Silver and Gold Price Action - Winter Outlook

Written By: The WealthCycles Staff

As markets never go anywhere in a straight line we have been licking our chops to explain to readers the small pull-back in silver and gold following a rally out of the summer consolidation period on new printing. Here is our projection for where we will head through early 2013 and why.

On July 17 veteran fund manager Marc Faber warned that investors “may lose up to 50 percent of their total wealth,” and said that “gold is oversold near-term” after observing two months of consolidation under the 1650 pivot point. For GoldSilver Insiders, Mike Maloney published videos at during the consolidation period, in which he said that “it is getting more bullish for gold and silver,” after commenting on the demoralized sentiment.

Citing little new web-based curiosity, Mike quipped that the “bull market hasn’t even gotten going yet,” despite gold’s actual rise ever since 1934, from twenty bucks an ounce to where we sit today.

Alternatively we could have said: “...despite the Fed’s dollar fall in purchasing power since 1934, from twenty bucks to buy an ounce of gold, all the way down to where we sit today.” In July, Mike said he “just does not think we have several months [more] before things start to move,” and that his preferred strategy was continuous diversification of savings into gold and silver.

Of course, as we know now, gold and silver prices did indeed rise above 1,700 dollars per ounce after the Federal Reserve (Fed) announced QEternity, pledging to print 40 billion new dollars a month without giving an end-date.

Printing Until Substantial Improvement in Labor Markets

In our August 22 Fall Economic Outlook we quoted the New York branch of the Federal Reserve Bank saying that 3.5 of the 5 point rise in unemployment in “the U.S. labor market [caused] by the recession is reversible, according to Federal Reserve research, leaving open the possibility that additional stimulus will be effective in reducing joblessness.”

This is the context one should consider when deciding just what would be considered “significant improvement in the labor market.” While labor markets recently showed a 0.3 point fall in the unemployment rate, Fed economists know that there was almost zero job growth in real, full-time private-sector jobs.

Of the 873,000 jobs supposedly added, precisely two-thirds of them were part time 582,000--goal seeking much?!

We can explain: If the government is not “goal-seeking” then it must just be luck that when one divides 582 by 873 it equals 0.66666666666666666666666666666666666666666.

Out of the 291,000 full-time jobs remaining, 187,000 were government jobs. We lost 16,000 jobs in manufacturing. No wonder one-time establishment man Jack Welch exclaimed that the jobs numbers were literally "unbelievable.” The Fed does not believe the establishment message that unemployment is falling, which is based on shrinking the size of the labor pool over the past few years, altering the denominator when calculating the unemployment rate. Simply put, four years ago we had 4.5 million more full-time jobs than we have today.

It is safe to say at this point that the Fed will not be terminating QEternity based on “substantially improving labor markets” any time in the foreseeable future. So what is likely?

Winter Economic Outlook

We maintain that the period through December will represent a prime buying period for those looking to diversify their savings into gold and silver money. Why?

One name: Dennis Gartman.

Not only is he proven to be an excellent contrary indicator, as he says he is "gravely" concerned about gold as a result of ongoing deflation. We completely agree: deflation is ongoing despite Fed efforts, and that is why we are so bearish on the dollar and bullish on silver and gold prices going into 2013. Mr. Gartman misses the fact that throughout this period of deflation we have been in for some time now (see chart below), gold and silver have both more than doubled in price when measured in terms of the shriveling Fed dollar.

The same factors are in play right now that have driven further printing since the 2008 crisis: The Fed reacts to deflation, a decrease in the total supply of currency and credit, first and foremost. Each time deflation has threatened, the Fed has printed. To do otherwise would threaten the entire banking and currency system, as asset prices would fall, impoverishing the owners of the Fed (mostly commercial banks) and triggering the implosion of the derivatives daisy-chain.

Based on the data from the most recent Fed’s quarterly Z.1 flow of funds release, deflation has averaged $50 billion a month over the first half of 2012. This can be seen on the chart below as the bounce in supply back up to $30 trillion upon larger previous printing has turned down.

Total Supply of Currency and Credit

That means that even with the Fed’s QEternity printing program totaling $40 billion a month in new cash, deflation is presently running at $10 billion a month and rising, as economic conditions worsen.

The ongoing deflation was anticipated by the Fed, with two regional branch presidents and the chairman himself hinting recently that they would “undertake additional asset purchases,” as the Fed also stated on September 13. The ongoing long-term U.S. Treasury bond purchases, originally slated to be terminated at year-end, have been widely viewed as the means by which additional asset purchases could take place. The Fed could simply continue buying the bonds at its present rate of $40 billion to $45 billion a month, while discontinuing the sale of an equivalent amount of short-term bonds. Such a move would boost new currency creation to $80 billion to $85 billion a month, eclipsing the QE2 run rate of $75 billion a month, proving a real impact to prices.

As we wrote in the September 13 piece, QE Event Horizon, “with each new round of QE, the Fed has gotten less and less bang for its bucks. As these diminishing returns dictate, the Fed must adopt (and has now proven the fact, as they have adopted) Goldman Sachs’ "flow" view of the impact of QE, where it is the rate of printing that matters, not the quantity. The Fed does not want to admit that fact, because in admitting it, it admits that QE will never end, as the frequency of doses must increase with each new dose, and each dose must one-up the previous.”

Fully half of the modern “money supply” is produced by the “shadow banking system,” under which the money supply is expanded exponentially by means of credit backed by assets that are then repledged to obtain more credit, over and over again. In other words, assets (such as bonds) are used as collateral in order to obtain cash. For example, a $10 million bond might be pledged in exchange for $9 million in cash; the “new owner” of the original $10 million bond can then repledge it in order to receive cash, say $8 million worth. There is still only the one $10 million bond, but now $17 million worth of new cash have been created, or borrowed into existence, backed by the same $10 million bond. In this way multitudes of new currency are  created “out of thin air,” making up 50% of the modern supply of currency and credit (commonly and erroneously called “money”). For a more comprehensive explanation, see Price Inflation Rate Not Predicated on Tripling of the Fed Monetary Base.

As unstable as this system sounds, it is a major factor in economic growth. As financial institutions become more concerned about impending collapse, they pledge fewer assets as collateral and do less repledging of assets and are willing to lend less on sketchy, repledged assets due to mistrust between parties. The assets pledged as collateral also naturally mature in time, which results in deflation in and of itself. With each dollar of shadow banking liability that evaporates, the moment when consumers will see rapid and severe price increases draws ever closer.

To sum up, deflation of the “money supply” will prompt an increase in the rate of flow, or the rate of Fed printing, possibly as early as the December 12 Fed meeting, or as late as March; the Fed must figure out how quickly deflation will occur in order to figure out by how much it needs to increase the flow rate. As quoted in another free premium article, Why Buy Gold Now?, Mike Maloney says, “I believe there will be deflation first [check], we’ll start printing like crazy to get us out of that deflation [check].” We would note that these two steps can be repeated a number of times.

Then What Will Prompt Serious Price Inflation?

Raging inflation of grocery store prices, or simply “price inflation,” is not predicated on Fed printing (increasing the monetary base), as the commercial banks then must lend on this base, along with other important factors such as expectations, as explained below.

As most know by now, under our fractional reserve banking system, banks can lend out up to roughly 10 times the base. So the tripling of the monetary base from $800 billion to $2.4 trillion means $1.6 trillion x 10, or $16 trillion, in new cash could be added to the $30 trillion already in existence. That is a lot of inflation.

Many ask if it is wages, economic growth, or the velocity with which money changes hands that needs to pick up before price inflation will follow. None of those are correct.

So how do prices rise? In Human Action, on page 399, Ludwig Von Mises writes:

In analyzing the equation of exchange one assumes that one of its elements--total supply of money, volume of trade, velocity of circulation--changes, without asking how such changes occur.
It is not recognized that changes in these magnitudes do not emerge in the Volkswirtschaft [political economy, or more loosely `economy'] as such, but in the individual actors' conditions, and that it is the interplay of the reactions of these actors that results in alterations of the price structure.
...start from the various individuals' demand for and supply of money.

What Mises is saying is that, from a big picture perspective (a macro view), the general price level rises because people demand a higher price, due to decreased and expected future decreases in the purchasing power of the currency.

This brings us to one of the questions on the recent Fox News Presidential Poll:

"Which is the biggest economic problem facing you?”

The response showed that inflation is a far bigger concern (+40%) for voters than unemployment (21%) and the housing market combined (7%). Consider that the presidential debates thus far have ignored voters’ top economic concern, as the lamestream media continues to parrot the “fact” that price inflation is low and a ridiculous concern. Even in the face of all this contrary input, the people are still correctly, and exquisitely, focused on the real problem.

But truth sure is hard to repress when there is a revolution in media, the old guard is losing its grip on the public psyche, and, one by one, good men and women come to their senses.  The rise of price inflation, while demonstrated perfectly by trial and error throughout history, can also be anticipated via simple logic and common sense. The people get it. Ten percent of the COMEX silver inventory was withdrawn on Monday.

The Perth Mint reported its September numbers, showing that gold ounces sold beat the previous high of any month in history, and silver ounces sold more than doubled the previous high of any month in history!

The Fox poll and the increase in bullion purchases combined illustrate that our message is reaching the global population: Exchange paper for physical gold and silver savings--despite the propaganda that ignores the rising prices, or worse, claims price inflation is low.

As Zerohedge explains:

Shadow banking is simply an inflation buffer: since there are no deposits, there is little risk of the "money" contained in the banking system from furiously vacating and be used to spur purchases of everything from 1,000x P/E/ stocks, to overvalued housing, to just being packed away safely in a mattress. In other words, the Shadow Banking system is circular as the money contained therein is self-contained.
Not so for deposits. Just ask any banker, central or otherwise, especially in Europe, who has had to deal with the threat of bank runs.

As shadow banking liabilities are replaced by traditional--deposit backed--liabilities (with the help of the Fed), our modern banking system will revert to a more conventional system. The risk that incremental printing by the Fed will eventually spur severe inflation will rise exponentially, as more and more "money" ends up residing within conventional bank deposit accounts.

Just last year, when the U.S. debt ceiling was raised, the view at the time was that the value of the dollar was diminished (due to the increasing impossibility of paying off the debt), and the trend was not improving, pushing the dollar to new lows versus gold ($1,922).

At some point, those who were long gold (and in the green for years) took profits, in the belief that the debt ceiling hike was a one-off response to the crisis, enabling the stimulus that would bring about a Keynesian green-shoot recovery, and eventual dollar value stability.

This is the same argument that is crumbling with respect to printing. Oh, yeah, QE1 was an anomaly in response to the crisis, and QE2 was an anomaly, and now we have QE3ternity. When the Fed increases the monthly rate of flow of printing, and the debt ceiling is hiked again, and the federal deficit remains a deficit even under a fully implemented Ryan plan until 2040, how exactly will even the most Keynesian institutional money manager continue to cling to the idea that QE3 is an exception?

This change in perception corroborates Mises and our own common sense on what will cause rocketing price inflation in necessities such as groceries and gasoline. Once prices shoot up, people will ravenously seek mediums of storing wealth that have stable purchasing power over long periods. We are on the cusp of the herd rush into the precious metals you seek to front run.


If you are still reading this without a stack of metals by your side to “fondle,” as Warren Buffett’s dad may have suggested to his son, what are you waiting for?

Go read what Warren Buffett’s father wrote about gold, silver and liberty.

It is a short read, and it is very powerful. Our premium article this week is titled: Warren Buffett Has Written Off Freedoms Father Defended.

You will be astonished at Warren Buffett’s hypocrisy in the face of his upbringing. Warren gets all of this; he understands perception and confidence are all that support his throne of paper.

In closing, we like the response of 40-year veteran and founder of wealth management firm The Portola Group when asked how much of one’s wealth one should keep in precious metals. As Robert Fitzwilson writes in King World News, his firm’s response is to ask its client in return:

“How much of your money are you willing to see destroyed?"

“Time is running short to take action,” Fitzwilson adds. We agree.

Please provide the page number from the flow of funds report that populated the Total Money and Credit graph. I am considering a subscription to your services and this is an important point for me. Also this doesn't have to be posted on the notice board, you can email me a reply at


Thank you for your reply, could you please tell me where in the quartely report the data comes from? It was my understanding that our fiat system means all money is loaned into exitence and therefore credit and money are (now) the same thing. However this ignores the issues of "on demand" etc.

True, all "money" is loaned into existence. Explaining why the system is both a mathematical exponential resigned to eventual failure, and is evil at it's heart --as it aggregates all free capital to the owners of the system. How? Consider this:

The first dollar in existence is printed and loaned into existence to you with the agreement to pay it back, plus interest, where do you get the interest $. The process is repeated in fast-forward over 100 years...

In traditional banking, new "money" is loaned into existence based on collateral and the agreement to repay

In shadow banking, new "money" is loaned into existence based on collateral and the agreement to repay

The data for both come from the report, where in the report? All over the report, across pages, rows and columns. All said and done we are deflating at an average of $50b a month during 2012/ hence Bernanke's actions.

As the economy worsens, this means less loans in traditional banking due to less demand from hurting businesses and consumers, and less loans in shadow banking as parties apply larger haircuts to collateral, and reduce counterparty exposure -- further increasing the average monthly rate of deflation.

And the monthly flow of new cash from Ben will rise from 40 to some larger number in attempts to offset this, just as has been the case for years now.

Hello, With Total Money and Credit graph, could you please indicate what page number that figure is on of the Flow of Funds full report? On page 64, there is total credit market debt which c$55T. This figure is used by Richard Duncan in his book the New Depression. It shows that while Households have been deleveraging since 2008, the other sectors, notably the federal govt have expanded credit, to the point that in total it has therefore remained nominally positive. So that there is no delevaging on net. That being said, an increasing amount of credit is required to maintain and expand GDP (in the short run).

TCMDO - Total credit market debt outstanding is not synonymous with the consolidated liabilities of the shadow and traditional banking systems. The broader measurement includes many components not viewed to be fungible as "money."

"So that there is no deleveraging on net"

We agree, there is no net deleveraging for the consumer, or for the government. This is not the same as deflation. We built the chart in Excel from the data in the quarterly flow of funds report.

There is deflation: A decrease in the supply of currency and credit.

And someday (besides in cell phones and homes) perhaps we will all enjoy price deflation. Falling prices !!! SALE !! Yayyyy!

Please enjoy Deflation and Liberty to fully understand why the TV and the banks and the textbooks HATE HATE HATE what we all normal citizens LOVE, falling prices (increasing purchasing power) and the accompanying rising standard of living.

Thank you for your questions and comments ;)

testiomials With each new round of Quantitative Easing, the Fed gets less and less bang for its bucks, forcing it to adopt Goldman Sachs’ "flow" view of QE, where it is the rate of printing that matters, not the quantity. The Fed does not want to admit that fact, because in admitting it, it admits that QE will never end.”

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