JULY 23 2007 3:30PM - After some early PM strength, Monday turned into a rather lackluster session as both silver and gold declined while the PM stock indices, the HUI and XAU, slipped just below their respective breakout levels. Not much going on today with individual silver stocks either. Stalling the momentum at this point would be an unwelcome development, so hopefully we get a quick backfill over the next few days and then a resumption of the move higher. I am still looking for the $12.50 level in silver to indicate that the current rally is a bust, which would likely lead to a furiously fast decline to $12.00 and possibly below.
I've updated the basis chart as of last Friday and the data now shows a slight advance in the silver basis over the past few days while the gold basis has actually remained somewhat tight. One way to interpret this is that physical demand for silver continues to be light and thus the white monetary metal remains vulnerable to the downside. Another interpretation is that silver may be having some trouble keeping up with gold on the way up. The latter position is supported by recent prices with the gold-silver ratio remaining relatively constant while both metals have rallied almost 10% since late June. Normally, silver would outperform gold on the way up but that has not been the case this time. Interestingly, the silver and gold basis seem to have predicted this exact development! Prof. Fekete and I will be explaining how and why at the Gold Standard University to be held in Hungary on August 17-24, 2007, so if you are interested in learning more about the potential of the basis as an investment and trading tool, please register before the limited spaces are gone.
JULY 20 2007 4:30PM - Somewhat disappointing that silver was unable to overcome resistance today as gold continued to romp and the dollar deteriorated. The general stock market weakness may have had something to do with this, and the rotten sentiment on Wall Street also kept the HUI, XAU and most PM stocks in check. There were a few exceptions, most notably Silver Dragon (SDRG.ob) which finally bounced back from a very oversold level and MAG Silver. MAG continues to amaze with its drilling and the recent AMEX listing has obviously helped as well. Indeed, its meteoric rise of almost 600% since last July makes it the best performer on my short list of silver stocks. Only Energold (the drilling company that also owns 6 million shares of Impact Silver) even comes close to MAG's spectacular performance. Few other silver stocks have even doubled since I put these lists together last November, and many are down by more than a bit. So if you own MAG and/or Energold, congratulations!
As predicted, the iShares silver ETF SLV has crossed the 140 million ounce threshold with ease and it looks to continue gobbling up silver even while physical demand from other corners of the market remains subdued.
To wrap up the week, I'm going to post a comment here that I made in response to the article Money is Also Destroyed by Michael Nystrom. This topic is very important and timely and I would urge those who seek a greater understanding of money and the future of the global economy to read this article and the comments that follow it on Mr. Nystrom's website. Hopefully my own comment should make sense on a standalone basis, but just in case it doesn't, let me summarize Mr. Nystrom's piece. He was basically saying that losses on subprime mortgages could cause a deflationary decrease in the money supply since investors' money has been "destroyed", such as what has happened with the recently failed Bear Stearns hedge funds. My comment addresses this theory:
Loan defaults themselves don’t cause deflation since by definition a loan that is not repaid will permanently add to money supply (ie., create a permanent inflation in the money supply). It is the sentiment toward lending and borrowing — leading to a net REPAYMENT of loans and a contraction in the credit (money) supply — that can create deflation. Written-off loans are NOT “repayments” and only factor into the equation in terms of future lender behavior. In effect, the only thing that really matters is sentiment, which explains why the Fed has a singular focus on it to the point of obsession. Interestingly, one of the major failures in Japan’s attempt to fight deflation was the unwillingness of Japanese banks to write off bad loans. Had they done so as quickly as it is done in the U.S., perhaps things would have turned out differently.
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