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Backroom Manipulation of Silver Prices to End?
Steady Inflation Crushes the Dollar's Value, Undeniable Evidence
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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
This week saw the end of an era for the silver market – and potentially a new dawn for investors in the metal who have long cried foul over price manipulation.
On Thursday, the London silver fixing ended after 117 years of setting benchmark prices through ritualized backroom trading. Many precious metals investors welcome the departure of the archaic price-setting mechanism. It will be replaced by supposedly more transparent electronic markets.
The new silver pricing system made its debut this week. It is administered by the CME Group and Thomson Reuters and known as the London Silver Price. The U.S. Mint said it will adopt the new London silver benchmark pricing in managing its inventory.
Whether the new system for delivering benchmark silver spot prices actually is more open and less prone to manipulation remains to be seen. Electronically traded markets have in some instances become very vulnerable to inexplicable gyrations in the hands of automated, high-frequency traders.
The silver futures markets remain dominated by concentrated positions taken out by a handful of Federal Reserve member banks. No other widely traded commodity has been virtually cornered like this in the paper markets. It will be hard to make the case that we have free and fair markets for silver as long as the big banks have the ability to exert such undue influence over them.
As for this week’s market action, silver showed a modest decline through Thursday’s close but is selling off a bit this morning. Prices currently come in at $19.56 per ounce, down 1.7% for the week with most of that decline coming today. The gold market also produced lackluster price action for most of the week, with the monetary metal coming in at $1,294 an ounce, down about 1% on the week thanks to this morning’s selloff.
Gold experienced a brief pop after the release of weak retail sales data pointed to a slowing economy, but the move didn’t amount to much.
The only real notable price movement we’re seeing in the precious metals markets this week is in palladium. The white hot metal finished near multi-year highs on Thursday. Palladium’s 2% gain on the week brings spot prices to $884 an ounce as of this Friday morning recording.
Most commodities moved to the downside this week, in spite of simmering geopolitical conflicts in sensitive parts of the world. Inflation as a concern remains off the radar of the mainstream media and most investors. But even though it’s not currently making news, inflation represents a very serious long-term threat to your wealth and is certain to rear its ugly head again under our monetary system.
It was 43 years ago this month that President Richard Nixon closed the gold window. He completely untethered the currency from the historic promise of being redeemable in gold. Since then, price levels in the United States have skyrocketed. A new car that cost $2,700 in 1971 now costs $32,000. A barrel of oil that could be had for $2.20 in 1971 now costs nearly $100. Since 1971, gold prices have moved from $41 per ounce to $1,300. Silver has gone from just $1.40 an ounce to $20.
In hisMoney Metalscolumn published just yesterday on our website, Guy Christopher gave us another stark example of the dollar’s loss in purchasing power over time:
In 1964, a gallon of regular gas in the U.S. averaged 25 cents. Dimes, quarters, and half dollar coins were still made of 90% silver in 1964, the last year the U.S. minted 90% junk silver for circulation. To buy one gallon of gas, you paid with a silver quarter. Fifty years ago, that silver quarter and that gallon of gas had equal market value.
Today, the silver in that quarter is valued in paper dollars at about $3.75, which is also the price you’ve paid recently for gas. That $3.75 price tag is fifteen times the 1964 cost, meaning a paper dollar today is worth less than 7% of its former self 50 years ago.
But the buying power locked in that silver quarter – its true value – is exactly the same as 50 years ago, and today it will still pay for a gallon of gas. The buying power of the silver did not change. It was the dollar that changed.
Metal and dollar values don't march in lockstep day by day with everyday prices. But over time, the illustration works perfectly.
And let’s not forget that the stock market is also reflective of this underlying inflationary mega-trend. The Dow traded at 900 in 1971. It now trades at over 16,700.
So the question isn’t whether to protect yourself from rising prices in the years ahead, but how.
There can be long periods within a secular inflation when stocks as an asset class are out of favor and lag behind -- while precious metals experience spectacular inflation-beating growth. And vice versa.
Gold and silver have certainly been laggards over the past three years. But they outperformed stocks from 2001 to 2011. At the 2011 cyclical peak in precious metals, gold traded at one-sixth of the value of the Dow. History suggests that gold can move all the way up to a 1:1 ratio with the Dow, as it did in 1980 and during the Great Depression.
The Dow:gold ratio currently stands at 12.7:1. That means that from here, the precious metals could outpace stocks with same magnitude that they did from 2001 to 2011 all over again. Another bull market leg of such power could bring the Dow:gold ratio back to 1:1.
Of course, there’s no guarantee the ratio will get all the way back to that parity level. But even if the best gold could do was get to one-third of the value of the Dow that would imply a gold price north of $5,500 based on the Dow’s latest tick. No matter what way you look at it, there’s a huge upside for gold and all the precious metals in the years ahead.
Well, that will wrap it up for this week, thanks for listening. This has been Mike Gleason with Money Metals reminding you that we remain fully committed to getting you the most value for your depreciating dollar… with speed, with accuracy and with top notch service. Have a great weekend everybody.