July 29, 2003
Silver & Gold Day Dreaming

Summer may be in full swing, but the doldrums have yet to arrive.  In fact, and even though there has been little hard evidence to suggest that the expected economic recovery in the United States is becoming a reality, money has been flowing out of bonds in recent weeks with reckless abandonment. When combining the wild action in the bond market – a market currently undergoing an investor sentiment shift because of oversupply and ‘bond bubble’ fears not necessarily ‘recovery’ fears – with the fact that other markets take their cues from bonds, one has to wonder if traders will take anytime off this summer at all.

While it is difficult to ascertain the actual reasons why bonds are suffering (i.e. who is dumping and what are bond sellers buying?), what is known is that bond market hyperactivity if fueling interest in precious metals. Given that deflation, not inflation, could quickly return to the scene, the bond/gold relationship is certainly worth paying attention to.

Silver & Gold Jump

Both gold and silver snapped out of a funk last week following Fed Bernanke’s speech. However, Mr. Bernanke’s speech – wherein he suggested the Fed could maneuver rates to zero percent – was merely the launch pad for precious metals: the dollar may have gyrated to the downside temporarily following Bernanke’s words, but the speeches’ impact on the greenback has otherwise been limited.

Given that silver had been lagging the move in gold many have argued, rightly so, that the rally in silver confirms the gold rally.  It is difficult to find fault in this logic, as silver’s jump above $5.00 an ounce has been just what gold has needed to find its own legs.


Although I would be weary of calling the latest move in silver the start of a new bull market, when you combine the recent jump in lease rates with the fact that bonds are in freefall, it is certainly possible that market participants will not be immediately compelled to jump back on the short side.  That said, the rally in silver - purportedly fueled by a run on stops (aren’t they all?) – could find further gains difficult unless bond market blues move over to different financial instruments (i.e. the dollar swoons).





Conclusions

It wouldn’t take much for silver and gold to be slammed lower, or for those chasing the current rally to be completely heartbroken.  Quite frankly, we have seen these types of indescribable sell offs countless times in recent years, and given that the latest rally has been somewhat indescribable itself, perhaps it is wishful thinking to believe the motherload precious metals rally is upon us. However, by the same token it would also not take much for silver and gold to skyrocket higher – with $5.50-$6.00 on silver and $400 on gold being broken in a matter of a couple of sessions if investor interest in stocks/bonds hits a wall.

If silver and gold continue to rally COMEX will raise margin requirements to squeeze longs, the Fed will lower gold lease rates to give the shorts ammo, and – ridiculous as it may sound - if these efforts fail the government will make it illegal to own gold.  These are not so much predictions or forecasts, but the plain and simple conspiratorial truth: the powers that be do not want gold and silver to really regain their ‘safe haven’ status given that when this happens financial instruments around the world would be sapped of liquidity.   Will Greenspan and his central bank followers be forever successful at containing gold?

In sum, something tells me Greenspan does not like the unintended consequences that could erupt if his magic liquidity wand begins to rain down over silver and gold.  Perhaps this is why the new American g