Wednesday, November 25, 2015

Precious Metals: Is The Price Right?

In this piece I won't be referring to a particular mining company, although I like Silver Wheaton. No, I will be looking at the end product, physical bullion and its price.
Let's do a story about a product that you can buy. This product happens to be a commodity and unlike regular retail items, it is subject to many rules and regulations. One of the many negatives of rules and regulations is that it makes the product more expensive and it allows for manipulation because those who enforce the rules and regulations are appointed. Nevertheless, we do need rules and regulations because we know man is greedy and not past corruption to obtain his desired objective. It is a shame that Libertarians don't recognize this aspect to life. It is also a shame that the appointed regulator can be a pawn used by man for a desired goal. This is the heart of the problem with the price of precious metals.
Enter a store
You look at the product for sale. You are already armed with the knowledge that both items have declined in value this year with gold at $1077.20 an ounce and silver at $14.15 an ounce. You pick up a gold American Eagle coin and debate with yourself over the premium to the price. If you are China, the largest producer and consumer of the product, you buy. You are not alone. Sales of US American Eagles by the US Mint are at a five-year high at 12 tonnes and up 251% YOY in the third quarter. In fact, the US Mint halted sales due to lack of supply. You didn't need me, dear reader to tell you that as you see many buyers in this store. You pick up a US Silver Eagle coin and debate within yourself again over the price. The merchant takes the Eagle coin from you. He says that he needs it to cover other buyers that purchased 42.02 million ounces, another all-time high. He says come back next week and he might get a resupply. Later, he admits that the solar industry is a heavy buyer and the mining supply declined this year.
As you exit the store, you see a limo stop outside. From the limo central bankers exit. They move past you into the store. For the 19 consecutive quarter they are plus buyers over sellers of the metal. This year they will purchase 8% more than last year or 1,121 tonnes. Central bankers may deal with fiat money, but deep inside, they know it is built on sand and having gold is a backup plan that is never mentioned.
You stop to think. Doesn't basic economics dictate price through supply and demand? The price should be higher with all the demand that you noticed in the store. As you pause in the street, an Indian man walks past you and enters the store. You find out later that India consumed 268 tonnes of gold in the third quarter of 2015 which is 13% more than 2014. This adds more confusion to what you see in reality and what the retail value of a physical coin.
Whispers on the Street
Getting back to the appointed shills that govern exchanges, you hear whispers that allow over 300 contracts on gold in the COMEX. Another whisper is worse. On LBMA they allow 1000x the actual amount of gold in their vaults with paper contracts. If buyers demand delivery, there will be defaults and a scandal. Someone argues this point by saying that JP Morgan will back the exchange and it has long been whispered that the Fed itself interacts with the market against gold. I think if that is true, everyone who works or ever worked at those institutions should be put in jail for violating the integrity of the free market.
You think about all that you saw, heard and know. You make a decision. You reenter the store. You start a plan to buy a coin from time-to-time because you also know that the market is irrational and it can stay that way longer than you can stay solvent if you purchase stock shares that are declining. Back within your deepest understanding of life, the day will come when people realize that fiat money buys less and less while precious metals can purchase more and more. As always, End the Fed!