Gold, Silver and the Animal Kingdom

February 13, 2003

To understand what is happening in the gold and silver markets, it is necessary to understand the rules by which the game is being played.

There appear to be four "teams" of players, as follows:

  • The Lions: Governments as represented by Central Banks and Treasury Departments, who begin with good intentions - believing that it is their responsibility to ensure continuing and orderly economic growth and/or to minimise the pain of economic contraction.
  • The Hyenas: Financial Institutions, which in essence, feed off large transactions generated at the behest of the Governments and, sometimes through greed, become principal counterparties in market transactions initiated by the Central Banks and Treasury Departments. Towards the end of the game, these Institutions tend to forget that they are really Hyenas, and they increasingly move to become "the" principals.
  • The Tick Birds: Private Speculators who closely follow the activities of the Hyenas, and attempt to scavenge tasty morsels that are to be found wherever the hyenas go.
  • The Observers: Private individuals who study and opine on the "rightness" or the "wrongness" of the Central Bank and/or Institutional behaviour.

There is a life cycle to the game. It starts with feelings of self righteousness and paternal responsibility on the part of the Lions, and with some unctuousness on the part of the Hyenas. The Tick Birds essentially have no particular agenda, and out of habit and a predisposition towards lazing around in the sun, just follow the Hyenas around waiting for the action to start. The Observers are usually at home with their families and friends, secure in the knowledge that the Lion is the king of the jungle, and He is their friend who can be counted on to look after their interests.

The game is essentially simple: The Lions survives and grow strong by feeding off the broader population of animals, and the Hyenas survive and prosper by scavenging the Lion's leftovers. The Tick Birds live an idyllic life, whilst the Animal Kingdom flourishes and does not seem to suffer inordinately through the loss of a few of its numbers.

As the game progresses, the Lions start to encounter problems that flow from an unforseen quarter. The environment in which the game is played is dynamic. There are rules which are not dictated or even manageable by the players themselves. There are outside forces at work.

For example, every eleven years or so, there are eruptions on the surface of the Sun, and this sunspot activity tends to affect weather patterns on the Earth's surface. This usually manifests in droughts - the effects of which are relatively easily quantifiable by an analysis of global wheat crop yields which tend to contract significantly around these times. When droughts manifest, the abundance of game ebbs (the economy softens for reasons that are unrelated to what the players are doing). Being a dumb and somewhat arrogant animal, the Lion does not understand (or refuses to acknowledge) that this state of affairs is not controllable by Him. Instinctively, he starts to devote more time and attention to the waterhole - where from experience he knows that there will always be an abundance of game. For a time, all is well, and prosperity continues to reign.

The Observers, who are documenting and commenting on the progress of the game start to write knowledgeable papers and critiques of the interplay of Lions and Hyenas and Wild Animals in general, and theories start to evolve regarding how the behaviour of these various constituencies. They even try to develop models to forecast this behaviour.

Most of these learned treatises and/or models fail to see and/or understand that there are exogenous variables which influence the game. To misquote the famous Economists' statement "Everything else is typically not equal".

The drought worsens and the waterhole dries up - but the Lions and Hyenas are still fat and happy - even though the other animals are starting to become a bit emaciated.

What happens next is that the other animals begin to migrate in search of lusher grazing - followed by the Lions and the Hyenas. The Tick Birds - unaffected by any of this - go along for the ride; although some are noticing that it is becoming a bit more difficult to find the tasty morsels, and some even notice that it is beginning to become uncomfortably warm in the sun.

Eventually, exhausted and emaciated, the herds of animals come upon the last water hole and, too tired to care about their safety and too wrapped up in their own problems, they throw caution to the wind and flop down at the water hole to drink from the meagre supply of water. With their defenses down, they make easy prey for the Hyenas, who start to feel invincible. The Hyenas start to think that THEY are the Lions, and kill off whatever they can find to the point where they become fat and bloated and have difficulty in moving around without straining some part of their overfed bodies.

Time passes, and soon all the animals generally start to feel varying levels of desperation, and their survival instincts kick in. "Unnatural behaviour" starts to manifest and it's every animal for himself. Under extreme circumstances, the animal Society starts to break down. After a time, the Hyenas become hungry and irritable and start quarrelling amongst themselves. The Lions start to bare their fangs and take swipes at the Hyenas to put them back in their rightful places, and they even attack each other to broaden their territories in the hope that with bigger territories there will be a better chance of finding food. The other animals scatter and huddle, bewildered, in small groups - resigning themselves to their inevitable misery and, perhaps, demise.

In the meantime, the Observers have started to focus on two facts: First, that the Hyenas have become arrogant to the point of being obnoxious, and second that the Lion is really nothing more nor less than a dumb animal who is not particularly powerful when it comes to pitting his strength against the forces of Nature. Some of the more astute Observers start to focus on the unnatural behaviour of the Lions and express outrage and dismay that Lions should be bickering amongst themselves. Virtually all the Observers begin to focus on the broader community of Wild Animals who are in a sorry state, and they yearn for an outcome - which is idealistically portrayed in folklore - when all will be well in the world, and the Lion will lie down peacefully with the Lamb.

The above is not an attempt at humour. There are some very serious lessons to be learned.


The very concept that Central Banks can "manage" the economy is fundamentally flawed. Regardless of whether "Gold" or "the US Dollar", or any other "Fiat currency" is the Currency of last resort, no economy can be "managed" in the long term. To aspire to manage the economy is tantamount to aspiring to manage the weather. It is just plain ridiculous. The seasons will follow one another. It is a Natural phenomenon. Any attempt to interfere with the process will exacerbate the fallout.


The current behaviour of George Bush (and the leaders of some Commonwealth countries and others who aspire to run with the Pride) is nothing other than that of Powerful Lions attempting to get rid of the flea-bitten, mangy Lions so as to broaden their hunting territory. More importantly, it takes no cognisance whatsoever of the plight of the other animals, many of whom are in potentially serious trouble because of the levels of personal debt that the Hyenas facilitated (at a profit to themselves) at the behest of the Lions.


The behaviour of the Lions and the Hyenas over the past twenty years or so has been despicable. This behaviour has not only encouraged the animals in general to live off their fat, but it has jeopardised the chances of survival of their children because there is now so much debt that the children have diminished chances of ever accumulating their own fat.


It is foolish to put a Lion in charge of protecting the welfare of what is essentially its prey.

Let us now turn our attention to the Gold and Silver markets.

In the end analysis, Gold and Silver are "precious metals" whose price behaviour has historically acted as a barometer of Society's equanimity. If the markets for these two metals had been allowed to react to "normal" forces of supply and demand, there is not a shadow of doubt that the prices would be higher than they currently are. This statement can be made with absolute certainty by reference to one single and unarguable fact, as follows:

There are insufficient above ground inventories of bullion available to allow the currently open short sale contracts to be honoured. The markets have become "dislocated", and are now being artificially managed.

It follows that provided the world economy continues to function, the price of both Gold and Silver will rise over the longer term until they reach a point where the forces of supply and demand balance each other out. Period. The attempts of the Central Banks and the Financial Institutions to control the outcome of that which is subject to the forces of Nature, will fail. Period. It is a matter of time.

Unfortunately, the time that will be required for the forces of Nature to prevail is unpredictable, but there are signs that the time is fast approaching.

The "volatility" of the Gold and Silver prices offers an important clue. When a market is orderly, prices rise or fall in small steps. If demand exceeds supply, prices rise in small steps, and vice versa if supply exceeds demand.

In the past week, the gold price has risen to around $390/oz and then fallen back to $362/oz . The Silver Price climbed to $4.90/0z and fell back to 4.56/oz.

Chartists will be wringing their hands whilst they point to broken support levels, Elliot Wave Theorists will be resurrecting their arguments that the Gold Price is really in a Primary Bear Market. Some Speculators will have scalped a few cents profit, whilst others will have been badly burned. Fear and loathing will be the order of the day - all of which brings to mind a famous quotation by Rudyard Kipling:

"If you can keep your head when all those around you are losing theirs, and blaming it on you …. Then you'll be a man, my son"

So, those of us who have the strength of character to keep our heads will understand that behind the scenes, the economic drought continues to have its inexorable effects, and the behaviour of the Lions and Hyenas is becoming increasingly desperate.

Here is a set of facts that will give the reader some perspective: (Various sources including a Gold Eagle article written by Wally Bently, and ;

Average annual mine production of Silver (as a by-product of other mining activities) is around 70% of the total mine production of around 600 million ounces per year

= 420 million ounces

Production of silver by "pure" silver mines therefore accounts for the balance

= 180 million ounces

Excluding Warren Buffet's inventory, and inventory held by industrial companies who need this inventory to support their own activities, the above ground inventories are roughly as follows:

  • Government stockpiles: 50 million ounces (zero in the USA)
  • Mining Company Stockpiles: 50 million ounces (and probably largely committed for delivery against their own forward sales)
  • COMEX: 100 million ounces
  • Private, undisclosed ownership: 70 million ounces

Assuming the largest source of Government stockpiles - China - will not make their inventory available, the total "available" to be purchased by the short sellers is therefore 170 million ounces.

Objectively, it is optimistic to assume that more than 170 million ounces will be available to deliver against roughly 340 million ounces of "open" short sales of the Commercials.

But there is another factor:

Including scrap recycling, the total amount of physical silver available to the market is in the order of magnitude of 800 million ounces per year, whilst the annual consumption of physical silver is around 860 million ounces excluding investor demand. I.e. There will be a PHYSICAL shortfall of 60 million ounces in this coming year.

In the past decade, this shortfall has been running at around 100 million ounces of silver per year, and the shortfall has been met by disgorgement of Government stockpiles.


So, if you add the physical shortfall of 60 million ounces to the short sale net shortfall of 170 million ounces, you get a total unsatisfied demand for Silver in this coming year - provided the markets are allowed to continue to operate - of 230 million ounces.

Alternatively, even if you ignore the short sales, you get an unsatisfiable demand for Silver of around 60 million ounces. Something has to give.

In this context, there is only one logical reason why the silver price (as an example) fell by roughly 8% in the past few days: The short sellers must have added more short sales to their list of obligations in the hope of scaring some of the weaker animals out of their hiding places.

Unfortunately for the Hyenas, there are no longer any animals in hiding. They are all in full view but are too emaciated to offer sustenance. The game is reaching its closing stages, and the Central Banks and the Financial Institutions will be forced to face this - or change the rules of the game. There comes a point when both the need and the legal requirement for physical delivery becomes unavoidable.

Now, whilst the Central Banks may or may not be prepared to change the rules of the Gold game they are very unlikely to interfere in the Silver market, and will probably leave the Institutions to their own miserable fates. In addition to it being a precious metal, Silver is also an industrial metal that has no satisfactory substitute, and this market cannot be interfered with - without seriously undermining the economy as a whole. Even the act of going to war will increase the industrial demand for Silver. In turn, this will further exaggerate the demand for Silver.

In a word, the shorts are "trapped".

For the sake of completeness, a few words need to be said about the gold market and, once again, I will resort to analogies of Nature.

Whilst it is quite true - as a general statement - that a day has 24 hours and is divided roughly into two segments of 12 hours of daytime and 12 hours of night time, there are parts of the world which experience 24 hours of daylight or 24 hours of darkness - depending on the season. The 12/12 "model" may be generally true, but may be totally inappropriate under special cases.

I believe that the Gold market is one of those "Special Cases"

Whilst I am intrigued with the concept of Elliot Waves I am more inclined to believe that Elliot Waves can be "massaged" to describe historical price movements than I am convinced they can be used to predict future price movements in general with anything other than hit or miss accuracy. Whilst there have been some spectacularly good calls there have also been some spectacularly bad ones and I am not particularly attracted to the game of Russian Roulette.

Furthermore, because the Gold Market is unique - it is not only very "thin" but there is a predisposition on the part of the Central Banks to manage this particular market - I am convinced that even if Elliott Wave theory could be used to predict future price movements in general, it cannot be applied to forecast the gold price in particular.

For protracted periods of time, the behaviour within this particular market is not allowed to be "natural" and, as a result, when natural forces do eventually overcome the artificial manipulations, the "catch-up" is likely to be violent. It's like trying to forecast the arrival date and time of a hurricane when the skies are still clear.

There are those who believe that according to Elliot Wave Theory, gold is in a Primary Bear market. I do not subscribe to this view for the same reason that I believe the Silver market will soon start to gather momentum. The open short position is just too large.

In the meantime the Silver price seems likely to do some spectacular catching up of its own. Because of the blatant manipulation of its price, it has been under-performing both the Gold Price and Commodities in general; and markets have a way of leveling the playing field.

Man has had the ability to separate silver from lead for as far back as 4000 B.C.

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