The Silver Bear Cafe

Force Majeure Inevitable as Silver Shortage Reaches Climax
Bill Holter

The cash metals markets, particularly in Silver are tight. Premiums for physical over the paper price are rising and delivery times extending. This can only end one way, “cash and carry” will ultimately “price” these markets and a force majeuer will be unavoidable as the physical does not exist system wide (never-mind on COMEX) to satisfy demand.

Gold and silver will go through a short squeeze unlike any other ever seen. History will call this “hyperinflation”. Once started, just as in a wildfire everything will burn until there is nothing left as fuel for the fire!

The last nearly 6 months has seen a constant barrage on the pricing of the precious metals. This process coincided with the last US quantitative easing and of course was completely counter intuitive. How one would ask can a Dollar increase in value versus another (any) real, fixed asset if Dollars are more plentiful? If we did not already know “why” this was done prior to last Wednesday, now we know for sure “why”. Japan’s BOJ plans to add $2 trillion worth of Yen to their balance sheet over the next 2 years. When you add in the Fed’s $85 billion per month ($1 trillion per year) you get to $2 trillion per year just from these two entities. We WILL have inflation one way or the other, the question is “how much?”.

So, in the Gold market we now have (have had for quite some time) “official policy” stomping on the brake and the gas at the same time. This cannot last and surely will not work. Something has to and will finally “give”. The cash markets, particularly in Silver are tight. Premiums for physical over the paper price are rising and delivery times extending. This can only end one way, “cash and carry” will ultimately “price” these markets and a force majeuer will be unavoidable as the physical does not exist system wide (never-mind on COMEX) to satisfy demand.

Over the weekend Jim Sinclair proffered that the U.S. will “flip” in the near future and actually assist in pricing Gold (and thus Silver) at higher levels to stop the outflow of metal from West to East. He very well may be correct in this theory but… with this change in policy would come an “admission”. The admission being that the West has lost control of the market. In my opinion, were Gold to rally $100+ and cross into the $1,700 range, control will have been lost and nothing will stop the stampede OUT of currency. Strangely, this in a roundabout way is exactly what the central banks want. They WANT you to “spend” your money. They want you to buy stocks, they want you to buy real estate, they want you to frequent Walmart and SPEND your money.I sent you a chart a couple of weeks back that showed “velocity” in a crash dive over the last 10 years. THIS absolutely MUST be halted and reversed.

Velocity (or lack of) is exactly why money supplies have by necessity been grossly expanded. Central banks have thus far compensated for lack of turnover by increasing the size of the monetary aggregates.

This is a dangerous game! “Dangerous” because human nature or psychology is involved. The central banks are trying to increase spending by lowering interest rates to zero, publicly debasing through over issuance and now through the “threat” (promise) of account confiscations (bank runs). So what’s the danger? That it actually works…that’s what! Human nature is a funny duck and when it comes to investing the “herd” mentality fits perfectly.

Should the official policy to get spending started begin to work(it will), there will be no way to stop it. Once the “runs” begin, they will spread, grow and run their course. THIS may be exactly what is “planned” and a push toward global “backed” (by Gold and other hard assets) currencies will arrive. The problem as I see it is that Gold will go through a short squeeze unlike any other ever seen. Supply is less than finite and demand will include those who “thought” they owned Gold through empty ETF’s and the like. Greed, fear, forced short covering and every other reason on Earth will line up as demand for Gold. Gold will be priced far above the ability for the common man to purchase, even governments (think China and Russia) will not receive much “weight” for their purchases. It will be a different game. History will call this “hyperinflation”. Once started, just as in a wildfire everything will burn until there is nothing left as fuel for the fire! It now appears that dealers are paying $2.70 over the “spot” paper (soon to be a big smudge?) price of Silver for junk and almost $3 to procure Eagles. This represents between a 10-12% premium BEFORE a fair mark up! So what does this mean? It means that the “powers that be” have sold the paper market price down so far that it will soon be irrelevant. Physical “owners” are NOT WILLING to sell at the current price to make up the continual deficit between supply and demand. As always happens, Mother Nature is “fixing” the problem (deficit of supply) with a premium in price.

Do you remember hearing the story of 2 butchers with shops across the street from each other? One has a sign in his window for filet mignon at $5 per pound and the other $20 (the original story was $1 and $4 but that was many inflated years ago). A patron walks into the store with a sign for $5 per pound only to find that he is sold out (and never had any to begin with) and then he walks into the other store. He asks if the butcher has any filet mignon and then complains that the price is too high. The butcher retorts “good luck waiting for that $5 per pound filet mignon”. The point? They are riding the brake and flooring the gas at the same time by trying to create “velocity” while at the same time breaking the thermometers (suppressing the prices of Gold and Silver). This cannot work for any length of time because “stirring up the herd” cannot be stopped once started. If (when) they actually do get some “velocity” of money, some of this will naturally (already has and is) find its way toward the precious metals. The problem is this, if the shelves go bare and investors find that metal is not available, human nature will make them want it even MORE! Nothing will create demand in a bigger fashion than when something is unavailable which is exactly what unnaturally low prices will do!We need to watch this event very closely as the entire paper system cannot be held together if the lid blows off the physical market. I have thought all along that the physical market would overwhelm the paper market. It came very close in the fall of 2008, this looks to be the beginning of a second swing at it.

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