I think there is one certainty that we need to come to terms with in the silver community, at least in the short term, and it is this. The notion that inflation will drive the silver price up has hit the one-two punch of the Law of Diminishing Returns and The Cartel. This became apparent after the last QE, (whatever number we’re on, I’m losing track) when silver was up only $3 or so after the Fed announcement. It should have been up at least $7 or $8 that day with more follow through the next day. Didn’t happen. Look where the price is now.
I will repeat something I stated in my last article, A Note of Caution To Our Silver Camp, unless there is war, the imminent threat of war, a COMEX/LBMA default, or a U.S. debt downgrade, I can’t see a catalyst for the upside in metal prices in the short-midterm. I still think we might have some work to do on the downside, especially if the stock market continues to sell off. Gold hit the 38.2% retrace at $1285 or so which I suggested in the last article. Silver went below my $21 suggestion. (Yes, they were just suggestions based on what I thought was probable, not “predictions.”) After silver bounced off $20.25 I posted on SGT Report that I wouldn’t be in a hurry to call a bottom right away. I was too late. My advice went unheeded (again) as the bottom callers started trumpeting their horns.
Now the price has dropped below $20. To repeat- I think if the stock market continues to sell off then the metals will go down also. Gold could go as low as a 50% retrace from $250 to $1921 (I’ll let you calculate it, I don’t want to scare anyone) which by the way; we saw back in the 70′s when gold went from $200 back to $100 before it went to $850. I don’t think it will really go that low, but I’m just trying to mentally prepare you. I think silver will bottom before gold, but who knows where it’s going in price? Maybe we’ll even have a default and get a real bottom in these metals.
I think all of us who have bought metals firmly believe that hyperinflation is probable, if not a certainty in the long run. John Williams said last year that we would have hyperinflation by this Fall. Now he has backed off this prediction and said next year. I think he will be wrong on both counts because as I stated in my last article, this whole mess will take years to play out. The one thing that we are up against that no one seems to consider is that in the long run the deflationists will be right. This whole hellish mountain of derivatives will have to unwind at some point. Deflation, not inflation, is the default economic reality we are facing every day barring intervention from the money printers. Thus, the Fed is artificially fighting the deflation with inflation.
What I am saying in other words is that unless, or until, entities (banks, governments, people, etc.) feel that the money that is printed to fight deflation is too outrageous (and thus worthless), we will never reach the point of hyperinflation because hyperinflation is a psychological response to currency debasement. It is not to be confused with garden-variety inflation which is what we have now; albeit to us in this camp the money printing already seems ridiculous and wrongheaded. There is no velocity of money right now so the Fed is off the hook for the moment. But I predict in the future that Bernanke will go down as one of the biggest imbeciles in economic history. History has a way of catching up with things.
Moreover, I think we could be in for a long wait for silver to climb back up in pricing. It seems more probable to me that with each passing day there will be an abbreviated stage two for silver or no real stage two at all. Time will tell. We may have to wait for one of the criteria I mentioned above or even for the hyperinflation for the price to really take off to the upside. The latter would mean going from stage one directly to stage three (where price rises in parabolic fashion). Again, this hyperinflation could be a long way off. But if and when it does occur, yes, the parabolic move would be breathtaking, especially if the price is still pounded down below its real, fair market value. In the meantime I am just cautioning that it may take an extraordinary amount of patience going forward. Hopefully, I will be wrong. As the trader Brian Shannon is fond of saying- “the shorts will either scare you out, or they will wear you out of the market.” Something to keep in mind.
I noticed last week that the interest rate in the 10-year note began to rise. I remember seeing a chart a few years ago that showed a direct correlation between the rise in interest rates and the price of gold. Maybe someone proficient in this type of thing could post that somehow. The point being it’s a myth that rising interest rates would kill the prices of the metals. In the very short term, maybe. But not if interest rates rise because of fears of currency debasement. The fact is if interest rates start to rise too rapidly it demonstrates the loss of faith in that particular currency. Thus, entities start buying metals in anticipation that hyperinflation may be in the cards.
Finally, when the bank holiday occurs, which is years away if I am right, the sheeple are not going to flock to metals, at least not right away. Cash/FRNs in your hand will be scarce. There will be a panic for cash because the ATMs will run out very quickly. The banks will be closed. So I would suggest starting to stockpile some $1 and $5 bills. Lots of them. Places of business may literally have to shut down if they can’t make change. Places like your grocery store or a restaurant may offer you a 10% or 20% discount if you pay in singles, for example. Just some things I’ve been trying to think through to prepare.
P.S.- As I get ready to send this over to SGT, I saw an article by Gold Money entitled ‘The Deflationist Error‘. I glanced through it because, alas, it contradicts my assertion that this whole mess will ultimately end in deflation. Let me be clear. I think we will suffer hyperinflation first, followed by a massive deflation to follow which is what I tried to show above. I will let the reader decide for themselves. BTW, silver and gold historically perform just fine in a deflationary environment.
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Contributed by Tom Goehle of SGT Report.