Weekly Metals Post Game Show, 7/20

It's becoming common knowledge that the US Government borrows 40% of what it spends, and that the percentage is increasing (hey, freedom isn't free, punk). It should also be common knowledge, though I'm afraid it's not, that the law of gravity is far more likely to discontinue than the increasing burden of government expenditures fall (at least until the whole shithouse goes up in flames), and that this is true whether the economy "recovers" to some extent or not. So anyone trying to predict the zombie apocalypse needs to be aware of how much it costs the government to borrow. That's why I always have my eye on the ratio of the 10-year yield to hard assets. In the big picture, the yield itself doesn't really reflect the cost to borrow -- unless you assume the dollar's value is stable, in which case you're probably a time traveler (Welcome to our blog and send my regards to the Air Lords of Han!).

Now, take a look at the 1/4 oz gold coin on the left, and the pink circle on the 1gram gold nugget on the right. These are actual size.

Just 10 years ago, the government would've given you a 1/4 oz 'roo a year for the privilege of borrowing $1000 for 10 years. Now, you get a little over a quarter of a gram. Borrowing costs are getting cheaper and cheaper for the government as it grows bigger and bigger. Understanding how that's happening and why is the fundamental macroeconomic question of our time.

Heck, I have more than a quarter of a gram of gold in my average stool, on account of the edible gold flakes I like to sprinkle on my eggs (washed down with a Goldschl├Ąger mimosa, of course).

I purchased this from Amazon
Does the trend look like it will stop any time soon? Of course it's not only gold. The amount of oil the government pays you a year for borrowing $1000 is at an all-time low, having dropped from 1/2 a barrel to less than 1/60 of a barrel in little over a decade.

And of course we've been looking at the ratio with silver for well over a year, also close to its all-time low:

If you believe this trend will continue (and why shouldn't it) then either yields have to keep falling or hard assets will have to start going up fast (or both). How much lower can yields go? Will they become negative, meaning people will pay the government a fee for the privilege of lending them money for 10 years?

That's why I say the establishment economists and even outside-the-box thinkers like Nouriel Roubini, who say the gold bubble already popped with the so-called "blow off top" in August are nuts (an event precipitated by the drop in the US credit rating that raised fears it might get harder for the government to borrow... regarding which things have only got worse, with the debt ceiling being raised even higher with no end in sight). This is especially true at this point, when the so-called blow off top has merely been followed by what (by any rational measure) appears so far to be a mild correction:

Note, I will keep buying at the brown dotted line (above) and selling at the 40 day EMA (below), until the trade stops working.

Gold in euros hasn't even corrected, merely consolidating sideways for the better part of a year

Silver also has stubbornly refused to drop past its post-2008 trend line (purple)

On the weekly silver chart, the end of the wedge clearly beckons something big:

 As Trader Dan Norcini has noted, silver has tracked the $CCI closely. Note that the $CCI has reached a critical point of resistance, at the 200 day MA. This will be worth following. Whether that resistance can be broken or not will probably dictate the direction of silver's next move.


S Roche said...

More GLD withdrawals...

Kid Dynamite said...

"Heck, I have more than a quarter of a gram of gold in my average stool, on account of the edible gold flakes I like to sprinkle on my eggs (washed down with a Goldschl├Ąger mimosa, of course)."

quote of the week winner!

I haven't been to the liquor store lately... have they invented Silverschlager yet???

GM Jenkins said...

I haven't been to the liquor store lately... have they invented Silverschlager yet???

Supply is too tight. Also, you could turn blue

GM Jenkins said...

A fellow named FunkyMonkeyBoy is creating quite a stir at Harvey Organ's site (a site I don't visit, but saw FMB linked to us from the comments). Anyway, any objective silver bull (which I am) has to admit the picture FMB paints is coherent (unlike his antagonists. (He also links to the canonical bubble chart, which Louis had pulled out last spring, and Warren had compared to silver last year.)



"I would definitely say what we saw with the whole gold/silver celebrity movement in past couple of years was a mania, this is self evident by some of the posters on here who bought into gold/silver on the advice of others (aka Harvey and the other charlatans) without knowing what they were getting into and the fact the price has collapsed just as fast as it rose.

Just because every single person in public (i.e. teenagers, grannies, housewives) didn't know about it doesn't mean it's not a mania.

Look at manias in the past, christmas toys manias, trading card manias, tulip manias, etc... all were proven to be a manias in hindsight, but not all members of the public were involved at the time.

It's ludicrous to just because your neighbors don't know buy gold/silver that it can't be in a mania phase within a section of society.


As i said before, historically silver prices are more likely to go sideways for years and years and years (even ignoring inflation). I see no physical demand to support a price rise at present. The gold/silver retailers are no doing special offers to try and sell their stock. Gold/Silver miners are more than willing to sell their physical at COMEX set price."

Warren James said...

I think Funny Monkey Boy is both right and wrong at the same time (which we know is possible). For me, the crux of the 'bubble' matter has been best expressed by Kid Dynamite (my paraphrase) who suggested that the sentiment/psychology/mania was well noticed (and completely exploited) by the big funds, who actually move the market.

Investors 'seeking alpha' about precious metals, are unlikely to get it from the likes of Harvey Organ's blog, or even Zero Hedge for that matter - as summed up really well here http://noahpinionblog.blogspot.com/2012/07/how-zero-hedge-makes-your-money-vanish.html. It's one of the reasons I'm so interested in the social media manipulation, since I imagine in today's world the various bubbles get planned, pre-packaged and sold on and what appears in the internet blogs is merely a component of that package, probably as a line item on page 3 of the packaged proposal. And I assume the banksters, in their efforts to dredge/sludge/wring the last remaining bits of productivity out of the last remaining productive people left on the planet, have probably found some way to make derivatives of said packages and probably have derivatives on the derivatives.

The only hope we have of side-stepping the people in charge of this god awful mess is to find something spectactular, a grand induction like FOFOA's thesis, and notice it through unnoticed things (like the GLD inventory changing). In any case, the hedge funds only amplify the effects - like manipulation, they can't stop the core trend. At the minute, the core trend is what GM describes at the start of this post - the distortion of the cost of borrowing money is hitting a mathematical limit and something has to give at some point. My personal wager we're still in the 'smart money' phase of silver. A really big bubble needs a large amount of 'social and cultural saturation' to really take shape, and silver is not anywhere near that index. I'm using the Australian housing bubble as my reference point.

Tony said...

Hi Warren,

I wholeheartedly agree with your assessment that the only way to navigate these waters is through the likes of sites like FOFOA. Speaking of, I think he offers one of the best explanations on whether or not the gold bubble has popped:


Warren James said...

Thanks Tony.

This thread seems appropriate to add Nickelsaver's gold chart analysis (from Jan'2012). He has squashed the canonical bubble curve to see if it fits the August 2011 gold price spike - a decent fit IMO [link here].

I find it interesting that some activity acts like fractals. It reminds me there's a lot more at work here, in this market. i.e. it's possible for entire subsets of reality to exist and operate inside larger sets of reality (this topic requires beer, to explore further).

costata said...

"...this topic requires beer, to explore further"


Cheers Warren

Vincent said...

I think supply and demand will play a role.

After years of research I find myself back where I started.
What a waste of time.
The simplest answer is usually the correct one.
Best wishes to all