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The Physical Markets Have Spoken


Patience is required when dealing in precious metals, yet there is little evidence of that these days.

G'day. The physical markets have spoken very loudly over the past few weeks, notwithstanding what you "hear on the Street." A lot of metal is bid for down at the $550-560 area and there will be great difficulty getting a London Fix below $560 from what I hear--Central Bank sales or not. Some suggest there will be large sales this quarter to "catch up" on the Washington Agreement sales. I doubt it very much. I have contended for a year or so that physical metal in large volumes will not hit the market due to US Dollar holders rush to "diversify" (read: dump dollars). The buyers are just quietly soaking up real metal at present and this $200 pullback suits them just fine.

There is definitely a floor under the metal, IMO, and we'll be back trading with a 6 big-figure pretty soon, although there has been plenty of paper metal selling on any serious attempts to push higher. That's what happens in paper metal markets because settling only requires paper for most players. The physical market is a lot different--here, you have to front up with the metal, not an agreed amount of paper as a net settlement. A commodity futures contract is enforceable by delivery of physical metal. You wouldn't know it judging by the position sizes and underlying business of the main players! I have said many times that if everyone took their "long paper claims" over gold and silver, there isn't anywhere near enough physical metal to go around. Hmm.

Silver looks like it is ready to head back to teenage territory over the next couple of months. Just my gut feel and I reckon buying silver with a 9 (paper or physical silver) is gonna be seen as one of the "buys of the decade" in 5 years time when the price will be at levels unimaginable to almost everyone in the "paper" silver world. Just my opinion, shared over the last five years with anyone prepared to listen. Most don't. Some of us bought at $4.50-4.75 and are sitting pretty. $9 for silver is nothing when one looks at it on an inflation adjusted historical basis. We know how much US government silver was used up over the last 30-40 years which obviously significantly distorts the prices. Supply/demand fundamentals will always win in the end. It is just a matter of time for the scales to tip. My physical silver is not for sale, even at $15 tomorrow. Silver is a metal par excellence and if a substitute for it could be found economically, it would be in use already. There is no substitute when it comes to silver, just poor imitations for one reason or another. Possessing both industrial and monetary properties, silver is the forgotten metal in the commodity world. There is bugger all physical silver in the world and it runs at a significant demand surplus and has for decades. Most all the mined silver in the world has been used. Gone. Finished. It is in your fridge, computer keyboards, electronics, aircraft, weapons system, photographic paper, medicines and associated diagnostic machines….. the list goes on and on and on and includes stuff you'd never have thought of. It is one very cool Noble Metal!! Interestingly, significant amounts of the "used" silver is unrecoverable due to cost. The gold/silver ratio is at 57ish and should arouse some interest from those who "know." Historically, silver has been set at about 12-16 ounces per ounce of gold. That's fair enough too, as there is only about 11 times the amount of silver in the Earth's crust. Scrap silver is a non-issue, IMO, until the price is way, way higher - like $50 an ounce. We shall be patient, trade opportunistically but be always biased to the long side. Hmmm. Tick, tick, tick.

Metal stocks are pretty wild but opportunities are everywhere, IMO. I threw out a few "hope" bids on given stocks over the last few days, bids I certainly didn't expect to get hit, but hit they were. One can never be too disappointed when buying stocks that you see as 25% undervalued - even with gold at $550. I do not believe we will head south of $510-$490 due to physical buying by big dollar holders. In equities, though, one has to be prepared (and nimble) when looking to pick up some "cheap" juicy shares. It depends on your investment parameters and be mindful that this buying is for a portfolio that has a performance expectation of years, not hours or minutes. Patience is required when dealing in precious metals, yet there is little evidence of that these days. There's over 9,000 hedge funds all hammering away for instant gratification in markets many have never looked at before. Seriously, just back a few years in 2002, there were bugger all people in the commodities markets, globally. Today, everyone's a commodities expert. They all have a "view," mostly something that they just read from whatever screens that morning. Commodities are very different to other markets and some are learning the hard way. Hmmm.

Local News

The Aussie soccer team performed well at the World Cup in Germany. They were far from the most skilled people there but they made up for it in other ways. "A Champion team will always beat a team of Champions" was the motto we played under when we were kids. The Socceroos were eliminated by Italy in heartbreaking circumstances, just 48 hours ago. Luckily for the German Police, it wasn't England or Poland etc. as their fans may have taken the disappointment a little further and probably would've torched Munich!! Our mob just went silent in shock, said "tough luck, hey" and then went looking for beer and the female Brazilian fans. It's only a game, a game we are just learning over here. I thought this summed it up pretty well. It makes some very valid points about soccer/football and life in general. Hmmm.

Even the Poms reckon we were stiffed. That never happens.

Enjoy the day – see you at the Buzz.

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Positions in gold, silver

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