In Jim Cook's Archive


The mainstream financial press and Wall Street talking heads argue vehemently that gold is in a bubble.  However, a bubble implies widespread public and institutional participation.  Nothing could be further from the truth.  It’s safe to say that hardly anybody owns gold.  Nevertheless, the high price of gold and its linkage to silver are cause for concern.

Historically gold hit a low price of $252 in 1999.  However as Ted Butler points out the hedging practices of gold miners Barrack and Anglo-American caused the price drop.  By selling future production they depressed the price.  Mr. Butler claims that without this hedging the price would probably have bottomed out around $500 an ounce.  Mr. Butler did warn these mining companies of the potential for loss in their leasing and hedging schemes.  Ultimately, they each lost close to $10 billion by failing to heed Mr. Butler’s warnings.

So if gold at $500 had been its low point it would only have gone up three times today.  The long term inflation adjusted price would probably be around $650 an ounce.  So from its low point in 1999 we could chalk up a few hundred dollars of today’s price as an inflation adjustment.  Given world monetary dislocation, money printing, new-found Asian wealth, increased freedom to own gold and this ease of institutional ownership through exchange traded funds it seems preliminary to call this a bubble.  Nevertheless, nothing goes up forever and my main concern about a steep correction in gold is its impact on silver.  The two seem to be joined at the hip in terms of price movement although silver’s recent gains have outdone gold.  Some time ago Mr. Butler claimed that the two precious metals would be getting a divorce.  In other words, silver would begin to leave gold behind in the price derby.

One thing appears certain, the silver story is spreading like wildfire.  This awareness of the potential for a short squeeze in silver has precipitated massive buying that quite possibly is aggravating a shortage.  A tight physical supply superimposed on paper short covering is the stuff that price fireworks are made of.  It’s good to remember that an adequate supply of gold exists above ground.  However, with silver the years of price suppression have reduced the supply and increased the demand.  Unlike gold, most of the silver ever mined has been used up by industry.  Furthermore, no government owns enough silver to douse a price conflagration.  That’s quite a difference between the two.  If you own plenty of silver sit tight, turn on the autopilot and stay tuned.

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