Why Silver Will Not Go To $500 But Will Always Buy You Lunch

November 20, 2010

Max Keiser is witty, brilliant, entertaining and informative. I also believe that his latest call for $500 silver is wrong. (See http://www.youtube.com/watch?v=UjDQUP-e_zI). Although he did not state by what date this target would be reached, it was clearly not a call made with his or my old age in mind.

His efforts to have everyone buy silver in an effort to flush out JP Morgan and other manipulators is admirable but not totally original. I made a similar call back on November 26, 2009 in a piece titled "The Mosquito Power of Gold" where I imagined the possible scenario of people taking action to bring the scoundrels in our system to heel:

"...people realised that they could not only save themselves but also save the capitalist system from the greed and corruption of the "suits". After all it WAS the capitalist system that served them so well until 1913 when the Federal Reserve came into existence.

How did they do it? Easy.....they went down to their banks and accessed their savings accounts. They all pulled out what they could....it was like a run on the banks. They then went to every single coin dealer, the US mint and every internet site they could access. They all bought at least one or more ounces of gold. The price shot up and kept shooting up.

The banks initially tried to meet the run on them and the government tried to impose a bank holiday but the anger mounted to the point that they had to back down. They gave undertakings for the future conduct of banks and their CEO's, the Federal Reserve and Congressmen. No one cared what the price of gold went to. No one was selling to make a profit. They just held onto their gold and cash because it was like a gun to the head of the suits. As I write, these things are still happening and similar events are unfolding in England and Europe and across the world."

No doubt, there probably have been others that have made similar calls prior to me.

But I digress, because the point I wish to make is that $500 silver will not eventuate in the foreseeable future.

The points made about suppression tactics using derivatives and the like are understood and appreciated. I also appreciate the points about unallocated accounts, ETF's etc. No doubt the price has been suppressed, but removing the suppression cannot and will not push the price to $500. There are many reasons but let me give you just three:

  • When people make a purchase at a particular price they do so because they either perceive that to be fair value and/or because they believe that their acquisition will in the future be worth more in dollar terms than if those dollars were kept in the bank. Discounting the possibility of Weimar style currencies or a Tulip Mania making another appearance, Max cannot possibly believe that such a gross undervaluation between price (say $26) and perceived value ($500) can exist, particularly when the cost of silver production falls far short of this figure.
  • Even if all the ETF owners of silver were to discover that the silver cupboard of their ETF's was bare, the only thing that would happen is that the investors would lose their money and the operators of the ETF would be in jail. The same would apply to the JP Morgans of this world. They would simply go bust. When the goldsmiths of yesteryear were discovered to be lending out their gold on a fractional reserve basis, there is no evidence that the price of gold went parabolic.
  • Imagine a crook who sells the same house to 20 people simultaneously for $100,000 by fraudulent means. Upon such a scam being uncovered, the house price should go parabolic by Max's reasoning. Things like this have happened but prices never went parabolic because there are always people with houses who would sell at a somewhat higher price but no one has ever been willing to pay $2,000,000 for a $100,000 house. As price spikes I suspect that silver owners would increasingly decide to cash in on their silver windfall and thus temper price rises. Silver price cannot on a comparative basis outstrip all other real assets by such a wide margin.
  • A similar example would be the sale of the Mona Lisa by the Louvre to multiple billionaires. At the end of the day, there would be some very angry losers but the price of the Mona Lisa would not be substantially altered.

Over time, gold and silver will move upwards as the creation of debt through money printing will only serve to dilute the value of each unit of currency while the debt level would eventually break the back of the system as well as the make believe assets that bankers have created. If nations fold and currencies are destroyed there is no doubt that the price of silver will go to $500 and beyond, as will the price of other real assets. Short of a systemic implosion we will at best see adjustments of the nature we have seen in the last 10 years if the current QE series continues unabated.

Max needs to understand that the only thing that will truly unravel the system is a bank run executed by the public (not because of panic) but because they wish to protest the manipulation of the system by the men in suits. This is the true Achilles Heel of the system as fractional banking only exists by virtue of the fact that the overwhelming percentage of the population is happy to hold a credit card or savings account rather than a mattress full of money. They do so for convenience and because they do not comprehend the fraudulent nature of the system.

The bottom line is what an acquaintance said to me the other day....."the 1966 Australian 50c silver coin could buy you lunch in 1966 and the 1967 copper-nickel 50c coin could also buy you lunch in 1967. In 2010 however only the 1966 silver coin can still buy you lunch. The 1967 coin can now only buy you a very small chocolate."

This simple example covering a very short time frame of 43 years is both a warning to the public to protect their savings and a challenge to governments and central bankers to restore honest money to its rightful place. Any investment adviser who convinces you that your retirement savings will grow at a rate that will exceed the rate of inflation, bad management and recessionary periods, is having you on. At best you can only hope to retain the present value of each dollar saved.

Got gold and silver? The answer to that depends on whether you want to have lunch in the future.

Sydney Australia

Silver has the highest electrical conductivity and heat of all metals.