Silver, Deflation, Gold and
March 15, 2004
extracts from a commentary posted at www.speculative-investor.com
on 14th March 2004.
bullish supply/demand picture can be painted for silver. However,
while there is little doubt that for many years the amount of
newly-mined silver has been less than the amount of silver consumed
it should be noted that any analysis of silver's overall supply
situation is based on assumptions, which may or may not be correct,
regarding the amount of silver in storage throughout the world.
There is also no way of knowing how much silver will be 'dishoarded'
by private Indian investors in response to a price rise. In our
opinion, therefore, silver's true supply/demand situation is
The silver price has moved sharply higher since the middle of
last year, but in this respect it has performed in line with
most of the other industrial metals. Furthermore, we don't see
a reason why silver will suddenly start moving in the opposite
direction to the industrial metals so when the metals complex
corrects later this year -- we expect the other industrial metals
to peak quite soon (by May at the latest) and then pullback for
1-2 quarters before resuming their upward march -- silver should
is a monetary component to silver's overall demand as well as
an industrial component and for this reason silver will probably
hold-up better than copper and some of the other economically-sensitive
metals during the coming correction (a correction that we expect
will roughly coincide with a downturn in the stock markets of
the world and in global economic growth). In any case, once global
growth expectations begin being ramped downward gold should start
to handily out-perform ALL the other high-profile metals, just
as it did between late 2000 and early 2003.
As an aside, in the current environment a downturn in global
economic growth will NOT have deflationary consequences. On the
contrary, if it happens it will have inflationary consequences.
Here's why: The argument for deflation revolves around the enormous
existing debt levels, but under the current monetary system it
is this debt that all but guarantees there will be nothing other
than inflation as far as the eye can see. This is because the
debt dramatically increases the short-term adverse consequences
of deflation, removing deflation as a political option. On the
other hand, if debt levels were considerably lower then some
deflation would be permissible in order to stifle the surges
in commodity and asset prices.
But, the deflationists argue, the debt levels are so high that
the Fed will be powerless to stop the impending deflation. This
argument is false, though, because the Fed's power to create
currency is unlimited. For example, the total amount of debt
in the US economy is presently 35 trillion dollars, give or take
a trillion or two, but if the Fed chose to do so it could monetise
$35T of debt tomorrow. Obviously, the Fed would absolutely not
want to take such drastic action because doing so would render
the US$ worthless. It's plan, instead, will be to facilitate
enough inflation at any time to keep things rolling along but
not so much that there will be a collapse in confidence.
To argue that the US faces a serious near-term deflation threat
is therefore to argue that the Fed will choose not to make full
use of its powers; and this argument flies in the face of 70
years of evidence. So, when the economic data takes a decisive
turn for the worse over the coming months and deflation once
again becomes a hot topic in the financial media, don't focus
on the perceived deflation threat; focus on the policy response
to this threat.
Getting back to silver, we've observed that support and resistance
levels tend to have less influence in the silver market than
they do in, for example, the gold and currency markets, making
technical analysis of the silver market more problematic. However,
the below long-term weekly chart of silver futures paints a picture
of a bull market, albeit one that appears to be very extended
in the short-term. Our guess is that silver will peak at around
$7.50 and then spend about 6 months consolidating in the $5.80-$7.00
range before resuming its ascent.
Since the final
quarter of 2000 the T-Bond price has surged for 4-5 months following
each intermediate-term peak in the gold price. The below chart
comparison of bonds and gold illustrates this behaviour.
There are three
things we think are worth taking away from the above chart:
Firstly, the surge in the bond price over the past two months
marks the January high in the gold price as an intermediate-term
Secondly, if the pattern of the past three years repeats then
the next intermediate-term peak in the bond market is not going
to occur until May or June.
Thirdly and most importantly, the trends of the past few years
appear to be intact. The implication, here, is that although
the January peak in the gold market was probably of the intermediate-term
variety, it most likely was NOT the ultimate high for the current
leg in the gold bull market.
Now, we've previously discussed the possibility that gold will
make a peak of equivalent importance to its December-1974 peak
during the first half of this year. That might still be the case,
but we doubt that such a peak is already in place. Instead, the
markets seem to be repeating the pattern of the past few years
and one characteristic of this pattern has been progressively
higher intermediate-term peaks and troughs for the gold price.
Therefore, even if gold has seen its peak for the first half
of 2004 it should move well above its January high before the
year is out.
Regular financial market forecasts
and analyses are provided at our web site:
One-month free trial available.
©2002-2004 speculative-investor.com All Rights Reserved