Inflation, Inflation, Inflation. But What’s Going on With Gold & Silver?

Gold and silver have been around since the beginning of time. Gold is a noble metal, and silver is on the periodic chart of elements.

Both are extremely hard to obtain. Both have intrinsic value. This article aims to convey thoughts on how gold and silver perform in times of inflation. The conventional wisdom is that gold and silver should be performing better. So what’s going on?

The “spot price” of gold and silver is a confusing concept. Let us call it the “spurious derivative price,” because a derivative sets the physical metal price.

A derivative is a financial instrument that derives value from an underlying asset. For example, when precious metals are valued, it is essential to remember that people are referring to the paper price.

PHySICAL SILvER mARKET 2021

According to the World Silver Survey 2022, around 823 million oz of silver were mined in 2021. At a spot price (19 USD,) this would value the physical silver market at approximately 16 billion USD.

PAPER SILvER mARKET

The COMEX and the LBMA are where “not actual physical silver” is traded, but a paper derivative product is exchanged instead. This allows parties to hedge against possible future price movement, i.e., betting silver prices will go higher or lower.

But these derivatives are abused. Hedging, derivatives, leverage, and financial instruments are polite words. Unfortunately, what is happening is fraudulent acts are becoming normalized.

It isn’t easy to find actual numbers for the value of the paper market. The only way to do so is to extrapolate or draw some inferences from clues.

The 2022 World Silver Survey mentions this:

“ ... annual turnover for the main COMEX contract fell below 100bn oz (-25% y/y) for the first time since 2016.”

For 2021 this was around 98 billion ounces. This means that the value of silver derivatives related to COMEX amounts to approximately 98 billion oz multiplied by the average silver price of 25 USD (in 2021).

This yields around 2.5 trillion USD, and then there’s the LBMA itself with 92 billion oz (almost another 2.5 trillion USD) and others like the Shanghai Futures Exchange. So, being conservative, if we divide this 2.5 trillion USD by 16 billion USD (the value of all mined silver in 2021), we get 156. This means that for every ounce of physical silver, there’s an additional 156 paper oz for COMEX alone.

COvERAgE

If all these paper ounces needed to be covered with physical ounces, we would find it impossible. To mine 92 billion oz would take around 100 years.

INFLATION SHOULD BE CALLED DEBASEmENT.

Politicians employ economists. Together their narrative is fed to the media. The media reports that inflation is expected, or a natural market phenomenon. The truth is that inflation is entirely a political act. Inflation is not caused by the butcher, the baker, the farmer, or the energy producers. Foreign scapegoats like Putin do not cause inflation either. The government is responsible for inflation with its monopoly over the currency. Governments borrow money from the Central Bank at interest on your behalf to “spend ourselves rich.”

Governments inflate the currency to generate more money than they could obtain through taxation. Inflation is a covert and insidious “tax” that the government takes from the citizens without their consent.

Inflation is nothing new. Even in ancient times, governments would resort to debasing their currency by introducing copper to silver, or clipping coins. Unfortunately, modern central banks and governments perform the same deception on a much grander scale. From the founding of the U.S., it took over 227 years to print its first $26 trillion. But in just months, the U.S. Government printed more than $6 trillion.

WHy DID WE KEEP INTEREST RATES AT zERO WELL PAST THE gLOBAL FINANCIAL COLLAPSE OF 2008?

Because the banks needed easy money and a riskless trade.

Who gets to borrow at the Federal funds rate? Nobody but the banks. The U.S. Treasury, ECB, and Bank of Japan have an enormous problem: massive amounts of debt. They can’t restructure this debt quickly because no one wants to take the other side

The market capitalization of Bitcoin (BTC) from april 2013 to august 8, 2022 (in billion u.S. dollars)

of the trade. The Japanese and Chinese are selling U.S. Treasuries.

The government can’t default on the debt or politicians would lose their jobs. So, the only choice remaining is to devalue the debt. The Fed only has the remaining tool to print money or downgrade the debt. At the same time, they kept interest rates ridiculously low for too long. This means the only buyers of debt have been the central banks.

Let’s look closely at this transaction. Banks have been borrowing at zero, then they buy Treasuries and lever them up 11 or 12 times. This is a riskless trade. JP Morgan had zero negative trading days last year. Think of that—an entire year of perfect trading!

They are not trading; they arbitrage by borrowing near zero and buying Treasuries.

Banks have been refortifying their balance sheets after being rescued. The Fed was happy with the banks, and the banks were handing out bonuses to managers who went on this miraculous run of NO NEGATIVE TRADING DAYS.

Meanwhile, the mega-corporations entered another sweetheart deal. They were the beneficiary of crazy and unfair tax legislation. The scheme went, “We will cut your taxes, and you can then buy back your stocks” (which increased the price of the stock even though their earnings were flat).

This has led to all sorts of distortions. This has turned the stock market into a derivative of the global debt market. Where does the money go? Mainly in these five areas:

1. Equities, Taking a beating

2. Currency, Inflated

3. Real Estate, Beginning to tumble

4. Bonds, Unsafe

And the emergence of domino #5, Crypto

Bitcoin is one of 20,000 crypto products on the market. Crypto is a new phenomenon since the last time we saw record inflation (45 years ago). The value of the global crypto market cap on January 1, 2022, was $2.188 trillion, but since that date, it has lost more than 60% of its value. Many precious metals analysts believe that a healthy part of these 2 trillion dollars would have resulted in bidding up the price of precious metals.

Housing, food, and energy are the three most critical parts of the everyday consumer’s diet. Now let’s look at a few of these priced in gold.

In 1971 the average home price could be purchased with 997 ounces of gold.

Nine years later, that same home could be purchased with only 115 ounces of gold.

Today, homes are relatively “cheap” when priced in gold. That sounds insane, but it makes sense upon closer inspection. On this Shiller Index shown above, there is no dollar component in the ratio itself. As a result, inflation drops out of the picture, so we are left with the value of two of the most popular tangible investments relative to each other.

A gram or an ounce of gold buys essentially the same crude oil today as it has over the past seven decades. I have chosen oil because the energy it provides is essential to our standard of living, but other commodities have a similar result.

CONCLUSIONS

We have been told that gold and silver should do well in inflationary environments, and no one disputes that we live in inflationary times. Unfortunately, this last round of money printing (justified by the Covid War) has unleashed the inflation beast.

However, we want to make the case that gold has preserved wealth, which is the mantra of the brutal money camp. The oil chart is an objective way to demonstrate this fact. In terms of performance, gold has had an annual compounded rate of return of ten percent since 2000. This outperforms both the U.S. stock and bond markets for the past 22 years.

Part of the problem is perception. Investors enjoyed a “forever” gold market for 11 straight years, from the year 2000-2011. The past ten years have seen the market wallow back and forth without a clear direction. However, we have reached an inflection point. Gold is currently undervalued and will surpass the price needed to accurately price it for the currency debasement of the past several years. What is that price? It would be $5000 minimum and $10,000 is not an unreasonable expectation.

The derivatives system is like a house of cards built on a swimming pool of ignited gasoline. Six trillion in money printing is astronomical money creation. We have experienced these miraculous and riskless trades by banks, stock buybacks galore, and war profiteers in conspiracy with Congress to steal tax dollars. This level of corruption is unprecedented, plus we have the emergence of crypto.

Gold and silver are not reacting as expected for another reason—lack of education. The monetary system is a mystery better left to the banks, so most people alive today have no idea how devastating a high level of inflation is to the physical (real) economy. A quick look at what has happened in Germany, Zimbabwe, or any of a thousand fiat currencies will prove they all fail. The U.S. dollar will die or get so close that a new monetary system will replace it.

Finally, I want to write something specific to the silver market. There have been multiple class-action suits against banks and financial institutions for charging storage fees on “phantom” silver. This means that silver was purchased, but it never made it to the vault; it was merely a bookkeeping entry. How big could the silver market be if this was the case?

A suit was filed in 2007 against Morgan Stanley. In that case, investors were frauded into an unallocated metals storage program. The bank defended itself and stated it was simply following standard industry practices. What if this bank was telling the truth? Morgan Stanley did settle by paying a fee. The silver was not delivered to the silver investors.

This dirty secret is seldom mentioned, and specific banks and investment houses play by the rules, but some do not.

If you are looking for a safe storage facility, send an email to our company, support@themorganreport. com, and put STORAGE in the subject line.

David Morgan is the publisher of the Morgan Report, found at www. TheMorganReport.com. This website offers three levels of service for investors in the resource sector. Although considered a leading voice in the silver industry, TMR focuses on the entire sector having been first in rare earths, cobalt, and cyanide free recycling. Visit the About tab on the website and view The Four Horsemen film for free. This documentary is must viewing for people during these fast changing times.

Jon Forrest Little resides in Pittsburgh PA. He is the publisher of The PickAxe and a market strategist for The Morgan Report. His professional background is in clay mining and architectural sales. He studied anthropology at the University of New Mexico and economics at Georgetown University. Jon is also a contributor on Palisades Gold Radio, Arcadia Economics and writes for Money Metals.