3 Legs Of The Precious Metals Bull: Part II
Jeff Nielson: In Part I, readers were again reminded of two of the primary reasons we should all be converting our decaying paper currencies to gold and silver. Currency dilution and price-suppression are realities which don’t merely suggest that bullion prices might rise in the future, but rather indicate why they must rise substantially.
However, precious metals investors don’t have to limit themselves to just those two reasons why bullion prices must rise dramatically over the longer term. There is a “third leg” to this argument which is an equally powerful dynamic, and also unequivocally certain to lead to much higher gold and silver prices.
I refer to the third leg of the precious metals bull as “demographics”, but in actuality this is just a reference to some of the extremely potent supply/demand fundamentals which are certain to drive bullion prices much higher.
In the global economy, it is common knowledge that there is a relentless transfer of wealth (and economic power) from West to East, as the thriving economies of Asia have real economic growth and real income growth amongst their populations.
In China, per capita income was only around $1,000/year (USD) in 2003. By 2011, that figure had exploded to nearly $3,500 (USD) per person, and China’s government is expecting a further doubling of that total by 2020. Given the explicit recommendation by official (i.e. government) media for the Chinese people to invest those rising incomes in bullion, we don’t simply suspect that Chinese bullion demand will continue to increase; we can be certain of it.
In India, per capita income finally crossed the $1,000/year threshold in 2011, which has already unleashed a wave of discretionary consumption; as low debt-levels/high savings and a low cost of living mean that Indian households are already rising above a subsistence existence at even these modest income levels.
However, Indians were voracious consumers of bullion even before they rose above this subsistence level, as their peasantry (who lack access to banking services) use their bullion holdings (generally in the form of jewelry) as their means of saving their wealth. This deep, cultural affinity for bullion is obviously unlikely to diminish as incomes rise further.
Instead, as indicated in a recent commentary; India has a huge, national gold-deficit – requiring the importation of hundreds of tons of bullion per year to satisfy domestic demand. With silver also widely held among the populace, there is a large silver deficit as well.
Meanwhile, in Indonesia – another very large Asian population with rising incomes and a growing economy – gold currency has already been introduced into the economy several years ago. And the appetite for gold in the Middle East petro-economies is nothing short of legendary. This is still another demonstration of the general understanding in Asia of a principle which is (as of yet) beyond the ken of Western Sheep: gold is money; paper is merely currency.
We can demonstrate the enormous power of these demand demographics with one, simple comparison. As already noted, from 2003 to 2011 Chinese per capita income more than tripled. During that same period of time, global mine-supply of both gold and silver only increased by approximately 20%.
The response (by the banking cabal) to this large-and-increasing supply deficit in the bullion market is to do what comes so naturally to bankers: sell “paper gold” – i.e. sell Chumps paper but tell them that there is gold (or silver) “backing it.” Western banksters have been scamming Chumps in the West with this fraud for many years, with their larger paper-gold (and paper-silver) frauds as of yet not fully exposed.
Not only is this form of gold-fraud already alive-and-well in China, but some of the bankster scams have already started imploding over there. Not surprisingly, the Western banking cabal is now trying to bring their gold-fraud to India’s huge, domestic market as well. However, as evenForbes Magazine observes; such fraud does not prevent prices from rising, but rather leads to even more spectacular price-spikes.
The dynamic here is simple. As the paper-gold fraud unravels (as all fraud inevitably does), there will be first the shocked discovery that actual supplies of bullion are only a tiny fraction of all “bullion” holdings. How tiny a fraction? Just ask Jeffrey “100:1” Christian, head of the CPM Group.
A panic then ensues, as holders of paper who thought they were holding gold and silver suddenly scramble to attempt to obtain the real thing. Most of these would-be buyers will end up disappointed – especially in the silver market. Global silver inventories have already plummeted by at least 90% over the past quarter-century, while noted silver authority Ted Butler estimates that global stockpiles have declined by over 80% in the past half-century.
Most of this silver has been consumed industrially (in tiny quantities), and is now scattered across landfills all over the globe. This silver is now gone forever; unless much, much higher prices make the recycling of this metal economically feasible.
For the more parochially-minded Westerner, oblivious to these global demand demographics; our own demographic picture is perhaps even more startling – but equally bullish.
Typically, Western investors have held between 5% and 10% of their wealth in precious metals; with that ratio tending to rise significantly in times of economic uncertainty. Yet with hopelessly-insolvent Western economies in the grip of the worst economic crisis in their history (and showing absolutely no signs of being able to cope with it), we see the average Western investor with roughly 1% of their wealth (on average) in gold and/or silver.
If Western investors have any doubt about their own, absurd folly; they need to merely have a look at the actions of the world’s central banks. Gone is the lie that gold is some “barbarous relic”. It has been re-elevated to being the premier monetary asset in our monetary system. Meanwhile, the lying central bankers have gone from being net-dumpers of nearly 500 tons of gold per year to net-buyers of roughly 500 tons/year – with their gold-buying increasing exponentially over the past three years.
Demand demographics couldn’t be more simple: nobody has as much bullion as either they want,or they need. Meanwhile, on the supply side the parameters are equally extreme.
The relentless price-suppression of bullion and the even more-rabid “shorting” of gold and silver miners means that these mining companies are in the midst of their second depression in the last five years. Under such conditions it is absolutely impossible for any significant increase in mine supply. This refers not merely to the short term (1 – 2 years), but the medium term as well (3 – 5 years).
We have massive supply-deficits in both the gold and silver markets, due to voracious and rising demand amongst the world’s largest populations and most-dynamic economies (with rapidly rising incomes). Conversely we have a totally stagnant supply picture, with absolutely no possibility of any significant increase in supply to match this demand – no matter how high bullion prices go.
“Scrap” sales of gold and silver cannot possibly suffice. As noted, almost all our silver stockpiles are already gone. Meanwhile, the poorer holders of gold have already pawned most of what they possessed, while (for obvious reasons) more affluent bullion-holders are unlikely to part with what they hold, even at dramatically higher prices.
Looking at the Big Picture the investment message is clear: nothing can beat this three-legged Bull. Purchase only real, “physical” bullion – and avoid the bankers’ magic beans.
[Disclosure: I hold physical gold and silver bullion, and shares in gold/silver miners.]
Jeff Nielson is from Canada and is a writer/editor for Bullion Bulls Canada www.bullionbullscanada.com. 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.