I’m sure some, or many of you have read or are aware of James Rickards’ Currency Wars. A recent interview with him can be heard here. I am pretty much in agreement that QE3 is on the way. It may be announced as soon as January or perhaps more likely February. Rickards says to key in on the euro-USD cross-rates, looking at below 1.30, perhaps with 1.27-1.28 as the trigger. As I have stated, the spec short in the euro is already very large. He also thinks China is going back to a soft peg, and that will be a factor. With the arrival of doves on the Fed, Rickards predicts notional GDP targeting, in effect giving up on inflation targets. This is all close to my view.
In considering silver as protection from this, let me start out by saying that silver is hardly a safe haven. A look at the chart demonstrates that. Still, I would favor silver over gold as it’s getting more washed out. That’s because it had a parabolic blow off. Secondly, silver has a distinct reaction to QE with a little lag. One can visualize it bottoming and moving slowly as QE3 gets underway, and then accelerating.
Also, I like the new industrial revolution aspect of silver for clean energy. This isn’t a huge story yet, but in the solar industry silver wasn’t really used in 1999. The 2014 projections expect the industry to use 130 million ounces a year. In 1999, 100 million ounces was used in the electronics industry. Today, we have closer to 250 million. To my understanding, the all-in cost for silver production is $20-22. Speculators are clearing out, and no doubt producers are using lower prices to close out hedges. This COT is right before silver was sold hard on Wednesday and Thursday. A review of the fundamentals of silver is here. I’m sure many of my readers are more familiar with the story than I, so I intend just to chime in on the manner in which to use it.
Silver (and gold) have had several headwinds: One is the aforementioned speculative blow-off and run-off phase; the other is the lack of adequate collateral that is causing European banks to sell other assets and dump or lend precious metals as fast as they can to get into a more liquid assets to pay off their debts. Some banks are even lending — at nothing or even negative lease rates — their gold and silver to raise dollars.
Let’s look at the question of continued asset liquidation. On the related issue of recapitalizing dead banks, such institutions will effectively be the recipient of capital that has been diverted away from healthy banks and into its toxic financials. Unfortunately, this money will be placed at higher risk in an effort to earn the incremental income needed to backstop bad bets that already are on the books. That means shareholders who are led to believe things are improving will actually find their money at an even higher risk than before. In other words, an honest accounting and debt restructuring is a positive event. In effect, continually subsidizing dead banks forces even healthier banks into a liquidation mode, and in turn would prolong a general liquidation cycle. For, now that seems to be the pattern.
The set up for silver looks like a Bump-and-Run Reversal Top pattern consisting of three main phases:
1. A lead-in phase in which a lead-in trend line connecting the lows has a slope angle of about 30 degrees. Prices move in an orderly manner and the range of price oscillation defines the lead-in height between the lead-in trend line and the warning line which is parallel to the lead-in trend line.
2. A bump phase where, after prices cross above the warning line, excessive speculation kicks in and the bump phase starts with fast rising prices following a sharp trend line slope with 45 degrees or more until prices reach a bump height with at least twice the lead-in height. Once the second parallel line gets crossed over, it serves as a sell line.
3. A run phase in which prices break support from the lead-in trend line in a downhill run.
(Quoted from article above)
Click here for larger image
Source: Nu Yu
As the liquidation factor kicks in and in the lead up to QE3 hiccups, the ultimate target (3rd line) might be or so, which would get my interest. The Fed might set up QE3 by dampening expectations (a hiccup) and delaying it awhile longer as well, mostly I think because oil prices are still too high.
If oil hangs in above 0 Brent, then QE might be postponed so that the new doves can earn their spurs for a brief moment as being “serious about inflation.” But it’s all a facade. If oil breaks down, QE3 will be rushed. As far as oil being used in the real economy, there is every indication that actual movement of oil has fallen a cliff.
I have no interest in physically holding metals, primarily because I want to be able to utilize option selling on SLV, where premiums are typically very rich. Also, the risk of storage outweighs the benefit. Frankly, it’s amazing how many people talk about holding metals (and guns). I had the following exchange with a wag on SeekingAlpha:
RW: My question relates to storing physical assets, such as gold, silver and even cold, hard cash. Where does one safely do so? If a bank vault, in what manner is it insured against theft? Plus, don’t tell me to keep it under a mattress or in the ground.
StillDazed: Ever hear of a safe?
RW: Ever heard of armed robbery?
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