I write a lot of these things at 4AM when I’m up with my son early. Coffee gets me moving!! See my entry from early this morning…
In my “day job” over the years, I do something called “metrics”. I used to do it full time for Electronic Data Systems (EDS) at the Vanguard Group from 1998-2002 where I did all of the measurements for our 90 person IT contract. Metrics, in a sense, are measurements. You track things like “how much did I do?”, “How well did I do it?” – and then you look for patterns in exceptions. We may have met our Service Level Agreement to produce 90% of widgets in specification, but in my review, I noticed that 80% of the defects were caused by one person out of a team of 90. You look at the processes, the people, and the technology and make constant improvements – and you use tools like Kaizen to do so. Today, there’s ITIL and Six Sigma type of stuff. These systems are highly complex ecosystems – and you must be extremely careful to measure apples to apples if you want to take any data and turn it into information.
Lyn Alden mentioned she came from an engineering background – and my guess is she’s talking about the control systems like SCADA systems my teams have worked on for 25 years. I also wrote some software with that stuff back in the day with visual basic so you can get an idea of monitoring systems real time from inputs. I also tinkered with some of that stuff in BASIC on balancing systems. So my background is “systems engineering”, and one of my pretty certifications is “Microsoft Certified Systems Engineer”. This does NOT make me a financial expert – but it does give me an appreciation for monitoring ecosystems and seeing how they interact. I’m also a shitty programmer, so don’t ask me to do any of that anytime soon either.
As I’ve shown before, the financial systems are, in a sense, control systems that as certain things move – it affects others. Some people can anticipate the red flashing light about to happen because they see these dials moving and dancing in certain ways. Perhaps Lyn is a jedi on that stuff, and I’m more an apprentice.
I’m not a bond guy. But I know if rates go up, price goes down. I know how they are, at times, negatively correlated with gold. Other times, they are not. I understand single and multiple regression analysis. But I’m not a statistician. When understanding these systems, you have to have a picture of how this may affect other systems. Or, at times, they may not, given other sets of inputs. Look now how the 10yr is 1.63 and silver is $26.06. A few weeks ago, this was silver’s price when the 10 yr fell off of a cliff and then went to just over 1.00. We are now 1 month later and the 10yr is .5% higher and silver price is the same. This shows you that after the initial hit, the information was digested and the market then decided to discount it. Does the pain stop and silver continue its ruthless assault? We shall see.
Metrics is one aspect of my job as an IT manager, that might now take a few hours a week. At all times, on every decision I make, I need to understand the delicate balance of how a change could affect those numbers. They are quick calculations in my head. Rough estimates. Ballparking. But you have to be really good with this sort of thing because any changes you make, can then alter your entire plan. This is sort of the same with markets – I could not tell HOW MUCH the price of silver might move with the 10yr going up, but the fundamentals told me this would eventually equalize.
In early February, I wrote my piece on Eric Sprott and the Longs taking out the banks. I’m NOT some grizzled veteran in this industry, and never pretended to be. I am like you – the casual investor, who is constantly asking questions and trying to get the best answers. I confided in a new friend in this space that if I had this to do all over again, I would have loved to have been a 22 year old getting a shot working at Casey Research. But I’m not. I’m a 45 year old who LOVES this space and wants to contribute little bits here and there – and it’s usually from collecting a lot of information from a lot of sources, and connecting the apples to apples.
What we HAVE seen in the last month or so….
- Continued thrashing of retailers. Looking at these sites, they are continuously out of product.
- Continued pressure on 1,000 oz bars. To be fair, I heard David Morgan report in some instances this is down to $.30 now premium.
- PSLV adding almost 30m oz in a month
- SLV losing almost 90m oz in a month
- Goldman taking 15m out of SLV and handing it over with March deliveries
- Prospectus changing on SLV and SIVR to reflect all metals might not be there
- Goldman on TV playing defense
- Hit pieces in mainstream media suggesting silversqueeze failed
- 40,000 apes join WallStreetSilver and pledge buying until they drop – and raising $100,000 for a billboard campaign to raise awareness
- March deliveries “drop off of a cliff”
- COMEX warehouses have over 20m oz removed
- Reports that suggest investment silver last year overtook industrial usage
Overall, it appears my hypothesis about HOW this will play out is still sound. I did write in my pieces that there could be delays in this, as the system fights back. I did mention the 10yr. No one saw it rising THAT quickly, but I did write to that part that they cannot let the 10yr go too high or else it will take everything down – and when Yield Curve Control happens, it will be rocket fuel for gold and silver.
“They CANNOT raise interest rates like in 1980 without defaulting on debt. Rates can go up, gradually, but that’s with massive inflation of the currency (and hence tax base) to then raise taxes. So the rates may tick up years down the road, but will not keep up with inflation, even giving us perhaps an “official” negative 4% rate.”
I have written about this in several of my pieces – but what this did was just simply delay the inevitable. I’m sure we’ll have a few more curve balls along the way.
What I’m FEELING is that we are in phase 3 of 4. Let’s recap:
Phase 1 – buy our retail, and get media involved
Phase 2 – buy ETFs like PSLV which will drain 1,000 oz bars and create tightness
Phase 3 – Industry feels supply pressures and increases orders in order to sure up supply.
Phase 4 – Prices rise significantly, forcing shorts to cover.
In that last phase, let me elaborate a bit.
If you look at open interest (OI) you will see it spread across many months. The next closest “delivery” month, May was about 120,000 contracts the last I saw. All of them combined came out to be about 155,000 contracts. Let’s just say 750m ounces.
So of these, you have the commercials at 300-400m short. For round numbers, let’s just say 375m to make it half of all shorts.
As price rises past $30….$32…$34, all of these “shorts” that play the paper games will start to go underwater more and more on hundreds of millions of ounces. To “cover”, they would then have to more or less cash settle – and would do it quickly, to knock down open interest.
My contention is that price is suppressed by the sales of all of these contracts of silver. The “paper silver” is spread everywhere. As this OI is knocked down, it then has the reverse effect, showing less silver is actually for sale. This is how price then rises, quickly from $32 or $34.
Furthermore, you would potentially have those in March, April, or May with futures contracts that WANT to stand for delivery. Maybe not the 400m oz all of us want to see, but even 40-50m oz months are taking their tolls. At mid March, we have seen 48m oz delivered this month in 2 weeks. We still have 5.5m oz to deliver, but it appears no one wants to give up more from their COMEX holdings – which have dropped 20m this month.
I have said in my piece that the second half of March would be where all the fun starts. That day, starts today. And I’m hoping to see some fireworks, and not a dull thud.
Recent reports have a lot of the gold shorts covering. I’m wondering if we now see that rotate into silver IF we are indeed in Phase 3. We could be in the early stages of Phase 3, and this might not be a crisis until May. Or, we could be 3/4th into Phase 3 and a crisis happens this week. I HAVE NO MEANS OF KNOWING THIS. I played options on SLV for end of this month as a lottery ticket which are probably going to zero – so do not use my items as financial advice. I play lottery tickets like this routinely from winnings of other options. If any month these things do go into orbit, I will catch it. If they don’t, I lose all of my lottery money.
I did listen to Steve St. Angelo on Palisades Radio and Tom was asking him about a lot of this and Steve seems to agree with the items in principle with shortages, industrial buying, and hedge funds that can front run. Steve, however, seems to disagree with my camp that a move up will happen sooner, but rather over a broader period of time and probably later. He’s the one who makes the big bucks, so I’d bet on him rather than me. That being said, what I’m seeing is a pressure cooker really getting to a critical point. I think Steve and others see this as soup being brought to a gentle simmer. I’m of the camp that this is Krakatoa in the making. My view is more salacious and could get more clicks. His is more methodical and data-driven with years of experience and research. I think many in his camp are served right to play this down and be more level-headed about it. You don’t want to be seen as the perma-bull screaming from the rafters every month silver is going to the moon. Let morons like me do that.
So – are we making a difference? I believe those 12 items up there have taken the pressure cooker dial into the red portion of pressure. How much more can the system take? I don’t know. The only thing I think they have left in them is a paper bomber to drops gobs more paper contracts to flush the price down to $23-24.
That all being said – my thoughts are we are in the red somewhere, just not a lot of people really know it yet. You hear of “tightness”- but this is also in the wake of everyone understanding inflation is here. With tightness – all it needs is one LARGE player to come in to this to send it to Mars. I’m not talking Elon. I’m talking General Motors having a contract expiring with a refinery and they make a triple order. Then Panasonic. Then Toshiba. Then Toyota. The point is, WHEN this moves, I feel it will be violent. Once one large player enters, it’s is the concept of Hoover Dam through a garden hose with industrials, hedge funds, and common investors getting FOMO. And this won’t stop. This will create the banking crisis of all of these shorts out there. And it will be lightning quick. Maybe all of this over a month to get to $50? I mean, look how quickly these ran up in 1980 and 2011. In today’s age, with Apes on WallStreetSilver and armies of Robinhood traders aimed at YouTube influencers – this tiny market could be overrun like an 18 wheeler hitting a bug on its windshield at 300 mph.
Timing that inflection point is not possible. But I feel that gauge is in the red, or at least just tipping there.
Steve St. Angelo and energy
Steve talks about gold and silver as a store of energy equivalent value – I’m going to slightly disagree with him here. Slightly. I think he’s on to something, but I’m going to suggest different wording. First, I’m going to mostly agree, but perhaps slightly add to his definition.
“It’s the energy that produces these things that gives them value”. – Steve St. Angelo
I see it as a “financial battery”, in which it stores “financial energy”. He discusses how the price of gold and silver are such because it takes a lot more energy to get gold out of the ground than silver. I might not be understanding the full value of what he describes as energy – but I’m trying to make it more concise and define it as financial energy.
Let me explain – he discusses in ancient times how a human used energy to get it out of the ground – that would be measured in newtons of force (apples), if we were using physics. He then discusses the trees knocked down to burn to smelt (pears). Today, he discusses how oil is used to extract these (oranges). Maybe perhaps petroleum products like diesel – to move the equipment and dig.
Where I think he’s missing it slightly is that he’s comparing apples and oranges (and pears), and not apples to apples. Let me find the apples…..one of my certifications is in something called the “PMP”, or certified Project Management Professional. with this, we do a lot of projecting labor, costs, requirements, etc – and this is measured a lot in financial capital to get a project done. You spend money on that project to then possibly produce a good or service with that to then get a return on your investment in that project.
The same is to be said about the mining projects. Look at every mining project – there’s the PEA and the like to get the NPV and from these types of economic measures, we determine if we want to spend financial energy to extract these metals. This financial energy is spent on….labor, equipment, petroleum, planning, etc. The financial energy is the apple.
Let’s look at this over history….
Scenario A – I would pay people money (or a stored value) to dig gold and silver. Today, with how difficult it is to extract, it might cost me $6,800 per ounce for gold to extract using human labor. Over time, we invented machines to make this more efficient. Maybe this gives us -4x on our Return on Investment if gold is $1700 per ounce on the open market.
Scenario B – We BUY those machines and BUY the fuel to run the machines, and we PAY people to operate these machines. This provides us a cost of $850 per ounce for gold, and we can sell it for $1700. This gives us a 2x on ROI.
In the above, we used oil energy (fuel) to complement technology (machines) and human energy (physical labor) operating the equipment. The commonality there is all of these had financial values associated with them.
In scenario C – oil is $600 per barrel, which drive costs for gold extraction up (and prices of all other commodities). What if we buy solar technology, batteries, and robotic AI equipment that runs off of energy from the sun? No human energy is needed? There may be a large upfront cost, but for large mines, this now has a cost to mine of $100 per ounce. Perhaps this gives us a 17x ROI to start? However, this new technology brings the costs down, and makes you more efficient. Industry will need to adapt this technology or be bought out, eventually. Gold becomes harder and hard to find – and under scenario B, it would have cost $4,000 per ounce to dig out, but now with Scenario C, over time, it costs $1,000. Maybe scenario C uses no oil. Maybe it uses little to no human labor except initial programming and light maintenance of equipment?
Point is – extracting gold and silver is financial energy, not energy in terms of petroleum. With today’s technology, petroleum is a driver of this, but perhaps not in future technologies. What goods or services would you trade in order to produce these goods or services? Whether it is human energy, petroleum energy, or solar energy – ALL of them are created with financial energy. I think that’s where he’s missing – a little. In a situation where oil is $300 per barrel and it costs $4,000 to extract gold using oil, the battery and AI technologies using solar energy might then be less expensive and be an efficient way of mining again for $900 per ounce.
One of the benefits of fractional reserve banking is the leverage you can have on tangible financial energy. This allows for easy credit and expansion. The problem is, we went crazy with this and spent well beyond our means for generations. The issue wasn’t the fed, the issue was those spending never stopped spending and the fed was more than eager to lend. Additionally, our government institutions tracking inflation in the system have put in place a system no one believes to be accurate – therefore they tricked the systems for decades (one of the reasons for Krakatoa above is I believe the sensors were all lied to. As this corrects, it’s gonna pop). But I digress….
He talks about human labor and charcoal in ancient times. Today it can be batteries and heating coils of sorts with plasma. No need to use human labor to cut down trees and burn.
The point is, I believe this is STORED FINANCIAL ENERGY in a bar of silver. Not petroleum energy.
This is important to understand during times of inflation, or hyper inflation. We need to continue to focus on the apple.
I go back to the “two dimes” theory I use. I was not alive in 1964, but I read that 2 silver dimes may have bought you a gallon of gas then. Today, those same two silver 1964 dimes buys you a gallon of gas. In 100 years, it should buy you a gallon of gas. No matter what the nominal value is – the GOOD (silver) has the VALUE EQUIVALENT of other goods (the apple constant). These may under/overshoot by a little, but they always find an equilibrium. The same is talked about with one ounce of gold being able to buy a men’s “fine suit” (an apple constant).
I would then say to Steve that efficiencies of production over time always seek out better, faster, cheaper ways of doing things. I would contend in a “green” era, better would consist of….
- less petroleum products
- less deforestation
- more “green” energy usage
- Proper sourcing, perhaps using a blockchain
Now, this might be “better”, but it might not be cheaper….at first. What happens when petroleum is $300 per barrel? It’s possible that the AI “Roomba” mining methods may be better (no petroleum usage), faster (no human labor to get tired), and cheaper (no expensive petroleum, no union labor).
In conclusion, I would thus contend that it is the “FINANCIAL energy that produces these things that gives them value”….
And gold and silver are financial storage batteries. Which can store financial energy forever.
In this respect, digitizing “money” is adding numbers to the total economy, but you have not added additional gold and silver. Therefore, creating more and more of this digital money then increases the nominal value of gold and silver BY DEFINITION. This is the beauty of the FINANCIAL ENERGY BATTERY (the apple constant). It doesn’t care about the nominal value of paper.
Instead of dollars, which confuse everyone, I’m going to call them Roccos, in honor of Steve.
If your entire economy has 1 million Roccos and you have 1 million ounces of silver, you can buy each ounce of silver for one rocco. In a sense.
If your entire economy has 10 million roccos, and you still have 1 million ounces of silver, you now would have to spend 10 roccos to get one ounce of silver.
The ounces of silver didn’t increase, only the roccos.
Therefore, if you started mining silver when silver was equal to 1 rocco, the silver would continue to store the financial equivalent energy AT THAT TIME. No matter how many Roccos were created, at the time of its creation, it had the equivalent value of 1/1,000,000th of the economy. Or, rather, the market cap of the economy could go up in nominal value, but the constant doesn’t change in the items you created with Roccos.
Just because you print more Roccos does not increase the value of the silver. It decreases the value of the Roccos. Meaning, it takes more Roccos to get the same silver. But silver still has the same value equivalent to a gallon of gas and gold to a fine suit.
In a sense, your commodities were all made with Roccos, and these increasing in value is simply a sign of the decreased value of the Roccos, not the increased value of the good or service. Those do not change – this is the apple constant. Those are financial energy stores. Now, some batteries have life drained out of them over time. In this respect, beef has a shelf life, so does soy, so does corn, wheat, etc – but the metals – they have an almost infinite battery storage.
And this is why they have been money for 6,000 years. It is a permanent store of financial energy.
One little dig at the alt coins/bitcoin….
For these same reasons, you could suggest bitcoin is a financial store like gold. However, I’m also a student of technology. What many people don’t understand is that at some point in time, when quantum computing comes along, the mining of bitcoin will be like clicking a button to add more and those that have quantum computing may be able to corner the market in literally minutes. And, there’s a lot of worry that quantum computing can crack the most sophisticated of encryption in millionths of a second – so if a Russian gang gets ahold of this technology, they may steal your bitcoin before you get out of bed tomorrow. And you will never know it. Even if they do find who did it, the idea is then technology would be around to steal this at will. And trust in it disappears overnight. Therefore – due to what future technology I do NOT know about, I would put bitcoin in the “beef” commodity section in that while it does take financial energy to create it, I would contend that it has a shelf life similar to beef. Whether it is advanced processing that mines bitcoin in seconds, a newer crypto that supplants bitcoin, a technology that can steal your bitcoin, or a national crypto currency that outlaws your crypto – all of them have a shelf life.
There’s also Moore’s Law, which might be coming to an end soon. Michio Kaku discussed this about 15 years ago and mentioned that he thought in the 2020s this would run into issues. The problem you run into with Moore’s Law is heat and a limit with miniaturization. We continuously make things smaller and smaller to increase processing power, but this will at some point in time level out. Meaning – that at some point we may mature with processing power and “mining” crypto may take longer, and longer, and longer. In a sense, the monetary supply won’t increase while population does. With increasing populations and energy needs, this is deflationary. Then, consider how many people HODL. So – mining coins with processors is a cool trick, but it may also have a shelf life of 5-10 years out. And the ultimate problem then with bitcoin is the inherent value is zero, as it is a fiat and not backed by anything but hope and prayers of the users. If you have 100 bitcoin, but you put them up for sale and no one buys because they all went to the new coin, your bitcoin is worth zero.
If you want to speculate in bitcoin, cool! Maybe you make a fortune. Maybe I’m wrong and it’s around 1,000 years from now. But just know that you are trading in soy or beef, and this particular commodity you are trading in, has a shelf life. Gold and silver have 5,000 years of a track record and are the grand daddies of money. The idea is as long as you understand that you need to get out, someday, you will be fine. If you wait too long, the value will drop off of a cliff to zero. Meaning, you need to consume it at some point. Gold and silver you can pass down for generations as a proven financial store of wealth. Bitcoin may not work or be illegal next week. That is a big, big difference that any holder of crypto AT LEAST MUST CONSIDER IN THEIR RISK ASSESSMENT. If I’m 22, I would have bought bitcoin a year ago at $4,000. If I’m 80, I’m nowhere near that shit. Risk – understanding the right things for you, at the right time. Higher levels of risk can have much higher payouts, but also go to zero. The problem is, holders of crypto appear to be blind to the absolute insane amounts of risk with this. If they understood that it was a commodity like beef and not gold, they may also have a better sense of how to consume it or transfer their profits into a longer term store of wealth – like gold.