Political Metals

Source

Suicide of the Saver
by Adrian Ash
BullionVault
Wednesday, 19 October 2011

Savers and pensioners! Your murderers need no revolution to storm your stately homes and
palaces…

IT’S NOW 100 years since Great Britain established its welfare state. Shortly after, and as
the First World War kicked off, it abandoned the free exchange of bullion for notes under the
classical Gold Standard.

Those 3 events were far from unrelated, but 100 years later it’s the monetary shift which
feels most pressing right now. Yes, political fighting over the welfare state is hotting up,
but a European shooting match looks unlikely (for the time being). Whereas UK savers and
retirees, like their peers across the continent, in North America and pretty much everywhere
else, are getting slaughtered.

Compared to the previous 100 years, real UK interest rates – the returns paid to cash deposits
over and above inflation – have been atrocious since 1911. Averaging less than 0.9% per
year, they’ve been a fraction of the 4.4% averaged in the 100 years starting in 1811, just after
the British Parliament’s Bullion Committee recommended a full return to gold following the
Napoleonic Wars, setting in train the global Gold Standard run from London until the start of
World War I.

Enough ancient history; fast forward to today, and the UK’s real rate of interest is now the
worst since 1975, back when inflation was running well into double digits but at least the
central bank made a pretence of addressing it, setting a nominal base rate of 11%. Last
month’s inflation reading was only a 20-year high, but all-time record-low interest rates make
cash such a losing proposition, savers are actively paying to hold cash in the bank. And these
unsecured creditors are lending to institutions whose “underlying problem is one of solvency
not liquidity” as Bank of England governor Mervyn King himself put it in a speech last night.

Losing real value by holding money with insolvent banks sounds like financial suicide.
Which for today’s moneyed classes – those millions of savers, pensioners and would-be
retirees raised by the welfare state – should sound uncomfortably like the “euthanasia of the
rentier” hoped for in the mid-1930s by J.M.Keynes, apostle of deficit spending (and nemesis
of the Gold Standard), and slowly put into practice after World War Two by decades of sub-
zero real interest rates. Taxation of unearned income peaking at 98% sure helped, too.

“Interest today rewards no genuine sacrifice, any more than does the rent of land,” wrote
Keynes in 1936, just ahead of that “depression within a depression” which forced economists
to coin a new term, “recession”.

“The owner of capital can obtain interest because capital is scarce,” Keynes went on, “just
as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic
reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital…I see,
therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it
has done its work…The euthanasia of the rentier, of the functionless investor, will be nothing
sudden, merely a gradual but prolonged continuance of what we have seen recently in Great
Britain, and will need no revolution.”

Today’s savers might not see themselves as “functionless investors” anymore than they see
themselves as stuffed-shirt aristocrats wielding “the cumulative oppressive power of the
capitalist to exploit the scarcity-value of capital”. But the owner of capital, however modest,
can no longer obtain interest, that much is plain. Because capital is no longer scarce. But
solvency is.

Adrian Ash
BullionVault

Since the recent price take down, we’re inundated by stories of retail buyers not being able to buy physical coins and bars at the ridiculously low spot prices painted by the paper futures markets. For those fortunate enough to get their hands on any physical bullion, it will be at relatively large premiums over spot with long delivery lead times. The disconnect is growing with each dramatic take-down..

“Sold Out”

KH of InvestSilverMalaysia reported that,

Back in Malaysia, it has been a wild ride. With the recent collapse of gold & silver prices, PM suddenly becomes very hot. Lowyat is having comments like 5 pages/per day ever since that crash. Physical silver bullion dealers are not selling. They are either: holding up the stock or, stock have been completely drained. Replenishing takes 2-3 wks. Even so, many bigger supplier from the states are having the same problem too! Too many orders! I am guessing even those at the top of the food chain are having problem processing massive orders. Many smaller local websites just shut down - refusing to take orders. 1cheapsilver has yet to recover from that 26-dollar-fall. It is really a war zone here.

Here’s what greeted him at UOB when he personally went there to buy his gold bullion. Read his story here.

Here’s another story along the same line from the UAE, courtesy of ArabianMoney.

Several readers of ArabianMoney have written to us over the past two weeks to express their astonishment at the current price of silver because demand where they live is so high that stocks have run out.

Consider this comment: ‘I used to buy silver from a shop in Kobar in Saudi. From the last four weeks they said they ran out of silver. I cannot find anyone who sells silver in Saudi now. I asked them from where do they get their silver. They said the UAE. The problem is they only have 1kg bars…and I still cannot find any supplier.’

No stock

Well don’t bother coming to the UAE. Our information is that the 1kg bars mentioned here and featured in a video on the website last month (click here) are all sold out too. We’ve also had feedback about low or no stock in Texas and Australia from big private bullion dealers there.

Now what would normally happen when a commodity is in short supply is that the price would go up to encourage sellers to put some more into the market. That is presently not happening because the silver price is being artificially suppressed in the Comex futures market by the bullion banks acting on instructions from the Fed presumably, so why would you sell that silver cheaply if you happened to own some?

But something has to give and it is the price of physical silver rather than the Comex price of the shiniest of metals. If you can find any silver these days you will pay quite a substantial premium over the spot price. But pay it because that is probably still a bargain compared to where silver prices are going.

The truth is that silver is a rare metal, more rare than gold. Silver reserves have been estimatated at one-hundredth of gold reserves. Silver is after all consumed by industrial processes and reserves have dwindled over the years because the price has been kept so low for so long by market manipulation. Why is that?

Silver price fixing

This market manipulation dates back to the last silver boom of the late 70s and the spectacular $50 spike in the price in 1980. The central banks then saw suppression of the silver and gold price as a part of their war on inflation. They clearly lost that war but kept gold and silver prices down until this decade.

Thirty-one years later and we are still not back to those silver prices despite a seven-fold increase in the global money supply. On that reckoning silver ought to be $350 an ounce, not $30 today.

However, the snap back for silver prices now has the capacity to be sensational, and far beyond the mini-spike in the first few months of this year from $30 to almost $50 again. So those who go seeking out physical silver to buy at current prices are going to be very well rewarded and soon, not in 31 years!

ArabianMoney continues to stick with silver as our top tip for 2011 (click here) and that means a big rebound in the price before the end of the year.

-End-

.. and watch what the Chinese are doing

-

It is evident from the stories above that trying to catch the absolute intermediate bottoms during corrections and expecting to buy physical bullion at those prices may be illusionary. So, if there are no gold vending machines nearby, what can the ordinary man on the street do to take advantage of the recent violent take-downs (expect more to come) and the increasingly volatile paper gold & silver prices? Consider these 2 options.

(1) Cost averaging

While there’s a possibility that that PMs prices may be forced to step into the elevator shaft yet again, the probability of that happening is anyone’s guess. For serious savers who understand that physical bullion is the only financial asset with no counter-party risks and that the fundamentals for owning PMs have not deteriorated one bit, the recent market intervention by the Powers That Be (PTB) should be viewed as a generous gift and an opportunity to start (or continue) accumulating on a cost averaging basis.  Here’s an excellent article on Ounce Cost Averaging buying strategy.

(2) Buy bullion like a professional

Retail buyers of physical bullion are so very far down the food chain that it’s very difficult to take full advantage of the sharp (deep and fast) drop in paper prices. This has driven some to consider PM derivatives like ETFs and pooled accounts. While these vehicles offer the advantage of capturing the narrow window of opportunity presented during price smashing operations by the PTB, the danger lies in the fact that these players end up buying and owning paper claims to PMs instead of owning the real thing. Living in the current financial system teetering on the verge of collapse, the more prudent among us would like to stay away from these investments carrying counter-party risks.

That leads us to the option of buying and owning physical bullion like professionals do - at the London Bullion Market. Of course we can’t do that directly. The way around is to use the services of established bullion dealers that act as the only middleman between us and the London Bullion Market. BullionVault, GoldMoney and AFE are 3 of the more reputable companies in this industry I’m familiar with, and they are reviewed here.

Learn more about buying and storage options, including discussions about Allocated Bullion Accounts in the comments section.

Updated: Oct 9

• Global Demand for Gold & Silver at Unprecedented Levels - KWN

-
Updated Monday, Aug 8. Go directly to updates
-

After the markets closed Friday, S&P downgraded US credit rating from AAA to AA+ with a negative watch.  Although there have been warnings as far back as April, this is significant because it is the first time the US actually lost its sterling AAA rating since it was granted in 1917. S&P’s full report in pdf. Dagong, the Chinese Credit Rating Company lowered the United States to A+ last November after the U.S. Federal Reserve decided to continue loosening its monetary policy and announced a further downgrade to A earlier in the week.

With this historic downgrade the US credit rating is at par with New Zealand and the bonds of Germany, France, Canada and the UK now have a higher rating.

Initial reactions to the downgrade

Buffet, whose Berkshire Hathaway was downgraded from AAA to AA+ by S&P in February, told FBN late Friday that the downgrade of the United States’ triple-A credit rating “doesn’t make sense.” He further went on to say

If nothing else takes place, meaning, if all other variables hold and there isn’t say, a new problem in Europe, it won’t make any difference. “Think about it. The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will. Now if you’re talking about inflation, that’s a different question.”

Peter Schiff, on the other hand, thinks that the downgrade was not low enough! Claiming that he has a higher credibility than S&P for giving the sub prime mortgage related bonds junk status way back in 2006 while S&P continued rating them at triple A, he thinks this downgrade is going to accelerate the flight from the US$ and kick off a self-perpectuating loop of Downgrades > Higher Interest Rates > Weaker Economy > Increased Deficit > More Downgrades.

-

Some seem to think that Wall Street insiders knew of the impending downgrade and have already started to sell down stocks the whole of last week. While the global stock markets lost about 10% last week in the midst of worsening Euro zone crisis, the US$ did not experience the “flight to safety” effect as it did in 2008, despite the fact that Switzerland and Japan intervened aggressively in the market to prop up the dollar. On the other hand, gold hit another weekly all time high despite a slightly stronger dollar.

Gold bugs and holders of hard currencies are eagerly looking forward to an exciting week to see how the big boys move their paper assets around. Would they be chasing perceived relatively stronger fiat currencies like the Euro or still-standing triple A paper assets or would there be a frantic flight to gold (& silver).

-

Any clue from BullionVault’s Round-the-Clock trading physical gold platform?

While all markets are closed for the weekend, BullionVault’s 24×7 physical gold & silver trading platform may give a clue of what’s ahead Sunday night when Asian markets open Monday morning.

Clients at BullionVault are able to trade physical gold & silver with each other (with BullionVault as a dealer) or directly with BullionVault as principal. A recent check online shows that offers have dried up for gold at their New York and London vaults.

Normally, even during weekends, there are active bids and offers at reasonable market depths. See typical screenshots here. At time of writing, there’s only 3.236kg (104oz) on offer at the London vault while the New York vault has only ONE oz (0.031kg) on offer at whopping $1804/oz ($58,000/kg). The markets at Zurich vault looks more normal, albeit at a much higher spread of 0.93%.

-

Finally, Dan Norcini has this to say about in his KWN interview on Aug 6, 2011. Read the interview here.

“I would expect the immediate reaction to the news in Asian trade Sunday evening will be to see the US Treasury markets open lower in a knee jerk reaction with gold opening higher from the get go. Whether or not the bond markets recover is unclear at this time since some of this might have been reflected in the move lower in the bonds just before the close of Friday trading late in the afternoon yesterday.

-

Updated 8 Aug (Monday Morning in Asia)

Gold up $25, Dow futures down 276 points when market opens in Asia. Buffet is wrong, Schiff is right!

-
By noon, Asian market.

Back to Top