The last nearly 6 months has seen a constant barrage on the pricing of the precious metals. This process coincided with the last US quantitative easing and of course was completely counterintuitive. How, one would (should) ask, can a dollar increase in value versus another (any) real, fixed asset if dollars are more plentiful? If we did not already know why this was done prior to last Wednesday, now we know for sure. Japan’s BOJ plans to add $2 trillion worth of Yen to their balance sheet over the next 2 years. When you add in the Fed’s $85 billion per month ($1 trillion per year) you get to $2 trillion per year just from these two entities. We WILL have inflation one way or the other, the question is “How much?”
So, in the gold market we now have (have had for quite some time) “official policy” stomping on the brake and the gas at the same time. This cannot last and surely will not work. Something has to and will finally “give.” The cash markets, particularly in silver are tight. Premiums for physical over the paper price are rising and delivery times extending. This can only end one way, “cash and carry” will ultimately price these markets and a force majeure will be unavoidable as the physical does not exist system wide (never mind on COMEX) to satisfy demand.
Over the weekend Jim Sinclair proffered that the U.S. will “flip” in the near future and actually assist in pricing gold (and thus silver) at higher levels to stop the outflow of metal from West to East. He very well may be correct in this theory but… with this change in policy would come an “admission.” The admission being that the West has lost control of the market. In my opinion, were gold to rally $100+ and cross into the $1,700 range, control will have been lost and nothing will stop the stampede OUT of currency. Strangely, this in a roundabout way is exactly what the central banks want. They WANT you to spend your money. They want you to buy stocks, they want you to buy real estate, they want you to frequent Walmart and SPEND your money.
I sent you a chart a couple of weeks back that showed “velocity” in a crash dive over the last 10 years. THIS absolutely MUST be halted and reversed. Velocity (or lack of) is exactly why money supplies have by necessity been grossly expanded. Central banks have thus far compensated for lack of turnover by increasing the size of the monetary aggregates. This is a dangerous game! Dangerous because human nature or psychology is involved. The central banks are trying to increase spending by lowering interest rates to zero, publicly debasing through over issuance and now through the “threat” (promise) of account confiscations (bank runs). So what’s the danger? That it actually works… that’s what!
Human nature is a funny duck and when it comes to investing, the “herd” mentality fits perfectly. Should the official policy to get spending started begin to work (it will), there will be no way to stop it. Once the “runs” begin, they will spread, grow and run their course. THIS may be exactly what is planned and a push toward global “backed” currencies (by gold and other hard assets) will arrive. The problem as I see it is that gold will go through a short squeeze unlike any other ever seen. Supply is less than finite and demand will include those who thought they owned gold through empty ETFs and the like. Greed, fear, forced short covering and every other reason on Earth will line up as demand for gold. Gold will be priced far above the ability for the common man to purchase, even governments (think China and Russia) will not receive much weight for their purchases. It will be a different game.
History will call this “hyperinflation.” Once started, just as in a wildfire everything will burn until there is nothing left as fuel for the fire!