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Precious Metals Fundamentals: The Numbers Don’t Lie, Part II - Jeff Nielson (24/5/2017)

Image: Money

May 24, 2017

The previous installment focused on establishing two of the dominant fundamentals of the precious metals market:

a) Gold and silver are currently priced below the cost of production necessary to sustain these industries.

b) The gold and silver markets are both experiencing long term supply deficits because these metals are priced below the cost necessary to sustain these industries. The silver mining industry has been almost completely destroyed and today (for the first time in history) the world gets 70% of its mine supply of silver as a byproduct of other mining.

Why are these two fundamentals so important? Let's turn the question around. Why does the Corporate media (and their banker Masters) go out of their way to avoid discussing these fundamentals – with real numbers?

Until three years ago, the crooked, quasi-official bookkeepers in the silver market were pretending that the silver market was in balance or even in surplus, every year. Only recently have they acknowledged that supply deficits in the silver market go back well over a decade . Meanwhile, additional evidence already in the public domain indicates that this supply deficit actually extends to at least thirty years , if not longer.

The bankers (and their record-keepers) pretended that the silver market was in balance so they could pretend that the price of silver was at a fair legitimate level. The bankers are no longer pretending that the market was in balance yet they continue to pretend that the fraudulent/manipulated price of silver over the past 30+ years is legitimate .

In legitimate markets, the economic mechanism of “price discovery” always creates balance in markets with deficits. The price continues to rise until supply meets demand.

There has been no price discovery in the silver market for 30 years or more. This is unprecedented in the history of commodity markets.

This market crime in the silver market (and to a lesser extent in the gold market) has only been possible because of the enormous stockpiles of these two precious metals which we have accumulated over thousands of years. We have had no price discovery in the silver market for 30+ years, ipso facto the price of silver over that period of time has been a fraud .

The price suppression of the silver market has been even more extreme than the price suppression of the gold market, therefore the supply/demand imbalance has also been more extreme. Why? Because (as previously mentioned) the price of silver was manipulated to a 600-year low (in real dollars), and continues to be held down near that level to this day.

The enormous expansion of the gold/silver price ratio quantifies the increased level of perversion with respect to the price of silver. Historically (for more than 4,000 years), the price ratio between the two metals gravitated around 15:1, reflecting the natural supply ratio between the two metals, 17:1.

Over the past century that ratio has been perverted to as much as 100:1 and today it is close to 80:1. Silver is even more under-priced than gold therefore the supply/demand imbalance has been even worse.

Anything that is under-priced will be over-consumed. Price chocolate bars at 10 cents apiece and store shelves would be completely emptied in a matter of days. Furthermore, with chocolate bars artificially priced below the cost of production, all of the chocolate bar manufacturers would be bankrupted and the world would quickly run out of chocolate bars.

The difference is that the world has never had any huge stockpile of chocolate bars, accumulated over thousands of years. At a price of 10 cents apiece, the chocolate bar market would quickly implode. But price silver at a similarly absurd level and the imbalance can extend (and has extended) much longer.

These stockpiles can sustain the silver market longer, but not forever.

To see how unsustainable are current prices for silver, we need look no further than India . At the end of 2008; the bankers crashed the price of silver below $10/oz. India responded in 2009 by setting an all-time record for silver imports of 5,390 tonnes. In 2013; with the price of silver at double that 2009 price, India smashed that record by importing 6144 tonnes.

In 2014; India smashed that record by importing 7169 tonnes. Then in 2015, India smashed its all-time record one more time by importing 8529 tonnes.

In 2016; India’s silver imports dropped off dramatically to a historically average level. Why? Two reasons. First, the price of silver rose above $20/oz (temporarily), and Indian precious metals buyers are notoriously price conscious. Secondly, after importing a total of 21,842 tonnes over the previous three years (an average of 7,280 tonnes per year), India’s internal silver inventories had finally risen to average levels. With the price of silver being once again pushed lower, we can expect India’s silver imports to quickly spike again in response.

Then we have our national Mints. The Royal Canadian Mint has been “rationing” the supply of Silver Maples for several years because of strong demand. The U.S. Mint has simply announced that it has ran out of supply on several occasions (because of unprecedented demand) despite the Mint having a statutory obligation to keep the U.S. market “fully supplied” at all times.

Anecdotally, large purchasers in international markets are reporting long waits to obtain their silver. This is a market which has been experiencing severe supply/demand stress for 30+ years, with those stresses seeming to be stronger by the day.

In terms of industrial demand, silver is the world’s most-versatile metal, with countless metallurgical, electrical, and chemical applications. In many of these applications, silver is irreplaceable. With many of these applications being cutting-edge technology, that demand will only strengthen going forward. Unlike the fantasy buyers in the bankers’ paper markets, these users require a steady supply of real metal at all times.

The fact that we have not already experienced a supply default in the silver market does not mean that default will never occur. It means that this default event is now much, much closer.

In the gold market, the story is the East: China, India, and Russia. In 2016; China imported more than 1,300 tonnes of gold. This is demand in addition to the 455 tonnes it produced as the world’s leading gold mining nation – gold which never leaves the country.

Total mine supply is roughly 3,000 tonnes per year. China accounts for more than half of that gold by itself .

India has traditionally been the world’s premier gold market, despite producing virtually zero gold in its own mines. From 2010 through 2016; Indian gold imports averaged over 900 tonnes per year.

That total dropped off in 2016 because of (you guessed it) higher prices, but with the price of gold having been pushed steadily lower since the latter half of 2016, we can expect India’s gold imports to quickly return to their recent historical average. This means that by themselves, India and China’s demand accounts for roughly 80% of annual mine supply at current prices.

Throw in what Russia mines for itself (and keeps) and what it buys on the open market, and that accounts for 100% of annual mine supply, just between these three nations. Where does the Rest of the World get all its gold each year for jewelry demand, investment demand, and (other) central bank buying? Out of ever-dwindling stockpiles.

These stockpiles can sustain the gold market longer, but not forever.

Regular readers have seen these fundamentals explained on several occasions over the years, yet apart from the Fake Rally of 2016, we have seen no sign of bull market conditions since 2011. Why continue to listen to this message?

Perhaps the words of legendary trader Jesse Livermore will be persuasive.

After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: it was never my thinking that made the big money for me. It was my sitting.

For those readers unsure if this sentiment is truly extolling the virtues of buy-and-hold, Livermore expressed the same advice again, in even plainer terms.

Throughout all of my years of investing I’ve found that the big money was never made in the buying or the selling. The big money was made in the waiting.

In the realm of physical commodities, the Law of Supply and Demand is immutable. The bankers have been able to pervert this Law over an extended period of time because (as explained) we had accumulated large stockpiles of these two metals.

We hold precious metals in anticipation of an inevitable upward correction in prices which will dwarf anything seen to date. This is what the supply/demand fundamentals in these markets tell us.

In the meantime, we hold gold and silver to protect our wealth from the bankers relentless theft-by-inflation, and as insurance against the pending collapse of our paper fiat currencies. This is how intelligent investors can deploy their wealth with the greatest degree of efficiency.

Jeff Nielson is co-founder and managing partner of Bullion Bulls Canada; a website which provides precious metals commentary, economic analysis, and mining information to readers and investors. Jeff originally came to the precious metals sector as an investor around the middle of last decade, but with a background in economics and law, he soon decided this was where he wanted to make the focus of his career. His website is

The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.


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