For the last several weeks I have had readers mailing me asking why gold and silver have been selling off. The answer is very simple. There is a strong correlation between a strong dollar and weak commodities. The dollar is no different than anything on earth – it will always follow the path of least resistance. As the dollar grows stronger commodities sell off or become cheaper. Take a look at the chart of the dollar below. (Click charts to enlarge) Click to enlarge
I look at this chart will show that in late August – early September The FOMC initiated “Operation Twist”. “Operation Twist” is a plan that took the money that was maturing from the short-term bonds the FOMC had bought during QE2 and roll it into longer 20 and 30 year treasuries that carried a higher yield. This caused the dollar to grow stronger because the yields on longer treasuries are higher.
With any investment the old saying is “no risk – no reward.” However with treasuries that have a strong yield there is not the same risk as there is with equities or commodities. The price of equities and commodities fluctuate but with treasuries you are assured that there will be no fluctuation in price and the yield will remain the same. Why would you buy an equity that would yield the same as a treasury and have the risk that the yield could be lowered or the price of the equity go down if the company had a bad year? With treasuries you are buying surety and comfort.
I would like to take a look at two commodities and show how the stronger dollar has impacted their price. Please see the chart below.
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As we can clearly see from this chart of the spot price of gold, as soon as “Operation Twist” was begun the dollar grew stronger and the hedge that gold had served against the weak dollar sold off. There was no need to hedge a weak dollar because the dollar was strong. Please see the chart below of silver. Click to enlarge
A look at this chart of silver will look almost identical to the chart of gold. When “Operation Twist” was instituted the dollar grew stronger and silver sold off. There was no need to hedge the dollar with silver.
Before I conclude I would like to point out two differences in the spot prices gold and silver. I do not believe gold will go much lower than $1500.00 an ounce. Silver however, despite being a hedge against the weak dollar, also has industrial uses. If the economy continues to weaken silver could fall as far a $21.00 an ounce. I am certainly not saying that you would be able to buy silver for $21.00 an ounce. There would be margin hikes from the sellers and also I visited three very reputable distributors to day AMPEX, Gainesville and Northwest Territorial Mint and all three of these dealers were mysteriously out of stock on one ounce silver coins. I can only conclude that they are willing to sit on them until the price of silver goes back up.
In my opinion the reason these dealers would rather hold the silver then sell it is because I believe that silver will one day be worth more than gold. I believe that silver is incredibly undervalued. While this sounds like an outrageous claim, silver is actually rarer than gold. This is because silver has industrial applications and every day our technologies will require more and more silver to operate. Silver that is above the ground has been diminished by 91% since 1980, while the stockpile of gold has grown 600%. Take a look at this video Future Money Trends. The video is a very compelling piece that makes a case for silver eventually being worth more than gold. This may be the last chance we will ever get to buy silver at these prices.