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When you go to a store and see a sign that says “sold out,” what goes through your mind?  Something like “that must be a popular product or the price must have been too low?”  If it is a product that you need or really wanted you might even think “I should have bought it while I had the chance.”  You might even ponder deeper in thought and think to yourself what a great business it would be if you were making the product that “sold out.”

People in Russia, Argentina and recently Venezuela are familiar with the sign “sold out.”  Their governments decided to put in price controls that priced products below the true market price and in many cases below the cost of production…”sold out” was the immediate result.  Currently in Venezuela many products hit the shelves (or don’t even reach the shelves) …and they’re gone.  In fact, many products that are produced in Venezuela get bought and immediately smuggled across the border to Columbia in a form of arbitrage.  Goods that are produced and then “forced” to be sold below production costs will always be snapped up and hoarded, this is Mother Nature’s way.

OK so you know where I was going with this.  Gold and particularly silver are and have been for the last 8-9 months below the all in cost of production.  Their pricing structures are the reason why demand all over the world (particularly Asia) has expanded.  Since Jan. 1st, less than 2 weeks, we have already heard from the Perth mint and the Royal Canadian mint that various product have “sold out.”  The U.S. mint which shut down sales of Silver Eagles on Dec. 9th has already gone to “allocation” because 89% of what was produced for January has been sold.  Last year 43 million ounces were sold and over 3.2 million ounces in just the first 10 days of January.  They also announced that wholesale premiums may rise another 3% to 17%.  This is simply Mother Nature at work.

Are buyers gobbling up the supply because they know that they are being produced below the cost of production?  Maybe by some (the analytical types) but Mother Nature works much more broadly than this.  People see and feel inflation.  They know that money supplies have blown out and also know that debt levels are unsound, unstable and unsustainable.  In short, people either outright know, subconsciously know or innately know that “something’s not quite right.”  This is the “draw,” human nature if you will that has created the global demand for precious metals that we see.

I have written many times before regarding the “lack of supply” that should never be seen after such huge selloffs in gold and silver.  If it was real “holdable” metal that was sold then there should be plenty of it around right?  The fact that there is not is the “tell.”  The tell being that “price controls” have been implemented.  Price controls are a tool (that doesn’t work) that governments try to use to halt price increases.  They do this openly and publicly which of course ultimately leads to shortages.  In the case of silver and gold, these “price controls” have been implemented “secretly” and with the stamp of approval by the various regulatory agencies.

But we haven’t seen the signs “sold out” yet? …”Yet” being the operative word.  “Yet” because unlike toilet paper, rice and beans or beef, gold and silver had been hoarded for 100’s of years and “official stockpiles” exist, I do not know of any huge toilet paper stockpiles.  The point here is that most production has gone to “just in time inventory” to save on the cost to carry this inventory whereas central banks have (had) large stockpiles compared to “flow” (supply and demand).

Let me finish with a few questions.  If there was no toilet paper to be had, what would a roll be worth?  How much would you pay for a roll?  Would you pay $5 for a roll even if the government said that its price was 25 cents?  If someone had a roll for sale would you demand that they sell it for the “official price” of 25 cents?  What if they told you that their price just went up to $6?  Or more?  The answer is that if you really really want it you will pay whatever asking price the person who actually has it wants.  In a nutshell this is where the precious metals market will go to.  “Price controls” are already creating shortages and even some spotty “sold out” signs from various mints.  When the house of cards (that our global financial markets are) collapses, what will your ounce of gold or silver be worth?  When global fiat currencies are seen to be worthless what will gold and silver be worth?  Mother Nature’s market of true supply and demand will decide this, not some ill thought out government edict.