What I would like to point out (again) is that any correction is not the end of the matter for the gold and silver bull. The gold “M2 supply” chart we displayed some weeks back paints the picture of a bull market that is not over yet. This is an important chart that I think needs to be properly digested (gold cycles in black, silver price in red).

I was never inclined to accept that but a recent finding has made me modify those views. In a nutshell, there will be a desert for gold and silver but it is not yet and this bull is not over yet.

click to enlarge

Here is the background to this latest installment in the silver bull story as shown in the chart below. After a grinding bear market of 23 years, silver entered a new bull market on 21^st March 2003. This bull will last 20 to 30 years as we enter an age of increasingly greater inflationary forces brought on by Baby Boomer retiree demands, Peak Oil and Silver as well as the underlying upwave of the well known Kondratieff wave.

Gold confiscation is a subject that divides gold investors. Some say it won’t happen again and others say it will happen again. The one thing they tend to agree on is that they don’t want it to happen again. I wrote on this subject three years and I just want to reiterate one myth about the previous Roosevelt confiscation that needs to be buried lest anyone think a government seizure would leave you bereft of gold.

People may say that the 2000-2009 bear market will have put many investors off equities, but that in my opinion is a different matter to how the market will actually perform in term of percentage gains. The truth is that hard sell-offs lead to hard buy-ups. To get an idea of how the rebound in the markets may pan out, let us look at the equally great bear market of 1968 to 1974. First we chart out the current bear market below for the S&P 500. (Click charts to enlarge.)

The point of that article is summarized in the chart below which displays the gold-silver ratio for German Marks between 1919 and 1923. As expected, the ratio moved near the historic level of 16 despite both prices rocketing as hyperinflation took a hold. The mystery was why the ratio leapt from 16 to 160 from October 1923.

I don’t personally use this ratio to trade in and out of silver. Some people swear by it as a useful tool to swap between silver and gold when one becomes undervalued relative to the other. Where I come from in Britain, with the high sales tax and spreads on silver such a pursuit is not very profitable, but I know it is for others.

The counter-asset to gold and silver – the US Dollar – continues to enjoy its season in the sun as mass redemptions and fund liquidations force investors to park their wealth into the safest perceived asset during a deflation and that is cash. Indeed, a look at a graph of the US Dollar Index (in red) versus the S&P 500 since this credit crisis began shows a recent negative correlation between stocks and cash.

But first, I was in contact with a large bullion provider in London with whom I have dealt with in the past. Like other dealers they have experienced high demand and they too have had to put the “Sold Out” sign on silver bar products. I put the obvious question to them, “Is this a silver shortage?” to which he replied “Don’t believe the hype!”. As he further elaborated, they could acquire silver “by the ton” from the London Bullion Exchange, the problem was fabricating it fast enough to meet this unexpected demand. Note that the London Bullion Market (unlike the COMEX) is a wholesale OTC market where silver and gold are intended to be bought for physical delivery by major customers such as central banks, refiners and fabricators. This market gives a better idea of physical silver availability than the COMEX. Note that the minimum bargain for silver is 50,000 ounces and in September alone nearly 144 million ounces were transferred between members.

Now of course some of these buyers will be just coin collectors who don’t give priority to the metal price but the savvier silver buyer can avoid all of this by purchasing in bulk. For example, at one dealer you can buy a box of 500 Silver Eagles for a better premium of 52% over the spot price but that means stumping up over $7000. No doubt some can quote better deals to me. The main point is this though, the higher the premium the higher you have to wait to break even.

Not surprisingly, the story is the same as precious metals stocks undergo a severe correction to retrace a large part of the bull market begun in 2000. The example we will use is the HUI index of unhedged gold stocks. The analysis is given below.

Three days later, gold topped at $1032 and has dropped as much as $773 for a 25% correction.