The Mother of all Buying Opportunities in Silver
Bravo, Fed! Bravo, Plunge Protection Team! Bravo, gold and silver cartel!
It's been quite a show for the past few days. Gold is down 10%, silver 20%! While we were overdue for a correction in gold and silver, this one stands out among all previous corrections as by far the strangest! Previous corrections, like the enormous one in June of 2006 that sent investors like myself... not yet confident enough in the bigger picture... to do a little panic selling and take some hefty losses. I learned a valuable lesson in the months that followed, as each and every equity I took a loss on swiftly recovered and broke through to post large gains in the ensuing year.
Let me digress for a moment to compare and contrast these two corrections. First, they are similar in that both occured suddenly, when least expected, and on the back of a markedly accelerated upswing during previous weeks. In contrast to the June 2006 correction, however, the present one is taking place in a wholly different context of underlying fundamentals. That is to say... other than the technical factors indicating we needed to consolidate... every event of the past week should be sending gold and silver to brand new highs! The upward price pressure that's underlying this technical (concocted?) correction is too great to be imagined. Let's stop for a moment to consider what has happened and what it would normally mean for gold (and, by association, silver).
First, Bear Stearns was drawn and quartered, and then handed over to JP Morgan (which, we must remember, is likely to be a member bank of the Federal Reserve!!) for a price less than the value of Bear's Manhattan skyscraper! The $30 billion of YOUR money that was used to back the deal is inflationary. The 75 basis point reduction in the Fed Funds rate and at the dscount window, which were announced Tuesday, was a sharper reduction than the 50bp cut the market expected on average, and this too on any other day would have sent gold higher. The term auction facility created by the Fed in December has pumped $210 billion into the system, while a further $200 billion was just promised through a new term securities loan program announced Sunday. So just there we have a $440 billion tally so far of money the Fed has magically appropriated in its attempt to stave off a systemic collapse of the financial markets. There were several "liquidity injections" prior to December as well, but frankly I've lost count. And so has everyone.. because beginning in 2006 the government ceased publication of M3 data... which is the primary tool necessary for tracking the money supply and forecasting inflation (see prior posts).
Silver, Silver, Nowhere! I received an e-mail from APMEX this morning... one of the nation's leading bullion dealers, indicating that they are low on silver and that the sales portion of their website is being taken down for a capacity upgrade to handle demand. In the meantime, they are taking telephone orders only for a minimum purchase of $5,000!!! This is unprecedented. Bullion-related blog sites are reporting silver hortages nationwide, both at neighborhood coind shops and at large regional distributors. The confluence of severely constricted physical supply and a deep correction in the spot price has not occured in the years I've been watching silver, and i believe this portends a very short-lived correction that will be followed by an equally dramatic resurgence once the markets begin to behave according to the underlying fundamentals rather than panic-selling.
Recap: the underlying fundamentals which have been sending gold and silver higher throughout this bull-run have not reversed, and that is the only thing that could suggest a real reversal is underway. But the fundamentals have only become more dire, locking in the certainty of higher gold and silver prices once this desperate attempt to bash them down has been oversome.
A word of caution, too, about the dollar. Gold and silver investors watch the USDX very closely, but they must keep in mind the way the index works, with heavy weighting on the Euro. Up to now, the Euro has enjoyed considerable stability in the face of the dollar's historic fall, but that too is about to change. The European Central Bank is working closely with the Fed, and with many European institutions in similar trouble to our own, you can bet their central bank will be generating further liquidity through inflationary means. As the Euro begins to slide, the USDX chart may appear to be stabilising... but this may not the whole story.
Investors in gold and silver must be contrarian at all the right times. Just when the fervor seems to be reaching new heights and you find yourself amazed at the rate of gains, that's when it can't hurt to take a little bit of profit off the table. That way, when the powers that be pull the rug from beneath you, you can actually profit by buying the dips. Or, if you're truly stoic in your certainty about where gold and silver are ultimately headed, you can sit back and watch corrections as a form of entertainment. More and more... this describes my approach. It's fascinating to watch the whole thing unfold.