DollarCollapse: Hi Tom, the tone of the precious metals markets seems to have shifted from utter despair to cautious optimism. Is this the bottom?
Tom Cloud: I’m not sure that the bottom is in, but it certainly will be between now and the 27thwhen the government raises the debt ceiling. In the meantime there’s the possibility of gold going lower, maybe breaking down to $1,540, which from a technical standpoint certainly looks possible.
But the fundamentals are there for it to go much higher. You just need something to jump start it, and I think that event is the raising of the debt ceiling at the end of the month. History tells us that when the debt ceiling goes up gold and silver go with it.
DC: How is the debt ceiling different from the sequestration that just kicked in?
TC: Sequestration is automatic spending cuts based on a deal from a year-and-a-half ago. The debt ceiling is about the government’s ability to borrow money. As long as they can borrow as much as they want and print however many trillions of dollars it takes to cover the borrowing they don’t have to control their spending. We know they’ll raise the ceiling because the alternative is to close the government down or actually cut entitlements and the military, none of which is politically possible. The only question is who claims victory for what. So we’ll see spending cuts that kick in ten years from now, which means never, and an immediate increase in debt. That’s a great environment for precious metals.
DC: How are your customers responding to all this?
TC: The little guys that should be buying 20 ounces of silver and one ounce of gold are staying away. They’re scared because precious metals are down so far this year. But the big investor who’s putting in $50,000 or more at one time continues to be remarkable in terms of how many orders and their size. If big money is smart money, then the smart money is piling in.
DC: Last time we talked, you mentioned a big order that you were having trouble filling. What happened there?
TC: That was an order for 115,000 ounces of Comex-grade silver bars. It took us over three weeks to fill it. All but 29,000 ounces have been shipped and we expect the rest to arrive soon. The fact that it was Comex-grade bars made it a little more complicated.
DC: What’s availability like in the silver market generally?
TC: Something that’s not well publicized right now is the tightness at the Canadian Mint. When the US Mint runs out of silver they suspend shipments, but the Canadian Mint keeps taking orders but delays shipping, and that’s what’s happening now. We’re waiting on thousands of silver maple leafs for clients. Right now it’s taking two or three weeks for delivery. I’ve only seen this one other time, and that was in the fall of 2008 after the financial crisis when a lot of people were buying silver after its big price drop between June and September.
The other reason for tightness is that central banks are now net buyers of gold. China, especially, has increased its gold purchases for 13 straight months. So the fundamentals are still there for a much higher price.
DC: One factor that’s been depressing gold is the strength of the US dollar. It seems like every time a foreign market hits a rough patch the dollar benefits. Last year it was Europe and this year it’s been Japan. What’s your take on this?
TC: The dollar has definitely been in a bull market the past few weeks. But that won’t hold because of all the money we’re creating. It will become more inflationary down the road.
John Williams of Shadowstats recently moved his prediction for the onset of double-digit inflation in the US from 2016 to 2014, based on the amount of mortgage backed bonds and other debt the Fed is buying up. When the velocity of money starts rising, there will be no stopping it.
DC: The mining companies have been in the news lately, primarily because of rising costs and shrinking margins. How does this play into metals prices going forward?
TC: Mining costs are as high as they’ve ever been. Barrick, for instance, recently said that they’ll need a higher gold price to open their newest mine. That’s bad news for holders of mining stocks but good news for the price of gold, because it means supplies will be constrained for years to come.
Related ETFs: SPDR Gold Trust (NYSEARCA:GLD), iShares Gold Trust (NYSEARCA:IAU).