The Swiss Vote and Gold & Silver

cropped-bob-shapiro.jpg   By Bob Shapiro

I wrote a couple of weeks ago about the Swiss referendum on whether their Central Bank should be required to:

  • Increase their holdings of Gold, as a percentage of reserve assets, back up to 20%, from the current roughly 7%
  • Repatriate Swiss Gold back to Switzerland from various Central Banks in other countries, where the Swiss Gold is being held
  • Never sell Swiss Gold in the future.

The Swiss Central Bank was vehemently opposed (well yeah, it would have restricted their misuse of Swiss Citizens’ Gold).

The vote was held yesterday (Nov 30), and the proposal did not pass (by a significant margin).

What I found especially interesting was the Gold (and Silver) market response to the vote. Late last week, the metals sold off significantly, in anticipation of a No vote. But, today, after the No vote results were reported, Gold and Silver both surged in price.

After an immediate fall late last night when markets resumed trading after the weekend, Gold closed up $44 for the day. Silver also fell and then rose for a gain of $0.88 per ounce to $16.45. It looked like another case of “Sell the Rumor, and Buy the News.”

Gold Chart

So, what’s the big deal over Gold? Why is this important about Silver anyway? These Precious Metals have a 5000 year history of use for money purposes. As opposed to paper (sometimes referred to as fiat paper money), Silver & Gold tend to retain their values over the long haul. A 1oz Gold Coin could buy a good custom-made men’s suit 100 years ago, and it still can today.

Paper can be printed, or digitally accounted into existence, whereas Silver & Gold have to be mined, and that costs a lot of money and time. At current prices (Gold trades today at $1207), both metals sell for about the marginal cost of production. At these prices, some mines already are reducing operations because they can’t profit.

Returning to paper, not only can it be printed, it IS being printed – by several countries and in massive quantities. Japan, which still hasn’t recovered from its late 80s market crash, once again is falling into an officially defined Recession.

The Eurozone Central Bank (ECB) head, Mario Draghi, recently said he needs to start a QE over there to get their Economy out of their impending Recession. China and Russia are inflating their paper money supplies.

The US FED, though it officially stopped QE, isn’t going to sell any of its Trillions in Treasuries that it has bought. And, since they say that they will maintain their Zero Interest Rate Policy (ZIRP), that means they will continue buying Treasuries to keep the rate artificially low.

In case you are unaware, currency markets – including Silver and Gold – operate as auctions (yes in the short run these markets are subject to intervention/manipulation, but can’t be controlled in the long run).

So, let’s consider a simulated auction, where 10 chairs (or widgets) are up for sale. Four bidders combined have Monopoly money totaling $1,000 and have to get as many chairs as they can to win. After the auction, the average price per chair is almost $100 ($1,000 total divided by 10 chairs).

Chairs

Now, lets up the combined total that the four bidders have to $1,000,000. How much would you expect the average price per chair to be? If you said almost $100,000 per chair you’d be right. The supply of chairs was the same, but the demand went up, from $1,000 to $1,000,000.

Getting back to Silver & Gold, if the paper money supply around the world has gone up around 7% a year for 1/3 of a century, then there is about 8 times as much fiat paper as 1980, when Gold touched $850 and Silver touched $50 per ounce.

There is a lot more going on, but this is enough to consider right now.

  • Silver & Gold are selling for about the cost of production
  • There is 8 times as much fiat paper chasing that Silver & Gold as there was in 1980, the last time they were super high
  • Gold is selling today for $1207 vs $850 in 1980
  • Silver is selling for $16.45 vs $50 in 1980
  • Governments worldwide are continuing to debase their currencies

I’m convinced, which is why I own some Silver & Gold investments. For those of you interested but new to this investment category, go slowly and go easy, possibly with some tradeable funds like SIL (Silver companies), GDX (Gold Companies), or GDXJ (Gold Junior Companies – I have some of this one). Caveat: I’ve been wrong before.

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