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## # gold, silver bulls read this ###

  1. 24,765 Posts.
    "The bull market in gold and silver has barely begun. It is still in its infancy as gold and silver move into their rightful role as real money. Unlike the last bull market of the 1970s where gold and silver were plentiful, this bull market is being driven by scarcity and the debasement of currencies around the globe.

    Gold and silver have been running supply deficits for well over a decade. According to the work done by GATA the gold vaults at central banks are now half empty. Over the last decade, through gold sales, gold loans and gold swaps, gold has flowed steadily out of the vaults of central banks reducing large stockpiles of gold.

    In the case of silver, supply is now at critical levels. Just as central banks have dishoarded over half of their gold inventory, aboveground stockpiles of silver have been eroded to critical levels as a result of 14 years of supply deficits. Those 14 years of supply deficits are now starting to impact the markets as the price of silver goes parabolic.

    While the memory of the last gold and silver bull market is rather faint, today’s professional investor and gold mining company would do well to revisit that market. During the last bull market, the price of silver rose from $1.32 an ounce to as high as $50 an ounce with the Hunts trying to corner the silver market.

    Factor 1: Trade Deficit

    The price of gold rose from its Bretton Wood price of $35 an ounce to $850. Gold and silver, which had been regulated and suppressed, rose like a Phoenix from the ashes assuming its historical role as money.

    The 1970s was a period of an expanding money supply, escalating government budget deficits and dollar debasement. Over three decades later we now find ourselves in the same predicament. However, the fundamentals of the gold and silver markets are far more favorable today for three specific reasons. In addition to an expanding money supply, we now must add America’s monstrous trade deficits which are putting vast amounts of dollars into foreign hands.

    Factor 2: Dwindling Stockpiles

    A second factor that will influence this new bull market in the precious metals is that supply is far more limited at a time that markets are far more integrated and larger in scope and size. This means that demand factors could send prices to levels never seen or dreamed before. Silver prices above $150 an ounce and gold prices of $3,000-$5,000 are not out of line. This may seem unrealistic to many, but I strongly believe that this is where we are headed. Silver stockpiles are dwindling each year. The U.S. government’s stockpile of 2 billion ounces is gone. Dealer inventories are minimal and it is getting harder and harder to acquire or take delivery on large orders of silver.

    Silver has been depressed by large short positions. Today commercial hedgers, speculators, and small traders are short 106,877 contracts, representing 534 million ounces of silver short. Long positions are of equal size. The problem is there is nowhere near this amount of silver held on the COMEX for delivery nor are aboveground stockpiles this large. There may be additional ounces of silver available in the form of jewelry, silverware, and coin in existence, but it can’t be mobilized by exchange officials to meet delivery if it is demanded. In essence the short sellers are trapped if the longs demand delivery, which may be one reason why exchange officials have raised margins on silver. In summary a major factor going forward in this new bull market will be the supply of available gold and silver to meet growing worldwide demand. In simple economic terms growing demand and dwindling supply means higher prices.

    Factor 3: The Danger in Derivatives

    Another factor that could influence the gold and silver markets is the precarious condition of our financial markets. During the 1970s gold and silver bull market, the derivative market was just in its formative stage. Derivatives began to grow in size after 1973 as a result of the work of three economists- Fisher Black, Myron Scholes, and Robert Merton. The Black–Scholes model enabled investors to determine how much a call-option is worth at any given time. The combination of this model along with probability theory caused the derivatives market to explode. Today it is estimated that the worldwide market of derivatives is between $125-$150 trillion. The U.S. banking system has increased its derivative position from $10 trillion to $67 trillion over the last decade. Derivatives, as Warren Buffett has described them, are financial weapons of mass destruction capable of taking down and destroying the global financial system. If the derivative market implodes as I think it will eventually, the financial markets will cease to exist in their present form. Investors and speculators will be looking for a safe haven. Gold and silver represent the only available safe haven that isn’t a liability. As much as fiat paper money advocates have tried to discredit gold and silver as money, they can’t fight the tide of history. Gold and silver have outlived every single fiat money system ever erected by kings, emperors, prime ministers, presidents, or any central bank. Gold and silver are the only real form of money that has ever existed, a point that is irrefutable in history.

    These three factors, an out-of-control U.S. trade deficit, dwindling stockpiles of gold and silver, and an expanding derivative market on the verge of imploding are what will make this new bull market in gold and silver go to levels never imagined before. I don’t believe there is an analyst, economist or investor who can quantify today how high this market in gold and silver will take us. All that an investor needs to grasp is the fact that demand is growing and getting larger by the day, while supplies and stockpiles shrink globally.

    The Race to Replace

    This brings me back to the issue of supply. Supply comes from mines and the production of gold and silver is falling and will fall even further in the years ahead. The last phase of the bear market in gold and silver in the mid-nineties led to mass consolidation within the gold industry. Today’s behemoth’s such as AngloGold, Barrick, Newmont, Goldfields, Placer Dome, and Harmony Gold are a bi-product of that consolidation. According to the chief executive of one of the largest consolidators AngloGold's Bobby Godsell, “It is the end of big picture gold consolidation; there is no compelling logic to combining anymore. The real challenge now is how to replace your ounces for the future.” The race to replace ounces is about to begin. It will take the form of takeovers of small producers with long reserve lives and high quality junior mining companies with large in ground reserves that can be mined economically."

    The rest of the article is at http://www.kitco.com/ind/Puplava/mar092004.html
    ====================================

    Form your own opinion about this.
 
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