The Conundrum With A Silver Lining

Includes: GLD, SLV
by: Biz Bluetree

"…buying all the way down. Silver's true value suggests its price has nowhere to go but up." Nov. 27, 2013

-Biz Bluetree

Don't look now, but silver and gold have outperformed the market so far this year. Both appear to have bottomed and should be on a path to higher highs. Contrarian investors who have endured the pain of the metals' slump for the last two plus years will be rewarded for patience, insight and courage so long as they remain so. As the metals make a move toward what many believe will be much higher highs, smart investors are wise to buy on the way up just as they did on the way down. Gold and silver's new highs will be tomorrow's old lows. And today the metals remain a ridiculously cheap buy.

This article makes a case for silver and gold, specifically silver, and looks at macroeconomic indicators that support this opinion.

This investor is of the mind that a sound and sensible economic recovery is unlikely. There is too much debt. Though economists say the means around an economic hump is to create more credit, this is no longer 2008. We are perilously over extended in 2014.

When paper fails metal prevails

Author of "Currency Wars", James Turk recently told King World News:

"The bottom line is that 2014 promises to be a great year for everyone who owns physical gold and physical silver. But let's take it one month at a time. Gold rose 3.2% in January, and is doing well so far in February. A few more months of solid gains, combined with increased momentum as the public once again jumps aboard, and before you know it gold will be at a new record high above $1,925."

Support indicator one …

It is obvious that banks are not lending money into the economy at the same rate the Fed is creating currency - with or without tapering. The currency currently being created in the experimental bond-buying program mounts up in the form of excess reserves on the Fed's book, while job growth remains stagnant despite reports to the contrary. Wages remain flat and labor participation flails at multi-decade lows.

Governments the world over continue printing experiments rather than implementing the obvious alternative, as the obvious alternative would surely spell the end of the party. Yes, the U.S. dollar still looks like the cleanest shirt in the closet, but that perception exists only as long as blind confidence and fluff propaganda permeate. The hurricane is yet out at sea. For when it makes landfall is when we should be preparing.

A strong case for hard asset precious metals

Support indicator two …

Let's take a look at the recent stock market rallies. They're being driven by sales of shares (volume) as everyone piles in rather than true growth of companies. The continued expansion of the money supply undoubtedly creates larger increases in the value of paper assets (stocks included) relative to real and hard assets.

And when the increase in credit/money supply (one in the same) is no longer relevant and unable to drive paper prices higher such as in the SPDR Gold Trust ETF (NYSEARCA:GLD) or the iShares Silver Trust (NYSEARCA:SLV), etc., real value will be transferred to safe, hard assets; physical silver and physical gold which will finally enjoy massive price increases.

In referring to paper metal products John Embry of Sprott Global Assets says:

"There are so many paper claims on gold and silver that when this Ponzi scheme is finally revealed for what it is, I think the move is going to be historic. When people finally realize they have been conned with all these paper products, it will be the very time they need their physical gold and silver. So this is building into a crescendo and I would expect this to be an interesting year for those who have suffered in the gold and silver space for the past 2 1/2 years."

Then, when we figure in the reports that China has recently sold $48 billion worth of U.S. Treasuries, its second largest one month sale ever, the opportunity to own physical metals at current bargain prices appears ready to end sooner than later. This article asks; what are you waiting for?

It is a difficult time to be an investor

Fundamentals no longer resemble normal. Markets inevitably change and if you don't change with them you will lose.

For those who believe the spin that an economic recovery is underway you might consider this question: Has the market rallied in recent months because of employment growth or a manufacturing boom? The answer is no. If that were the case, where are the jobs? The truth is the market got fat because of Fed stimulus rather than organic economic growth.


Support indicator three …

The too big to fail banking system has not been restructured since the start of the so-called Great Recession of 2008, just simply papered over. What has changed, however, is that 20 million more Americans are on food stamps while the dysfunctional practices inherent to the banking system remain in place setting the stage for a greater meltdown. Mainstream media does not tell the truths of a nation being sold down recovery river.

Hong Kong fund manager, William Kaye formerly of Goldman Sachs espouses:

"…the propaganda being issued from the United States government and the mainstream media that the US is on a recovery path is an outright lie."

Support indicator four …

In this scribe's humble opinion decisions facing policymakers this year or soon after will be to either default on debt or increase currency debasement. Is it obvious to you which course they'll choose? Mainstream America has not yet grasped the inevitable problem. While thinking people understand the obvious; a government default would essentially push the reset button forcing the economy to correct itself in a free market. This is an unattractive option for central planners.

The powers that be, however, know a default on U.S. debt would end world reserve currency status for the U.S. dollar. An even more unattractive inevitability.

Expect continued debasement

As is evidenced by the U.S. Fed's recent act of tapering quantitative easing down from $85B per month to $65B per, financial chaos is being realized around the world starting in emerging markets that could escalate to create a domino effect that will almost certainly find its way home to the U.S.

It should be obvious to policy makers by now that with each layer of easy money piled on top of each previous round of QE that equities markets become artificially pumped up by misguided monetary policies.

In this article's opinion physical silver and gold will be an investor's salvation. And in this opinion (and shared by others), silver is preferred. Silver's intrinsic value as both a monetary metal and an industrial metal, and its almost certain future supply contraction, assure silver will outperform gold - perhaps even out value gold in the long term.

According to David Chapman of MGI Securities: The potential exists today for silver to climb,

"…to the inflation adjusted high of 1980. The 1980 high of $50 would be just under $120 today." But that until silver eclipses the $25 level, "…risks remain that could see silver make new lows below the June 2013 low at $18.18. (..but) At current levels of about $22, it is noteworthy that silver prices today on an inflation-adjusted basis are lower than they were for most of the 19th century. No wonder precious metals analysts tout that it is silver that you must own."

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.