"For the first time in a while silver looks like a deep value play. All you need is a supply shortage and that can be a major catalyst." -Andrew Chanin, PureFunds
By the behavior of silver and gold spot prices over the past two plus weeks it almost appears the breakout is underway. Perhaps it is as many would like to think. But let's not speculate ahead of ourselves without support of logic and the holding of no misconceptions about metal price rise. Fact: the price of silver and gold is going up, because the value of fiat currency is going down.
This article intends to make a case for precious metals with examples of mine-production decline and supply shortage, where and why the trend is most likely to continue, and a look at compounding economic factors that when combined with shrinking supply will create prosperity for some and despair for others.
1. Mexico, silver shortage; our first catalyst is silver mine production down nearly 10%.
Mexico is the largest silver producing country in the world and is realizing significant production decline (by first five month report 2013). Mexico's forecast was for increased silver production this year, but current trends show otherwise. If this continues, silver mine output falls 10% or more below 2012 production.
According to an article in Silverseek.com, the majority of decline has come from Zacatecas State, the richest silver region in Mexico and home to major miners Fresnillo (OTCPK:FNLPF) and Goldcorp (NYSE:GG).
The article furthers that in April, overall silver production in Mexico was down 10.3% year over year, whereas output from Zacatecas fell 21.6%. Even though the drop in production in May was not as severe as in April, total Mexican silver production declined 9.1% overall thus far.
Total silver production from January through May was 2,062 tons, down from 2,288 tons in 2012, a difference of 226 tons or 9.7%. In Zacatecas, the two mining companies combined for 50 million ounces of silver production (50M oz. Ag) in 2012. But according to 2013 half-year reports, silver production at Fresnillo was down 2.2 million ounces and Goldcorp's Penasquito mine down 2.5 million oz compared to the same period last year.
Seekingsilver.com reports certain data attributes the silver production drop for the two miners was due to falling ore grades, and that Penasquito experienced water availability problems in treating its ore. But then, what of the near 10% silver production decline across the rest of Mexico?
We should not ignore complex economics and rampant manipulation when pondering this question. Because of depressed spot prices mines are operating at costs above the price at which they sell their product. Curtailed production causes shrinking profits, elimination of jobs, forcing of lower grade ore zones into production, and placing mines on care and maintenance, which essentially means suspending operations.
Why would metals prices suddenly plunge like they did in April?
How it happened and who may be behind it is the subject of countless conspiracy theories. Some said it was the market simply correcting itself. Some, gold was in a bubble. Well, I have a bridge in Brooklyn for sale. Let's not spin the endless theory wheel.
Listen to the toot on the whistle by someone who knows what happened -- noted silver analyst, researcher and manipulation whistleblower, Ted Butler of Butler Research who said the following to silverdoctors.com, April 17, 2013:
"JPMorgan (NYSE:JPM) the big concentrated short seller and manipulator of silver and other markets, has made a boatload of money, many hundreds of millions of dollars, by short selling at higher prices than the prices they have been buying back at. I don't begrudge JPMorgan for making large trading profits if they were doing so legally, but that is not the case. The trading profits being made by JPMorgan and the other commercials [banks] are as far from legal as is possible. That's the only plausible conclusion…"
How they "do it" is perhaps a question for another day. Or click the above link to read Butler's answer in the sourced piece. However, the question here could and should be -- has a particular major commercial, bullion bank reversed its short silver position?
As reported recently on the Sprott Money Blog, silver guru David Morgan believes this is the case and the bullion bank in question is none other than JP Morgan.
So, is JPM preparing to rocket long the price of silver to new all time highs after having just shorted everybody out of the market? And after having built-up their own massive, bank vault stock-supply of silver bullion? Note: JPM's banked silver bullion is not for SLV customers. It's for JPM.
Sprott Money Blog furthers saying, by catching this depressed silver market off-guard, they [JPM] can quickly move the price higher with little or no resistance. This would not be difficult considering that the "weak hands" are now out of the market. David Morgan suggests there is strong evidence JPMorgan has INDEED gone long silver. (emphasis theirs)
Please keep this in mind as we add more pieces together.
2. South Africa, gold shortage; our second catalyst is gold mine labor strikes imminent today.
According to David Franklin of The Sprott Group who sourced Reuters, Bloomberg and NBC in writing his piece "All Eyes On South Africa" describes the ongoing labor dispute saga involving 140,000 striking gold miners as a likely reality to begin this week.
Quick research tells us South Africa provides 10% of the world's gold and is a mother-lode possessing more than 40% of the world's remaining gold reserve [still in the ground].
Franklin writes that labor talks are close to failing again in South Africa, setting the stage for gold mine strikes that could have a crippling affect on the South African economy and a more than significant impact on gold supply, which will heavily affect the global market.
"Wage talks in the gold sector stalled and the main mine union said it planned to ask members to vote on a strike beginning potentially as early as next week. Six weeks of talks between South African gold producers and unions have failed to solve an impasse over wages, increasing the prospect of strikes in an industry battling low gold prices and soaring costs."
South Africa's top gold producers, AngloGold Ashanti (NYSE:AU), Harmony Gold (NYSE:HMY) and Sibanye Gold (NYSE:SBGL) were each downgraded to "sell" status by HSBC, which said the lower price of metals is cutting margins at the companies dealing with labor disputes. How ironic, as HSBC is to April's gold smash-down as JPM is to silver's.
Gold producers represented by the Chamber of Mines of South Africa (CMSA) are in dispute with South Africa's four biggest labor unions after offering a 5% raise that was rejected by workers.
The expiration date for the settlement process [was] August 24th and negotiators are miles apart. Solidarity General Secretary Gideon du Plessis, the head of one union involved in negotiations said in a statement this week:
"The employers will have to offer more than what is budgeted, and unions will have to get a mandate to demand less than what our members' current expectations are, to avoid a strike."
Analysts agree the outcome of the upcoming arbitration may push top gold producers like AngloGold Ashanti and Gold Fields (NYSE:GFI) to leave South Africa or simply close down all operations. Tensions are high in these negotiations as fresh memory of violent clashes between police and workers is only a year old.
Halted gold production in South Africa will certainly cause tighter shortages to an already thinned above ground supply. Where will this drive demand? Where will this drive price?
3. Federal Reserve, rising interest rates and JPM long silver; collectively our third catalyst.
An epic the size of "War And Peace" could be written on these collective topics.
Remember the Fed's QE program goal - the creation of $85 billion new dollars per month to stimulate the economy, create controlled inflation, and keep interest rates artificially low. We move on.
This May, the 10 Year Treasuries yield was 1.6%. Now it has risen to 2.8% and poised to go higher. Some say it's not cause for concern, citing it shouldn't have been as low as 1.6% in the first place. I see the logic there. But it was, and now is now. Now we navigate uncharted seas with new outcroppings of jagged rocks, and gone are the old reliable lighthouses that stood as beacons of the wrong direction.
Sailing quickly past Bernanke's tease talk and other innuendo and rhetoric designed only to measure sentiment, if the Fed does implement a slowing of QE - a taper - the private corporation sanctioned by congress will soon realize its egregious error and back pedal, pumping greater amounts of stimulus into the mix, as stated in another article last month. What kind of effect might we expect on rates if more money is available as it seems Fed intentions get anything but calculated results?
And what happens if the "anti-gold," 10 Year Treasuries hit a yield of 4%, the rate at which they stood just before the housing bust? I don't claim to be that smart, but one man has a strong opinion as to what we might expect. Michael Pento of Pento Portfolio Strategies told King World News, August 21, what he believes is likely:
"Interest rates have already started to climb. That's just the beginning-I think they go to 4% by the end of the first quarter of 2014, and that is where your watershed moment occurs where the Fed says, 'Enough! We are now permanently in the business of manipulating the long-end of the Treasury yield market. That's when you had better be exposed to precious metals and mining shares because these investments should then soar in price."
And then there's JPMorgan, whose raiding of the silver market in April, consequently slowing silver mine production in Mexico, perpetuating a silver supply shortage, is now poised (with a vault full of freshly acquired silver bullion) to ramp up the market quicker than a head snap. Question: if you know JPM is long silver, what are you waiting for?
4. China: The X Factor.
Kinross Gold (NYSE:KGC) recently walked away from the richest gold deposit in the world, the Fruta del Norte in Ecuador. When 70% windfall taxes were imposed by the Ecuadorian government, mining of Fruta del Norte became unprofitable -- a case of realized country risk for Kinross and its shareholders to the tune of a $720 million write-down.
And the sweetest gold spot in the world sits idle.
For how long?
Who now might be willing to write fat checks to Ecuadorian hard liners to get their hands on that gold? A country holding so many U.S. dollars that it is a liability, that's who. China, a country that produces large amounts of gold, exports none, yet imports in excess of 200 tons per year.
With their thirst for gold, and the fact that Chinese companies are not subject to the same market forces as Canadian miners, it would not be unimaginable for China to trade those devalued dollars for something of value -- the richest gold deposit in the world. Fruta del Norte also sits in close proximity to the Panama Canal, which Chinese interests own, too.
An unprecedented, unexplained and unrealistic precious metals migration from west to east continues. And the U.S. Treasury Department tells Germany it will take seven years to return their 330 tons of gold held in our vaults? There is something wrong with this picture.
If you're still having trouble wrapping your head around the concept that calamity is possible here, and today, because the shenanigans of those we trusted with our wallets will have no ill effect, pause to reflect on why Eric Sprott is so amazed when he declares,
"I don't know why people can't accept that there is a serious vulnerability in the financial system."
Conclusion: Remember, metals aren't just precious, they're real money. As mentioned last week, the end time for buying physical silver below $30 and $40 an ounce, and gold below $1,500 is drawing near. For the sake of survival and prosperity, now is the time to be long silver and gold.
I wouldn't be writing about the writing on the wall if I didn't believe it myself, and I wasn't setting sail for the same course. Now, with insane monetary policy, is time to chart a future for increased value and security.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.