Monday, April 15, 2013

Gold and Silver Prices Plummet. Now What?

So what more can be said about the largish decreases in gold and silver last Friday? Can I add anymore from what you have already gleaned about the reasons we lost 5% and 6% respectively in the PMs on one day?

I too have read with interest (as you do when the savings of your hard earned work are at stake) the many and varied views from the shrill to the rude and uncivil on this latest massacre. From the bankers are demons to the goldbugs are stupid. Every troll on earth seems to have hit the PM blogoshere with all they had.

So what's happening?

Dan Norcini was the most level-headed commentator on this issue during the weekend. Here's my summary of where we are at.

In 2008, the system was on a brink of a complete deflationary catastophe. Deflation is the worst case scenario for a system geared only for growth. As we know, large amounts of QE was injected into the system to keep liquidity flowing. This had the effect of inflationary expectations rising as punters assumed the economy would pick up and the money base increase in proportion to hard assets. The PMs shot too the moon at $50 silver and $1900 gold.

But in the following years, as the economy did not pick up and growth turned negative, expectations turned deflationary once again. Banks were not lending the newly created money. How could they, their balance sheets were abysmal and people didn't have the increased incomes to borrow that money.

So the new and existing money went elsewhere looking for positive yield. To specific sections of the economy like stocks and bonds. Even at 0.5%, 10 year bonds looked cool. Even the little old NZ dollar looked better than even the euro.

So here we are, QE being regarded as ineffectual, commodities dropping fast on deflationary expectations and bubble mania in certain areas. Today, the only way huge hedge funds can get yield is on the stock market and in bonds (just). This is why they are liquidating the PMs faster than pig runs to mud and running elsewhere.

So what next. A few views have come out that are worth mentioning. My thinking is we could still see some downside. Maybe quite a bit more. After all, who really knows the value of 'things' in this new deflation anyway. Maybe the old ways of value setting are coming to and end and new ones will occur. If I read him correctly, this is one of Jim Rickards ideas. His view is the Fed simply cannot allow this deflation to continue. The sole reason they exist is to keep inflation in the system in order for banks to make money and own assets. The only tool left for them at the end of the game will be gold revaluation. Since QE is having less effect, they will announce and deploy a method of quickly driving the price of gold to a level that will naturally create the inflation they require. Maybe this will hit $5000 or $7000 per ounce. You see, if gold does this, then all assets will then rise in price to meet the new base.

Maybe. But the kicker in all this is public confidence in currencies. The more the central banks play with QE etc, the closer the public come to walking away from paper and causing a systemic collapse. The Fed will need some of this mayhem anyway to do the gold revaluation scheme. But they will need it in a measured way. Measured mayhem, hmm...

Anyway, there's some thoughts.

Gold in New Zealand dollars: $1708.56 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $29.21 per oz
Previous all-time high: $59.19 per oz (30 Apr, 2011)

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