Silver Breakout Ahead

The silver price—range bound currently—is seen by many as a dead asset. Exhaustion has set in among both sellers and buyers, after last year’s epic volatility. It is hard to say how long the lethargy will last in the silver market. But as we have seen so often, just when no one is expecting it, the price of the white metal can make a powerful, unstoppable move to the upside.

It looks as though last year’s low of roughly 18.30 or so, will provide powerful support against shorts trying to take the market price to new depths. This support, in my mind, is all the stronger when you remember how at the end of December the paper pushers were able to knock gold right down to its June 2013 low—but they could not do the same thing to silver. All of the negative sentiment, the gloomy calls from investment banks, and talk of silver surpluses and gluts on the market still could not break the market for the white metal. I should also add the same was true for many of the leading silver mining stocks out there—when they were pressured lower in December, they too did not break down.

Although silver has been knocked lower by those who have a bullish view on conventional stock markets as well as the global economy, it is important for investors not to stay too long at the equity party. And they certainly should not look in the rear view mirror for too long. A lot of good news has been priced into global stock markets—with a lot of people likewise claiming that the worst is behind us in terms of the threats from all sorts of overleveraged financial entities around the world.

My advice-- notwithstanding the siren song of those claiming that a very long list of potential risks to the western economy can now be ignored-- is to keep your focus on the macro global picture. This is all the more important as conventional equity markets, along with major bond markets, may be signaling a shift, one where economic reality—as opposed to the fantasies dreamed up by our current monetary masters—returns to the fore. This reality is one of economic contraction and a consequently shaky banking system, in need of near constant bailouts from western central banks and governments.

As I write this, news comes that the Chinese are having to deal with credit problems in their banking system that seem eerily similar to those experienced by us westerners in 2007. It looks as though the temptation to build overly elaborate credit contraptions is once again coming back to bite people you know where—and that it therefore may have been premature to call an end to the crisis that began nearly eight years ago.

And the cracks in the happy days are here again argument can also be seen in continuing, recurring complaints regarding the way the precious metals are priced—and to what extent the pricing system based in New York is simply one big Ponzi scheme, as elaborate as any of the phony bank balance sheets that so many now think can simply be made solvent by wishing them to be. You should recall this week how many Germans seem to be unhappy with the manner in which the metals trade, and to what extent their views may positively impact future precious metals prices.

Whether or not you believe the views of those who talk about market manipulation, you have to admit that with something well over 200 paper, or electronic ounces of silver trading for each real ounce, that the price of silver is not determined by real physical demand. When one remembers that the Germans are also having little success getting their gold back from New York, you have to wonder if some rather large problems in the paper pricing system aren’t in fact starting to appear—perhaps to become a big deal in the years ahead.

We can talk about silver as an industrial metal—and it is an important one at that – but ultimately what drove silver from below 5 to over 40 in period from 2003 to 2011 was about monetary, or safe-haven demand. It also didn’t hurt that large parts of the emerging world—most notably China—have liberalized and continue to liberalize their bullion markets. There is even increasing talk of competing markets for the pricing of precious metals in the Far East. After this week’s complaints about the highly geared (some would say phony) precious metals markets here in the West, one has to wonder if we aren’t very close to physical demand beginning to overcome paper supply. There are rumors, after all, that China has the second or third largest gold hoard in the world—and it likely is a hoard that could grow to be number one given the Chinese government’s determination at adding to it. Someone still thinks that accumulating physical precious metal is worthwhile—and those people are likely the ones who will, with time, be getting a larger and larger say in what price should be attached to those shiny bars of gold and silver bullion in the future.

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University of San Diego Lecturer

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