What’s Behind the Slide in Gold and Silver?

After watching the price of silver soar to as high as $15 /ounce in May 2006, Warren Buffett, the “Oracle of Omaha”, offered some sagely words of wisdom:

What the wise man does at the beginning, the fool does at the end. At the start of the party, the punch is flowing and everything’s going well, but you know at midnight, it’s all going to turn into pumpkins and mice. People think they’ll be able to get out just before midnight, but everyone else thinks that too. The problem is that, in commodities there are no clocks on the wall.

Nine years earlier, in 1997, Buffett had begun accumulating 130-million ounces of silver, or nearly one-third of the entire world’s supply, at roughly $4.50 per ounce for around $572 million. His public announcement of the silver purchases sent the price up to $7.50 an ounce from just under $6.00 in a few weeks. Then it was discovered that Mr. Buffett was taking delivery of March silver while selling July futures contracts. As quickly as silver prices soared, they plunged.

But by May 2006, silver was spiraling higher again, doubling to $15 /oz, and Buffett lamented before his shareholders that he had sold his silver too early and did not profit much from the sale. Still, Buffett's warning of a commodity bubble that was ready to deflate was initially proven correct when silver tumbled 32% and gold fell 24% over the next five weeks. Other key commodities, such as copper and crude oil, fell by a third by year's end from their peak levels that year.

Yet in hindsight, the perceived “bursting” of the silver bubble in May-June 2006, from a peak of $15 /oz to as low as $10 /oz, was simply a wicked correction within the context of a long-term bull market. Fourteen months later, silver would mount another spectacular rally, this time to as high as $21.25 /oz, and surpassing the May 2006 high by 40 percent. Now, for the third time in the past four years, silver is undergoing yet another wicked correction from a spike top.

The May-June 2006 slide in the silver market was triggered by a surprise rate hike by the Fed to 5.25%, above the perceived “neutral rate” of 5%, leaning on the side of restraint, to keep the powerful “Commodity Super Cycle” in check. Fed chief Ben “Helicopter” Bernanke was anxious to shed his dovish reputation after he had secretly confided to CNBC reporter Maria Bartiromo, “It’s worrisome that people look at me as dovish and not as an aggressive inflation-fighter.”

Bernanke tried to reinvent himself as a hawk on June 1, 2006, when he told the International Monetary Conference in Washington:

The Fed will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained. The Fed must continue to resist any tendency for increases in energy and commodity prices to become permanently embedded in core inflation.

Bernanke held the fed funds rate steady at 5.25% for more than a year, even as US home prices began their historic slide. Silver prices were locked in a sideways trading range, gyrating between $11 and $15 /ounce. But when startling revelations about the $1.8 trillion sub-prime mortgage crisis began to surface in the summer of 2007, threatening to topple Wall Street banks and brokers, Bernanke panicked and opened the money spigots, thus jettisoning the silver market to above $20 /oz.

Silver peaked on March 17^th, near $21.25 /oz, coinciding with the Fed’s eleventh hour rescue of Bear Stearns from bankruptcy. Since then, silver has tumbled 25% to $16 /oz, enduring its third major shake-out in the past four-years. Whereas the 2006 shake-out in the silver market was triggered by the Fed’s surprising 0.25% rate hike to 5.25%, the latest slide is based on opposite ideas - that the Fed’s rate cutting spree has arrived at a dead-end at 2 percent.

In today’s highly sophisticated financial marketplace, there is no longer any need to employ Federal Reserve officials to figure out the most appropriate target level for the federal funds rate. Instead, it’s done by remote control, by traders in the US Treasury and Chicago interest-rate futures markets who are usually several steps ahead of the political lackeys sitting at the Fed.

A pause in the Fed’s rate cutting campaign was signaled when yields on the US Treasury’s two-year note moved above the 2.25% fed funds rate last week. Treasury yields jumped after NBER chief economist Martin Feldstein, a close confidant of Mr. Bernanke, said on CNBC television:

It would make sense for the Fed to stop cutting its target rate at between 2% and the current 2.25%, because to go lower could exacerbate the problem of inflation emanating from high commodity prices.

On April 9^th, former Fed chief Paul Volcker lashed out at the Bernanke Fed’s super-easy monetary policy, which has fueled the biggest commodity bubble since the 1970s.

When concerns about recession are rife, the central bank will be tempted to subordinate the fundamental need to maintain a reliable currency, to the impulse to shore up a flagging economy. The danger is that you lose both battles, as the US did in the 1970’s, and wind up with stagflation. The Fed has a particular duty to defend the integrity of the fiat currency in its charge.

But the political lackeys at the Fed take their marching orders from the Bush White House and US “Plunge Protection Team” commander Henry Paulson, who are calling the shots on monetary policy. “I’ve got confidence in the Fed and I’ve been very supportive of what the Fed has done and what the Fed is doing,” Paulson said after the central bank lowered its key interest rate 0.25% to 2.0 percent.

The latest shake-out in silver and gold may have a little further to go, but for investors betting on higher commodity prices in the longer-term, fueled by strong Asian demand, explosive money supply growth, and negative interest rates in the United States, one should recall the advice of the London trading wizard Nathan Rothschild, “The time to buy is when the blood is running in the streets.”

ECB Hawks Trip the Precious Metals

Unlike the rookies at the Bernanke Fed, the hawks at the European Central Bank aren’t bullied by politicians or German schatz traders in Frankfurt, who campaigned hard for a series of ECB rate cuts in the first quarter. German 2-year yields fell as low as 3.10% in February, or 90 basis points below the ECB’s repo rate, anticipating rapid-fire rate cuts to re-inflate the battered European stock markets.

But fighting inflation is the top priority for the ECB, said Greek central banker Nicholas Garganas on Feb 6^th. “Our monetary policy is not led on what the markets expect. I’m very concerned about the high inflation rate. Inflation risks remain on the upside,” he said. Consumer price inflation in the Euro zone hit a 16-year high of 3.6% in March. But when German schatz yields still refused to move higher, Bundesbank chief Axel Weber stepped in to set the markets straight.

“Interest-rate expectations for the Euro region don’t reflect the monetary-policy assessment of a central bank that’s obliged to maintain price stability. Be assured, our aim is and remains price stability in the medium term,” he said on Feb 27^th. Then on April 17^th Weber said, “Recent wage dynamics in conjunction with elevated and persistent energy and food price pressures have increased the risk of a prolonged period of intolerably high inflation,” ruling out an easier monetary policy.

“Against this background, we will have to continuously monitor closely all incoming data and evaluate whether the current level of interest rates in fact ensures achieving our objective,” Weber warned. With the recovery of the European stock markets above their March 17^th lows, German 2-year schatz yields eventually shot higher to within spitting distance of the ECB’s 4% repo rate.

The ECB has kept its repo rate steady at 4% for eleven months, and throughout the US sub-prime mortgage crisis which began last summer, in sharp contrast to other members of the G-7 central bank cartel, such as the Bank of Canada, England, and the Fed, who capitulated to political pressure, and slashed their overnight lending rates, despite signs of explosive commodity inflation and money supply growth.

While the ECB has held its repo rate steady at 4% this year, Jean “Tricky” Trichet has pulled another fast one, allowing the 3-month Euro Libor rate to climb 45 basis points higher to 4.85%, thus engineering a clandestine tightening of monetary policy. Higher Euro Libor rates are indicative of instability in the European banking system, with its arteries clogged by toxic US mortgage debt.

But unlike the Fed and the Bank of England, the ECB hasn’t taken any extraordinary measures to flood the banking system with excess liquidity, and counter the sharp rise the Euro Libor rates. Combined with open mouth operations to push German 2-year schatz yields higher, the ECB has managed to steer money away from the precious metals markets and into higher yielding European credit markets.

Japanese Bond Traders awaken from Grand Illusion,

Japanese bond traders have been brainwashed by government propaganda artists and are taught that Japan, one of the world’s biggest importers of food and energy, is immune to global inflation. But after reporting a decade of deflation, Ministry of Finance apparatchniks are finally forced to paint a rising inflation trend, after crude oil prices doubled and a ton of Asian grown rice soared 140% from a year ago.

Last week, Japanese consumer inflation was reported at a decade-high of 1.2% in March, led by rising fuel, raw materials and food prices. Ironically, the Bank of Japan’s super-low interest rate of 0.50% encourages global traders to borrow funds in yen, in order to bid-up commodities and stocks worldwide. Yet it’s tough to get the BoJ to shift to a tighter money policy because the Japanese government is addicted to low interest rates, saddled with a national debt of $6.7 trillion.

To avoid hiking interest rates to curb inflation, the Japanese ministry of finance allowed the yen to strengthen by 12% against the US dollar to hold down the cost of soaring commodity imports. “A stronger yen will ease the negative effect from rising costs of crude oil and commodities,” said former BoJ chief Toshihiko Fukui on March 7^th. It was an historic shift in Tokyo’s foreign exchange policy, which had intervened with a strong hand in prior years, to prevent the dollar from falling below 106-yen, the break-even point for many Japanese exporters and multinationals.

Yet despite the stronger yen, the Rodgers International Commodity Index [RICI], the most diversified index including 35-commodities traded on 11-global exchanges, is up 47% from a year ago, near a record 850,000-yen. Yet Tokyo traders were bidding-up Japanese bond prices alongside rising commodity prices for nearly eight-months and knocking bond yields 80 basis points lower to 1.20 percent.

Since the two markets can’t co-exist in a bull-market forever, and with the RICI refusing to budge from its record high, the Japanese government bond snapped first, and suffered a violent backlash, with its biggest one-week loss in 5-years. The lead JGB futures contract fell as much as 2-½ points last Friday, triggering the first-ever halt in trading. Schizophrenic JGB traders did a 180 degree flip and switched their sights towards a Bank of Japan interest rate hike to 0.75 percent.

Yen Libor futures (Dec ’08) suffered their worst losses in 16-years, tumbling 15-ticks to 98.90, and lifting its yield to 1.10%, or 60 basis points above the BoJ’s overnight loan rate. Seeking to quickly extinguish expectations of a rate hike, the BoJ, under its new boss, Masaaki Shirakawa, switched its tightening bias to neutral on April 30^th. “The outlook for economic activity and prices is highly uncertain. It is not appropriate to predetermine the direction of future monetary policy,” the BoJ said.

“Given that the economy is underperforming compared with expectations and risks are rising, our stance can be described as flexible,” explained BoJ chief Shirakawa. However, any heavy-handed move by the BoJ to jig the Yen Libor and JGB market higher, would be of great interest to Tokyo gold traders, who have priced in a BoJ rate hike to 0.75% by knocking the yellow metal 12% lower to 90,000-yen /oz.

Comments

[zenalgorithm]

Gold and silver are so shiny! They aren't completely worthless...

[suep]

I'm convinced that bonds are certificates of guaranteed confiscation in these inflationary times. And what times aren't inflationary, here in the United States?

Here is my reasoning, and anyone of course is free to attempt to find fault with it:

Assume that I buy a ten-year, $1,000 bond that pays 3% interest (assuming simple interest for this exercise). Now, I think in terms of lamb chops: how many pounds of lamb chops can I now buy with my $1,000? Say they cost $10/pound. So with that $1,000, I can buy 100 pounds of lamb chops. So for ten years, I receive $30 each year while I wait for my bond to mature. When that happens, I get my $1,000 back. Now, how many pounds of lamb chops can I buy with that returned $1,000? Well, over those ensuing ten years, the purchasing power of that $1,000 has dropped by 3% annually, for a total depreciation of 30%. That means that after those ten years, I can buy only 70 pounds of lamb chops with my returned $1,000. So by buying that ten-year bond that paid $30 annually, I've lost 30% of my original investment in real terms.

You may say that while I was waiting for my bond to mature, I was earning 3% on my money. But was I? No. Why not? Because the government wants its slice in taxes. So that 3% return is really perhaps 2.2%. And if I spent that purported 3% nominal return, I'm really in a fix, no? If I don't spent the interest, at least I came close to maintaining the original purchasing power of my money. But it's still a losing proposition.

The bond I thought was an OK deal turned out to be a loss.

If anyone disagrees with me, you are also disagreeing with a banker and a bond expert who, in quiet voices, completely agreed with my logic.

Today, the only way a person could buy a bond and come out ahead is if he successfully played the interest game.
I believe that's why the Ben Bernankes of the world say they hate deflation. Why? Because in a deflation, the above argument is reversed, and bond distributors would then find themselves on the receiving end, not the dishing end. They would need to turn profits with the money they collect, rather than making a guaranteed profit the way it is now.

[OJO Zafado]

It is difficult to interpret what the conclusions are of the author given all this technical charting and sniping at the world's Gov't "men behind the curtains". While a particularly dry text it is has some merit based on the use of so many critical euphemisms. I am particularly enamored with some not used here like, "Ben the Dollar Slayer", " Henchman of the Dummya" . The sentiment of the author's remarks would seem to echo those as apt descriptions. So I guess my question is , based on all this discussion was my purchase of a partial position in GLD @ $83.73/=~$850 an ounce yesterday, ill timed? I have watch listed the DBP as it is a dual participant in the Silver and gold market. Still there seems no really good US based ETF yet that can match US Investors' "basket" diversification as reflected in it's mutual fund UNWPX. UNWPX is a $5K initial investment and has a 6 month trading restriction. An ETF where you could take partial positions and not be penalized for a trading decision would certainly be welcome. There are some of these funds trading in London and Canada that like UNWPX contain palladium, platinum, rhodium and other precious metals in addition to silver and gold. I own RJI and find it a very good fund if not for it's higher expense ratio. I will add to DBA if it drops a little more to below $35. MOO is my most heavily weighted of these three. I am not selling any of it. There seems to be no end in sight to $ destruction, with even McCain trying to out Democrat the Democrats with how much tax money he can give away to buy votes. He will end ALL earmarked pork barrel spending to pay for his proposals. This is just more of the "DUMMYA" cut taxes and dramatically increase spending on EVERTHING. As if McCain will have any ability to end pork when elected given the state of the country and the Congress most likely to sliding even further into the control of the Democrats. The Democrats at least propose some tax enhancement to get the Fed to rescue Student loans, and save Medicare and Social security. Abrubtly withdrawing from IRAQ and leaving behind the collaborators to fend for themselves could serve as a sobering lesson to the rest of the Eh-rab world. The nearly 5million refugees we have thus far created could be doubled in number and a wave of genocide of Eh-rabs killing each other will certainly ensue. That would save us $800 billion a year. So the Obama guy really will cut spending! Never the less the author's observations of those running the EC , seems to indicate at least some concern for how to maintain the confidence in linen fiat currencies. Reguardless of the current rally in the bear market for the US $ it seems it is destined for some hard times globally in the longer term. There is a real rise in demand worldwide for commodities and a huge amount of linen curency out there as the US has exported it's inflation machine worldwide. The Chinese had so much linen that they found the idea of a Strategic Petroleum reserve to be an excellent idea and have started one of their own. That is alot of linen money that could have gone into purchasing more US treasuries that are losing alot of value. Value, which has nothing to do any more with losing alot of money. We know that "they" were cooking the LIBOR rate numbers until recently. Does any one have an opinion on whether or not the US Treasury may be cooking the TIC data that is 3 months delayed and reported around the 15 th of each month? Are gold and silver likely bottoming here or are they going some or alot lower with this Faux $ rally?

[OJO Zafado]

Soup ~Your post is of course the meat of the issue. But what about a comparision on the basis of taxation? The FNM Preferred P has a guaranteed minimum yield. It sells so dramatically below par as to make the yield appear tempting. It is an adjustible rate yield based on an inflation related index & best of all! it is 15% tax qualified. People in bonds and CDs are getting slaughtered to feed the masses by the US tax system!

[John Angstrom]

awesome picture of Paulson, Bush and Bernanke! Sums it all up nicely. Wall Street and Big Oil are pleased with the Fed.

[OJO Zafado]

As of noon 5/2 we find the interest rate on the Ten year treasury increasing by 2.5% and the bond losing value, down 26/32s in price. The financials are ralllying on the Fed anouncing it is increasing the emergency borrowing facility from $50 to $75 Billion, increasing liquidity to the banking system. Gold & Oil & are rallying as well on this gratuitous conspicuous shifting of the printing presses into 4th gear.

[Mister C]

You started strong, gave your conclusion in the middle and waffled through the rest of the data.

So what exactly are you trying to say? could this be the summary of your well elaborate post.

The latest shake-out in silver and gold may have a little further to go, but for investors betting on higher commodity prices in the longer-term, fueled by strong Asian demand, explosive money supply growth, and negative interest rates in the United States, one should recall the advice of the London trading wizard Nathan Rothschild, “The time to buy is when the blood is running in the streets.”

[silverprodigy]

Commodities are the REAL money in the actual world, bond and notes are PAPERS dont forget!!, they can be created when you are rich in their or social need appear, and this is for the USD, CAD, GBP, EUR, all!. Commodities are the value of life. Stocks are part of an industry, they can have value too. Because the industry have commodities (Buildings, Machines, Work power, Lands, etc.)

[Galt]

There's merit here, of course, but my real fear isn't making or losing money, but having the freedom in an increasingly unfree world, to enjoy the fruits.
GPC MD

[preacher]

Warren Buffett often uses his reputation to make a quick buck at the expense of others! The latest crash in silver was caused by goldcorp selling it's 48% stake in silver wheaton, leaving silver wheaton functionally bankrupt. If silver wheaton is forced to start dumping silver, silver is back to $5.00 very quickly! GOD BLESS Y'ALL!

[WAKEUP]

Anyone whose net worth is less than one hundred million dollars, who invests in bonds is an idiot. For the rest of us, let's not spend 5, 10, 15 years trying to figure out the math involved in this hocus-pocus, shell game. DO NOT BUY BONDS. BONDS ARE BAD. BONDS = BAD. Almost ANYTHING else you do with your money, short of burning it, will produce more profit.

[Kunst]

"apparatchniks" -- the correct spelling is apparatchiks -- no "n"

[zenalgorithm]

Wakeup,
I totally agree with you about bonds. They are a horrible "investment" when inflation is factored in.

[KSV.Padmanabhan]

Gold and Silver will reach their (previous) levels of early Nov 2007 by end October / Nov 2008.

Regards,

KSV.Padmanabhan, Mumbai, India.

[bearfund]

The surest bet in the game right now is short Treasuries. Supply is bloated and growing, demand is weak, yields are well below inflation, and the issuer has some real serious fundamental problems. 3%, I have to pay taxes on that pittance, and if interest rates rise (IF?!) I lose on a mark-to-market basis, too. Who'd want em? Oh, yeah...idiots. I'll give you two scenarios: (A) the US economy recovers quickly and the Fed raises rates to mop up all the excess liquidity. (B) the US economy goes in the tank and the US ends up in real trouble, with tax revenues plummeting, government expenses rising even further, inflation soaring, and the dollar in free fall. Now, in which scenario do your Treasuries rise? That's right: neither. Convince me that there's a third scenario and I'll listen. Until then, wanna buy some Treasuries?

[OJO Zafado]

I had a great move up on Friday in my shares of DXKSX! My money is where most of the sentiment towards bonds seems to be! Thank you Mr Padman... This is an opinion I was seeking when I started to read the posted article. I did get a nice pop in my newly acquired GLD shares as well as my holdings in GDX today. The talking heads on the tube seem evenly split on the action to be seen next week in US $ valuations. Some are saying the Euro should fall below 150 and that oil could retreat to as low as $90 by the end of the month. The markets on Friday, certainly were not buying into that as the Fed flooded the world with a few hundred million dollars more in liquidity. I will now go back and try to find the conclusions of the author somewhere in the middle of the text. Good luck to all!

[alpa]

What is this a classic article WITH no forcast pure manipulation try to convince people that the market have react to interest rate while in fact we are swiming in an ocean of junk paper silver that have no colateral.. Nothing prove that buffet had really sold his stuff, and where etf found its stuff...
The reality is quite different, just shifting from etf gold to etf silver is impossible in masse...
Where is my silver, try to get yours in hand... go back to sleep...


www.infowars.com/?p=1875

May 2, 2008


“I believe George Bush and Dick Cheney plan to take care of Iran before they leave office,” former CIA analyst Ray McGovern said in an interview published in the Charleston Gazette on Wednesday.

“There’s no doubt in my mind that the United States is planning right now, as we speak, a military strike against Iran. The chairman of the Joint Chiefs of Staff and almost every senior US military official has pretty much acknowledged the same,” former UN weapons inspector and now anti-war commentator Scott Ritter had told Democracy Now on Monday.

[notphaedrus]

Interesting, if sometimes unnecessarily obscure essay. Perhaps, though you don't mean "jettisoning" silver to $20. To jettison is to cast overboard, as a ship does waste or nonessentials to stay afloat. The castoffs presumably sink, not soar.

[User 180260]

What if you take those trends from the past and add in
soaring food and oil prices along with WWIII, then what will
happen to gold and silver?

[xing-hu]

Much ado about nothing. We all know fiat currencies are useful only when stable, and when they are not one holds metals. As for bonds, they are only illusions issued by the treasury to bleed the public and avoid PM bubbles. Just simply buy some metals and hold you will not be sorry unless you buy too little or fail to hold them until it rains this fall.

[frenchy967]

you are all obsessed with treasuries. there are many other, every other asset in the US that is cheaper and cheap. the metals as well as the grains (I have traded grains for 30 yrs) are volatile and hold no value at these prices. We have been through these commodity trades many times and each trade is the same. I would advise looking at sentiment, open interest and headlines as early indicators. It is very difficult to time fundamentals.

[Glance]

WW III, coming sooner than you can imagine... Let's C Gold and silver ... the real value

[Patti Morey]

Well, I think the gold market is being controlled by China right now. chinagoldmines.com and also Forbes report that China is now the world's largest producer of gold - previously it was Africa. So, what causes gold to gain and lose value? Amd meanwhile, there's been a big campaign going on both overseas and here at home to portray our American dollar as weak. I think Americans are expected to see a shaky gold market and run out and buy Yuan or Euros, for a "safer" hedge against inflation, as a nefarious plot against American currency. Look how many times our money has changed faces during the current administration - that speaks to a battle against a nefarious plot.
I read about a gold mine in Russia that a Canadian/American company wanted to extract gold from. The Russian government only permits outsiders who partner with Russian companies. So, the Canadian/American mining company found some Russian partners. But the Russian partners had no money, and so had to borrow money from the Russian government for their half of the business. They got loans from the Russian government based on the gold they'd have in the future. Well, after the Canadian/American company and the Russian company got the mine well constructed and started getting gold out, what do you know - somehow, mysteriously, the world gold price dropped so low, the Russian half of the partnership was broke. They could not afford to repay their government loans, and the Canadian/American company was able to buy them out. Afterward, what do you know, mysteriously and inexplicably, the gold market went right back up! But, thankfully, the Russian government has not allowed the Canadian/American company to take any gold out of the country.
So, I think part of the plot involved getting affluent people to take their money out of stocks, etc. and put it into gold, then drop the gold price.

[User 190251]

patti you're stark raving mad - but the rest of you posters had interesting things to say, as well as the article that started it all. The research done by the author answered many questions I had that I simply didn't have time to research.