Dear Reader,

Firstly, our title this week is quoted from the excellent GoldSilver.com, the website overseen by Mike Maloney in the States. Sometimes you can’t begin to improve a statement so all credit to the original author of this title. I will further quote from the article from which it came later on.

We often focus on Gold, assuming that Silver will roughly follow suit.  But that isn’t always the case and occasionally it fairs us well to take a more in depth look at Gold’s more modest sister.

The reason this week is a good time is that Silver is showing some marked differences to Gold at this time.  Silver is currently selling at a much lower cost than Gold so makes for a much more affordable investment.

“Can’t decide if you should buy gold now or wait? We all want the best price we can get on our gold and silver purchases. It’s only natural, and any good consumer will consider the timing of their buying decisions. It’s a question almost every investor asks: am I getting a good price now, or will I get a better price in the future? Well, history has an empirical answer for you. In preparation for the new year, I thought I’d look at the historical data to see if I could identify the best time of year to buy. I suspected January would be best, but what I found was interesting.

We calculated the average gain and loss for every day of the year since 1975 (when it was legal to buy gold again in the US) and put it in a chart. Here’s what it looks like.

You can see that on average, there’s a nice surge the first couple months of the year. The price then cools down through the spring and summer, and takes off again in the fall.

You can also see that the gold price, on average, does not historically revisit its prior year low. The low of the year is indeed in January—but it’s the low of that year, not the prior year.

All this means that you are likely to be better off buying in 2016 than in 2017.

Obviously, there were years where the gold price did fall. But there were also years it soared. Smoothing out all those surges and corrections and manias and selloffs, investors are, on average, better off buying the prior year than waiting for a downturn the following year. Prices are indeed seasonally weaker in the summer, but they still don’t touch the prior year’s price. Meaning, you are likely to pay more even then than now.

The conclusion is simple: • On average, you’ll get a better price on gold now than in 2017.”  (Jeff Clark, Senior Precious Metals Analyst, GoldSilver)

This does seem to bear out.  For all the corrections and punishments the Gold and Silver price has taken over recent weeks, it is still up 27.11% for Gold and 33.66% for Silver on this time last year.

But, let’s look around at further commentators to see specifically what Silver is gearing up to do in 2017:

Money Morning Resource Specialist Peter Krauth believes that silver prices could rise to the mid-$20 level within six to nine months.”

Now let’s build in some context:

“When the Fed raises interest rates, it makes the dollar look more appealing. And since the dollar directly competes with silver, this can put some downward pressure on silver prices in the short term. Higher interest rates also boost the attractiveness of other non-commodity investments, like certificates of deposit and savings accounts. That’s because after a rate hike, investors can generally earn a higher rate of return with these investments.

That being said, silver will always retain its safe-haven appeal. And that’s something unique to the precious metal. So whether interest rates are going up or down, it’s always a smart idea to own silver in case we enter another bear market or recession.” (Money Morning, 12 December 2016)

The majority of our readers know that the daily spot price is based on paper contracts, not the physical metal. So another way to gauge how Silver is really shaping up is to look at the physical figures. Back in 2009 China advised all its citizens to buy physical silver. I’ve written extensively about Silver and particularly about this point on several previous occasions. Let’s now update that key piece of information:

“Now, interestingly, the Chinese started building up their silver stocks in the second half of 2015. Between August 2015 and May 2016 the SGE silver stocks went up from 239 tons to 1,964 tons (an increase of 722%). Then, due to higher prices, the Chinese stopped accumulating silver. Between May and late October 2016 the stocks went down to 1,570 tons (as of October 21, 2016). However, taking the advantage of lower prices, now the Chinese are accumulating silver again. According to the last SGE report (as of December 16), there are 1,898 tons of silver in SGE vaults.” (Seeking Alpha, 19 December 2016)

The above article is a great report but if you don’t wish to register on their mailing list to receive it, here are the four key summary points to watch for now in Silver:

  1. The Shanghai Gold Exchange is rapidly accumulating silver.
  2. Most recently North American speculators increased their net long positions in silver futures. On the other hand, they are still liquidating their net long positions in gold futures.
  3. Three entities, SGE, COMEX and SLV, hold 583 million ounces of silver (66% of the forecasted 2016 annual production); in their opinion, the silver market is cornered.
  4. Given all this, they expect that in the coming years silver will perform much better than gold.

The Silver Market is Cornered:

Another incredibly strong and different pattern emerging in the Silver Market which is not (yet) present in the Gold market is the cornering of the Silver market by just three entities, one of which is the Shanghai Gold Exchange. Yes, that is correct. The SGE is buying up lots and lots of Silver:

“A question. Have you ever heard of the Hunt brothers? It is an old and relatively well-known story. Between 1973 and 1980 these two Texan speculators were trying to corner the silver market. Over the years they and their business partners accumulated around 130 million ounces of silver, most of which were in the form of physical. [At the time] 130 million ounces accounted for around 40% of total world’s annual production (323 million ounces per year, on average). 

As a result, silver prices went up from $3 per ounce in 1973 to $50 per ounce of silver in 1980. Then the prices of silver crashed…Well, that is history but today the situation in the silver market resembles the Hunt brothers’ times. The graph below shows the largest holders of silver bullion:

graph showing the largest holders of silver bullion

(Source: Simple Digressions)

As the graph shows, the largest holder is the iShares Silver Trust – SLV (340 million ounces of silver). All three entities (SLV, COMEX and Shanghai Gold Exchange) hold 583 million ounces of silver. This amount of silver accounts for 65.7% of the forecasted 2016 production of silver (887.4 million ounces).”

To see how unusual and how squeezed the Silver market is quietly becoming, let’s put those figures into historical context:

  • The Hunt brothers and their allies held 40% of annual silver production
  • Now, the three big entities hold 66% of annual production, of which the largest holder, SLV, holds 38.3%

Simple Digressions continues to expand this information as follows: “Simply put, now the silver market is cornered again. What is more, it is cornered to a greater extent than during the Hunt brothers’ era. Some people say that history repeats itself. If that is a case, silver is poised for a much stronger bull market that we have ever seen. However, the main question is when. I am leaving this question for the oracles because I have no idea when the silver mania is going to start. On the other hand, all I want to say is this:

Among the largest holders of silver bullion is a new player – the Shanghai Gold Exchange. A few months ago this exchange started heavy accumulation of silver. Now there are “only” 61 million ounces of silver in the SGE vaults. However, keeping in mind the rate at which the SGE is accumulating silver, quite quickly this exchange may get much closer to the second largest holder of silver, the COMEX. In this way the silver market may get cornered to a much larger extent. If correct, in the coming years the silver market should be stronger than the gold market. As a result, applying the old rule that during a bull market in precious metals it is silver that is stronger than gold, I think that the bull in precious metals is still alive.” (taken from a subscribers only article on Seeking Alpha, 19 December 2016)

Another massive signal that flashed quietly in the dark this week was this. China has been ever so quietly selling off its holdings of U.S. debt. It has done this in an orderly fashion and very slowly. But the scales tilted four days ago. Why? 

“The United States has a new creditor-in-chief.  Japan has overtaken China as the largest foreign owner of U.S. Treasury debt, according to data released by the Treasury Department late Thursday.

The latest data, which measures shifts in foreigners’ Treasury holdings during the month of October, show China dumped $41.3 billion in Treasury bonds, bringing total holdings of private and official investors (i.e. its central bank, the People’s Bank of China) to $1.115 trillion. Japanese investors also dumped Treasurys in October, but at a much slower pace: The Japanese sold $4.5 billion, bringing their net holdings to $1.131 trillion.” (Market Watch, 16 December 2016)

This is one of those economic moments that may well make more sense in retrospect, as the straw that began to break the camel’s back. Why? Because the U.S. need China to finance their debt.  

For the U.S. economy, is this like watching your last but one life boat leave the Titanic, and the final boat – which was never meant to be a life boat in the first place – is full of more holes than you can imagine?

Japan’s debt to GDP ratio is now over 200%, the most indebted nation on the planet. And they are the ones that now “own” or hold the lion’s share of U.S. debt!

And I was staggered to read this week that in the U.S. “In fact, households are still struggling with the housing debacle of 2008. As of the first quarter of 2016, 12.7 percent of homeowners owed more than their house was worth, according to the research firm Zillow. (Debt Nation: The Problem, The Solutions, 16 December 2016)

All these points are recipes for mathematically certain economic disaster.

In conclusion, here is a level-headed and figure-based look ahead into the early months of 2017. I’m not sure I believe it, because geo-political, and even natural, events seem increasingly unpredictable and volatile. But if nothing else happens to rock the boat, and that’s a big if, charts of worth something, even as a base line into looking at price moves in the near future:

“November was a difficult month for gold, and so far December hasn’t provided much relief either. Now, the Federal Reserve is in rate-hike mode, voting last week to lift its target range for the fed funds rate a quarter percentage point and indicating that three more hikes may come in 2017. Higher interest rates tend to weigh on gold prices. But pundits are at odds over how the precious metal will fare next year. Maxwell Gold, director of investment strategy for ETF Securities, believes: ” Inflation will rise faster than the central bank will raise rates, keeping real rates very low. According to the Fed’s latest ‘dot-plot’ of its committee member’s assessment of appropriate policy settings, the Fed is only likely to raise rates twice in 2017. Low real rates are gold price positive. We believe that gold’s fair value is between the $1400-1450/ounce range. 

Silver has a close correlation with gold and hence we expect silver prices to rise. In contrast to gold, which trades like a currency, the physical supply and demand for silver also drives the silver price. Factoring in the decline in mining investment and rising industrial activity, we estimate silver’s fair value in the $22-24/ounce range.

Speculative positioning in gold and silver has retreated from highs reached in July, but they remain elevated as investors seek a hedge against geopolitical risk. The Italian constitutional referendum, the French Presidential election and the German parliamentary elections are some of the items on the calendar for the coming year. When and if the United Kingdom (UK) will start the process of leaving the European Union (EU) has still not been resolved.” (Barrons, 20 December 2016)

Do take a look at the Silver coins and bars offered by Bleyer, plus the low V.A.T and paid V.A.T. products. We hope you have a lovely holiday and look forward to hearing from you in the New Year.