Monday, August 1, 2016

James Turk – Is History About To Repeat In The Silver Market? Plus One Of The Most Stunning Charts Of The Last Decade

Markets zig and they zag--they don't move in straight lines.  If one recalls in the book and movie The Big Short, the protagonists made the right bet in shorting (e.g. betting against) the fraudulent subprime mortgage boom in 2006.  However, they initially lost a ton of money when loans were defaulting, which should have generated profits for their short positions.  Instead, because the secondary derivatives (or "shadow") markets were grossly manipulated and illiquid, the bearish short positions against the mortgage-backed securities (CDO's) were tanking initially.

Fortunately for the protagonists, the credit default swaps (a CDS is an insurance contract betting  against the credit debt obligations) regained sanity in 2008 and soared in value when the deluge of mortgage defaults accelerated.  The underlying real estate industry took a nose dive nationwide. The CDS holders profited in the billions, far outweighing their previous losses.  In summary, the speculators (the big shorts) bet correctly, but they were early, before being proven right and profiting handsomely in the end.

One could debate that manipulated markets take time to cleanse themselves before true price discovery mechanisms bring supply and demand dynamics to rational levels.  That's theoretical.  But the pragmatic point is that speculators should have enough liquidity to outlast the transitory cycles when markets move against their positions.  In the aftermath, they will profit from the inevitable outcomes.  Profits come from being right in both direction and timing.

Likewise, for 4-plus years, precious metals have been taking a beating.  However, against a backdrop of 6000, 100, 45, or 15 years, gold and silver have outperformed equities and bonds.  More recently, the two noble metals have outperformed other assets in 2016.

Precious metals provide a counter-balance to traditional financial assets, and tend to outperform when there is distress in markets.  With equities particularly, they move up on an escalator, but plummet down violently in an elevator.  For example, the tech-heavy NASDAQ index lost 80% between its 2000 peak before bottoming out in 2003.  The S&P 500 lost approximately half its value between the 2007 peak and the 2009 bottom, when Fed Chairman Bernanke stepped in with the bank bailouts in 2008 and QE in 2009. 

Accumulators accumulating the metals on the way down have brought their average cost down as well.  And now that the precious metals asset class has rebounded, the paper profits have risen.

But that's not the point of accumulating physical precious metals: to garner "profits".  They are stores of value, not trade-able securities.  They are true buy-and-hold portfolio hedges, protecting holders against inflation--and deflation, when all other assets have uncertainty attached to them.

Yes, I mention deflation because while cash is king understandably in deflationary times, precious metals are also counter-intuitively valuable due to their durability, divisibility, portability, acceptability, and uniformity.  For these reasons, cash is a viable currency.  The fact that until now, the USDollar is also the global reserve currency creates demand for it, rendering it even more valuable.

But the winds of geopolitical change are upon us, as the dollar's perch as the reserve currency becomes increasingly perilous.  Precious metals outshine fiat currency as they are also solid stores of value, because they are limited in supply, and therefore cannot be debased by reckless currency creation from central bankers.

And be careful with unallocated gold and silver ETF's as they are merely paper promises to deliver precious metals.  They are not sufficiently backed by physical inventory.

Having said that, patience is a virtue, and the time for gold and silver to shine is upon us and will only get brighter going forward.  Continue accumulating physical precious metals.  Better yet, buy the price dips when they occur.

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