WHAT NOW FOR GOLD AND SILVER? / MACLEOD FINANCE

What now for gold and silver?

Friday’s knockdown was severe and shocked investors, particularly those who just recently jumped on the gold/silver bandwagon. But that was what it was designed to do!

Alasdair Macleod

Kipling’s famous lines are called to mind: If you can keep your head when all about you are losing theirs… 

They seem apt in these markets. 

A cold rational examination of the following simple facts is timely:

· Recently, overnight buying seemed to have come from Asia, with Europe waking up to higher prices and being squeezed, particularly in silver. 

But on Friday, there was some profit-taking in Hong Kong / China. 

Consequently, prices were steady in London until New York opened and after an hour’s trading prices slid sharply lower. 

Ahead of the weekend, buyers in London where the silver squeeze is acute were happy to watch from the sidelines. 

Weekend factors played an important part in timing.

· The slide was a Comex affair only, coinciding with increased margin requirements. 

However, current speculative positions usually shaken out by margin increases are not extreme, so the margin factor should not be overemphasised.

· The backwardation between London spot and Comex futures remains at $1.24 indicating the silver squeeze is still on.

· Friday’s knockdown is unlikely to change a worldwide panic into gold and silver by ordinary people. 

And rising demand for ETFs appears to have only just started.

We have always cautioned against trading gold and silver futures, because you get whipsawed. 

This knockdown in paper markets is a classic.

The reason for owning gold and silver is to get out of credit, which is in an enormous bubble. 

So much so, that even central bankers and the likes of Jamie Dimon are now warning us of the dangers. 

The next chart, of margin debt says more about the stock bubble than anything else:

Well over a trillion dollars in soaring margin debt financ stock positions worth $3—$4 trillion. 

And punters who leverage their positions are inherently weak momentum players.

As well as this elephant in the room, there are increasing concerns about the banking and shadow banking systems. 

In the latter case, private equity and hedge funds are borrowing from the banks to lend at higher rates to businesses which are invariably zombies because the banks won’t lend to them. 

It is a situation which rings loud alarm bells (cf. Jamie Dimon’s cockroach statement about bad debts — see one and there will always be lots more).

Increasing caution expressed by leading bankers inevitably leads to credit being withdrawn from the private equity and hedge funds playing this game. 

And we are beginning to see that that most sensitive financial asset, bitcoin, is losing momentum and beginning to slide.

This pseudo money, like tulipomania is a classic bubble play and an important timing signal. 

As the next chart shows, it appears to be falling out of a broadening top formation which is a very bad sign, particularly when hodlers believe it to be a credit hedge:

The reason for emphasising the credit bubble in an article about gold and silver is that when it implodes, which bubbles always do, it is the value and not the quantity of credit which takes it on the chin. 

The reason is simple: central banks and their political masters become frightened about the other side of credit, which is debt. 

They simply cannot afford to stand by and watch escalating defaults in the banks and other financial intermediaries as the combined credit and debt bubble implodes. 

Rescuing insolvent borrowers and banks simply kills the value of credit, including that of fiat currencies which are the top level of credit. 

This is why the gold price soars after a central bank rides to the rescue of everything.

Today, there are additional uncertainties — a US president who is capricious and at loggerheads with Jay Powell, and a government which is hampered by being shut down due to the debt ceiling. 

Increasing credit risk could not happen at a worst time. 

And we haven’t even considered weaknesses in other jurisdictions, which make a coordinated G7 response to a credit implosion difficult to envisage.

Quite simply, short term uncertainty over gold and silver values can make them volatile, as was demonstrated on Friday. 

But at the top of a credit bubble, selling physical gold and silver for fiat currency is simply nuts. 

Those who truly understand money, credit, and the difference between them will sit tight in the safe haven of true money without counterparty risk, which is monetary metal. 

It is the only way to protect wealth at times of escalating credit risk.

If you can keep your head when all about you are losing theirs…