There has never been a time in modern trading history when precious metals have made and continue to make consistent new highs for so long. This unprecedented price appreciation is one that will go down in the annals of precious metals history when all is said and done.
I have been involved with precious metals since 1977. I was trading gold and silver when the very few believed it was a legitimate investment opportunity. Then all of a sudden in 1979, bang, zoom the metals took off. Gold was soaring from a low of around $220 an ounce and ended in December 1979 at around $518 and wasn’t finished. Silver was equally as exciting going from a low of around $5 an ounce to a high of around $25 an ounce by years end. It was a thrilling time for precious metals.
The momentum carried over to about the third week of January 1980. Gold hit its all time high at around $850 an ounce and Silver had it highest closing on January 21, 1980 at $48 an ounce.
Let’s briefly examine some of the history at the time to discover what really happened and why.
In 1973, the Hunt family of Texas, possibly the richest family in America at the time, decided to buy precious metals as a hedge against inflation. Gold could not be held by private citizens at that time, so the Hunts began to buy silver in enormous quantity.
In 1979 the sons of patriarch H.L. Hunt, Nelson Bunker and William Herbert, together with some wealthy Arabs, formed a silver pool. In a short period of time they had amassed more than 200 million ounces of silver, equivalent to half the world’s deliverable supply.
When the Hunt’s had begun accumulating silver back in 1973 the price was in the $1.95 / ounce range. Early in ’79, the price was about $5. Late ’79 / early ’80 the price was in the $50’s, peaking at $54. It’s estimated that in 1979 the Hunt Brothers made approximately $2 billion on their silver holdings.
Once the silver market was cornered, outsiders joined the chase but a combination of changed trading rules on the New York Metals Market (COMEX) and the intervention of the Federal Reserve put an end to the game. The price began to slide, culminating in a 50% one-day decline on March 27, 1980 as the price plummeted from $21.62 to $10.80.
The collapse of the silver market meant countless losses for speculators. The Hunt brothers declared bankruptcy. By 1987 their liabilities had grown to nearly $2.5 billion against assets of $1.5 billion. In August of 1988 the Hunts were convicted of conspiring to manipulate the market.
The result: Silver crashed (Gold did as well).
Now lets’ discuss the present and look to the future. Many say there are similarities to the past regarding metals and there are. However, there are many more new and interesting facts to consider.
Here are the facts: the money supply is outrageously high. Federal debt is way over the top and the USD is becoming a second rate value to many on the international front. There can be little doubt that we will see the beginning of a multi-year rise in the price of silver. Here are some additional reasons:
1. Inelastic supply, 70% of the world’s silver comes as a byproduct of other metal production. As a result, silver production cannot be increased without much disruption to the other mining activities. That is overproduction of copper, lead, and zinc. It is a fact that silver supply from MINING is extremely inelastic, that is insensitive to price changes.
2. Inelastic demand. World industrial demand, for tens of thousands of small but high volume uses, is inelastic and price insensitive. For example a typical flat screen TV uses about 4/100 oz of silver. So, a very small amount is actually used in the TV yet it is vital, no silver means no TV. Because most end products use such a small amount per unit produced that the cost of silver per unit is a small percentage of the total cost. However, it is indispensable regardless of its price.
3. Shortage. The total annual world consumption of silver is greater than mine production and has been at least twenty years. Inventories held by Governments world wide are nearing the end. According to CPM total government stocks are at 180 Million ounces. Think about that, the US Government had 4 Billion ounces of silver stockpiled in my lifetime and now the total is not even enough to support the deficit.
4. Price control. Market supplies offered by the US treasury stocks in the 1960’s at government controlled prices, built up private stocks, discouraged production, and encouraged consumption. This had the effect to depress market prices after direct market sales had ceased. When the effect of price suppression (regardless of the reason) ends completely, the price will move naturally in the direction opposite the control to whatever level is required to ration the totally inadequate current supply to the most urgent demand. How long did it take to use up the 4 billion ounces of silver? How does the 180 million ounces in government hands now look?
One argument I get even from people who should know better, is that silver’s price cannot go up because so much still exists. From a historical point of view I would like to lay this argument to rest. There have been three speculative scrambles into silver in the recent past. The first in the time frame of 1967-1968, again in 1972-1974, and also as I mentioned above, 1977-1980, each of these multiplied the silver price from two to four times. In each case cited there was more silver available to the market than there is today! Yet somehow silver was able to rally with all that silver. Here we are today with more debt money than at any time in the history of the world, the lowest silver inventory on record, and I get brokers and dealers telling me, I just don’t get it.
For the record, I will state, there will be another, more frenzied, scramble that will carry silver prices to record highs that will repair all the excess paper money creation, price suppression, supply deficit, and bearish sentiment over the past three decades. This will become known as the Great Silver Sensation. It is important to prepare for what lies ahead. Silver is already soaring. New price highs are almost a daily activity. Ironically, it always seems to take investors by surprise.
All I can offer is the importance of being too early, once the move starts (which it already has) and the technicians are waiting for confirmation it may be too late. I was around for the great move in 1979-1980, it was very exciting to make more money per day than I was making in a month of normal work. I wish to go on record for recommending physical silver on a non leveraged basis first and foremost. I truly believe that most paper silver contracts will be settled in paper only. Build your silver fortress with real silver, silver is the most under priced commodity in the world. When the world’s industrial users inventories are below normal levels and for the first time they try to buy their requirements in a completely unhampered market, silver prices will continue to move upward as never before.
Finally, I took a look at how I could present to the newly initiated silver bull just how tiny the silver market is, in comparison to other markets. I took a look at Microsoft recently and calculated the market capitalization as 288 billion. (Share price times shares outstanding). If Microsoft paid a one percent dividend it would equal enough money to buy up the entire reported and unreported silver bullion in the world. Another way I thought about the true size of the silver market is the United States trade deficit. The Chinese average about one billion dollars per day being exported to them. Just think if they asked for payment in silver for just three whole days? It would wipe out the known and unknown silver supply.
So, to the answer the question of topic, ‘Why Gold and Silver Will Crash"; the answer is because they always do.
However, and this is a BIG HOWEVER. This crash will happen perhaps in 2 to 4 years from now and Silver will have peaked at around $150 an ounce and Gold around $2,500 (In my humble opinion).
Therefore, as I sated before, buy Silver bullion now while it is still cheap.
Source by Jules Martel
Why Gold and Silver Will Crash
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