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XMFSinchiruna (26.55)

J.P. Morgan: "Gold is Money. Everything Else is Credit."



January 26, 2011 – Comments (11) | RELATED TICKERS: CDE , HL , AXU

No, that's not a capitulatory concession by Jamie Dimon, but rather a quote from the company's namesake from the year before the creation of the Federal Reserve. It's as true today as it was then.

With that in mind, I strongly recommend that Fools give John Embry's latest article a careful read. John is chief investment strategist with Sprott Asset Management, the wildly successful hedge fund that has been on the correct side of the gold and silver bull market from the beginning. He states essentially everything I was trying to convey within my recent article "Your Last Chance to Go for the Gold and Silver", only he does so with greater effect.

As Dan Norcini reminds us, these inevitable corrections are essentially an exchange of assets from weak hands to strong. The algorithm-led momentum chasers of the big money world, combined with the least certain and most recently arrived portion of the retail public, has just been washed out of the sector with incredible speed. Enter the stronger hands like you, me, and longer-term oriented big money interests to accept unsavory gift, and we are left with a far stronger base from which to mount the next upward leg.

Again, like Embry, I am less concerned with divining the absolute bottom of this correction than I am with ensuring that I systematically adapt to the condition with continued and accelerating buying activity. If the president's speech about spending freezes has you spooked, then you may not be a strong hand in gold. Projections for this year's deficit alone just ballooned to $1.5 Trillion. The state and municipal debt crisis has yet to explode, and yet its detonation is unfortunately 100% unavoidable. The California pension fund (CALPERS) is being forced to accept 21.4 cents on the dollar for Lehman bonds ... a mere sign of things to come as these funds have yet to absorb their full derivative losses.

We're starting to see a bid come into the pm equities even on weak days for the metals like today. That's a sign of the strong hands coming in. You want to follow the money flows of the strong hands, not the weak ones. Buy into weakness, and raise cash into significant strength. This manufactured sell-off is designed to shake you out of your positions so that wealthy momentum traders can cycle their capital back in for a repeat ride on the end-of-year surge. Invest in gold and silver on your terms, not theirs. Keep some powder dry for $1,280-$1,290 if you consider that a likely critical support, but continue to hunt for anamolous bargains on the way down. The USDX has broken down through 78 yet again, and (absent another acute Euro crisis in the near-term) any disposition to remain below that threshold is likely to signficantly hamper the designs of the gold shorts to extend this correction to $1,280 or deeper.

Long and strong, and getting stronger every day...



11 Comments – Post Your Own

#1) On January 26, 2011 at 1:42 PM, Valyooo (34.27) wrote:


1) Silver is at the same price it was exactly 2 months how come 2 months ago you were raising cash and now you are aggressively buying if its the same price?

2) Can  you please give me some examples of times in the past where fiat currency has collapsed and reverted to metal as money?  I can't name any, although I do believe you that it has happened, I just don't know very much about the history of money in this aspect.

3) Can you also please tell me where you and a bunch of other people are getting this data that silver demand is outstripping supply?  Again not doubting you but I have asked a bunch of people and never got a reply.  I would rather track this myself than have to rely on other people's blogs.

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#2) On January 26, 2011 at 5:01 PM, rfaramir (28.64) wrote:

I'm not Sinchi, but...

1) Two reasons. a) the money supply is bigger now, so the same nominal price is lower now in real terms. b) I'd assume that 2 months ago, while prices were rising, he was *starting* to sell, bit by bit. Then as prices crested in December, stopped selling (maybe one last splurge once a top was seen), waited while they fell, and fell, and fell, and now he is *starting* to say it may be time to get back in. But notice that his gold target for buying is lower than the current spot, so he can't really be saying "buy now" but rather "buy soon".

2) John Law's paper currency in France collapsed back to silver francs, US Continental Congress paper ("not worth a Continental") led to "No State shall ... make any Thing but gold and silver Coin a Tender in Payment of Debts" in Art. I Sec. 10 Cl. 1 of our Constitution. Germany's Weimar Republic paper gold marks were replaced by Rentenmarks, which were not directly redeemable in gold but were indexed to gold bonds. From the worthless currency was recycled into paper, used as wallpaper, and exported as curiosities to foreigners (esp. Americans).

3) I suggest going to your local gold and silver exchange. They'd know for sure. If the price is artificially suppressed, they probably won't sell what they have at that low price without an extra premium because they can't actually re-stock at that price because of the shortage.

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#3) On January 26, 2011 at 5:35 PM, 100ozRound (28.51) wrote:

Valyooo - here is a good presentation from the CPM group from May 2010.  I'm not sure if the supply/demand ratio has changed much since but I think it is a good guide.  I think you'll find it informative:

There are also yearbooks for gold and platinum group metals as well.

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#4) On January 26, 2011 at 6:10 PM, XMFSinchiruna (26.55) wrote:


Fair questions indeed.

1.) I'm not trading in bullion, but rather in the equities of companies that mine and/or discover the stuff in the ground. Many of the relevant stocks are down substantially from their recent peaks in the midst of this dramatic sell-off. I have been able to trade around 30% movements in several of my favorite stocks, which I would characterize as a significant pullback. They are each still the very same company they were in December when I paired positions into strength, but today they are 30% cheaper. It is difficult for me to provide specific examples because I am actively trading, and I have quiet periods to await with respect to those transactions.

2. Gold never stopped being money. It's not about a passing of the torch from paper to metal, but rather a resuscitated understanding of the nature of gold. J.P. Morgan understood it. Even Alan Greenspan gets it. And now we see China and Russia's central banks altering their reserve currency strategies in parallel with this emerging realization that no fiat currency regime will ever strip gold's immutable role as the one form of money that's immune to debt and counterparty risk.

Our nation's original gold-backed currency regime was itself a reversion to gold following a tumultuous period of experimentation with fiat currencies:

Monetary issues became acute during the War for Independence. The Congress had authorized the printing of large amounts of inconvertible or fiat paper currency. A form of payment was badly needed to pay the soldiers and purchase supplies. Without backing in gold or silver, the “Continentals” (as the notes were called) quickly declined in value. By 1780, it took more than 100 Continentals to equal one gold dollar.

Similar problems existed on the state level where local authorities printed fiat paper money. Rhode Island, for example, issued currency that quickly dropped to nearly zero in value. The legislature responded by proclaiming that this paper was legal tender and had to be accepted as payment for debts. An interesting situation followed in which creditors actually hid from debtors in order to avoid taking the worthless paper.

Consider this exerpt from a letter George Washington wrote to a colleague in RI following the dramatic failure of its paper currency:

"Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice."

Here's a little more background on the colonial currency experiences as told by representatives of the Federal Reserve Bank of Minnesota.

There are far too many examples to choose from to make this the place to enumerate them. Most recent examples involve not a direct reversion to gold and silver as official currencies, but rather result in dramatic revaluations of existing currency to mere fractions of their former purchasing power. This is a tricky form of sovereign default on debt, and in each case the holder of gold would have been spared the ravages of the corresponding debasement.

If that's a particular area of interest to you, I recommend you take a few hours and start Googling. :) 

3. Here again, I lack the time to adequately address your question. My own understanding of the tightness in the physical silver market is the result of countless hours of ongoing research drawing from scores of disparate sources. I have been, and remain in regular contact with representatives from several major bullion retailers. I have invested the time required to survey the reams of analyses by Adrian Douglas, Ted Butler, and other accomplished names in the field. I am familiar with the extreme difficulty that Sprott Asset management encountered recently in procuring physical silver to back its new silver ETF, involving 3-month delays on delivery from sources that are purported to be liquid with physical backing. I regularly track sales statistics from the U.S. mint, commitment of traders data from the world's major futures exchanges, and mine production data both industrywide and one key producer at a time. I am in contact with professional silver traders, as well as gifted amateur traders. I correspond with countless mining industry CEOs, and request of them their characterizations of trends in offtake demand relative to mine supply. I attempt to keep separate track of the Asian retail market for physical investment silver, and extrapolate emerging physical demand from the growth trajectory therein.

Short of inviting you to quit your job and move into my office as a permanent fly on the wall, I am not aware of a quick or easy way to convey to you how I go about maintaining my understanding of the nature of tightness in physical silver supply. It is a full-time undertaking.

These questions you have right now are some of the very same questions I had when I began looking into these topics 5-6 years ago. There was not then a comprehensive source available to answer my questions, and nor was any one person available to address the thousands of tangents I wished to explore. So I dove in, and ultimately made it my profession to analyze the space. If you have the time and the inclination, I strongly encourage you to do the same .. it's a fascinating set of inquiries into topics that few people have really explored thoroughly.

I will say this, the crux to understanding the paucity of physical supply lies in investigating the nature of the paper leverage to notional physical silver. Paper contracts floating through the LBMA that are meant to behave like liquid physical silver (and gold), but which in truth are leveraged against the above-ground supply many times over. When demand reaches a certain pivot point, that bluff will be called, and the true nature of the physical shortage will be understood by all market participants.

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#5) On January 26, 2011 at 7:37 PM, Valyooo (34.27) wrote:

But how will you know when its over?  If silver shoots to silver how well you know if thats the peak or if it wil hit 2000?  I have read on my own that the demand outstrips supply...but what I meant more specifically was, how do I keep tabs on it...for instance how will I know when demand finally is at par with supply.

I would love to quit school and be a fly on the wall in your office haha. My problem...well to me it is a problem, others wouldnt see it as a that I want/need to know everything.  I dont want to devote all of my time to knowing silver inside and out...I also want to know gold, banking, insurance, other metals, other countries, railroads, tobacco, utilities, healthcare, oil, gas, media, tech....everything ever.  In the long run it will probably pay off because I will be well educated in a lot of aspects and be able to take advantage of different opportunities, but I will get blindsided a few times in the meantime when I make a trade without understanding every detail about it and get caught off guard.  However, this is why it is so nice having access to bloggers like you...I can form initial hypothesis and then have you back me up on it.  Sorry to bother you with so many questions all of the is not that I am lazy it is just that I try to spend all of my tim learning and if there are any short cuts I am more than happy to take them, but if there are not I am cool with doing the hard work.

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#6) On January 27, 2011 at 8:14 AM, XMFSinchiruna (26.55) wrote:


I don't know where gold and silver will peak... no one does. But I am 100% confident that it will be substantially above $2,000 gold and $50 silver ... with $100 silver remaining a very strong likelihood. I am also substantially confident that prices will settle into a no normal at extremely elevated levels rather than spiking back down as they did in 1980 ... (that is unless Bernanke pulls off a miracle and magically mops up liquidity, shrinks the Fed's balance sheet, and raises interest rates into double digits without destroying a limping economy). 

I know that the physical tightness combined with growing investment demand will take silver above $50 ... I've known it since silver was $6. At $50, I will reduce my silver exposure, and will trim further on the way up to $100. I'll keep some on the table for the possible hyperinflationary blowoff top, but it will then represent only a fraction of booked gains.

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#7) On January 27, 2011 at 9:18 AM, b33rnuts (< 20) wrote:


Thanks for all the great PM info you have shared over the past months.  Your insights have helped me establish nice long positions in SLW and GPRLF.

You may have covered this in the past, but I was wondering what are your thoughts about holding physical silver in lieu of or in addition to silver stocks.  I'm primarily interesed in if/why it's a good idea.  I'm not up on the buying/holding/selling of physical (especially non-coinage, such as rounds/bars from apmex, kitco, great panther, sunshine, etc) and uncertain if it is a necessary addition to my current holdings.  If so, what % exposure (relative to silver stock holdings)  to physical makes sense.

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#8) On January 27, 2011 at 10:39 AM, XMFSinchiruna (26.55) wrote:


That's an excellent question, but a really hard one for me to answer for you. I have always advocated some physical exposure, but decisions of how much, at what price, etc. I have chosen to leave to the individual investor. I cover mining equities primarily, and helping Fools to select the best among them is my role here. If you do decide to go for physical, APMEX is a very reliable source.

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#9) On January 27, 2011 at 11:23 AM, b33rnuts (< 20) wrote:


Thanks for the reply.  I actually have a preference for holding securities rather than physical (as it is part of my 401), but it kills me to leave other investable funds sitting in .25% interest bearing accounts when we seem on the cusp of once in a lifetime opportunities in PM.

Part of my underlying questions regarding holding physical I think is my uncertainty of how it's stored value might be redeemed at a later date - which could be many years down the road.  I have a feeling that known coinage (eagles, maples and the like) might be more "liquid" either directly in a transaction or conversion to convential currency via a coin shop, bullion broker, etc in the future due to their familiarity.  I don't really know if the apmex rounds and those from other "mints" would be viewed has having the same credibility stored value (in spite of the fact that they are .999).  Appreciate any thoughts you or others might have in this regard.


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#10) On January 27, 2011 at 11:48 AM, XMFSinchiruna (26.55) wrote:

APMEX bullion rounds and bars will always be easily transferrable. They also offer IRA-compatible products that can be deposited within an IRA.

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#11) On January 27, 2011 at 3:27 PM, Valyooo (34.27) wrote:


I didnt really mean "at what $ will silver have topped", I meant "what would change for you to stop being bullish on silver".  When demand is less than supply?   When Bernanke announces no more QE?  When debt crisis are lower than usualy?  Or never?  Be honest, would you ever turn bearish on silver?

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