July 4, 2013

Follow The Money

7/4/2013 12:01:00 AM

 

Whenever the market makes any large moves, either up or down, one of the most important indicators of the future movements of a commodity is how the large institutions (governments and banks) react to the move.  When a stock or commodity falls through the floor and even die hard contrarians are running from it, it is probably an indication that the long term prospects are somewhat minimal.  On the other hand, when a stock or commodity drops off and you find major players deciding to move from short to long positions, it indicates that those players see either a major chance for a rebound or they know that the position will pay off.
An excellent example of this is “gold”.  Within the last few weeks, gold suffered a substantial drop to the spot price, leaving many to believe that the economic indicators that were being touted by this administration were coming to pass as truth.  You would think that it would follow, then, that the major banking institutions would continue to keep their short position on the metal; what actually happened was the complete opposite.  Instead, the banks reduced their short positions and have substantially increased their long positions with every passing week.  So why would they do that?
A major reason might be the actual production costs of the metals.  To locate, dig out, separate, and then refine a troy ounce of gold costs a mining company approximately $1175 dollars.  Per ounce of silver?  Almost $40 dollars.  Now you might be thinking to yourself "Wait, so the price of gold to mine is still (barely) profitable - but the cost of silver to mine is double the value?  Why would anyone throw money away like that?"  That answer is twofold.  The demand for physical precious metals (not ETFs) has remained consistent and reasonably high.  The other part of that is scarcity.  While silver has numerous industrial uses (and the companies that use silver might be willing to pass their cost on down the road), gold does not.  If the price of gold were to fall past the price of mining the gold, the likely outcome would be temporary shut downs of mines and mining facilities.  This, in turn, would create demand: jewelry companies would have to pay significantly more to get materials for jewelry, while world governments would also have to pay more to get gold and silver for coins to mint.
Another reason might be the increasing political drama on the back of increased unemployment from Europe.  Fears about the economy typically drive the price of gold up substantially.  Further, countries like Germany are having doubts as to our gold holdings and may apply pressure to see some sort of audit or numbers from the United States.  But what if, like Ron Paul feared, there was nothing to audit?  What if Fort Knox was just a show and the gold had long since been spent or sent away?  What if the Federal government, to save face in the international community, had to buy up a huge section of the physical market.  Overnight, the price of gold would double while the price of silver would also skyrocket as people grabbed it up in lieu of gold, which would be out of stock everywhere.  If this sounds implausible, keep in mind it happened before: in 2008, as the subprime market was in the midst of collapsing, silver shortages caused the price of silver to jump massively with as much as a 30% purchasing premium over the spot price from dealers, leaving many people to go without.  Those who could get a purchase order in were often left with weeks to wait for product.
Given the history of the big banks and their track record on precious metals, I believe that we could be looking at a huge gain in gold and silver that would cause the market to shoot up, increasing the value of bullion and so-called "broken gold," semi-numismatic coins, and unique rarities in the process.  Where there's smoke, there's fire - and it looks like the major banks are creating a bigger and bigger smoke signal in the precious metals market with their long move into gold.  Gold is as cheap as it's been in the last several years; now is the time to get ahead of the market!