Narratives: The stories we tell ourselves can help or hurt us

A gold-standard 1928 one-dollar bill. It is identified as a "United States Note" rather than a Federal Reserve note and by the words "Will Pay to the Bearer on Demand," which do not appear on today's currency. This clause became obsolete in 1933 but remained on new notes for 30 years thereafter. (Photo credit: Wikipedia)

For years, with a few twists, the precious metals narrative has been the same. A U.S. Dollar, no longer tied to gold backing and printed at an ever-increasing rate will lose it's value, resulting in massive inflation and higher gold and silver prices.

Or, if you prefer, the available supply of silver is decreasing as demand soars. Some even say that demand has outstripped supply for years. Have not been able to locate the issue, but recall that the Kiplinger Letter in the 1980's was pushing short supply narrative sighting increased demand due to film used in cameras and increasing demand from China.

How about this one? The massive U.S. government debt is unsustainable and will lead to an existential crisis (e.g., Dollar collapse) that will pull the rug out from the Dollar and send the metals to the moon.

COMEX default, gold-backed Yuan, precious metals prices falling below mine cost of production, manipulation, Armageddon...and the list of narratives seemingly goes on ad infinitum.

Barry Ritholtz writes that "Everybody loves a good story". While he opens his story referring to Wall Street, it applies equally to gold and silver.

When it comes to storytelling, we have a long and venerable history of narrative. The spoken word emerged millennia ago — before even the Greeks — when the only way to share knowledge was verbally, person to person, generation to generation.

It is in your DNA to love a good story. You know, neat tales with heroes and villains and conflicts to resolve. A good story pushes our buttons, is exciting and memorable.

It should come as no surprise that Wall Street also loves a good story. And when Wall Street spins a yarn, its emotional pitch drives sales.

Ritholtz later continues:

Of course, many of these stories turn out to be wrong. Surprisingly, that is not what gets us into trouble as investors. As it turns out, it doesn’t matter whether a story is true or false. It may be counterintuitive, but even true stories can end up being money-losers.

What matters most to you as an investor is the entire concept of the narrative. You have a natural tendency to want an emotionally satisfying tale — and to make investments based on that — despite times when the actual data may be telling you something different. 

The fear trade doesn't seem to be panning out. Stocks climbed, gold fell. It appears that the economy can teeter on the edge of a precipice for longer than many anticipated.

None of this is to say that gold and silver prices won't eventually end up much higher. At the same time, it's a valuable exercise to, from time to time, examine the stories you listen to, believe, tell others, and most importantly - the ones you tell yourself. What if those stories are wrong? What if you're missing some important detail?

A good story is enjoyable to listen to. A story can clarify or cloud our understanding. It can even make us feel better about ourselves. But, believing the wrong story can cost us dearly.

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$200 Silver Prediction from 2011

Editor's Note: This article was originally published in April of 2011 on the Daily Libertarian. The Daily Libertarian, apparently, is not an active site at this point in time. Some of the predictions made in this article are now obviously wrong. This was written at a time when silver was approaching its high price and many were predicting $200 silver as evidenced in a previous post here. At a later point, we plan to flesh out more arguments for $200 silver or $150 silver, which also seems to be a common level that some are predicting. Originally the title for article was "Silver is Screaming". The article was followed by another in June of 2011 titled "What's Silver Saying?" Hope you enjoy this article. If you have any questions or comments please feel free to leave them in the comments section.

If I were the Mogambo Guru over at The Daily Reckoning might open by ranting about how the idiots at the Federal Reserve are creating Too Much Freaking Money (TMFM), leading to a devaluation of the U.S. Dollar and increasing food, fuel and commodities prices. However, I don't need to scream, silver is yelling at the top of it's lungs. What's silver screaming about?

Silver's screaming about the incredible shrinking dollar - whether measured by the U.S. Dollar index (DXY), or one of the Trade Weighted Exchange Indices, the message is the same. The U.S. Dollar is going down like the Titanic.

It may not be obvious to Helicopter Ben Bernanke, but the rise in silver prices has coincided with the decline of the dollar. While the DXY was falling from around 120 to below 75 from 2000 to present, silver bumped along around $5.00 per ounce for years before beginning it's climb to $43.00 per ounce at present.

Sadly, but not surprisingly, the declining dollar is the result of a deliberate government policy of devaluation. In "The Global Recession Risk: Dollar Devaluation and the World Economy" by Pelaez and Pelaez, they discuss how a 40 percent devaluation of the dollar might be necessary in order to bring the current account deficit (CAD) of the U.S. back into balance. Interestingly, a FEDPOINT from the Federal Reserve Bank of New York outlines why a country might devalue its currency and what effects that might have. The effects of devaluation reads a bit like those warnings on prescription drugs:

A significant danger is that by increasing the price of imports and stimulating greater demand for domestic products, devaluation can aggravate inflation. If this happens, the government may have to raise interest rates to control inflation, but at the cost of slower economic growth.

Another risk of devaluation is psychological. To the extent that devaluation is viewed as a sign of economic weakness, the creditworthiness of the nation may be jeopardized. Thus, devaluation may dampen investor confidence in the country's economy and hurt the country's ability to secure foreign investment.

Let's see - inflation, higher interest rates, jeopardized creditworthiness and inability to secure foreign investment. Sign me up Dr. Kevorkian!

The flip side of increasing exports and closing the current account deficit is that Americans will have to reduce their consumption plus ("The Global Recession Risk: Dollar Devaluation and the World Economy"  by Pelaez and Pelaez):

The US must abandon residential

construction in favor of export activities and the rest of the

world must buy American goods and services. The US government as

well as those of surplus countries must engage in fiscal consolidation.

Does any of this sound familiar? It should since we're living it right now.

Devaluation also aids the United States with at least two other issues:

1. Reduces the burden of the U.S. debt by allowing it to pay its creditors in increasingly worthless fiat currency.
2. Pushes China to unpeg its currency from the dollar allowing its currency to float. Most likely this causes the Renminbi (RMB) to appreciate against the dollar. This makes Chinese imports more expensive when priced in dollars and helps reduce the current account deficit.

People are waking up to the cold, stark reality of devaluation. The dollar in your pocket is likely worth less today than it was yesterday. Government policy is designed to force you to consume less and save more. But, why would you save an increasingly worthless fiat currency like the dollar? Many people refuse to do so. Purchasing silver isn't just for survivalists waiting for something to hit the fan or silver bugs. Silver has become the common man's way to unplug from the government controlled currency matrix and hold onto money (yes, silver and gold are money) that maintains its value as the dollar declines.

Take that Nostradamus. 

 Here's the part where, if I were really clever, I would write some vaguely worded quatrains in dead languages, and let you interpret them. Fortunately for you, and unfortunately for me, I'm not that clever.

The decline of the dollar is an ongoing trend. Devaluation is a deliberate, coordinated government policy. In January 2002 the U.S. Dollar Index (DXY) was roughly 120. By December 2004 it had declined to 81.

By June of 2010 the DXY had made a pretty stunning recovery to around 88. Using the January 2002 to December 2004 decline as a guide, I am predicting the DXY to decline to about 60 by May 2012. That also lines up pretty nicely with an overshot - 50 percent instead of the 40 percent decline - thought necessary to bring the current account deficit (CAD) back into balance.

So, what does that mean for the price of silver?

I believe silver will go to $200 per ounce, perhaps more. How did I get there?

This is based on a few different factors. First, even though it was the subject of manipulation by the Hunt brothers, silver did reach $50 per ounce. Inflation adjusted silver, to match the $50 high, would have to be valued north of $100. The number I hear thrown around often is $140 per ounce. I haven't checked the exact number out, but that doesn't sound far off.

Second, the gold-silver ratio is declining. A year ago it was around 60 to 1. Today it is around 35 to 1. This combined with experts Peter Schiff and James Turk predicting gold prices of over $8,000 per ounce lead me to believe that $200 per ounce silver is not an unreasonable expectation. In fact, both men are predicting a 1 to 1 ratio of Gold/Dow ratio - in other words if an ounce of gold is $10,000 per ounce then the Dow will be 10,000. Although I'm not sure gold and the Dow will meet at such a high level, I would not be surprised if the Dow declined 25-35 percent and gold climbed to meet it somewhere around $8,000-$9,000 per ounce. A 40 percent decline in the Dow would put it around 7,200. With a 35 to 1 gold-silver ratio silver would be priced around $205 per ounce.

So, at $43 per ounce, it looks like silver is just warming up its lungs. Yes, it may be screaming, but think how hoarse it (and perhaps you) will be from screaming as it approaches the $200 per ounce mark. Of course, if I'm wrong, my next prediction may be written in quatrains. 

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Factors That Will Drive Gold Price Higher

Gold Buddha (Photo credit: @Doug88888)

Many people ask, "Has Gold Price Reached it's Low?" While it's not absolutely clear that it has, signs are accumulating that indicate gold has probably reached it's low and will climb higher over the course of the next several months.

Gold Price Near Resistance

Gary Wagner, who we recently highlighted for his charts indicating gold could dip as low as $1030 per ounce, now says if gold can break through the $1,339 level that it should continue to climb.





Bullion Banks Running Out of Gold?

Zero Hedge highlighted how JPMorgan's gold vault is emptying out at a rapid clip. This led us to bring up the possibility of a short squeeze driving the price of gold up.

COMEX Default

Jim Sinclair writes:

The cause of today’s spectacular rise in the gold price is the reality that with Friday continues large drops in the Comex warehouse gold inventory. No cogent argument can be formed against the reality that because of the continued fall in gold inventory that within in 90 days or sooner the Comex must change its delivery mechanism.

Gold Short Squeeze

Zeal Speculation and Investment, in "Gold Short Squeeze" opens their post with:

Futures speculators have responded to this year’s extreme bearishness plaguing gold by amassing wildly-outlying record short positions in it.  These huge and highly-leveraged bets can only be unwound by buying gold futures to cover the shorts.  As gold continues rebounding out of its recent hyper-oversold lows, the futures traders on the short side will have to buy.  This will likely fuel a massive short squeeze.

Their article concludes:

And given such extreme spec gold shorts, widespread despair, and gold recently hitting the most oversold levels by far of its secular bull, it is due for a monster upleg.  As this accelerates, the leveraged shorts will be forced to buy back the gold they owe at increasing rates.  This will feed on itself and likely ignite a buying panic.  It will very likely lead to the biggest and fastest upleg of gold’s entire secular bull. 

China Seeks to Displace U.S. Dollar as Reserve Currency 

As outlined in "China Maneuvers To Take Away US' Dominant Reserve Currency Status" China is buying vast quantities of gold in an effort to displace the U.S. Dollar as the reserve currency. Their effort includes creating a trade settlement system which also utilizes the yellow metal.

Inflation

QBAMCO expects inflation:

Inflation will be the means to de-lever systemic balance sheets and it will affect different equities in different ways, at different times and in very different magnitudes. We believe the implied mandate, long precedence and demonstrated current willingness to inflate will ultimately sustain and increase the money stock, which in turn portends further nominal gains.

Taken separately any of the above could be discounted. Together, it becomes more difficult to deny that it appears a number of events are coming to a head which could potentially drive the price of gold higher. From gold pressing through technical resistance at the $1,339.00 level to signs that the bullion banks may be running out of gold have the potential to ratchet prices higher - perhaps to new records.

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Has Gold Price Hit its Low?

Gold Jewelry Necklace with Golden Coins (Photo credit: epSos.de)

We have examined many predictions, price targets, and charts for both gold and silver. For example, Gary Wagner's forecast for $1030 gold. However, what if these forecasts are incorrect and the low is already in for gold?

Two interesting possible events were suggested by Zero Hedge and Zeal Speculation and Investment that could significantly boost the price of gold.

1. The bullion banks run low on gold and cannot deliver enough to meet their obligations. JP Morgan has seen a serious amount of gold flow out of its vaults recently. This scenario has been discussed for many years, but - should JPM and other bullion banks be forced to default on their obligation to deliver - the price of gold should move higher.

2. Either independent of, or in conjunction with, a failure of bullion banks to deliver, higher gold prices could result in a short squeeze. It wouldn't take a huge rally in the price of gold to wipe out the shorts.

At maximum leverage, a mere 6.4% gold rally would wipe out 100% of the capital risked by gold shorts!  While not all futures traders run with minimum margin, plenty do.  The faster that gold rallies, the more pressure it puts on these guys to buy offsetting futures longs to cover.  Short squeezes are born when just a small fraction of traders are forced to cover, unleashing buying pressure that sucks in many more.

With gold significantly oversold, it seems only a matter of time before the price rebounds.

The extreme price levels often present the greatest risk, and the potential for the greatest reward. While gold could certainly drop lower - to somewhere around $1,000 (give or take), you should not take for granted that it's a foregone conclusion. Markets are nothing if not unpredictable.

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Price of Gold Headed for Extinction?

A few days ago we examined whether or not gold is an investment. But, what if the price of gold is headed for extinction due to permanent backwardation? That's what Professor Fekete postulates:

A. The price of gold is headed for extinction. I for one don’t believe that the 

price of gold is headed for five digits. Long before that might happen, 

permanent backwardation* would shut down the gold futures markets. Gold 

could no longer be purchased at any price. Gold would only be available 

through barter. World trade is facing an avalanche-like transformation 

flattening out monetary economy into barter economy. Practically all 

economists, financial writers and market analysts have missed this possible 

scenario. They don’t see the greatest economic contraction ever staring them 

in the face. They don’t see the coming tsunami of unemployment. Very few see 

deflation as indicated by the progressive disappearance of cash gold. It never 

occurred to Bernanke that the new Federal Reserve notes he is printing galore 

could also go to purchase physical gold, causing the gold basis to shrink. Once 

the gold basis* goes permanently negative, the total U.S. debt, all $16 trillion of 

it, will not be worth one ounce of gold. That will pull the rug from underneath 

the international monetary system. Barter is the ultimate in deflation, and that 

is what the world economy is getting. 

And why will the price of gold collapse? Hyperdeflation.

But there is also a second variety for which no precedent exists because 

we have no previous historic example of experimentation with global fiat paper 

money. If breakdown occurs during the phase when the rate of interest is 

falling and money flows from the commodity to the bond market, then we have 

what I call hyperdeflation. That is what we are apparently having right now. It 

started over thirty years ago in the early 1980’s. When in January 1980 interest 

rates failed to break out on the upside (as appeared likely at the time, with the 

gold price hitting $875), the system went into the mode of declining interest 

with such a force that put the Fed out of control. For the past three decades 

interest rates have been falling relentlessly. Of course, the Fed would like to 

have us believe that this is the result of deliberate monetary policy. I suggest it 

to you that it’s not. It is runaway resonance in action – on the side of interest 

rates and the velocity of money falling to zero. Fall they do inexorably. It is 

hyperdeflation. The Fed is desperately trying to fight it, but all is in vain. We are 

on a roller-coaster ride plunging the world into zero-velocity of money and into 

barter. In my lectures at the New Austrian School of Economics I often point 

out the similarity with the collapse of the Tacoma Bridge in 1941.** 

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Will Silver Drop to $15 per Ounce?

American Eagle, design by Adolph Weinman. (Photo credit: Wikipedia)

It doesn't seem like too much of a stretch considering how far silver has fallen already, that it might reach $15 per ounce. Will it? Silver remains enigmatically unpredictable.

One place to start to look at the charts as Don Harrold of The Day Trade Show has done.





Sunshine Profits asks Is it Time for a Breakout or for the Final Bottom in Silver? They believe the final bottom for silver will be $15 - $17.50.

This coincides with some other predictions of the future silver price:

• Peter L Brandt: $16.15
• Don Harrold: $17.50
• Chris Marchese: $17.50
• Louise Yamada: $14.00-$15.00

So, there are a range of forecasts for the silver price, ranging from $14.00 to $17.50.

Will silver reach $15.00? It's difficult to say, but it does seem within the realm of possibility.

Miners Falling Down a Shaft

If you're thinking (hoping) that precious metals miners' prices will stop falling then you could be disappointed. Sunshine Profits writes in, Is It Right Time to Buy Mining Stocks?

In this week’s very long-term HUI index chart (a proxy for the gold stocks) we see that miners finally moved close to the upper border of the declining trend channel. Soon after that, they declined once again (it happened yesterday) and could be that the correction to the upside is already behind us.

The trend remains down, and another decline is likely before the final bottom is formed.

Where will it form? In our opinion, close to or slightly above the 2008 low as indicated in the above chart by the red ellipse (which also includes the 61.8% Fibonacci retracement level).

And where would the 61.8% Fibonacci retracement level take the Hui? Around 150.

The bottom line:

Summing up, the outlook for mining stocks remains bearish. Miners are still in a downtrend and it seems that the next move lower will probably be the one to take miners to their final bottom

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Gold is Not an Investment Unless...

English: 1 oz (Troy ounce) of fine gold Deutsch: Eine Unze Feingold mit Zertifikat (Photo credit: Wikipedia)

Gonzalo Lira runs down some common arguments for not investing in gold, and then makes it clear why it's worth putting some money into gold.

Ritholz is absolutely right: Gold does not have cash flow, earnings, coupons, or yields. Unlike, say, a factory, or a piece of land, gold cannot produce anything; gold just sits there, inert. Though it has a handful of industrial applications, and of course can be used for decoration, gold has no practical use. You can’t eat gold. You get caught in the middle of the Sahara with a ton of gold and not a drop of water? You’ll be the richest corpse in no time. 

So just like Ritholz says, gold is not an investment—unless.

So, you can't eat gold, or your iPad or iPhone (for a light snack). So, why bother? Well, gold isn't an investment...unless...

Unless what? Unless the fiat currency itself becomes worthless. 

You could choose to ignore gold, calculating that the possibility of a monetary crisis is remote.

But, that probably isn't a wise choice.

But this is not an ordinary recession: This is a balance-sheet depression which is being exacerbated by Federal government debt monetization (otherwise known as Quantitative Easing).

Which, ultimately will lead to a monetary crisis.

 Now? Gold is the absolute best and only bet against currency collapse—which is coming, courtesy of central bank irresponsibility. 

In normal times gold might not be an investment. However, these are not normal times.

Related articles

• Richards: "Gold is Not an Investment"

Silver Price Will Go Up, But Not Yet

With the silver price straddling the fence around the $19 - $20 level many are wondering if it will resume its upward trajectory, or once again slip back down. Today, Sunshine Profits offered a clue:

Technically, at this time we have no breakout, so the situation remains bearish (even the short-term trend). The downtrend will remain in place here unless silver can increase and hold a breakout above the $20.70 price level (this is a short-term resistance level based on the intra-day highs).

In the recent days we haven't seen such action. Therefore, in our opinion last week’s rally was nothing more than a contra-trend bounce.

And later...

Last week we saw a move to the upside for silver on relatively weak volume. In the recent past, this was also seen before bigger declines. This was the case in early June, late May, early May and also in April. It seems that we have this once again (the volume we saw yesterday was exceptionally tiny).

Summing up, silver moved higher last week and rose on Thursday to its highest level since the June 28 low. Despite this growth, there was no breakout and the downtrend is still valid. We think that the next move for silver will be down and in tune with its recent and current short-term trend. 

Sunshine Profits currently has a silver price target of $15.00 - $17.50. This aligns quite nicely with some of the other targets we have highlighted previously.

• Peter L Brandt: $16.15
• Don Harrold: $17.50
• Chris Marchese: $17.50
• Louise Yamada: $14.00-$15.00

So, don't be surprised if the silver price slips back should it fail to overcome resistance around $20.70. Silver is nothing if not unpredictable, but that's part of what makes it so interesting.

 

Silver Price Per Ounce Set to Slide?

5 kg Silver bar (Photo credit: Wikipedia)

With the recent rebound in the price of silver, there has been speculation that the bottom is in. However, predicting a bottom in silver has proven nearly impossible given the unpredictable nature of silver's price.

One possible set of signals to predict the low silver price was proposed by Rahool of the Altinvestorshangout. His idea was that the value of the USD Index and the yield of TIPS could signal when silver has bottomed.

...a USD Index level of 89 and a 10-Year Treasury Inflation Indexed Security, Constant Maturity at 2 percent will signal the price bottom for gold and silver.

Another interesting idea was proposed by Don Harrold to use the SLV as a proxy for the silver price and look for a double bottom in the RSI as a buy signal.

More recently BrotherJohnF advocated using the Directional Movement Index (DMI) as a counter-trend indicator to predict when the price of silver was going to rebound higher.

A number of individuals have offered their predictions as to the future price of silver:

• Peter L Brandt: $16.15
• Don Harrold: $17.50
• Chris Marchese: $17.50
• Louise Yamada: $14.00-$15.00

These price predictions, as a whole, point for the price of silver per ounce to fall before resuming its upward climb. This does not seem unreasonable given that markets often seem to overreact both to the upside and the downside. In 2011, the precious metals got overextended to the upside, and subsequently are now overextended to the downside. 

Rick Rule, in an interview in late June, expressed that he believed that mining stocks had entered the capitulation phase where investors are throwing up their hands and giving up on them.

Likewise, it seems, the physical silver market is reaching a stage where many have given up. A push to new lows for the year could well complete the phase, marking the end of the decline and a resumption of an upward trend in the price of silver.

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Predicting Gold and Silver Price Bottoms is Hard

Not to pick on McAlvaney Financial Group, but this video from April 12th demonstrates that price bottom predictions can easily be blown away.





While the overarching reasons for holding precious metals - instability in the financial system, money printing, government debt, currency wars, etc. have not changed, predicting when gold or silver reach their bottom price has proven to be difficult. We won't really know when the bottom is in until after the fact.


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