Gold & Silver: How The Bankers Drive Up Bullion Prices, Part I (GLD, SLV, GDX, GDXJ, AGQ, SIL)

December 21, 2011 12:00am NYSE:AGQ NYSE:GDX

Jeff Nielson: Regular readers are excused for being confused by this title, or perhaps even suspecting a misprint. After all, having written numerous commentaries documenting the activities of the

bullion banks in suppressing bullion prices, at first glance the title appears nothing less than perverse.

At the same time, I have previously observed that what the banksters are able to accomplish in depressing prices over the short-term must lead to a boomerang higher in prices over the longer term. In our markets we see yet another example of the principles of economics mirroring the laws of physics: for every action, there is an equal and opposite reaction.

There is a particular reason for me to raise this issue at this particular time. While the predatory actions of the bankers in the bullion market are frequently highlighted by precious metals commentators, much less often discussed is the even more rabid suppression of the gold and silver miners.

To understand why the bankers are terrified of seeing gold (NYSEARCA:GDX) and silver miners (NYSEARCA:SIL) valued at fair multiples, we must first understand what those rational valuations imply. First of all as I have explained in previous commentaries, commodity producers provide natural leverage on the price of the commodity they produce (for better or worse). A rising price makes these companies more profitable in multiples of the increase in the price of the commodity, and similarly decreasing prices exert a greater than 1:1 impact on the way down as well.

Thus with gold prices (NYSEARCA:GLD) having risen by roughly a factor of six from their absolute bottom, and silver prices (NYSEARCA:SLV) having risen by roughly a factor of ten; we should see these miners sporting fantastic valuations to reflect their record (and rising) profitability. In reality, at current valuations many of these miners have not even matched the rate of increase in bullion prices – and in fact there are plenty of actual laggards.

Because of the fact that commodity-producers provide natural leverage on the price of the commodity they produce, rising prices for the producers are seen as a bullish indicator for the sector. Immediately we see the primary basis for the bankers’ hatred of the miners: allowing them to rise to their fair market value would be like a neon sign for investors, highlighting the stellar returns from investing in gold and/or silver.

Instead, despite the fact that precious metals has been the #1 sector over the past decade, it represents approximately 1% of the holdings of the average investors’ portfolio. Arguably, there has never been such perverse under-ownership of an asset class in market history. Readers should note that this is also an absolute rebuttal to all the nonsensical babble of “gold bubbles” and “silver bubbles”. Obviously a sector cannot be in a “bubble” (which by definition is a market mania) when the asset class remains a secret and/or mystery to the vast majority of the investment community.

As the predatory/parasitic conduct of the banking crime syndicate nears the point of completely destroying our economies, however; a second and even more imperative motive has arisen for the banksters to focus all of their power and malice on sabotaging this sector: their fear of the inevitable decoupling between gold and silver miners and all other equity classes.

As I have detailed in dozens of commentaries focusing on the larger macroeconomic picture; there can be no argument that Western economies are on the verge of a catastrophic meltdown. Thanks to the Ponzi-scheme financing in which all of these governments have been ensnared by the banksters, there will be a “domino effect” as these economies crumble – with the inevitable result being an economic depression unprecedented in modern history.

Unfortunately that is literally only half the nightmare. The bankers’ predatory conduct in all commodity markets is simultaneously pushing us toward numerous supply crises. Shorting and all price-suppression have an inevitable effect on all commodity markets. Artificially low prices simultaneously stimulate over-consumption and discourage production. As a matter of arithmetic, the only possible long-term result is the total collapse of inventories. Empirical evidence shows this is precisely where we are headed.

What this means is that at the same moment that Western economies are plunging into horrific economic depressions, we are about to see a massive spike in prices for basic necessities, above and beyond the large increases already experienced. One by one, each of these commodities will experience massive price spikes as (finally) the fundamentals of exhausted inventories overwhelm the price suppression of the bankers.

This “hyperinflationary depression” in the West (as it was first dubbed by John Williams) will be exacerbated by the relative economic health of the East. While Asian (and other emerging) economies may not be able to sustain growth, their dynamics are strong enough that they should at least be able to hold onto gains in their standard of living to date. That (along with even modest population growth) ensures that demand will remain strong for these natural resources, irrespective of what ‘Chicken Littles’ in the Western media are incessantly clucking.

Conversely, while resource producers will continue to enjoy relatively healthy economic fundamentals (with the exception being base metals production); most other Western commerce is destined to be hammered by the depression. The notable exception to that would be those high-tech sectors where Asian economies cannot (yet) match/replace Western production. Such niches are two few and too small to sustain our economies.

This means the decimation of our “consumer economies”. People with no money and no jobs can’t consume. Similarly, every/all business which is in some way associated with residential real estate will be crushed. The combination of bubble-markets (the product of near-0% interest rates) and near-zero buyers ensures that the worst days are yet ahead for all Western real estate markets. This in turn will mean depression for the construction industry – and every niche of the economy dependent on that economic activity.

This brings us to decoupling. Not only are gold and silver commodities with massive supply-gaps between total demand and mine supply, but they are also the world’s only “good money” – and ultimately the world’s only true, safe havens. So while precious metals will benefit from the same fundamentals favoring all commodities; it is their second identity as prime, monetary assets which will set the precious metals sector apart from all others.

As Depression overwhelms our economies, “record profits” will continue to be the mantra of the gold and silver miners. At that point of course, any market lemming whose wealth has not yet been exhausted through heeding the investment advice of bankers will flood into this sector. Thus, the “moment” which the banksters seek to delay as long as possible is when lemming-awareness finally identifies gold and silver as the “go to” class of equities.

At that point, we will actually have the mania and “bubble” which mainstream propagandists have been “predicting” for nearly ten years. However, with the sector so grossly undervalued at the present time, those “bubble prices” will be at valuations which make the NASDAQ bubble look like nothing more than a tiny, market hiccup.

The NADAQ bubble was driven by greed. The (eventual) bubble which will hit the precious metals sector will be driven as much by fear as by greed. Never before have the two most potent emotional drivers of markets been simultaneously focused – and at maximum intensity.

Because the babble of the mainstream media is certain to confuse/misinform the ordinary investor, let me provide those beleaguered individuals with a “signpost” they can use to actually measure if/when the precious metals sector reaches the stage of an asset bubble. Let me reiterate a point which is beyond the reasoning capacity of media drones: gold and/or silver cannot be in “bubbles” until people actually own them.

When I refer to precious metals representing 1% of the average investment portfolio, by no means am I implying that everyone has a 1% holding in gold and silver. Indeed, the reality is the exact opposite. The tiny segment of the investment community which has discovered this sector tends to be heavily invested in it. Canadian investment icon Eric Sprott has gone on record on many occasions in saying that he is completely comfortable having the vast majority of his personal holdings in precious metals.

Thus, it is much closer to the truth to say that 1% of investors are holding 100% precious metals – and 99% are holding none at all. We don’t need some clueless stooge in the media to tell us when precious metals becomes a “bubble”. We can observe it for ourselves.

Simply ask yourself as a matter of human nature if you were infected with “gold fever”; how much of your investment portfolio would be focused on precious metals? Would it be 10%? Highly unlikely.

Indeed, human nature tells us that when gold (or silver) mania hits that people could be expected to channel 25% of their holdings, 50% of their holdings – or even more. Since this “mania” totally equates to gambling, we can merely observe how gamblers not only funnel all of their “investment” dollars into their betting, but sell/mortgage assets to plough even more of their wealth into their addictive behavior.

However, as prudent investors we should never envisage such extremes. Suffice it to say that when precious metals reaches a level of 10% in the average investor portfolio (which is little more than an historic average), then we can begin to suspect that the sector might be headed toward a bubble.

Put another way, our “bubble alarm” will not even begin to sound until total investment in the sector has increased by 1000% from current levels. Until that moment arrives, we can simply equate any/every headline shrieking “gold bubble” with “idiot writer”.

This brings us back to the miners. Let me reassemble the facts. We have a sector of companies generating record profits, huddled within entire economies which will soon be in a state of total collapse. This is to be followed by what we can conservatively expect to be a 1000% increase in total investment, by a throng of investors being simultaneously driven by extreme fear and extreme greed.

At the moment, however, these miners are mired in a valuation-depression of their own. In Part II, I will take a closer look at the extremely depressed prices of the miners, and explain how (inevitably) the lower the prices of the miners go over the short term, the higher that bullion prices will go over the medium and long terms.

Related:  ProShares Ultra Silver (NYSEARCA:AGQ), SPDR Gold Trust (NYSEARCA:GLD), Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ), iShares Silver Trust (NYSEARCA:SLV), Market Vectors Gold Miners ETF (NYSEARCA:GDX), Global X Silver Miners ETF (NYSEARCA:SIL).

Written By Jeff Nielson From Bullion Bulls Canada

Jeff Nielson is from Canada and is a writer/editor for Bullion Bulls Canada   He has a personal background in law and economics. Bullion Bulls Canada provides general macro-economic and political commentary, since the precious metals markets are among the most complex (and  misunderstood)  in the world.

Bullion Bulls Canada also provides basic coverage of Canadian precious metals mining companies. Canada is the global leader in mining exploration, and Canadian-listed mining companies (on the Toronto Stock Exchange and Venture Exchange) are responsible for the majority of the world’s most-promising discoveries.

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