Mike Gleason: It is my privilege now to be joined by Dr. Chris Martenson of PeakProsperity.com and author of the book, Prosper: How to Prepare for the Future and Create a World Worth Inheriting.
Chris is a commentator on a range of important topics such as global economics, financial markets, governmental policy, precious metals, and the importance of preparedness, among other things. It’s great, as always, to have him with us. Chris, welcome back, and thanks for joining us again.
Chris Martenson: Mike, it’s a real pleasure to be here with you and your listeners.
Mike Gleason: Well it’s been a number of months since we’ve had you on last, far too long by the way, and there has been a ton of things going on in the financial world of late. I’ll get right to it here. For starters, what did you make of the Brexit decision last month? Is this potentially the beginning of some meaningful opposition to the ongoing drive for a world government? Or was this just a one-off event?
Chris Martenson: No, this was not a one-off event, this was a continuation of a pattern that we’ve been talking about at Peak Prosperity for a while. We thought that there were three scenarios for the future. One of them we called fragmentation. I think this is the beginning of it, and fragmentation has its roots in a growing wealth gap. It happens when you have a stagnant to shrinking economic pie that is increasingly seized by the elites who are tone deaf.
And when they do that, people get cranky, and this is the first form of crankiness we’ve seen break out. Austria is next, we are going to see the sweep across Europe, I believe. People have seen that austerity is just a punishment by the bankers upon the average people for the sins of the banker. It feels unfair because it is.
I think Brexit as a political statement is just the beginning, and of course the powers that be are going to do everything they can to paint this as a mistake and punish the wrong people again.
Mike Gleason: What about the banking system, despite some recovery in the past week or two, the European bank stocks have been getting hit hard. We’re seeing that Italian banks need to bailout, and the share price of Deutsche Bank is signaling that the firm is in real trouble. The IMF just named them the riskiest financial institution in the world.
There is a rally here in share prices, Brexit appears largely forgotten, and Wall Street certainly isn’t acting too worried. Is the concern over European banks overdone? Or might we see a firm like Deutsche Bank actually collapse. And what do you see as the ramifications here in the U.S.?
Chris Martenson: The European banks are absolutely in trouble. I think they are insolvent, that is the step that precedes bankruptcy which is a legal action. Insolvency is just when your assets and your liabilities have a big mismatch. We know that’s the case for the European banking shares. It also explains, Mike, why we are seeing this rally, we call it on Wall Street, but it’s global.
We saw two things. First, we saw a big decline, a scary decline in January, and then this miracle, nipple bottom vault back up to the highs that came out of nowhere. To me, that was a liquification event. Somebody put a lot of liquidity into the system. We know that the central banks are coordinating on this because they are scared of the Franken-markets they’ve created. They cannot even tolerate a few percent decline without freaking out. That should freak ordinary people out, because if they are scared, you should be too.
So they re-liquefied like crazy, and then we had just another post Brexit re-liquification. My evidence, stocks at all-time highs, bonds at all-time highs. Listen, you cannot have that unless there is a lot of liquidity coming from somewhere. People cannot be panicking both into negative interest yielding bonds and stocks at the same time for this to make sense through any other lens than the central banks are absolutely pouring money into these markets.
Mike Gleason: Yeah, it’s certainly been a head scratcher to watch these equities markets, the DOW and the S&P making these all-time highs in the wake of what we’ve seen here recently. That’s a good explanation and I don’t see any other potential for why that’s happened. That’s not sustainable forever, they cannot get away with that forever before without the bubble finally bursting, is that fair to say?
Chris Martenson: That is fair to say. And just for your listeners, I just got back from a major wealth conference. These are people, families, institutions that are managing enormous money… they’re all scratching their heads. I watched these poor fund managers and CIOs, that’s investment officers, attempt to explain all of this. They contorted themselves into pretzels. I got up there and just said, “Look, somebody is dumping money in this market.” A lot of heads started nodding. First wealth conference I’ve been to, Mike, in many years where I was no longer the contrarian in the crowd. That makes me nervous.
Mike Gleason: Switching gears here a little bit, what do you make of all of the recent social unrest here in the U.S., Chris? We’ve seen police shootings followed by protests and revenge killings of police officers in a number of cities around the country. Then we’ve got probably the two most polarizing figures ever running for president. The months between now and the November election are sure to be interesting. But there is at least the potential that they could also be very dangerous. What does the recent unrest signal here Chris?
Chris Martenson: I think this is connected to the same factors that I talked about with Brexit. Look, Mike, what’s happening here is that people are getting squeezed. If you believe the inflation numbers go get your head checked or study up on it, because we know we are getting inflation. It’s at least twice as high, maybe three times as high as officially announced. And that’s really hurting people, savers just getting crushed.
We are watching banks get bailed out, we are watching Hillary skate on what are obvious transgressions of the law as it’s written and it’s not a complicated law to understand about mishandling of classified information. She got a pass on that amongst other things. So listen, we’re primates. Fairness and justice are hard wired into us, that’s a thing. People are feeling and seeing the unfairness of this all.
What it comes down to, really, for me, Mike at this stage, is they ran these really interesting experiments back in the 40’s and 50’s. Where they would take a rat and put it in the cage, make it so there is nothing in the cage so it cannot escape, and they shock the floor. The rat hates it but ultimately they figure out how to tolerate it. They curl up in a ball, they’re miserable.
If you put two rats in the cage, what happens is that all of a sudden they are both getting shocked, they are both hated, it’s painful, but now they have somebody to look at and go, “Oh, it’s you.” And they fight. And if they leave them in there long enough, they fight to the death.
What that experiment shows us is that when people – and rats and people are the same this way – if you don’t know where the shocks are coming from, you go to the blame game. That’s what we are starting to see. I believe that police and the people they are policing are actually on the same side of the story, but they don’t know it, so they are looking at each other, they are blaming the wrong parties in the state. The pie is no longer expanding. In fact, the piece of the pie that used to belong to even the upper middle class on down is being rapidly vacuumed out.
All that oxygen is being sucked out of the room by a financial system, not just bankers but a complete financial system that just doesn’t know how to say enough. And it’s vacuuming more and more for itself at ever increasing rates. That’s leaving less and less for everybody else. Guess what? Along comes polarizing figures. One who is representing the status quo, and allows people to default into the denial of saying, “Well, if we just get back to pretending that everything is okay and we shoot for the middle zone and don’t see anything too troubling, things will be okay.” Spoiler alert, they won’t.
And then another guy that’s saying, “Hey, I got an answer for this, and this is troubling and we need to start getting angry about this.” So he’s tapped into the anger side, and I think both of them are missing the mark on this, which is that we have to have a more fundamental substantive discussion about what’s really happening in this country, which is that we have some systems that are run amok and they are going to take us into a really dark territory if we don’t stop them now.
Mike Gleason: For the people who live in these urban areas where there is maybe a little bit more danger in being in an environment where there is a lot of animosity towards police officers. I know you’ve organized your affairs, so you are no longer living in a major metropolitan area, do you have advice for people to maybe consider that type of move given the fact that there could be some real instability in some of these major city centers with all of this violence?
Chris Martenson: Short answer, move. Longer answer, be prepared to move. I do work with people who live in urban areas that they are there for a variety of reasons, they’re not ready to make the move, but they are increasingly having plans for how they would get out of there. Listen, the difficulty of this Mike is this idea of shifting baselines, where if you are a person and you took a person today from my town and you dropped them into Oakland, California they would leave so quickly because it would be like dropping a frog in boiling water. They would jump right out of that.
But for people living there, it’s a little bit violent, but it’s four blocks away, and somebody got shot six blocks away. A month later, it’s two blocks away, but that’s okay, the police responded quickly. Over time, people lose their sense of perspective over what’s happening. So my invitation to people is to really look around and actually see what’s happening, ask yourself if the trend is getting better or worse.
And regardless of whether it’s getting better or worse, is that really where you want to live? A lot of people say the answer is no, but they don’t know what to do next. My invitation is, well, start figuring out what that plan is because there really is no time like the present to begin figuring these things out. It takes time, it just takes time.
Mike Gleason: Changing gears again here. I want to get your thoughts on the Fed. The FMOC meets again next week, they have been punching on interest rate increases. We’ve had mixed economic data, growth below expectations and central bankers everywhere are ramping up stimulus. Janet Yellen and company are finding it exceedingly difficult to tighten. Throw into that that this is an election year. What do you see the FMOC doing between now and the election? Could we see some kind of surprise to the dovish side to help boost the markets and keep the status quo going this November? What are your thoughts there?
Chris Martenson: Yeah, that’s the 85% probability. I’m on record as saying that I thought it was more likely that they were going to lower rates instead of raise rates on their next move, whenever that comes. I said that back in December after that first tiny little wiggle hike. And the reason I said that is because look, you can’t have the United States raising rates while the rest of the world’s rates are going down. That just doesn’t make sense from a variety of logical standpoints. But let’s be clear, the Fed follow, it doesn’t lead.
This is not an aggressive, assertive organization ever since Paul Volcker left. These are not people who have the moxie to run against what the markets want. They’re totally captive to the markets, the markets are clearly saying rates are going down. I don’t think this fed has it in them to do anything other than follow the markets. So since the markets are going down, the best the Fed can do is hold pat. But at some point, honestly, I would put a little bit more money on the wager that said the next surprise would be to the downside not the upside. Especially in an election year.
Mike Gleason: Speaking of following and not leading, I don’t know if you have been following Alan Greenspan and his comments, but now all of a sudden late in life after leaving his Fed chairman post, he is now advocating for a gold standard. It’s quite amazing to hear that come out of that man’s mouth after all these years. Maybe it just goes to the fact that when you are in that position, you’re just following and you’re not making any real leading decisions. What have you made of what Alan Greenspan has had to say in these recent days?
Chris Martenson: Yet another extremely disappointing CYA retirement circuit lap. We’ve seen this a lot, Senators who finally on their retirement day say, “Oh, by the way, Washington is really broken, here is all the ways they are.” Eisenhower on the way out, “Hey, watch out for this military industrial complex.” Yeah thank you, would love to have had those insights while you still could have made some decisions that would have shown that you had the personal fortitude and internal authenticity to have stood up and done what was right.
So for Alan to come out afterwards, I agree with a lot of what he is saying, it’s too little, it’s too late. It doesn’t do anything to resurrect or buff his reputation in my eyes. I think he was the architect that will ultimately end so badly, that his name will be mud if you follow the historical reference, for a long time coming.
Mike Gleason: What is your best guess for what to expect in the markets between now and the election… particularly for the metals? We’ve had an excellent first half of the year in gold and silver, although they have struggled a bit here in the last week or two. So do you see this as maybe a short term pause before the next leg higher? Basically can the metals match the performance in the second half of the year that they had in the first half?
Chris Martenson: Well I still think metals of course, particularly gold given the monetary shenanigans, that’s something that has to be in everybody’s portfolio. It’s your insurance policy, get it there. I really thought that Grant Williams about a year ago had just to me the quintessential, best gold exposition where his summary was, “nobody cares”.
And his thought was that the west is perfectly happy to sell gold, we’re perfectly happy to sell our paper gold on the COMEX. We’re perfectly happy to see about 1,000 to 1,500 tons a year leave western vaults just for Shanghai alone. So we were okay with that because nobody cared. The Treasury didn’t care. He was talking with fed officials, like, “Yeah, if we lose gold, it’s fine.”
The west is starting to care. This hearkens back again to this wealth conference I was at, big money people, of course I’m always testing the gold waters with them. And more and more people are saying, “Yeah, I’m thinking about gold now.” So we’re starting to see this really show up on the western radars. I think that if I was going to mend Grant’s title, it moves from “nobody cares”, to “some are starting to care.” And that’s a very constructive environment for gold, just from that standpoint.
And the other part, of course, has to be how can gold not be constructive in a negative interest rate environment? People used to always say, “Chris, gold doesn’t yield anything.” And now I get to say, “Well at least it doesn’t yield negative something.” So this is a really positive environment for gold. It’s clear somebody has an interest in not allowing gold to go up. We saw that on Friday late night post Brexit. Somebody put 50,000 new open interest contracts to contain gold at the $1,360 mark. And we don’t know who that was, but we can all guess.
Mike Gleason: At some point you have to think that more and more people will recognize it as a safe haven. You talk about the wealth conference you just went to, about how maybe more and more people are starting to wake up to the idea of owning precious metals as a way to hedge against what may come. Obviously, and I’m talking about physical bullion now, there is not a tremendous amount of it. There’s been so much of it going to the east, and the west does not have a whole lot of precious metal left at this point.
If we did see an increase from say 1% of the general public and going to 3% or 5% of the general public, I have to think there is going to be a difficulty getting your hands on the metal if you wait too long. Is that fair to say?
Chris Martenson: That is fair to say, particularly at the retail level. I think the people who have the big, big money, they have access to vaults that you and I don’t normally have access to. There’s a very different structure for the big 400 ounce and 1,000 ounce bars for gold and silver respectively. But for people who want to buy coins, we saw this in ’08, we saw it in 2011 again when there were big price moves, particularly to the down side in silver where people started to want to get into that market.
And those were almost exclusively people who had already bought silver. This wasn’t new people coming into the market, just people looking for better deals. That alone swamped the retail supply chain, the refineries were maxed out, the mints were maxed out, supplies were tight, and the wait times ballooned out to six and eight weeks in some cases.
So that’s our learning which is that when the metals really do begin to move, your chance as a retail investor to get into that are going to be very, very limited if you wait or the percentages move from whatever it happens to be, 1% or 2%, to 3% or 5%. I think that that will swamp the retail availability for quite a while.
And then, you know what, people are going to be stuck with, and they’re going to say, “Oh there’s a six week wait.” When six weeks comes by, they discover that the price has moved a lot at that point in time. So either you put a lot of money on the line in the hopes of being in line somewhere, or you wait and discover that both the prices and availability have scurried away from you in the meantime. It’ll be hard I think psychologically if not practically for people to acquire what they want. So my motto always is I’d rather be a year early than a day late.
Mike Gleason: Very good advice. In terms of gold versus silver, obviously gold is really just monetary demand that drives that market, but silver is both pushed and pulled from both the industrial demand and the monetary demand. Generally speaking, when we see the metals rising, we’ll see silver outperform, but if we have an economic slowdown, perhaps that could hold silver back a little bit as it gets maybe lumped in with copper and oil and other industrial types of commodities. What are your thoughts there on the potential for silver versus gold going forward?
Chris Martenson: They’re very different words to me. A lot of people say, “Gold and silver” like it’s one word. They are two words to me. Gold is my monetary metal, love it, I have it because I think a monetary crisis is happening. If you have a short term horizon, I like gold better because I think we are having a monetary crisis first before we have a big industrial resurgence.
Silver, primarily Mike I love it as the industrial metal, as something who’s known ore grades are vanishing and deposits are depleting, and we know that it’s being used increasingly for more and more industrial applications. Silver is my Rip Van Winkle metal. I love it. If somebody said, “I need to pick one of these two, 20 years I want to be happy when I wake up.” Silver’s it. It’s a volatile metal that goes up and down, I think it could have a run down if we hit a capital “R” recession or depression across the world… if China blows up or something like that. But barring that, I love silver because of its actual supply and demand characteristics going forward. I think it’s heavily underpriced here.
Mike Gleason: Well as we begin to close here, Chris, what would you say are maybe the top three or four actions that people could be taking right now to become more self-reliant and generally more insulated from the chaos that’s on the horizon?
Chris Martenson: Well if I could just plug my own book here for a minute that I wrote with Adam Taggart called Prosper. What we do there is we specifically talk about steps people can take so that they will be more resilient given certain futures that might arrive. But every one of these steps we advise will make your life better today. So there’s really no way to lose in this story.
What we do is we have eight forms of capital that we like people to focus on. Financial capital, which commonly everybody focuses on only. But what we’ve found, and there’s a great quote, it says, “None are so poor as those who only have money.” If you only have financial capital you are not resilient. So there’s seven other forms of capital we talk about. I’ll just go through a couple.
One is social capital. Not just how many people you know, but how well you know them. Have you had experiences with them? Have you seen them operate under a variety of scenarios so you know really who they are at core? Building that social capital is going to be one of the most important things you can do to build you resilience. And guess what? You’ll know more people and connections are proven to make us happier, more fulfilled people.
Emotional capital, also in the mix. This is very important. It doesn’t do any good to be rich in all sorts of other areas if when a crisis comes you basically fold up your mental shop and shut down. Not good. We already see people doing this with increased rates of suicide, drinking, video game playing, other forms of numbing out because the reality is just not appealing. We think there’s lots of ways to rotate your thinking so that you can be positioned to not just be on the wave of change that’s coming, but the surf it.
There’s great opportunities coming here, but not for people who are going to be feeling the loss of the changes instead of the opportunities in the change. So those are just a couple of examples. Living capital is an example, knowledge capital, time (capital). Things like that. And so this book is our collection of stories and personal experiences with each of these forms of capital, from having worked with thousands of people in our seminars, at our website, Peak Prosperity. For people who are consciously and prudently as adults saying, “Hmm, different future coming, how can I be prepared? More importantly, how can I be resilient so I can increase my quality of life today and be more prepared for tomorrow?”
Mike Gleason: Yeah, it’s truly fantastic stuff. Obviously it was years in the making. You and Adam did a fantastic job, so many practical things in there. Now as we begin to close here Chris, why don’t you talk a little bit about the Peak Prosperity site and then also let people know how they can get their hands on that book if they haven’t already done that.
Chris Martenson: Thanks Mike. Yeah, the site is PeakProsperity.com. And we have a lot of free content there, we have a subscription newsletter for people who like to go a little deeper and maybe have more information. Our site is dedicated to two big things. One is educating, we want people to understand the context of what’s happening so they are not one of those rats getting shocked without an understanding of what the shocks are.
Once you know what the shocks are, then you have information that’s really important, that can help you move when other people are paralyzed or confused. So that’s half the site, the other half is about how we can become more prepared, more resilient… (there’s a) wonderful community of people there. They are very thoughtful. If I could identify us with one word, I would say we are all curious.
This is a life to be lived, it isn’t a dress rehearsal, we are not here hunkering down saying, “Woe is us, bad times coming.” We’re saying, “Big changes coming, now what do we do about it?” So it’s very positive while realistic, if I can put those two words together. And Prosper, the book, available on Amazon. You can come to the website and get that. It’s available pretty much everywhere.
Mike Gleason: Well again, excellent stuff. Thanks so much Chris, and I hope you have a great weekend, enjoy the rest of your summer, and we’ll catch up again soon.
Chris Martenson: Thanks Mike. You too, and to all your listeners, have a great weekend and summer.
Mike Gleason: Well that will do it for this week, thanks again to Dr. Chris Martenson of PeakProsperity.com and author of the book, Prosper: How to Prepare for the Future and Create a World Worth Inheriting. For more information, just go to PeakProsperity.com, check out the extensive site there and the great online community. Or check out the book, which is also available on Amazon. You definitely will not be disappointed.
Mike Gleason is a Director with Money Metals Exchange, a national precious metals dealer with over 50,000 customers. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.
Today Thomson Reuters publishes the GFMS Gold Survey : Q2 2016 Review and Outlook. First published in 1967, the GFMS Gold Survey analyses the independent supply and demand data for the gold industry. We have published the brief below.
Highlights:
The first half of 2016 had seen a dramatic change in the rhythm and flows of the gold industry, even long before Brexit. Encapsulating this, we estimate that for the second quarter in a row physical demand was down by more than a fifth year-on-year, to a seven-year low, with Asian offtake being exceptionally weak.
Demand for gold ETFs, in stark contrast, has set a new record half yearly total in the first six months of 2016 at 568 tonnes, with interest centred on North America and London .
Overall the market is in a small surplus for the first half of the year, as the dramatic drop in physical demand is largely offset by the stellar western demand for ETFs. As a result, the upturn in scrap flows ensured that total supply rose, despite a contraction in mine production, and ensured a surplus at the net balance level.
We have revised our 2016 average gold price forecast to $1,279 /oz from $1,184 /oz forecast in April. The revision is a mark to market of the impressive gains that gold has posted so far this year, and reflecting the changed sentiment stemming from increased uncertainty from economic and political outlooks. These include Brexit, reduced expectations of a rate rise from the Fed, a wobbly Italian banking sector and the U.S. Presidential race.
China : ” China’s total gold demand remained in free fall in the second quarter of 2016, declining across the board. Jewellery offtake, which has constituted over 60 per cent of the country’s total physical demand in the past, fell 31 per cent year-on-year. This represents the industry’s worst second quarter performance since 2009. Economic pressures remain central to the weakness as consumers have tightened purse strings and limited discretionary spending. The absence of positive price expectation has also been a factor with investors looking elsewhere for capital growth. After three consecutive quarters of increases, gold demand from the retail investment segment (bars and coins) stalled in the second quarter of 2016, recording a 12 per cent decline.
India : “Jewellery consumption in India declined by 56 per cent year-on-year to 69 tonnes in Q2 2016, making it the second consecutive quarter of hefty year-on-year declines. The second quarter, which is normally a period of seasonally strong demand, started with a weak sentiment, as a result of continued nationwide strike, which stocked negative publicity for the industry, leaving consumers divided on the purchasing decisions. More importantly, consumers, who are otherwise well informed of the retail price, were left guessing, as the price varied significantly from what was available in the media. Added to that the demand from rural areas continued to be muted, a result of a poor monsoon in 2015. The day of Akshaya Tritiya, which has traditionally made a major positive contribution to jewellery retailers’ sales in the second quarter, was uneventful this year, as consumer have turned to lower weight pieces and in some cases one gramme coins. Higher gold prices in local terms also weighed on jewellery demand, the Q2 average was up 10 per cent year-on-year, and from the start of the year the price had surged by 25 per cent, to its highest since October 2013 .
“Following net-disinvestment in Q1 2016, net investment returned in the second quarter, although it was still down 40 per cent from last year, as some investors continued to take advantage of higher prices by selling their stocks.
Supply: “World gold mine supply increased by less than two tonnes year-on-year, totalling 744 tonnes in the first quarter of 2016. We expect that mine supply will contract in the second quarter, with the total estimated at 770 tonnes, a two per cent year-on-year decrease, with losses expected in China , Mexico and Mongolia . More broadly, there are relatively few new projects and expansions expected to begin producing this year, and those in the near-term pipeline are generally fairly modest in scale, hence our view that global mine supply is set to begin a multi-year downtrend in 2016. Supply from scrap was up nine per cent year-on-year for the second quarter, aided both by the stronger dollar price and in many cases depreciating local currencies.
Market balance: “Overall, the market is in a small surplus for the first half of the year, as the dramatic drop in physical demand is largely offset by the stellar western demand for ETFs. The uptick in scrap supply ensured that total supply rose, despite a contraction in mine production, and ensured a surplus at the net balance.
Investor Sentiment: “Investor sentiment towards gold had rebounded in the first half of the year, triggered by heightened concerns about the slowdown in emerging markets and the impact on the global economy, as well as reduced expectations of the interest rate increase from the Fed. The Brexit shock following the UK referendum on 23rd June had sent shock waves across global markets and sparked demand for safe-haven gold. This translated into a rebound in interest from speculative investors and impressive inflows into gold ETFs.
“CFTC data on managed money positions in gold futures and options shows that net long speculative positions surged to an all-time high at the beginning of July, while short positions have remained substantially below their previous highs. Demand for gold ETFs, meanwhile, has set a new record half yearly total in the first six months of 2016, at 568 tonnes, with interest centred on North America and London .
Price Outlook: “We expect the gold price to average $1,279 /oz in 2016, an upward revision from $1,184 /oz forecast in April. The is a reflection of the impressive gains that gold has posted so far this year and a shift in investor sentiment towards the yellow metal in light of increased uncertainty from economic and political outlooks, including Brexit, reduced expectations of a rate rise from the Fed, a wobbly Italian banking sector and the U.S. Presidential race.”
http://www.kitco.com/news/video/show/Freedom-Fest-2016/1318/2016-07-20/Gold-Silver-Is-Best-Way-For-Investors-To-Own-Real-Wealth—Author
Guest(s): Chris Martenson Co-founder, Peak Prosperity
Investors are in search of returns in a marketplace that is in unchartered territory given the unconventional central bank policies around the world. However, one author and economic researcher says the answer may lie in the precious metals space. “The next 20 years are going to be completely unlike the last 20 years, so we think that history is a really poor guide at this moment in time,” Chris Martenson, co-founder of Peak Prosperity, told Kitco News. “The reason is that the world is running into resource limits right now in a way it’s never done before.” Martenson noted that the economy is unsustainable and said he likes gold and silver as wealth preservation assets. He explained that right now, there are too many claims built up in the market and not enough of the metal to back up these claims. Once that turns around, the beneficiaries will be the investors that hold the physical metals. “It’s transferred from the people who have too much paper wealth to people who own the real things, so gold and silver is the best way for the average person to own real wealth,” he said
Investors need to understand an important fundamental reason why the silver price will explode much higher than gold. While many analysts state several reasons why silver will outperform going forward, I believe one vital fundamental factor is overlooked.
This critical factor is based upon a certain supply versus demand component of the gold and silver markets. Actually, I came across this data while working on the research for a completely different article. However, the more I compared the figures, the more surprised I was by the results.
One of the important aspects of my work here at the SRSrocco Report is to take data, figures and information and to look at them in a different way than most analysts. By doing this, I can spot interesting trends and factors unnoticed by the majority of analysts.
However, before I get into the critical reason why silver will outperform gold in a big way going forward, let’s dissect some of the underlying factors.
THE HUGE DISCONNECT: Silver vs Gold Jewelry Recycled Supply vs Demand
While most investors realize that gold and silver scrap supply are used to help supplement the market, very few understand the huge disconnect between these two precious metals when it comes to recycled jewelry scrap.
First, let’s take a look at silver jewelry scrap supply. According to the Metals Focus: Silver Scrap Report, the world recycled approximately 551 metric tons (mt) of silver jewelry in 2015. This may seem like a substantial amount until we compare it to total world silver jewelry demand of 7,045 mt:
Silver Jewelry Recycled vs Demand
Thus, recycled silver jewelry supply of 551 mt accounted for only 8% of global silver jewelry demand in 2015. Why so little? Because, very few people will take the time to go down to a pawn shop or precious metal dealer and sell a couple of pieces of silver jewelry for a few bucks. It’s just not worth the effort.
This is the very reason why very little silver jewelry is recycled. However, gold jewelry is a much different animal all together. Matter-a-fact, the majority of global gold scrap supply comes from recycled gold jewelry. It was difficult to obtain the data on global gold jewelry scrap supply, but I was able to provide an approximate figure based on the data in the Metals Focus: 2015 Silver Scrap Report:
The recycling of silver from old jewelry makes up the second smallest category of silver scrap supply. Its limited scale is also marked in comparison to gold; silver jewelry fabrication may be more than double gold by weight, but its jewelry scrap is less than half gold’s. These modest numbers for silver are largely due to the small amounts typically sold back by consumers as the low value per item means there is little incentive to sell.
Second, according to data from the World Gold Council’s Full Year Demand Trends, and based upon my calculations, global gold jewelry scrap supply was approximately 1,000 mt versus 2,415 mt of total gold jewelry demand in 2015:
Gold Jewelry Recycled vs Demand
Thus, global gold jewelry scrap supply comprised 41% of total gold jewelry demand in 2015. This is an astonishing figure as gold jewelry scrap supply versus gold jewelry demand is five times greater in percentage terms (41% gold vs 8% silver) than its silver counterpart.
Again, this is due to the fact that gold jewelry owners are well rewarded for their time to sell a few gold rings for say $500-$1,000 versus $5-$15 for several pieces of silver jewelry (based on metal content only).
NOTE: The data in the Metal Focus: Silver Scrap Report states that silver jewelry scrap was less than half of gold jewelry. Unfortunately, this is where I had to make an adjustment and estimation. The World Gold Council states that total gold scrap supply in 2015 was 1,093 mt. Half of that would be 545 mt. This is less than the 551 mt reported by Metal Focus for silver jewelry scrap supply. Not all of global gold scrap supply comes from jewelry. Some may come from recycled industrial scrap and old gold coins and bars.
This is why I provided the estimate of 1,000 mt for global gold jewelry scrap supply in 2015. Furthermore, each official reporting source may publish different statistics for the same data which makes it difficult to provide exact figures. So, it is important to look at the overall trend and not to waste time focusing on exact measurements or data.
Now that we have an idea just how out of balance silver jewelry scrap supply is compared to gold jewelry scrap, let’s look at pathetic figures in the next component.
The Majority Of Industrial Silver Demand Is Not Recycled
One of the things I hear a lot thrown around the precious metals community is the figure that 50% of silver demand is lost forever. This is due the huge consumption of silver by industry. However, the real figure is much larger. I’ll get to that in a moment, but let’s first look at how little of industrial silver is recycled on an annual basis:
Silver Industrial Recycled vs Demand
Well, if we go by the figures in the 2016 World Silver Survey and Metals Focus: Silver Scrap Report, global industrial silver scrap was approximately 3,266 mt in 2015 compared to the massive 18,311 mt of world industrial silver demand. Which means, global industrial scrap supply only accounted for 18% of world silver industrial demand in 2015.
I have decided to convert some of these figures in troy ounces for new folks in the gold and silver industry:
Silver Jewelry Scrap vs Demand 2015: (metric ton = mt) (million oz = Moz)
Silver Jewelry Scrap of 551 mt = 17.1 Moz
Silver Jewelry Demand of 7,045 mt = 226 Moz
Gold Jewelry Scrap of 1,000 mt = 32 Moz
Gold Jewelry Demand of 2,415 mt = 78 Moz
Silver Industrial Scrap of 3,266 mt = 105 Moz
Silver Industrial Demand of 18,311 mt = 598 Moz
Several of my readers have contacted me asking me to present the figures in only one standard to make it easier for individuals (especially new investors) to understand. Unfortunately, private and government sources report their data in either metric tons or troy ounces. Even though it would be convenient to only publish my data in one standard, TROY OUNCES for example, readers would be lost when they come across tables or reports that are published in metric tons. So, I try to convert figures as much as possible. And if I don’t, remember this conversion:
[1 metric ton = 32,150 troy ounces]
Okay… if you are beginning to understand how little silver is recycled in the jewelry or industrial markets, wait until you see the TOTAL PICTURE.
A Hell Of A Lot More Silver Is Lost Forever Than Originally Thought
If we compare global silver scrap supply versus total demand compared to the gold market, the figures are like NIGHT & DAY. In 2015, the world recycled 4,665 mt of silver, while total demand was a staggering 36,423 mt. Thus, only 13% of total world silver demand was recycled last year. This is one hell of a lot less than the 50% figure repeated by the precious metals community.
Total Silver Recycled vs Supply
While it’s true that physical silver investment demand is a significant portion of total demand, much of that will never be recycled. This is true for Official Silver coin sales which reached 134 Moz in 2015 (4,168 mt). Regardless, some of Silver Bar & Coin demand will be recycled, but it’s the smallest segment of the silver scrap market.
According to the Metals Focus: Silver Scrap Report, only 6 Moz (186 mt) of silver coins were recycled in 2015. And, the majority of that amount came from unsold European commemorative silver coins minted years ago.
So, how does the gold scrap market compare to silver recycled supply? In 2015, global gold scrap supply was 1,093 mt versus total world demand of 4,253 mt:
Total Gold Recycled vs Demand
Here we can see that global gold scrap represents 26% of total gold demand. This is double the percentage of silver. Only 13% of total silver demand was recycled last year. However, these percentages don’t really paint the true picture.
Global Gold-Silver Demand Minus Scrap Supply 2015
Gold Demand – Gold Scrap = 3,160 mt
Silver Demand – Silver Scrap = 31,718 mt
If we compare total demand minus scrap supply, there is ten times more silver demand that is not recycled compared to gold (silver = 31,718 mt vs, gold = 3,160 mt). Which means, there is a hell of a lot less silver available to the market than gold…. in percentage terms
Furthermore, the majority of gold bullion, jewelry and coins still remain in the world compared to silver. If we assume that most of silver jewelry and industrial demand is not recycled, then this is truly lost forever unless the silver price surpasses $200-$300.
When the world wakes up the fact that they are invested in PAPER ASSETS that have no future, the mad rush into physical precious metals will push the value of silver up much higher than gold. As these charts show, a great deal more gold is recycled compared to its total demand than silver.
Which means, a lot more than 50% of silver demand is lost forever. Actually, if we go by the data, only 13% of total world silver demand came from recycled silver supply in 2015 while 26% came from gold. Thus, 87% of total world silver demand did not come from recycled silver supply.
Yes, it’s true that in 2011, silver scrap supply increased due to the high annual average price of $35. Even though total scrap supply increased to 6,430 mt (206 Moz) in 2011, it still only represented 20% of total silver demand that year. I am using the 206 Moz figure from Metals Focus: Silver Scrap Report rather than the 260 Moz figure reported by the World Silver Surveys because the Metals Focus group went back and did a much more detailed job researching scrap and found out that the market had overstated scrap supply for several years. I will be writing about this shortly.
Regardless, even at a much higher price of $35, only 20% of the total silver demand in 2011 came from silver scrap supply. Which means the world lost 80%, more than the 50% figure repeated by the precious metals community.
Furthermore, if we just add up all the silver jewelry produced for the past decade it equals 60,500 mt or 1.95 billion oz. Let’s say a conservative average of 10% of this silver jewelry was recycled (remember only 8% was recycled in 2015). That means only 6,050 mt of silver jewelry was recycled since 2006. Thus, nearly 54,500 mt or 1.75 billion ounces was lost to the market. Only at much higher silver prices will some this silver jewelry come back on the market as scrap supply.
Precious metals investors need to understand that the majority of manufactured silver will never come back on the market until we see insanely high prices. However, at that point… it won’t matter. There still won’t be enough silver to meet demand as mainstream investors stampede out of worthless paper assets and into physical precious metals.
IMPORTANT UPDATE: The SRSrocco Report will be having a Live Precious Metals Webinar with Tom Cloud who has 40 years experience in the Retail Gold & Silver Market. The webinar will take place on Tuesday, August 2nd at 6 pm EST.
Lastly, if you haven’t checked out our new PRECIOUS METALS INVESTING section or our new LOWEST COST PRECIOUS METALS STORAGE page, I highly recommend you do.
Check back for new articles and updates at the SRSrocco Report.
The gold market is hovering near important technical support levels as prices trade at their lowest levels in two weeks. August gold last traded at $1,324.80 an ounce, down 1.4% on the day.
However, analysts remain optimistic on the yellow metal as prices remain above near-term support at $1,320 an ounce and longer-term support above $1,300.
In a recent interview with Kitco News, Ole Hansen, head of commodity strategy at Saxo Bank said that gold could fall to $1,308 an ounce and still remain in a technical uptrend. He added that he wouldn’t be worried about the correction unless prices fall below $1,275 an ounce.
“I think we could be in a new trading range between $1,275 and $1,375,” he said.
George Gero managing director with RBC Wealth Management, said in a report Thursday that he is not surprised gold is on the defensive following the Bank of England leaving interest rates unchanged and ahead of potentially more hawkish comments from regional Federal Reserve presidents. At the same time, he added that he expects gold prices to hold support at $1,220 in the near-term.
Phillip Streible, senior market analyst at RJO Futures said that investors shouldn’t rule out further short-term weakness in gold; but added that he sees the long-term bull market remains in place as long as prices remain above $1,252.80 an ounce
In a report Thursday, he said, “It is clear that this week’s slippage thus far is grossly insufficient to be approached as anything but another corrective hiccup within the broader bull.”
Joshua Mahony, market analyst at IG said that he is expecting to see weaker gold prices in the near-term.
“Given that we have seen a break below yesterday’s $1337 swing low and the $1335 support level, there is reason to believe we will see further losses,” he said. “Ultimately, a bearish short-term view is in play unless we see an hourly candle back above $1347.”
Analysts at iiTrader said that they are watching support areas between $1,318.90 an ounce to $1,315.20 an ounce.
“The bears will have a slight edge in the very near term as long as they can achieve a close below $1331-1$336 an ounce,” they wrote.
According to Kitco.com’s technical analyst Jim Wyckoff, investors should be watching for sell stops at $1,320 an ounce and then at $1,308 an ounce to $1.300 an ounce.
A few hundred exceedingly rich and discerning collectors are the target market for a new diamond-encrusted, one kilogram gold coin struck by the Perth Mint.
The 99.99 per cent pure gold coin, known as the Kimberley Treasure, has been inset with a purplish red Argyle diamond worth about $950,000.
The coin depicts a red kangaroo holding a 0.54 carat red gemstone between its front paws, with Queen Elizabeth II pictured on the other side.
“The Kimberley Treasure is the only coin in the world to feature a radiant red diamond from the Argyle Diamond Mine,” Perth Mint CEO Richard Hayes told people gathered at the Mint for the coin’s release.
Apart from its status as a one-off collector’s item, the coin is also legal tender in Australia.
WA Premier Colin Barnett was at the Perth Mint to unveil the coin, which goes on the market today.
“I don’t know who will buy it. Someone will buy it. It will make a lovely gift for the lazy million dollars,” Mr Barnett said.
Mr Hayes said he expected strong interest in the unique item.
“We think we’ll have significant interest, we think mostly from overseas, but there will be significant interest in it,” he said.
“I would estimate there’s probably a couple of hundred people [worldwide] who would be interested in something like this.
“It would appeal to a very, very high net worth individual who is a collector of things unique and of things rare.”
Prospective buyers will be able to view the coin until late August.