Addressing More Myths about Gold and Silver

Originally published on August 5, 2013 (August 2013 Intelligent Investor, Part 1)

 

I wanted to mention some points about gold and silver I have not previously addressed. Many of you who have read our articles on gold will note that I have addressed virtually every aspect of these metals.

I have discussed the use of gold as a hedge against market declines and deflationary periods.

I have also dispelled most of the ridiculous myths being spread about gold and related economic claims such as the gold/inflation hedge myth, the dollar collapse/hyperinflation hoax, and many others.

Finally and perhaps most significantly, I have also spent a great deal of time and effort exposing the dark side of the gold dealer network, explaining the genesis and mechanisms by which they have spread massive waves of gold propaganda.

In fact, I’m willing to bet that you will not be able to find a more accurate and comprehensive assessment of gold and silver anywhere in the world, than what can be found in the numerous articles I have written over the past few years.

 

 

But there are a couple of more recent issues I plan to address here because they seem to be gaining momentum by those who are desperate to cling onto anything they can find that will revitalize their hope that gold and silver will soar to new highs.

As the gold and silver bull markets continue to solidify their bearish status, the gold charlatans have unified to deliver a variety of conspiracies, false information, lame excuses and such in order to maintain mind control over their sheep.

For some time now we have been hearing all sorts of crazy statements made by gold charlatans such as the economy is fake, the dollar is headed to zero, hyperinflation is coming, earnings are fake and the stock market is being driven by quantitative easing, the stock market is going to collapse to 1000, and so forth.

These ridiculously pathetic claims have been repeated over and over again by virtually every single one of these gold charlatans and their minions, even as the stock market continues to make new record-highs, as the dollar sets multi-year highs, and in the face of a period of devastating price declines in gold and silver.

One of the more ironic things about these gold charlatans is that they invariably trash the dollar, calling it “worthless paper,” yet they want your “worthless” dollars in exchange for their gold and silver.

Many of these same gold charlatans have insisted that the central banks were responsible for collapsing gold and silver pricing because they wanted to buy it at lower prices. “Now that prices have collapsed and central banks are buying, you need to buy as much as you can,” according to these con men, “before the price soars to the moon!” 

They will always have an answer for you, regardless how ridiculous, just as any good used car salesmen would. Remember, the key aspect of the gold manipulation scam is that it relies of unsophisticated sheep that are more prone to swallowing whatever they hear rather than questioning it.

 

 

As you can imagine, these clowns have failed to explain why gold and silver have not soared if in fact central banks are loading up on it. 

 

 

As well, I’d love to hear their answer this very simple question…If gold and silver are headed to the moon, why don’t you gold dealers just hold onto it for yourselves?

On the contrary, gold dealers are spending huge sums of money trying to get people to buy precious metals from them.

Regardless what happens, they continue to insist that you buy physical gold and silver even though doing so will prevent you from trading the price volatility. As well, buying the physical metals will cause you to take a huge hit on commissions (8-10% in and 8-10% out).

Instead of telling you to buy the gold and silver ETFs which are associated with very low fees and are very liquid, they insist that you buy the physical metal because they claim that the ETFs don’t actually own the physical gold and many other conspiracies and scare tactics designed to spook you.

The truth of the matter is that if everyone chose the precious metals ETFs over physical metals, precious metals dealers wouldn’t have any suckers willing to pay ridiculously high commissions for the physical metals. This is what the gold propaganda is really all about. 

Many of these same gold charlatans have even insisted that people around the world are lined up for miles, waiting for days and even weeks to get physical gold and silver at these “bargain prices.”  They claim that because gold and silver delivery is delayed and dealers have run out, it is an indicator that demand is hitting record levels, and “you should buy it while you can before the price takes off.”

Yet, the price remains down for both gold and silver and the trend continues to be very bearish. That’s okay though because I’m sure they will give you some great answer if you mention this.

 

 

Finally, most gold charlatans have insisted that gold and silver must rise higher because these metals are now selling at a price that is the same or lower than the cost required to mine them. Like all other arguments created as a way to pump gold, this one is equally ridiculous. 

Let me explain how the economics of these types of relationships play out. I call this the inventory price bubble correction.

During an asset bubble, all players take a piece of the pie, causing costs to rise higher and higher. In the case of gold and silver, you have mining companies, tool and machinery companies, land owners who lease or sell the land for mining, gold wholesalers, gold retailers, etc.

When one or more segments of the industry representing the asset experiencing a bubble period raises its prices, the price increases are passed all the way down the food chain until it hits the consumer. These price increases are sustainable for as long as the bubble continues to expand because there is a high demand for the item.

Essentially, so long as the demand for gold and silver remain high, these price increases will be absorbed by those who buy these metals. This is specifically why gold companies have spent hundreds of millions if not billions of dollars on advertisements, for talking heads and sponsoring endless events in order to manipulate the psyche of Main Street. The asset bubble pump-and-dump actually works kind of like a hybrid version of a Ponzi-pyramid scheme. The only problem is that it is not viewed as illegal.

But no matter how good the con artists are, all bubbles eventually pop. And when this happens the demand for the asset vanishes. As a result, the suppliers are left with a huge inventory that has a high cost basis. This high cost inventory does not encourage more production in anticipation of rising prices, as gold charlatans would have you believe. Production is stimulated by demand.

Instead, what you see is a competitive fight for survival as pricing declines. In the case of gold, prices for machinery, land rights, royalties, and even labor decreases due to vaporizing demand for gold. Those who are willing and able to accept lower prices for all aspects involved in the mining and distribution of gold will remain in business. The others will go out of business. This process ultimately leads to a recalibration of industry costs according to supply-demand dynamics.

What I am getting at is that the cost to mine gold certainly was not $1200/ounce ten years ago when it was selling for $350/ounce.

The reason why the costs have soared is because everyone involved in the mining, distribution, sales, marketing and so forth have pushed prices up higher and higher because they had suckers lined up to pay these elevated prices. And they recruited these suckers through all of the lies, delusions and scare tactics, such as delivered by scum bags like Glenn Beck, Alex Jones, Max Keiser, Mark Levine and many others.

But all bubbles eventually pop. And when the bubble pops, those who scramble to adjust to lower prices will remain in business while the others get washed out. This is the typical behavior seen in all bubbles.

This is precisely what happened during the dotcom recession of 2001. It was really a recession characterized by excessive inventories. For instance, we saw huge stockpiles of inventories in the consumer goods sector. Wholesalers found it difficult to unload the massive inventories so they marked items at deep discounts for bulk purchase. This provided an opportunity for Patrick Byrne to start Overstock.com.

We also saw an excessive inventory of fiber optic cable lines and related components that had been fueling the tech bubble. When the bubble burst, the costs associated with manufacturing and laying fiber optic cables was sky high. In fact, the costs were much higher than the current sales price. But that did not matter because there was no demand for fiber optic cables, so pricing collapsed to the point when buyers became interested.

Once the dotcom bubble burst, JDS Uniphase, Global Crossing, Corning, Nortel and other firms were not making more fiber optic cables in preparation for a price jump. They saw that demand had vanished. And they realized that no one cared how much money they had put into their fiber optics. They were only going to sell their cables for the price based on supply-demand dynamics. The price these companies were able to sell their cables for had nothing to do with the costs of production of the cables.

So what happened?

Because many companies were stuck with huge inventories that were amassed at high prices, they had to sell their inventories at fire sale prices. This led to dozens of bankruptcies and distressed acquisitions in this sector.

In the end, India purchased the vast majority of underwater fiber optics cables from US firms at pennies on the dollar. As a result, much of the retirement savings of millions of Americans actually went to Indian firms which had purchased the fiber optics cables these investors had invested in. Incidentally, this could end up being the fate for gold in a few years.  

It does not matter whether Joe’s Gold Shop has run out of gold, or whether it now takes two weeks for physical delivery.

And it doesn’t mean a damn thing that gold is selling at a price that is lower than the cost to mine it. Hell, why do you think the gold mining stocks are financially distressed? The industry is in the process of washing out.

As you will recall, the solar industry bubble played out in a similar manner. Today, most solar companies are sitting on huge inventories of solar panels and components that cost much more than they are able to sell them for. As a result many of these firms have amassed “inventory debt” because they are now forced to sell the panels at a loss since the demand for solar panels has collapsed.

The bottom line is that similar to other assets, gold and silver pricing are largely determined by supply-demand characteristics of the futures market. Thus, pricing is largely dictated by central banks and Wall Street. That is the way it has been for a very long time. So if you chose to believe the BS pumped out by gold charlatans, I hope you have plenty of cash to fall back on.

 

 

If you do not already realize that gold charlatans are not to be trusted or relied upon for anything related to gold and silver, I cannot help you; no one can at this point.

Those who are looking for hope will succumb to the wildest fantasies and form the least rational conclusions. Inevitably, desperation always leads to poor judgment.

Only a fool asks a real estate agent if it's a good time to buy a house. Remember, if you want to know about gold and silver, the worst place to go to find out the truth are those who make money selling it, including those who get paid to pump it.