Is A Silver Surprise Ahead?

January 16, 2014

2013 was the year that everything and the kitchen sink got thrown at the precious metals market. The massive liquidation of the GLD ETF along with practically every Wall Street firm and broker dealer evacuating from the metals’ space- to the tune of several hundred tons of the stuff- turned out to be just the beginning. Later in the year, we had the equally devastating news that the Indian government was in effect trying to kill the gold market--not that it could control all smuggling-- but still, it left a mark. Finally, we saw a massive euphoric move higher in the stock market that gave people a reason to mock those silly gold and silver bugs hunkered down in their bunkers. It looked as though, finally, risk taking was back in vogue and all could safely chase a new equity bull market higher.

At the risk of making light of the decimation in the precious metals space last year, I for one would have expected gold to trade far lower than it did during 2013—given all of the incredibly negative factors outlined above. But, in fact, even after the April crash in gold, we managed to spend much of the year around 1300 dollars an ounce—still considerably higher than 2008 and 2009—at the height of the financial crisis.

And when you factor in the sentiment out there in 2013—where everyone and their mother wanted to short the living daylights out of metals like gold and silver—you have to wonder whether the precious metals market holding up so well isn’t in fact a message that this bull market is far from over. You also have to ask yourself whether or not Wall Street can dump another 500 tons of gold this year and just how effective the Indian government will continue to be at trying to attack what is otherwise known as the religion of gold ownership in that nation. I think you can guess my answers, and I think you should remember not to be psyched out by the mind game that is the gold and silver market.

At the risk of being overly positive, I would like to point out that as 2014 begins, there are some signs of life coming from badly beaten gold and silver bullion and their related mining stocks. Even as the stock market continues to slog its way higher, backed up by financial “data” showing some sort of mildly improving economy, the shorts still can’t seem to knock gold and silver to new lows. In other words, everything and the kitchen sink has been thrown at this market, but here were are still above 20 dollars in silver and above 1200 in gold. No new lows here.

Recent sales data from the US mint in particular seems to suggest another strong start to 2014 for silver coins. Some are taking a skeptical eye regarding this sales data, since a lot of this demand represented an early start to the 2014 season last year that is only being reported now. The problem with this argument is that 2013 was a record year for silver sales. So even as someone was buying record amounts of silver eagles last year, they also began backing up the truck for 2014 coins. This data point is simply one of many pointing to real physical demand for metal that could not be stamped out by all of the negatives in the paper market seen last year.

The outperformance of the precious metal miner stocks so far this year is another key to the performance of the metals themselves. Looking at the GDXJ, a proxy for junior mining stocks, we see a strong 10 plus percent rally just over the last couple of weeks. Many in the industry like to say that the mining stocks helped to lead the metals lower in 2011, 2012, and 2013. Might this strong start to 2014 signal that the tide is finally turning and that a new bull leg in gold and silver has begun?

Notwithstanding all of the bluster and swagger out of the equity bulls’ camp about the improving outlook for stocks and how this must be signaling an improving economy, you really have to ask yourself whether or not the deflationary trend established in 2008 can be so easily overcome. As a historian, I need to remind you that the last two great global deflationary crises (that of the 1930s and, before that, the 1870s) took roughly two decades to finally be put to bed. When you look at the still struggling housing industry (most neighborhoods are still well below their 2007 peaks), coupled with all of the bad news regarding labor participation rates, food stamp usage, stagnant wages, zero percent interest rates, emergency liquidity measures that seem to now be permanent fixtures in our financial system, etc. I don’t think the basic deflationary trend is over. If in fact global central banks get behind the curve again, by prematurely taking away stimulus measures out of a false hope that a meaningful recovery is here (or because they are afraid of a new bubble in financial assets), you might see all of that liquidity so recently fleeing gold and silver come surging right back in. When you think about all of the data regarding strong physical demand from around the globe, one wonders if the price action in 2013 will go down as one of the great head fakes in market history. Make sure you are not left behind if you are still on the fence regarding diversifying into the precious metals markets at these low prices.


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Silver has 47 protons and 61 neutrons

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