Outlook 2016

We have consistently been making the contrarian call for a falling silver price and a rising gold to silver ratio for years. This ratio has risen a lot during this time. So are we ready to change our call yet? This being the start of a new year, we wanted to take the opportunity to [...]



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30 replies
    • LTango says:

      Great work. To me, yours ist still the best model – i.e. the one with the least level of contradictions – for the price movements (medium and long term) since the breakout of the financial crisis.

      One potential contradiction I see is the development of the gold silver ratio. What is your expectations for the gold silver ratio as these metals (however slowly that may occur or whatever the driving events might be) regain their monetary status? Shouldn’t it then also move towards historic levels of the GSR (of say 30 to15) instead of staying with a “fundamental” ration of 80 or above?

      Greg

      • Greg Jaxon says:

        FOFOA is a prolific blogger on the subject of wealth and gold’s place in the history of it.
        Freegold is the belief that with the assistance of “just a little” state power, permanent gold backwardation can be made illegal, and that doing this will not destabilize and distort economics in any important way. Many inspiring thoughts can be found in the years and years of posts on the subject, and its adherents mostly have their hearts in the right place. Their economic thinking seems (to me) to still include some magic, however.

  1. Scott says:

    Excellent article Keith! This is perhaps the best analysis of precious metals and the monetary system that I have read. It was clearly a major amount of time and effort on your part. Thank you.–Scott C. Miller

  2. 1952angus says:

    If the US debt is going up but the price of US treasuries are valued at purchace price and the chinese and others are selling US debt. How can the US debt be worth what is/ And how can gold be valued at its current valuation which cannot take into account the real value of us debt on a mark to market basis.

  3. Greg Jaxon says:

    Thanks for so much careful work supporting each point and debunking each hysterical correlation.
    Hmmm. So a light truck full? That’d be $17.6M worth, the truck would need a gun turret, too.

  4. Racoon69 says:

    Hi Keith, Great work as always.
    Is owning PM’s a NO WIN situation?
    I used to think of purchasing G & S as being a wise investment. I now think of it as being more like having insurance against collapse of the Monetary System. Not only in this article, but in others I think you have mentioned “Be Careful what you wish for”. Implications being that it may take quite severe economic conditions before the price of the dollar in terms of REAL MONEY goes down. Quite possibly so severe that it would not be something we would want to have to live through.
    This line of thinking also begs the question of what is the end game for PM ownership? If gold (priced in dollars) went up to $5,000 slowly would we want to partially divest along the way upward? Probably not since we know where the dollar is ultimately headed. How about if it happened within a week? The only logical end game I can see is trading PM’s for whatever replaces the dollar AFTER the collapse.
    Side question: What do you think the G:S ratio would be in a post economic collapse scenario?

  5. bgoldman says:

    Hi Keith. Great article.

    I’m struggling to get my head around your thesis on the SNB, the Swiss franc collapsing, and the relationship to the negative yields. Can I paraphrase how I understand this, and you correct me, please?

    My (simplified) understanding: “The SNB has failed as an institution in that it no longer provides a currency suitable for its citizens. Since Swiss citizens, just like all other rational citizens, are predisposed to the ‘Time Value of Money’, they will not long accept a money that yields no interest rewards for carrying or lending it. Swiss citizens are thus highly incentivized to sell off their francs for either goods or services, or more likely for currencies from central banks that have not failed, or for hard money gold or silver bullion. When this need to sell is recognized and intensifies, the Swill franc value vs. Gold and other currencies will begin a terminal decline, and will likely accelerate to the point that the SNB and Swiss franc will cease to exist in their present form.”

  6. Keith Weiner says:

    Thanks for your comments.

    David: Freegold is a whole discussion, but suffice to say that if people were free to choose their money they would choose gold. This is not hypothetical, but proven repeatedly in history. So I don’t get the combination of (A) a free market and (B) a price of gold, measured in irredeemable Fed paper. In a free market, the latter would not be accepted by the market.

    LTango: I think at the end of the day, the ratio of gold to silver will be a lot lower than 80. However, we’re not at the end of the day right now.

    1952: The key to understanding the Treasury is one factor. It is priced in dollars. It pays in dollars. However, the dollar is but a small slice of the Treasury debt. The price of Treasurys in dollars is disconnected from anything in the real world. It can collapse, as it did in the 1960s to 1970s. Or it can shoot the moon, as it has been doing post 1981.

    With COMEX, it’s easy to count the contracts as they’re all listed on the exchange itself. However, it’s impossible to count the other side. Contract sellers may have gold elsewhere, they may have gold leases, mining streams, etc.

    Racoon: if you mean the price, in this report we say that the price of gold should be higher. If you mean in the bigger picture, well owning gold is not a profit-making asset. It simply avoids the losses incurred by the dollar owners. We will have more to say on this soon…

    bgoldman: that is part of it. Why suffer steady, guaranteed losses to hold francs when you can earn positive interest in dollars? Another part is that negative interest incentivizes capital destruction in myriad ways.

  7. Redeem says:

    Nice analysis, but it still seems to me that the markets are rigged. GATA.org work demonstrates that Central Banks have manipulated the gold price for decades, officially as in the London Gold Pool, and unofficially through the bullion banks. As they point out, how much gold central banks really have is the most closely guarded secret in the world. In order for the US to keep confidence in the US dollar in the face of massive money printing and rising debt, it is imperative that the Federal Reserve and/or Exchange Stabilization Fund suppress the gold price (the canary in the coal mine). As gold flows from West to East (China), the amount of gold left to suppress the price must be getting fairly low. If demand for gold picked up in the West, then it would be game over. Also, the way gold and silver are suppressed in the futures market is by target raids in which tens of thousands of short contracts are dumped in thinly traded markets in a matter of minutes for no other apparent purpose other than to drive price lower. Then when the price is lower, the bullion banks buy back their short positions. The process is referred to as the “wash and rinse” cycle and repeats time and time again. How is this not manipulation? Seems to me that the price of gold and silver will rise when the ability to suppress the price comes to an end.

  8. Racoon69 says:

    Keith, What I meant when I drew the analogy between PM ownership & taking out an insurance policy is this: Let’s say, (not so) hypothetically, that I have 75% of the money that I don’t need invested in PM’s. What should I do next? Root for Gold to go to 5000 in the next month? That’s where the “Be careful what you wish For” thought comes into play.

    Let’s say I go buy a $1 Million Life Insurance Policy tomorrow. What shoud I do next? Root for my wife to be able to cash in on that policy in the next month?

    The “end game” for PM ownership MIGHT be almost as dismal as the Insurance Policy.

  9. jtibbs says:

    Hi Keith,
    Nice Outlook, your best yet! Especially liked the Nortel Networks default reference; how quickly we forget that even ‘high-tech’ companies can go bust (as well as banks).

  10. Keith Weiner says:

    Redeem: I encourage you to scroll back through the articles on this site. We have posted at least half a dozen (plus one video) debunking the claims of manipulation. Those claims just aren’t so, no matter how many times they are asserted.

    Racoon: I agree and add (as I always do) that if you own an ounce and the price goes to $5,500 then you do have more dollars, however those dollars are worth less. How much less? They’ve gone down by 5:1. Not only is the world a much-worse place, but you have no more money than before. You still have an ounce!

    jtibbs: thanks! 🙂

  11. greenapple36 says:

    Keith.

    I really appreciate you looking back at last years predictions and assessing how you did. This is something that not many are honest enough to do, especially not the die hard goldbugs with their manipulation theories that never work.

    reading your articles gives a really good sense of gold and the reasons to buy gold and hold gold. Silver however remains kind of fuzzy. I understand that buying sliver right now doesn’t make much sense, but what about holding silver in general. If one already has silver, is there any reason to keep on holding it? I mean, I fully understand why gold is a monetary metal, but is silver really a monetary metal, or just something that tags along behind gold, and kind of is and kind of isn’t.

    I somewhat understand gold, but I really don’t understand silver. can you perhaps write something focusing mainly on sliver, so we understand sliver better.

    on another note. I really want to encourage you to run a webinar, or a day long presentation in phoenix (which is where you are, I think), or something like that. so we can ask you questions in person.

    thanks

  12. Racoon69 says:

    Keith, I see your point. An ounce is an ounce no matter how many pieces of Fiat Paper I can trade it for. Guess I’m still stuck in the mindset of valuing things in terms of dollars.

    But can you give us your vision of what a logical “end game” would be for PM ownership? Are you picturing that the collapse of the Fiat Monetary System will eventually happen and then the next Monetary System will be backed by PM’s? In which case we will have neither lost nor gained anything but 95% of “Normal” people will have lost most of what they thought they had.

    Perhaps the only logical end game is no end game at all? Just hold your PM’s until the time comes when you really need them. Then trade them for whatever is the currency en vogue at the time & make your purchase. I guess that’s a far more pleasant end game than the end game for my Life Insurance Policy 😉

  13. Pizza Genie says:

    Regarding this comment:

    What we will get is a persistently rising cobasis……….. The pattern will change too. Instead of a dropping cobasis with each price blip, we will see a cobasis that rises with price dips and holds firm or rises on price blips.

    If you apply your model using currencies other than the US dollar are we seeing this already, and what does it mean?

    From what I understand if this happens in the US dollar, it is the “end game” or withdrawal of the gold bid on the dollar and currency collapse.

    I’m thinking plugging in the black market rate of the Venezualan bolivar indicates a collapse in that currency.

    What about the Canadian dollar, South African Rand, Russian ruble or Norwegian krone?

    It would be good to hear some commentary on the application of this methodology to gold and silver priced in other currencies.

  14. pbevan4 says:

    Please correct my understanding of silver vs. gold

    – unlike gold, a substantial amount of silver is consumed not hoarded

    – the world inventory of silver is much lower than it was 50y ago; silver (unlike gold) has been consumed faster than it has been produced in that time

    – the current world silver inventory is about the same as gold (5 billion oz; although estimates of this number vary from half to 4 times that figure) despite silver production being multiples of gold
    production

    – current consumption less production of silver teeters around zero

    – actual physical silver could run out entirely (especially at these low, uneconomic prices)

    – silver is indeed a weird hybrid between a monetary metal (which it was until the late 19th century) and industrial metal (that is consumed just like copper, nickel or tin) and therefore more price dependant on production.

    Keep up the great work, I’d love to read an article focussing on silver

    Dr George

  15. Keith Weiner says:

    Thanks for your additional comments.

    greenapple: I plan on more seminars. Stay tuned. 🙂

    I think silver is still very much a monetary metal, and like gold, it’s aboveground stocks are likely underestimated very badly.

    If we do not change the system, then I think the end game is collapse. I discuss it here: http://goldstandardinstitute.us/?p=525 It is going to be a horrible time. Yes, holding gold may give you options that others don’t have (e.g. to bribe a guard to escape somewhere) but no one wants to live through collapse.

    I hope to drive something else, a graceful transition to the gold standard. In that case, what you have *is* money.

    Pizza: the other currencies will all collapse, and then the dollar last. Bolivar may be collapsing right now. Canadian probably has some years left in it. I wrote an article about a year ago arguing the Swiss franc will collapse (though not necessarily calling for it to happen in 2015).

    pbevan: Some silver is consumed. Hopefully, not so much that it is demonetized. Silver plays an important role. Not just for small change (which may be rendered less important by electronic gold programs) but for the small saver. Silver is the most hoardable good for someone who is setting aside 10% of his weekly wage. A portion of hoarding needs to be in physical metal at home, and silver is better for this purpose for most wage earners.

    • pbevan4 says:

      Thanks Keith
      So you agree there is probably about 5 billion oz. (1 billion oz. = 31.1 t) of both gold AND silver above ground – less than 1 oz. of each per person on the planet. The new monetary system is going to be interesting!
      Also, I understand there is about 750moz. of silver mined each year + 250moz. recycled etc. = 1 billion oz.
      Of this, some 650moz. is consumed – this is a bit more than some…
      Please don’t take this as criticism – love your work… and your discussions.

  16. rosslm888 says:

    Great article Keith.

    In economic collapse you will be selling some Gold not for worthless fiat but for other depreciated hard assets, houses, land etc. as they return to real valuation once the debt cycle resets. In Australia real estate has out performed Gold about 10x Gold miners 25x over the last 25 years. Valuation wise swapping some real estate for Gold now is prudent insurance, those with Gold already relax and wait.

  17. mhabner says:

    ‘What we will get is a persistently rising cobasis. The pattern will change too. Instead of a dropping cobasis with each price blip, we will see a cobasis that rises with price dips and holds firm or rises on price blips.’

    Question is, do movements in the cobasis precede price movements, or merely move simultaneously with price? ie, can the cobasis be used to predict price movements? In any timescale?

    Also does historical examination of the cobasis predict price movements such as the rise in gold from 2000 to 2011 – and especially the subsequent bear market, which caught many off guard?

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