Perspective in Precious Metals Markets - Jeff Nielson

July 18, 2016

Readers of these commentaries know that the analysis presented is almost always exclusively framed in terms of “the big picture”, which usually (but not always) implies the long term. Why? The most general answer to that question is that examining issues from a Big Picture standpoint provides the best perspective.

This answer can also be framed in mathematical terms. In any form of statistical analysis, the longer the timeframe incorporated into the data, the greater the certainty in analysis based upon that data. This is why readers rarely see any short-term charts used as reference sources, because (with rare exceptions) they show nothing more than statistical “noise” – i.e. the degree of uncertainty is so large that incremental changes in the chart become statistically insignificant.

This reasoning is counterintuitive to many readers. To their thinking, the best way to get a clear picture of what is happening now is close up: via scrutinizing short-term charts, short-term data, and the short-term analysis based upon that. But we have an axiom which exposes the flaw in such pseudo-logic.

You can’t see the forest for the trees.

If one wants to see (and thus comprehend) a forest, the best way to do so is not close up, standing amongst the trees. Rather, if one wants to be able to view a forest, one must step back, away from the trees, in order to get a clear look at the forest as a whole, and not merely individual trees.

Close up, it is impossible to see the forest, only trees. This allegory fully applies to analysis of markets. If one studies (only) near-term data, it only shows what is close up, the short term. One sees only a handful of trees, not the forest. The problem with studying anything from a short-term perspective is that the short term is analytically irrelevant.

The trend is your friend.

Here it is important to understand that there is no such thing as “a short-term trend.” Over the short term; there are only deviations from the mean. It is impossible to discern whether a short-term deviation from the mean is the beginning of a trend, or merely more statistical noise. Analysis which attempts to form such conclusions is only guesswork. This is not opinion. It is a restatement of the mathematical principles of statistical analysis.

The purpose of this preamble is to provide a clearer explanation of why these commentaries continue to reflect the theme that the modest upward movement in previous metals prices over the past six months is not a rally, but merely an upward price-fixing operation by the banking crime syndicate which readers know as the One Bank .

The purpose of this price-fixing operation has been explained many times. The Next Crash is extremely imminent. The Crime Syndicate wants to “crash” precious metals markets along with other markets, but (at the beginning of this year) gold and silver were already at rock-bottom prices. Thus those prices had to be elevated before these markets could be “crashed.” No more will be said on that subject here.

Instead, focus will remain on the market evidence which supports this hypothesis. Previously, a reader asked “what would it take?” to provide convincing evidence that there was actually “a new rally” in precious metals markets, and not merely more contrived price-fixing. The reply was simple: new highs in precious metals prices.

There are two manners in which we can engage in analysis of precious metals markets. The first manner in which we can do so is to treat the data reflected in the charts above at face-value. Even then, the automatic question which comes to mind in viewing either chart is “where’s the rally?”

In the case of both gold and silver, all we see is prices having recovered some of their losses, and returned to 2013 price-levels, which were deemed outrageously low at the time. Indeed, in the case of gold, even after six months of this so-called rally, the price is still (far) below the break-even mark for the industry as a whole, as was thoroughly explained in a previous commentary . What kind of rally is it, when after six months of this “new, bull market” the price for gold has not even come close to reaching a break-even level for the industry?

Many readers are unfamiliar with analysis of this nature. It concerns a concept which they rarely encounter: “fundamentals.” The premise in this radical mode of analysis is simple: any industry where its product is priced at a net money-losing level is not in “a bull market.” To be in a bull market, the industry must be (at least minimally) profitable.

The scenario in the silver market is even more absurd. When the price of silver was taken to a 600-year low (in real dollars), this naturally bankrupted more than 90% of the world’s silver mines (and silver miners), and most of these operations have never resumed production, to this day. Even the somewhat legitimate rally in the silver market between 2009 and 2011 was too short and too modest to allow more than a handful of these mines to be resurrected.

Thus while the silver miners in production today are profitable with silver priced at $20/oz (USD), these companies represent the richest-of-the-rich in terms of the quality of the silver deposit being mined, as the price is too low to allow more than 90% of the world’s silver deposits to even start production. For those readers who subscribe to the radical concept of “fundamentals”, it is impossible to refer to the modest, upward price-movement in recent months as a silver rally.

However, this mode of analysis is based upon the nominal prices of these metals. It totally excludes discounting these pathetic, nominal prices for inflation (the “inflation” which the central bank criminals insist does not exist). Gold and silver are monetary metals. Thus another one of their “fundamentals” is that gold/silver prices must reflect all increases in the supply of (paper) money: the medium of exchange in which we price these metals.

Those readers with better memories may still remember the Bernanke helicopter-drop. Ultimately, it resulted in a quintupling of the U.S. monetary base. As monetary metals, the prices of gold and silver had to reflect the insane/fraudulent/criminal increase in the U.S. monetary base. At a minimum, this would have required the price of gold to reach $4,000/oz (USD), the nominal price required to suitably reflect the dilution/debasing of the U.S. dollar.

With the price of silver having been more grossly perverted than the price of gold (as seen above), it is not even rational to engage in similar, straight-line analysis. Rather, we can only state a rational price for silver in relation to a rational price for gold. Even at a conservative 15:1 ratio , the price of silver would have had to rise to well over $200/oz for this market to properly reflect the Bernanke helicopter-drop. As a side note; had the price of silver risen to that level (and remained there), we would be well on the way to restoring the global silver-mining industry.

However, the price of gold never remotely approached the nominal figure of $4,000/oz. The price of silver never approached the nominal figure of $200/oz. Instead, gold and silver prices are presently at the same levels they were at mid-way through 2010, when we were still in the early stages of the Bernanke helicopter drop. 2010.

Six more years of the central bankers’ ultra-insane, stealth inflation has taken place since then, yet in nominal terms, we are back where we started. Even according to the first, more simplistic mode of analysis, both gold and silver are grossly undervalued, and any industry where its product is grossly undervalued cannot be considered to be in a bull market. However, based upon the second, more sophisticated mode of fundamentals analysis, gold and silver are insanely undervalued. In the case of silver, undervalued by at least an order of magnitude. Suggesting that any industry where its product is priced at 1/10 ^th of a fair-market value is in “a rally” is delusional .

F-u-n-d-a-m-e-n-t-a-l-s. There is only one valid approach in analyzing any market: via the actual fundamentals of that market, and from a “big picture” (long term) perspective. The Big Picture allows us to see what is really happening in any market, rather than becoming fixated on (short term) noise. Fundamentals provide us with the only valid explanation of what we see in the Big Picture.

Want to see a real rally in precious metals? It starts with new, nominal highs: $2,000/oz for gold, and $50/oz for silver. Want to see legitimate markets for precious metals? It starts with $4,000/oz gold and $200/oz silver.

We should not be seeing the price of gold inching higher by $10 to $20/oz per day. We should not be seeing the price of silver inching higher by 20 to 30 cents per day. We should see price of gold leaping higher, by $50 to $100/oz per day, day after day. We should be seeing the price of silver leaping higher by $1 to $2/oz per day, day after day.

After several months of such price action, we would have merely caught up with the monetary insanity of the past eight years. That’s the starting point. But now the central bankers are talking about literally “more helicopter drops”. (Legitimate) markets are supposed to be forward-looking. In legitimate markets, that would send the price of gold catapulting higher from $4,000/oz, and the price of silver catapulting higher from $200/oz.

Readers are to be excused for no longer recognizing what a real rally looks like in the precious metals sector. They haven’t seen anything close to such a phenomena in over 5 years , despite the radical undervaluation of precious metals prices. Readers are to be excused for no longer recognizing what a legitimate market looks like for precious metals. None of us have seen that in our entire lives.

Jeff Nielson is co-founder and managing partner of Bullion Bulls Canada; a website which provides precious metals commentary, economic analysis, and mining information to readers and investors. Jeff originally came to the precious metals sector as an investor around the middle of last decade, but with a background in economics and law, he soon decided this was where he wanted to make the focus of his career. His website is www.bullionbullscanada.com.

The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.