Economy Tanking, Precious Metals in Liquidation

Silver is getting pummelled:

So is gold:

What does this mean?

Hedge funds and speculators who were long gold are trying to get a buffer of cash to soak up hits from the coming default cascade.

What does that mean for gold’s long term fundamentals?

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About Silver Manipulation…

There have been a whole lot of swirling rumours suggesting that a whole host of major economic players — including the London Metals Exchange, J.P. Morgan, Bear Stearns and HSBC — are engaging in a conspiracy to suppress the price of precious metals. A whole host of antitrust lawsuits fired off in recent months, based on these theoriesSome of these theories have come from the Chinese establishment. Some have come from seasoned metals traders. Some supposedly come from inside the financial system itself.

Personally, I am not really interested in whether the price of silver is being manipulated, because I am a long-term investor, using fundamental analysis to make forecasts. Here’s what I know about silver:

  1. The current AU:AG ratio is around 1:44; the historical average is more like 1:16
  2. Silver is a highly-demanded industrial metal used in computers, televisions, mobile phones, missiles, dentistry, medicine, etc
  3. Silver, like gold, has retained and strengthened significantly against fiat currencies in recent years, all while central banks have engaged in competitive printing.

All of these factors make me significantly bullish on silver in the long term.

If the rumours are true, and J.P. Morgan’s commodities desk, alongside other players, is taking measures to artificially depress the price of silver — and make such a hot commodity available to investors at a discount when we know fair-value is much higher — then I think we should be thankful to them.

Will China Bail Out the World?

With fear running high on global markets, particularly regarding sovereign debt in the Eurozone, many commentators are asking: will developing nations flush with cash (i.e. China) ride into town and save the day?

From Reuters:

Italian Economy Minister Giulio Tremonti said on Thursday that Asian investors are reluctant to buy Italian bonds because it sees they are not being bought by the European Central Bank.

Speaking at a news conference, Tremonti also said it would be desirable for the central bank to follow the lead of the Japanese and Swiss central banks in taking expansionary steps to tackly the euro zone’s crisis.

“I note that the Bank of Japan today launched quantitative easing and the Swiss cen bank cut rates to zero, we are waiting for decisions if possible, but desirable (from the ECB),” Tremonti said.

When you talk to Asia they say: “We don’t understand what Europe is,” he continued. “The second point is that they say ‘if your central bank doesn’t buy your bonds, why should we buy them”?

That is a fairly unqualified no. And why should they? As Amschel Mayer de Rothschild famously put it:

Buy when there is blood on the streets

And China are entitled to hang onto their money and let asset prices depreciate further to get more bang for their buck. But some signs suggest they will act. The more Europe and America deteriorate, the weaker the demand for Chinese goods.  And China’s massive FX holdings’ value is dependent on the system of international trade and the economies of various Western nations retaining functionality. Most importantly, the only remedies that Western governments have are money-printing, and (China’s worst nightmare) debt-forgiveness, neither of which the Chinese would like to see.

Of course, China stepping in to buy shoddy debt isn’t going to offer any  solutions to underlying problems. At best it will kick the can do the road awhile, as Europe muddles around and continues to fail to come to any kind of meaningful or coherent agreement on its future. So as as Europeans clutch furiously at (Chinese manufactured) straws, there is still only one bailout party in town: