How Western Bankers SERVE Precious Metals Holders by Jeff Nielson, Sprott Money
For the last four years (in particular), those who have chosen to convert their paper wealth into gold and silver have been suffering – just ask them. It might be time to remind these individuals of an old adage
Be careful what you wish for; you just might get it.
Playing the “what if” game with precious metals markets (and invoking the old adage) is relatively simple. For instance, what if the silver market had not been subjected to the most ruthless financial attack on a commodity market in the history of commerce?
Back in the spring of 2011, it was the silver market that was leading the way through the strongest segment of what was (at the time) a ten-year, uninterrupted bull run in precious metals markets. This is a matter of both empirical and historical fact. The trough-to-peak move in the silver market during that run was much greater in magnitude than the same move in the gold market. Historically, the trough-to-peak move in the silver market is always stronger.
For the sake of simplicity, let’s assume that there were only two possible alternative scenarios if precious metals markets had not been subjected to the price capping operation of 2011 and the permanent (until default) price suppression we have seen in these markets since that time. Let’s call one possibility the “fair-price” scenario, and let’s call the other one the “full-price” scenario.
Then we have our definitions. The “fair-price” scenario is defined as a partial move in gold and silver markets, where the prices move roughly halfway toward their full value. The “full-price” scenario, as the name implies, means a full price for gold and silver, or as close to full price as we can get, given that Western paper currencies are already worthless .
For readers not familiar with previous commentaries, a “full price” for precious metals today was previously pegged at $10,000/oz for gold, and $1,000/oz for silver. For the purpose of this analysis, the fair-price scenario will peg the price of gold at $5,000/oz and the price of silver at $200/oz. The fair- price scenario represents a partial reduction in the utterly absurd gold/silver price ratio , while (naturally) the full-price scenario represents a relatively correct gold/silver price ratio, given the depletion of global stockpiles of silver.
Let’s begin with the fair-price scenario. It is undoubtedly the more benign scenario, since it does not require precious metals holders to make the most difficult decisions. Imagine the full implications of $5,000/oz for gold and $200/oz for silver.
At those prices, gold and silver holders would already be listening to a deafening crescendo from the mainstream propaganda machine. Gold is a bubble! Silver is a bubble! Run for your lives! Simply remember how loud that cacophony grew with gold under $2,000/oz (USD) and silver still below $50/oz (USD).
Thus, we begin our benign scenario with precious metals holders already feeling intense psychological pressure to reduce their concentration of wealth in gold and silver. Add to this struggle the “wealth effect,” where the paper exchange rate for gold and silver would make precious metals holders feel much wealthier.
Part way into the benign scenario, gold and silver holders would be seeing/reading/listening to a constant propaganda barrage urging them to “diversify” out of their gold and silver, or face the consequences. Meanwhile, feeling much wealthier (with the same amount of metal), many precious metals holders would conclude that they didn’t need all of that gold and silver, the trouble of storing it, or the added cost of insuring it at higher prices. They’d think, “Why not lighten the load and take some (paper) profits?”
Of course, most of us would not have much metal to begin with in the fair-price scenario. If the price of gold and silver had not been capped (and then reversed) with gold below $2,000 and silver below $50, it would have cost us much, much more for each ounce we purchased between 2011 and today. This means (unless we had inexhaustible wealth) that we would start our fair-price scenario with fewer ounces of metal and then have to fight the psychological impulse to sell that is fuelled by media propaganda and our own delusions of greater wealth.
Now it’s time for us to move to the full-price scenario, where gold and silver holders “get what they deserve.” Let’s think about what a wonderful world that would be. To begin with, we would have even less metal, as the much higher paper exchange rate would dramatically reduce our purchasing power.
And remember how much sell-and-run propaganda came from the mainstream media with gold at $5,000/oz and silver at $200/oz? Now imagine the decibel level of that Chicken Little propaganda when the price of gold doubled, yet again, and the price of silver quintupled (after an already greater-than-tenfold rise in price).
Imagine dealing with that “sell, sell, sell” pressure every day, while simultaneously feeling much wealthier. How long could we listen to the chant of “Bubble, BUBBLE, BUBBLE!” from the mainstream media before we began to reallocate our wealth away from gold and silver
What would we hold instead of our gold and silver? Bushels of wheat? Barrels of oil? A warehouse-full of lumber? True, we could follow those wealthier than ourselves and funnel our gold and silver into high-priced art, or antiques, or some other wealth-preservation vehicle of the Ultra Wealthy. But this presents two additional issues.
First of all, when the Ultra Wealthy put some of their wealth into such vehicles, they do so to shelter their wealth from the Tax Man. And they have no need, or intent, to liquidate such holdings in “an emergency.” Most of the people reading this commentary will not fall within that privileged group.
If we choose to move our wealth out of gold and silver and into art and antiques – with these asset classes already at record prices – we do so with the knowledge that we may be forced to sell these less-than-liquid assets during a trough in the market. Out of the frying pan and into the fire. Moving from one ( supposed) asset bubble to another, less-liquid asset bubble is not the path to “financial security.”
Of course, we could not move our wealth directly from gold and silver and into art-and-antiques, or even into other commodities. First we would have to convert our gold and silver back into the bankers’ paper currencies (sell our metal). But now we are traders of gold and silver, and we say hello to the Tax Man.
Different readers around the world with different income levels would face different “hits” as the Tax Man took his cut, so readers are invited to pull out their calculators and think about how much of their wealth would evaporate into taxes, should they liquidate any substantial amount of their bullion holdings with gold at $10,000/oz and silver at $1,000/oz, or even at the previous fair-price numbers.
After facing the taxation consequences, we would be trying to move between asset classes without assurance that