Over the past few days we have witnessed a truly impressive beat-down across the entire commodities complex, with the most impressive illustrations being Crude - down over 10% and Silver down over 25%. The following graphic really tells it all (click to enlarge).
After seeing a parabolic rise in Silver since the middle of January, we truly were in need of a correction. The question for now - how much farther to go before the sell-off in Silver is complete? Hard to say when the selling gets this intense. There were several places along the way where I thought we would see a pause and some consolidation during the past two days, but these levels provided about as much support as spider web would to a falling brick. Nada. Last night before going to bed, I was thinking that the area around $34 would be the bottom, but in early morning trading today, we are already down in the $33's, so it looks like we may have some more downside to come. The next technical support levels have been shown in the above chart, and if I were a betting man, I would say that we'll likely test $30 before all is said and done. Question #2 - Is the rally in Silver over? If you're not capable of independent thought and all you do is listen to the pundits on television, you probably believe the drivel they've been spewing - that Silver has simply been in a speculative bubble, and now the bubble has been popped. Hmmm....
If, on the other hand, you've been paying attention to what's really been going on, you'll understand that we've just been given an incredible gift - the opportunity to buy more physical silver at a 25% discount, and perhaps even more, by the time the sell-off is complete. How can I say this? Do you think I'm nuts? Well, I'll come right back to the same question that I have been posing for the past 3 years. What has changed?
Has the U.S. Govt curbed spending? Nope - as a matter of fact, front and center on the Congressional debate docket is another push to raise the U.S. debt ceiling, because our idiot politicians won't make any real attempts to cut spending...particularly on entitlements and the military.
Has the Fed stopped monetizing debt? Nope - we are in the middle of QE2, with the Fed buying $100 Billion a month in U.S. Treasuries.
Have the largest states in the union (economically speaking) suddenly become solvent again? Nope - California, Illinois, New York and Michigan are all barely keeping their heads above water, and are a far cry from being prosperous.
Are the big banks all healthy and lending? Are you fucking kidding me? Hell no! They are all still carrying massive losses on their balance sheets that have been covered up by not having to mark their assets to the market, and have been showing profits via accounting gimmicks and their prop trading desks, just so their executives can continue to rake in obscene bonuses.
How's that housing recovery going? Have real-estate prices in your area recovered to 2005 - 2007 levels? Nope, not even close.
Nothing. Has. Changed.
The only thing our leaders have done is kick the can down the road for the past few years, but we are rapidly approaching the time when the can will not move another inch. And what has happened as a result of the incessant can-kicking? Well, one thing our leaders are doing is destroying the US Dollar, which hit new 3 year lows early this week.
Once again, if you listen to the news, you'll be told that dollar devaluation is a good thing because it makes US made products more competitive in the international market place, and is therefore good for our economy. I guess that's okay if you're the CEO of a large manufacturing company, but the real effect of dollar devaluation for Joe and Joanne Sixpack is inflation. As I've explained on this blog before, commodities around the world are priced in U.S. Dollars - from crude oil to pork bellies, orange juice to soy beans...the USD is the defacto valuation medium. So what happens when Ben Bernanke prints $100 Billion per month in new USD's? It lowers the value of all USD's around the world. What happens when the USD loses value? It takes more USD's to buy the same amount of wheat, corn, oil, and beef....in other words, the prices for everything goes up. Unless you've been living out in the wilderness as part of a self-sufficient commune, I think it's safe to say that we have all seen this effect over the past 6 months at the grocery stores and at the pump.
Going forward, is it likely that we will see any significant change? I find it highly unlikely. In the very short term (1 - 6 months), we will probably see very volatile markets, and a significant sell-off in stocks. This is the only way that Ben Bernanke and our other illustrious leaders will be able to justify QE3 in the public eye, and believe me, QE3 is all but a certainty, in some way, shape, or form. With the Fed buying up 50% or more of our public debt every month, who do you think will buy it if they were to suddenly end QE? In years past, you could always count on the Europeans, the Japenese and the Chinese to purchase US debt, as they all saw US Treasuries as a safe haven investment. Not anymore. The Chinese are actually dumping their USD assets, and the Europeans and Japanese are in financial shambles themselves. So who would step in to buy US debt if the Fed stops? The answer is, nobody. The US would have a failed auction, resulting in a funding halt to the federal government. So yes, QE3 is coming folks. There's simply no alternative. Unfortunately, this will result in the final death spiral for the USD, and Americans will be faced with rampant inflation.
Which brings me back to the point of this post. We've been given a gift. Even if Silver drops to $30 or $25 - this will be a short term correction. Whether prices remains suppressed for a week or a number of months remains to be seen, but trust me, once QE3 gets announced, or anticipation of QE3 starts getting priced into the market, commodities are going to explode and we will not see prices this low ever again. I still stand by my call that we will see silver priced at over $100/oz by sometime next year. The only way you will be able to protect yourself, your family, and your dollar denominated investments from the coming inflationary onslaught is to buy physical silver and/or physical gold.
I'll try to post more regularly in the coming weeks/months. Thanks for stopping by.
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