Dear Reader

I believe it is now apparent to many that we are in the beginnings of a Stock Market Crash that may be unprecedented.  I say that not to grab your attention but because it’s true.  Never before have the markets been injected with so much quantitative easing, preceding their bubbles.  Never have Central Banks and governments been so in debt in relation to their GDP’s.
 
Please watch this short video from The Telegraph, which describes the figures we are dealing with in this week’s Stock Market Crash. Truly mind blowing figures.  The moves on the Stock Market were so wild and huge, many mainstream news commentators looked shocked.
 
Yet, this isn’t a surprise. Please read our last months blog’s clearly warning that this was coming:
 
19 August 2015: Gold Up or Down? Doomsday Clock or Upbeat Data?

11 August 2015:  Currency War: China, the Dollar and Gold

5 August 2015: Level Headed Thinking about Gold

29 July 2015: China, the Stock Market Dominoes Begin to Fall

22 July 2015: Is a Stock Market Crash coming in late 2015?

And all the way back in April 2015: China and Alan Greenspan: Something Big is Coming

 

As you can see, although we cannot predict the future, we can gather information and make educated views on what is around the corner, giving people enough warning to move out of stocks and into the safe haven of physical Gold and Silver.
 
Now, the questions which may be central on your minds is, “What happens next?”  and if you are reading this specifically, “How will this affect the price of Physical Gold and Silver?”
 

So, firstly what happens next?  Well, you will read one of two reactions:
 
1)  The understated “not much to look at here” more pop-culture view of news. Vox produced a classic this week, with a phrase that would be funny if it wasn’t so serious a topic. “In other words, several of the world’s major drivers of economic demand face problems ahead. And if they all crack up simultaneously, that would be a bad thing.”  To their credit, they then do pick up the logic a little more in an adult tone by stating clearly that: “So whether you believe stocks are overvalued depends a lot on what you think will happen to interest rates. If interest rates rise quickly in the next few years, stock prices could fall a lot further. On the other hand, if interest rates stay low, stocks could stay high for a long time.”  What happens next will depend, in a very small degree I believe, on interest rate hikes or a frozen rate. I believe larger geo-political and natural events will affect the global economic crash far more. But it is an important side note to make on interest rates.
 
2)  The “prepare for the worst” scenerio now:  “A former adviser to Gordon Brown has urged people to stock up on canned goods and bottled water as stock markets around the world slide. Damian McBride appeared to suggest that the stock market dip could lead to civil disorder or other situations where it would be unreasonable for someone to leave the house. “Advice on the looming crash, No.1: get hard cash in a safe place now; don’t assume banks & cashpoints will be open, or bank cards will work,” he tweeted.  Crash advice No.2: do you have enough bottled water, tinned goods & other essentials at home to live a month indoors? If not, get shopping.  “Crash advice No.3: agree a rally point with your loved ones in case transport and communication gets cut off; somewhere you can all head to.”  What is eye-catching about this call-out to prepareness is not that it appeared in a Texan prepper’s online blog but the front page of the political section of The Independent this week!
This raises an important point.  Some assume that if you’re not invested in the stock market, then what happens there does not affect you.  I was surprised to read this flavour of writing in the American section of the Business Insider yesterday: “The stock market roller coaster is not being felt by most Americans for one simple reason. That’s because fewer people are invested in the stock market today than at any time in nearly the last two decades — the product of dogged wage stagnation and a dramatic loss of faith in markets.”  I believe this view is incorrect in that it is shortsighted. It assumes damage is only done on impact, rather than the spreading fire that follows, sometimes over months and years. And America should understand this far more than Britain, because of cities like Detroit. “Since 2008, the average price of a home in Detroit has been below the average price of a new car.”  In human terms the effect of the last economic crash and sub-prime mortgage crisis is staggering to every day people: “more than 1-in-3 Detroit properties — 139,699 of 384,672 — have been foreclosed because of mortgage defaults or unpaid taxes, property records show. The vast majority are houses, and the tally is so huge it shocked even those who spent years working on foreclosure in Detroit. “When you see it on a map, it’s absolutely terrifying,” said Chris Uhl, a vice president of the Skillman Foundation that is working to prevent foreclosures. It’s not just 140,000 properties. It’s people living in those properties. The number of lives affected is just staggering.”
So, the historical reality of a stock market crash of a large scale does not back up the Vox journalist view but the Independents view. These are just historical economic facts. 
 
A few commentators have referred to what is happening this week in the Stock Market as a “Flash Crash.”  But I would politely disagree.  With interest rates so low and quantitative easing at saturation point, there is no where else for the markets to go. There are just too many solid fundamentals; from rumours of wars, economic unrest within entire countries and continents for the figures to be white-washed for too much longer. The crashing of the market was not just in China this week but across the globe:
 
The Middle East markets took a hammering and lesser talked about Canada is “in a technical recession, after the economy shrank for the first five months of the year.” Canada, like Russia, relies heavily on the price of oil for the health of its economy and the price of oil per barrel is plummeting.  Although this feels nice for us, particularly in rural areas of England with large personal travel costs, around the world low oil prices increases political and social unrest: “A year ago, the international price per barrel of oil was about $103. By Monday, the price was about $42, roughly 6 percent lower than on Friday.In oil-endowed Iraq, where an Islamic State insurgency and fractious sectarian politics are growing threats, a new source of instability erupted this month with violent protests over the government’s failure to provide reliable electricity and explain what has been done with all the promised petroleum money. In Russia, a leading oil producer, consumers are now paying far more for imports, largely because of their currency’s plummeting value. In Nigeria and Venezuela, which rely almost completely on oil exports, fears of unrest and economic instability are building. In Ecuador, where oil revenue has fallen by nearly half since last year, tens of thousands of demonstrators pour into the streets every week, angered by the government’s economic policies.” (New York Times, 24 August 2015)
 
Can you see how the world finances, and therefore heavily dependent geo-political dynamics, feel like they are coming apart at the seams?  Just like the build up under tectonic plates, something eventually has to give, and usually – very sadly – that is abruptly and in a destructive manner. The longer the surface quiet between real and financial earthquakes, the greater the damage.

So, onto the second question of “How does all this affect the price of physical Gold and Silver?”
 
A more accurate question would be to ask, “How does all this affect the VALUE of physical Gold and Silver?”  This is because the price of physical Gold and Silver is currently tagged to the paper markets, as explained succinctly by Clint Siegner in yesterday’s The Market Oracle: (as we at Bleyer have long explained, the two products – paper certificates and physical gold/silver – are truly different entities of highly different values:)

 
“U.S. Investors are on edge following last week’s and today’s sell-off in stocks around the globe. The carnage impacted equity markets in Asia, Europe, and the U.S.  Interestingly, the U.S. dollar also weakened. And bonds and gold are getting most of the safe-haven buying.  The probability of U.S. interest rate hikes this fall is now falling a rock. We are once again hearing the familiar call from Keynesian economists, including Paul Krugman, for more stimulus and debt. They acknowledge the trillions already printed and borrowed haven’t worked – but say it is only because it wasn’t nearly enough.

The Dow Jones index has fallen over 1,000 points in the last few days. At the same time, gold has risen about 4%. Gold futures had not been benefiting from safe-haven buying in recent months.  But that’s changed in recent days as confidence in worldwide equity markets and the dollar has waned.  Should Investors Wait for Even Lower Gold Price or Jump In Now? Looking at 2015 overall, precious metals have not fared well.  Many people are hesitate to make their first precious metals purchase with the fear prices will fall further.  It’s certainly true that metals recently have not, for the most part, functioned as an attractive alternative to these conventional assets. That’s largely because gold and silver prices are set in paper futures markets. And these markets are prone to all the same weaknesses: high-frequency trading, bankers manipulating markets in order to cheat their brokerage clients, central bank interventions, and extraordinary leverage. In other words, prices set there do not fully reflect supply and demand in the real world. It is understandably tempting to wait for even lower prices before buying.  But with price discovery as broken as it is, relying on price charts alone to make investment decisions is unwise.  The shakier financial markets get, the wiser it looks to diversify out of paper assets including dollars, stocks, and bonds.  Investors should consider what’s going on in the physical market for gold and silver coins, rounds, and bars. The fundamentals in the physical market paint a radically different picture than the paper and electronic markets do. While a handful of traders may be selling half the annual world production of silver short on the COMEX and other futures exchanges, there is record buying in the physical market. Mints and refiners are already unable to keep up with demand. This at a time when, according to CNBC and some of the financial press, gold is no more useful than a stupid “pet rock.”  What will happen when mainstream sentiment starts to shift, and some of those “paper bugs” become “gold bugs”?

Investors shouldn’t let a fixation on trying to pick the bottom in prices distract them from the more important mission – diversifying out of paper assets.  We believe those that currently own little or no gold or silver are taking a huge risk by not fixing that problem immediately. Such folks don’t have the luxury of timing the market. We agree with this insightful analysis at the SRSRocco ReportInvestors aren’t going to get advance warning of the next crisis in financial markets. When it happens, most will be caught short. And by the time it is clear metal prices have bottomed in the paper futures markets, it may be hard, if not impossible, to get actual physical metal.”

On the other hand, I personally would ignore the message of Sky News in this short piece, which has a distinct entertainment flavour, and matches Vox’s pop-culture view of the “nothing to see here” approach to owning physical Gold and Silver. Or rather than ignore, I would ask myself, “Why am I being told to ignore Physical Gold and Silver?” 

Gold’s real value is after the crisis has passed.  Sometimes you will hear a person remark that “You can’t eat gold in a crisis.” Well, that’s true. But where gold (and silver) really shine is during the period after a currency has been devalued sharply (think Venezuela, Mexico, Argentina) or has collapsed outright (think Zimbabwe and again, Argentina). When the old currency is removed from circulation, your precious metals -which will have retained their pre-revision value -can be exchanged for the new currency.” (David Morgan, 24 August 2015)  If there is a central focus to this week’s blog, this would be it.  

Here is the anomaly explained quickly in the Supply and Demand of Physical Gold and Silver, related to paper certificates:

1)  The paper price of certificates in Gold and Silver falls

2)  This can sometimes be caused by large companies and central banks selling their paper certificates in Gold and Silver onto the markets, either quickly or over a number of months

3) The price of physical, which is currently based on the price of paper certificates therefore falls

4)  Mining companies that have to find, dig out and refine the actual real physical gold and silver therefore close, as they can’t sustain a profit

5)  Therefore global supply of physical falls

6) Meanwhile the actual demand for physical stays firm behind the scenes, particularly as stock markets crash

7)  The demand for physical then rises further, but supply has fallen for several consequent preceding months/years

8)  Mints have to delay sales due to late of supply and orders back up

9)  Price of physical sky rockets, usually too late to get on board at this point

This is a simplified version. Real life can be slower or faster than the above, where moves can take weeks, months or days in between each step and steps can repeat for a few cycles. But, while the headlines are screaming about the Stock Exchange and asking whether we can all catch China’s cold, to which I think we all by now already know the answer, let’s quietly look behind the scenes at the real life figures:

  • So far this year, India a has purchased 40% of the world’s newly mined silver.
  • China, which used to e export 100 million ounces annually, now imports it.
  • Canadian Silver Maple Leaf sales continue to flirt with another annual record.
  • New uses are found for silver in industry and medicine on a daily basis.
  • Total U.S. 1st quarter silver imports are up 531 metric tons from last year
  • On Tuesday July 7th, one million American Silver Eagles were so old, causing the U.S. Mint to suspend sales for 2 weeks, until new blanks could be procured. In all of 2014, investors bought about 43 million Silver Eagles. 
  • (All figures credited to David Morgan, Commodities, Market Oracle, 24 August 2015)

 

If you would like to find out more about Gold’s lesser, and more affordable cousin Silver, please enjoy two of our previous blogs:

Silver is the New Black

All the Glitters is not Gold, it’s Silver

 

We recommend calling to discuss your first moves into owning your own Physical Gold and Silver or if you are already a customer, consider calling to increase your holdings. Call 01769 618618 and browse our website.  We hope you enjoy researching further by clicking on any of the links in this blog and researching our previous articles in this section.

Over the coming weeks we recommend our readers watch for lower falls in the price of oil, watch the volatility of the market moves either way, as this increasing lack of confidence in those markets, watch to see if Central banks are frozen in their ability to rise interest rates, meaning there is truly in reality nowhere else to go and also watch for the unexpected. Some commentators talk about markets as if they are detached from the real, living, chaotic world. But they very much are not. Watch for sudden events that are external, that will dramatically and sadly affect the markets; increased social unrest, talk of wars and actual sudden aggressive moves by “tribes with a flag” as Churchill called them, and large natural disasters.  These all affect the demand for Physical Gold and Silver. We highly recommend owning your own Gold and Silver before these events take place.

This is because the above external events are legs of a table and the markets depend as much on these as the internal rising and falling of inflated bubbles of its own making, such as quantitative easing and interest rates.  Take out a leg and a table can’t stand. It may highly overcompensate for a period of time but everyone knows their coffee cup will eventually spill!