Silver Remonetization Rumblings

A number of states are now considering remonetizing both gold and silver (see States seek currencies made of silver and gold and Colorado looking at gold, silver currency). Understand that the Constitution bans states from printing their own paper money or issuing their own currency. But it allows the states to make “gold and silver Coin a Tender in Payment of Debts” (Article 1, Section 10). Given the concern over the U.S. dollar’s stability, the states will likely run with this idea at some point in the not too distant future. Therefore, we should consider adding a third demand curve to the silver price equation.

Presently, the price of silver is driven by the convergence of just two demand curves: industrial and investment. The third, yet future, demand curve is monetary.

1. Industrial demand. About 50% of the demand for silver is industrial. This demand has steadily and consistently increased over the years, even in recessionary times, and there is no expectation that it will change. For most manufacturers, the price is inelastic, meaning that a change in price does not affect the demand. This is because silver is used in such small quantities that the manufacturers typically absorb the price fluctuations.
2. Investment demand. Investment demand includes paper (i.e. futures and stock) assets as well as real physical metal in the form of coins and bars. Investment demand has followed a more explosive path. For example, up until 2008, demand for American Silver Eagles was rather flat at around 10 million coins a year (e.g. 8.5, 8.9, 8.9, 10.7, and 9.9 million for the years 2003 through 2007, respectively). Then, in 2008, demand doubled to 19.6 million coins and continued to increase each year to the point where Silver Eagles are now selling at four times the number they sold prior to 2008. And this is with a nearly fourfold increase in the price of silver. Yet another inelastic price curve. This explosive demand for silver has also occurred in other countries around the world.
3. Monetary demand. Although silver is today no longer used as money anywhere in the world, its history as a monetary metal is well established. In fact, it is even better than that of gold. In the words of Milton Friedman, “The major monetary metal in history is silver, not gold” (Nobel Laureate Milton Friedman in an interview with James Blanchard at the New Orleans Investment Conference. November 7, 1993). The reemergence of silver as legal tender will come soon enough given the interest shown by the various states in this country.

The remonetization of silver in the United States will be incredibly bullish. To get some perspective on the supply/demand dynamics: If every American (that’s 350 million) were to purchase just two silver coins (or about seventy-dollars worth), the ENTIRE year’s supply of mined silver all over the world (i.e. 750 million ounces) would vanish. That’s if all the mined silver were turned into coins. But that’s impossible, since half of it is used in industry and another big chunk is used in jewelry. So monetary demand would have to go after the above ground silver inventory of approximately 2 billion ounces.

But it gets better. If the United States monetizes silver, then other nations will likely follow. We know it is already being entertained in Mexico, for example (see Mexico Mulls Silver Lining Against Currency Crash). Once the nations of the world get on board, then the above ground inventory of 2 billion ounces itself would go poof!

A major reappraisal of silver would then follow.

Silver Price Action for 2012-2013

In order to come up with shorter-term price projections, I used StockCharts‘ free charting services to produce the following 5-year silver, spot, weekly chart.

Given the trend line convergence (around the red oval) near $32 on September, 2012, and the Fibonacci Time Zones for May, 2012 and June, 2013, I suggest the following optimistic view:

1. Major price resolution by September, 2012. The contracting symmetrical triangle forming since September, 2010 (on the breakout over $20) will continue and resolve on (or shortly before) September, 2012.
2. Resolution will be to the upside. The resolution will be to the upside, with a resumption of the long-term uptrend (above the blue line since 2009 and above the orange line since 2002).
3. A steep climb into June, 2013. The uptrend will follow the green arrow to the price objective of $52, and any pullbacks will not break below the ascending blue trend line through June, 2013.
4. Shorter-term, meaningful pullback between May and September of 2012. Shorter term, I’m looking for a May, 2012 high around $36-$37 (at Fibonacci Time Zone 34) followed by a meaningful pullback to the $31-$32 area by September, 2012. This sets the stage for the steep climb into June, 2013 described previously.

The pessimistic view suggests a breakdown below both the orange and blue trend lines on or shortly after May, 2012, then a bounce that approaches the September, 2012 convergence area, followed by further weakness in the ensuing months.

Silver Price Projections Into 2013-2014

I availed myself of netdania‘s convenient (and free) charting services to produce the 10-year silver spot, monthly chart shown below. It is scaled logarithmically in order to equalize percentage changes in price—i.e. a 100% move of $1 to $2 displays on the same scale as a move from $5 to $10.

Consider the peaks in 2002, 2004, 2006, 2008, and 2011 (referenced by the yellow arrows). Notice that for the first 6 years from 2002 to 2008, silver was producing price cycles every 2 years. Also, notice that from the trough (bottom) to the peak in each cycle the difference was generally a double. That is, from the 2003 trough of $4-ish to the peak in 2004 of $8-ish it’s a double, then from the 2005 trough of $7-ish to the peak in 2006 of $14-ish it’s another double, finally from the 2006-2007 trough of $10-ish to the peak in 2008 of $20-ish it’s once again a double.

Had this pattern continued in the 2008 through 2010 period, we would have gotten a peak at around $34-$36 from a $17 to $18-ish trough for another double. However, the 2008 financial crisis came and cost silver a lot of upward momentum. It took all of 2009 and 2010 to regain it and then produce another peak in 2011. By then, a year late in arrival, the peak was higher at $48-ish.

Given these observations, what can we project going forward? I will suggest two possible scenarios.

1. Optimistic. If the low of $26-ish in December of 2011 is not exceeded, silver produces a pattern similar to 2008-2011, where a double from $26-ish to the $52 level is achieved in late 2012 or early 2013, then a pullback no worse than $42 (i.e. a 38% Fibonacci retracement), and finally a sustained run begins in late 2013 resulting in another peak in early 2014 at around $84 (i.e. a double from $42) to match the peak trend going all the way back to 2002 (i.e. the trend line hitting the peaks in 2002, 2004, 2006, 2008, and 2011 as shown in the above chart).
2. Pessimistic. A Lehman-style financial crisis occurs this year which crashes silver below $20 and it takes a full year to recover the momentum back to the mid-$30s. A run over $50 would not occur until the first half of 2014, if at all. In technical terms, this view suggests a broken major trend and a reversion to a longer term mean beyond the last 10 years.

The $50 price level has huge technical significance, since it was the all-time high in 1980 and it became resistance in 2011, followed by major pullbacks on both occasions. The next time we get there, the $50 price level will offer a lot less resistance and the pullback will not be as extreme. If it occurs in early 2013, then we’ll see a spike over $50 to the $52-ish target price and then trade below $50 for several months before resuming the climb. But, if it happens in late 2013 or early 2014, then the run over $50 will be explosive, similar to what occurred in late 2010 to early 2011.

The Coming War Economy

It seems that President Obama is preparing for war with Iran. From Massive U.S. Military Buildup Reported Around Iran:

In addition to some 50,000 U.S. troops currently in the region waiting for orders…President Barack Obama is deploying an additional 50,000 soldiers to be ready for ‘any contingency’ by March….Western military sources familiar with the American buildup on the two strategic islands tell DEBKA-Net-Weekly that, although they cannot cite precise figures, they are witnessing the heaviest American concentration of might in the region since the US invaded Iraq in 2003.

Assuming a prolonged engagement with Iran, the following series of economic events are likely to occur:

1. Higher oil prices. Oil prices rise from $100 per barrel to $150 and higher.
2. Worldwide recession. U.S. unemployment rate rises to 15-20%.
3. More fiscal stimulus. More money-printing by central banks to prop up failing banks and key industries.
4. Higher gold prices. A mad rush for gold as a hedge against currency risk. Silver tags along.
5. Higher commodity prices. Commodity prices rise even as demand for them collapses.
6. Higher inflation. The official rate will be 6-8% while the real rate will be more like 12-15%.
7. More deficit spending. Massive government-funded programs to reduce dependency on oil will be offered.

Even if only the threat of war is maintained, an external enemy like Iran (however real or perceived) becomes the perfect political cover needed to push a Keynesian-style fiscal stimulus, inflation be damned. It might produce enough of a short-term, economic kick to help the President sail through the elections. At least, that would be the hope. The consequences that have to be dealt with on the other side (in 2013 and beyond) are another matter.

My Strategy for the Coming Wealth Redistribution Event

Never mind the CPI number reported by the government (at around 3%), the real inflation rate is somewhere around 10% (using the SGS 1980-based methodology found at ShadowStats.com). That’s high inflation. And it’s likely to go higher as the Federal Reserve accelerates its money printing in further attempts to kick start the U.S. economy and finance the ever increasing national debt—the national debt is growing exponentially and is now on the vertical side of the slope (going past the “knee” some time in 2008; see Be Financial Cycles Educated). Although a little dated (February, 2011), these economic charts illustrate the ongoing problem.

If history is any indication, a massive inflation spike or possibly a series of intense spikes is in our future. It will destroy the life savings of millions. But you don’t have to be one of them. There is, in fact, a way to benefit from it.

The Strategy

The idea is to implement an arbitrage by going short financial assets and going long tangible assets.

The short is to hold a fixed interest rate loan on real estate property with these characteristics:

• Income-producing. The ideal property is income-producing (e.g. rental property) or with the potential to appreciate in an inflationary environment, such as farmland or land with mineral rights and a potential energy play (such as oil or gas). However, any real estate property will benefit from this strategy.
• High LTV (loan-to-value). A recently purchased home or refinanced loan will work.
• Longer term, fixed-rate loan. A 30-year fixed rate loan is the best.

The long is to hold a proportionate amount of tangible (i.e. non-paper) assets that will appreciate in nominal dollar terms (not adjusted for inflation) during the inflationary period. The two obvious candidates are petroleum and precious metals. However, for most people, obtaining petroleum assets of any significance is beyond their reach. When it comes to precious metals (i.e. gold and silver), they should be in your physical possession—if you don’t hold them, you don’t own them. Store them in a gun safe (bolted to the floor) or bury them two feet or more below the ground and do whatever you need to safeguard them. Having multiple storage locations is the best approach.

So here’s what happens with the arbitrage. Each year that the dollar devalues through rampant inflation, the value of your loan decreases, while the value of your gold and silver increases. Let’s take an example.

Suppose you get a 30-year, fixed rate loan of $200,000 on a $250,000 home (i.e. your down payment was $50,000). At the same time, you purchase $100,000 in gold and silver coins (American Eagles work the best). If the inflation rate is 15% and continues for the next five years, the value of the dollar will have dropped by about half (from $1.000 to $0.522 to be exact), and your gold and silver should have appreciated (in nominal terms) to double its original purchase price. Thus, after five years, two things will have happened:

• The loan has lost half its value (in real dollars). You are paying the same monthly mortgage in nominal dollar terms, but in real dollar terms (i.e. inflation-adjusted dollars) you are only paying half the amount, since the value of the dollar has been cut in half.
• Precious metals have doubled in value (in nominal dollars). At the same time, your gold and silver should have doubled in nominal dollars. You then have the luxury of paying off the loan, if you so chose, and have money left over.

You win on both assets through the inflation crisis, a kind of one-two punch.

Further insights into this approach can be found here: Deadly Dow 36,000 & The Secret History Of A 70% Market Loss.

Cashless Society: India Implements First Biometric ID Program for all of its 1.2 Billion Residents

Revelation 13:16-17, “Also it causes all, both small and great, both rich and poor, both free and slave, to be marked on the right hand or the forehead, so that no one can buy or sell unless he has the mark, that is, the name of the beast or the number of its name.”

“India has launched an ambitious program to fit each of its 1.2 billion residents with an Unique identification number (UID). Each number will be tied into three pieces of biometric data: fingerprints (all ten digits), iris scans (both eyes), and a picture of the face. Starting this month, the Unique Identification Authority of India (UIDAI) will begin processing people in various locations around the country. UIDAI aims to slowly roll out the program through February of 2011 and to ID 600 million people in the next four years!” (See India Launches Universal ID System with Biometrics.)

I knew it was technologically possible, but I didn’t believe it made economic sense for a country like India to do this. Yet, here they are taking the lead in this. The entire Indian population, representing about one-sixth of the world’s population, will soon be identified by hand (fingerprints) and face (both eyes and picture of the face), and all business transactions (i.e. social services, banking, licensing, etc.) will be conducted using this UIDAI (Unique Identification Authority of India). No need for credit cards, checkbooks, driver’s licenses, or any other type of ID. Just go up to the teller (or any authority requesting your ID) and put your hand or face to an optical scan and you’re done. Fast. Convenient. Secure. And so Orwellian.

Other sources: Unique Identification Authority of India–Planning Commission, Government of India; Cashless Society: India Implements First Biometric ID Program for all of its 1.2 Billion Residents

Argentina is at it again

The country of Argentina has been the poster child of what ultimately happens when a country takes on too much debt—i.e. economy collapse and social chaos. You can read about what happened 10 years ago from an Argentinean himself: survival-spot.com

Well, wouldn’t you know it, Argentina is at it again! Read this from an article written on Tuesday, January 10, 2012:

“The economy [of Argentina] is rapidly deteriorating, and street-inflation has surpassed 25%. Naturally, the administration of President Cristina Fernandez insists that inflation is not a problem, despite the Argentine peso losing 25% of its value against the US dollar over the last three-years (and far more against gold). Meanwhile, [President] Fernandez has…imposed capital controls, raided pension funds, nationalized private property, and taken control of the media… all in a vain attempt to delay the endgame. A few weeks ago, the government passed a package of new laws, essentially criminalizing public protest under the auspices of combating terrorism. The legislation, snuck in at a midnight session during the holiday period, provides severe punishment for various crimes under a Very Broad Definition Of Terrorism.” (Excerpted from: simon-black-another-consequence-of-economic-decline)

We’re not that far behind. Our government is spending over 55% more than it receives in revenues. (i.e. U.S. Federal Spending is $3.626 trillion compared to Tax Revenues of $2.322 trillion; see: usdebtclock.org) Our national debt is already over 100% of GDP. Almost as bad as some of the crisis countries in Europe. And who is the government borrowing all this money from? The Fed is printing most of it, of course. More than half of it is being printed out of thin air. That’s because Japan, China, and Europe are not buying U.S. debt. They have problems of their own to deal with, thank you very much.

I still believe we won’t see a U.S. financial crisis until the 2013-2014 timeframe. Nevertheless, whenever it is, it will come and it will not be pretty. I hope you’re preparing for the inevitable. If not, consider reading this guide for ideas: what-should-i-do