insignificant collapse of a minor bullion fund/ETF could quickly mushroom into a market-ending event.

Regular readers are familiar with my frequent criticisms of the two largest bullion funds in the world: the bullion-ETF’s known (by their U.S. trading symbols) as GLD and SLV. My suspicions here are obvious: any close scrutiny of either of these two funds reveals a totally preposterous business model – fraught with massive counterparty risk for anyone foolish enough to hold units in either fund.

While readers looking for a more detailed critique can refer to previous commentaries (such as “The Seven Sins of GLD”), for the sake of brevity I will focus on just one glaring anomaly: the blatant, gigantic conflict of interest involving the custodian of each of these funds.

In the case of GLD (or the “SPDR Gold Trust”), the custodian for virtually all its gold is UK banking behemoth HSBC: the largest gold-short in the history of the world. As already noted; it’s nothing short of preposterous that the world’s largest gold-short is also the legal custodian for the world’s largest long bullion fund. It is the epitome of the cliché “the fox guarding the henhouse.”

   

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