Silver To Energy To Ukraine

May 19, 2014

The fundamentals underlying oil and silver (two of the most important industrial commodities used today), share some unique bottlenecks and a monetary albatross that serves to mask true value. For now, oil is considered by many to be the ultimate monetary backing for the dollar, while the silver dollar has been all but forgotten by the collective mind. 

Massive put under oil prices from the energy cartels. Producing countries depend on higher prices. The U.S. energy revolution depends on high prices to justify that the inputs be profitable. Higher energy prices will serve to eat away at future profits, as prices return to equilibrium.

War will be fought over this "put".

Falling energy prices would be almost as devastating as rising interest rates or the next housing market or equity crash. The great so called energy-fracking boom and oil dependence in the U.S. would dry faster than a shallow puddle in the Sahara desert in the summertime at high noon.

Meanwhile, currency wars are heating up in the Ukraine. Despite the literal build up and propaganda from both sides, the major war may be played out on the stage of FOREX. And any discussion of foreign exchange should include at least the covert presence of monetary metals - or the lack thereof, as the case may be. 

War, what is good for? Or rather, Qui bono?

Either side. Serious military involvement in Ukraine would benefit both sides that ultimately benefit from higher energy prices.

Somewhat like the metals, they will be allowed to return to some semblance of reality for different reasons, but slowly - and controlled to control perception.


Talk of war is good enough for Treasuries. The threat or fear bids U.S. Treasury markets because in this upside down world of fiat, debt backed by a hold over power is as good as gold or silver. 

War would justify a surge in issuance. Without issuance, collateral and liquidity dry up. This makes printing much more tenuous.

Ukraine is a tactical batle in a war over the petrodollar.

Ultimately, the dollar itself - which is the inevitable consequence of debasing money supply or printing money to fund governments. 

It might not have started that way, but that's where we are now. To win that war, not just this battle, Putin needs the other BRICS and the non-aligned with him.

But there is a financial component that should not be overlooked. The currency wars accelerated some way with Russia's well publicized announcement that it is taking serious steps at moving away from dollars. They will seek partnership with China, Iran, and most likely India. Aside from Orwell turning over in his grave, this should not be swept under the carpet or filed away as a non event. No doubt if you are reading this, you have long heard of the shift away from dollar-centric forex. Russian dollar trade may be small relatively speaking, but it isn't the size. It's the audacity. And if they can do it without shots fired - others will. And this will ultimately lead to the kind of inflation that destroys not just the college students, poor, and elderly, but the entire middle class an economic complex. 

Silver Dollars, Metal Backing 

It too is a key industrial commodity cartel controlled, but in a different direction. It is inherently difficult for people to see how an asset could be manipulated downward. While it is somewhat complicated, it is not hard to see a fee major reasons why silver needs to stay low, for the grace of the elite power structure.  

While impossible to make direct comparisons based on the history and nature of crude production and distribution, an indirect view can be made in considering the precariousness of silver production. 

Most silver is mined as a byproduct.

This makes silver an impossible asset (outside of very limited paper exposure) for the mainstream analyst. It's easy to ignore (by the mainstream analyst) that there is no standard way of adjusting for this anomaly. Standards serve a purpose; although sadly, most valuable learning results from error.

After visiting Ecuador to understand the South American mining sector better (and meeting with the former mining secretary director), development of new and existing projects is severely limited by third world problems and practices. For example, multiple claims of ownership to property are very common. It is almost impossible to get basic financial data. Obviously, as is the case just about everywhere, political forces are aligned against development and discovery.

Nickel, lead, copper, gold, etc. all have dynamics of their own that are not dependent on the value of silver they discover.

It is the reverse of the inelasticity demand of silver used in small quantities in electronics. There is a certain inelasticity of supply, given that primary copper miners would not likely switch production focus to silver or precious metals unless we saw truly dramatic and sustainable price moves.

Will the price take off before, or in conjunction with, the coming collapse of the dollar? Also unknowable. For too many analysts, rising silver price independent of gold or the entire commodity complex is outrageous. But a leading edge price move should not be written off as a consequence or trigger. 


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