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Franklin Sanders: Paper prices no longer rule the precious metals markets

Section: Daily Dispatches

Either This Is the Greatest Silver- and Gold-Buying Opportunity of All Time, or the End of a Bull Market

By Franklin Sanders
Friday, August 15, 2008

Twenty-eight years of brokering silver and gold have not prepared me for what I met this morning.

One of my wholesalers said he was not selling anything, only buying, until further notice.

Another refused to give any prices until he adjusted his spreads.

Another was spreading one-ounce gold coins, normally at $7-$8, at $25.

Another said he was making no sales for immediate delivery or deferred payment, only sales for 30 days' delivery paid at once.

Premiums were high: Austrian 100 Coronas, 4.7 percent; Sovereigns, 5.2 percent; Krugerrands, 6.8 percent; American Eagles, 8.2 percent (but none for immediate delivery); and Mexican 50 pesos, 4.5 percent.

Ninety-percent silver was at $9,783 a bag, a whopping 6.7 percent premium.

Silver American Eagles for 6-8 week delivery, a 23.7 percent premium.

But "premium" is only one way of looking at things, dividing the item's price by the spot silver price. Another way to view it is that physical prices have de-coupled from paper prices. The paper prices -- futures, ETFs, etc. -- no longer rule the market.

Physical prices are declaring their independence from paper pricing as those holding physical gold and silver refuse to sell it at prevailing paper prices. I have been expecting this to happen toward the top of the bull market, catalyzed by some paper purveyor's failure, but now? What can it mean?

At the very least, the public is nourishing a gigantic hunger for silver and gold in their hands, and no place else.

By now all the leveraged silver and gold longs have been forced out, just as all the dollar shorts have been chastened, bruised, and beaten away. Either this is the greatest silver and gold buying opportunity of all time, or the end of a bull market.

But it is NOT the end of a bull market. Time alone argues that. A bull market runs 10-20 years, and this one has run only seven, since 2001. Those who think silver and gold have fallen into the "bursting of the commodity bubble" completely misunderstand what drives them in the first place.

For silver and gold are not commodities; they are money.

When investors pile into silver and gold, it's not any commodity bubble forcing them there but monetary demand. They aren't buying metals because they think that all the Indian ladies are going to be wearing two nose rings instead of one this season, or that the American bourgeoisie will suddenly begin stockpiling sterling silver forks again.

They are buying metals because -- listen to this, get it straight once and forever -- they distrust fiat central bank currencies (or if you prefer, national currencies). The dollar is trash, the yen is trash, the euro is trash; all are equally insolvent, equally unbacked by anything expect a politician's or central banker's promise, which is not nearly as good as that of any madam at any bordello anywhere.

The dollar is rising? So why? Did it become better, acquire more gold backing, solve its chronic balance of payments deficit last night? Come on.

Did the euro get worse overnight? The yen? How much worse could it get?

You are seeing competitive devaluations, all very much worked out collegially in advance by central bankers. Fundamentally meaningless.

What is NOT meaningless is that the great alternative currencies, silver and gold, have long been advancing against ALL national currencies. All markets swing like pendulums, too far one way, then too far the other. Silver and gold prices became overbought -- a lot of people short dollars were long silver and gold. The dollar rallied and oil and commodities fell, sucking down silver and gold money.

Look at the numbers. Even with gold down to $787.50 today, that's only a 21.5 percent correction, while always more volatile silver is down 37.4 percent. Friends, these are normal, not outlandish corrections. Sober up.

Out with the worst of it: If the silver price is correcting its entire rise from November 2001 at $4.025, a 38.2 percent correction would carry to $14.253; a 50 percent correction to $12.30 (nearly seen today); a 61.8 percent correction to $10.35.

Assuming that the gold price is correcting the move from $255.1 in February 2001 to $1,003.2 last March, 38.2 percent correction carries it to $717.43, 50 percent to $629.15, 61.8 percent to $540.87. Carefully mark that these are not my projections, only what is possible at those commonly seen correction percentages.

On the other hand, if silver and gold prices are correcting the 2006 to 2008 moves, then gold hit its 50 percent correction level today at $782.60, and silver finished its correction today to the 75 percent level.

Crazy, am I? Five years into a bull market in 1987 the Dow plunged more than 30 percent in just four days. Was the bull dead? Hardly, since it rose more than 10 times in the next 12 years.

Bottom line: Silver and gold remain in a powerful bull market with another seven or more years to run. The bull market is handing you a gift: Buy. The bottom was probably seen today, but recovery will take a while. The dollar rally may carry to 82 but will peter out in three months at most, probably sooner. Stocks may reach 12,500 but will come down hard thereafter.

On this day in 1971 President Nixon announced a 90-day freeze on wages, prices, and rents, and formally reneged, welshed, and repudiated any promise to pay gold for U.S. dollars, even to foreigners. Nixon broke the dollar's -- and the world's -- last link with monetary morality and set the whole world afloat on a sea of paper money and floating exchange rates. Tricky Dick did some bad things, but of all he did, this did the most damage.


Franklin Sanders is editor of The Moneychanger, a monthly newsletter, and a coin and bullion dealer in Westpoint, Tennessee:

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