The Precious Metal Investors Greatest Secret Weapon

As the FED turns up the heat in the central bank frying pan, the frogs (public) don’t realize they are being cooked to death by inflation.  I am quite amazed how loud the sizzling sound has become, but for some odd reason hardly anyone notices it.

Unfortunately, we are well past the point of no return.  It’s only a matter of time now before the whole “Financial Cliff” falls off the mountain side.  Until then, gold and silver investors will have to put up with some of the worst analysis ever to come out of government and MSM.

You see this is quite amazing when we consider that just a few generations ago, gold and silver were the two most important monetary metals used in the economy.  Gold’s strategic role was shown when Roosevelt confiscated the precious metal in 1933 and revalued it to supposedly save the economy.

However, any mention of the subject of gold today to any of the members at the Fed or U.S. Treasury during a public hearing, and you will hear a subtle laugh or snicker as they explain it’s just a traditional piece of metal taking up space in central bank vaults.  Of course, down deep they believe the opposite, but when their job is cooking frogs for a living, the less the public knows… the better.

ENERGY:  The Precious Metal Ally & Secret Weapon

While the Fed has been spending a great deal of time printing money, buying Treasuries and talking out of both sides of its mouth to keep the public’s faith placed firmly into the disintegrating fiat monetary system, the fundamental values of gold and silver just keep on baking in the oven.

Sure, both the paper price of gold and silver have tanked recently, but this is a temporary situation.  The one fundamental force that the FED cannot manipulate in the future, is the “Store of Value” that is locked into each ounce of gold and silver.

Another way of calling the value stored in precious metals is its “Economic Energy”, coined by Mike Maloney which he describes in his video, “Hidden Secrets of Money: Money vs Currency.”  I highly recommend the video because it simplifies the whole complex matter of money vs. fiat currency.

Furthermore, the video points out that we mistakenly label the Dollar as money, when in fact it should be correctly called as just a currency.  Gold and silver are money because they function as a currency and as a store of value.  A Federal Reserve Note does not have a store of value, unless you want to attribute a few cents to the high cost of its printing.

There is a reason why the rest of the world is buying gold hand-over-fist as the paper price continues to fall.   Gold contains a certain amount of this “Economic Energy”, which I label as “Trade-Able Energy Value” that is based upon the energy that runs the overall economy.

Gold & Silver vs A Barrel of Oil

One way to understand this “Economic Energy” value is to see how the value of gold and silver relate to a barrel of oil.  Most economists today, make future forecasts based on superficial data and information.  For some strange reason, the energy equation seems to be missing from this analysis.

Many of these government economists believe all we have to do to “Increase Jobs” is to stimulate the economy.  Do any of these economists ever consider whether or not there will be a growing energy supply in the future to support these increased jobs?  Of course not.  This is the biggest problem with status quo economists — making forecasts without including all the tangential factors.

It seems as if the Ivy League Business Professors view the macro economy in the same way as an individual in the big city believes food comes from the refrigerator.  The business schools focus on finance and monetary policy is incorrect… because,

ENERGY IS THE DRIVER OF THE ECONOMY, not finance

Finance is supposed to steer the economy on a healthy path, but due to the fact that this power is in the hands of the corrupt Central Bank Fiat Monetary Authorities, we are heading towards a chain reaction collision.

If we look at the chart below, we can see how the price of silver stacked up against oil and the Dow Jones Average at the time.  In 1928, a barrel of oil cost $1.17 while silver was $0.58.  As the brunt of the depression hit the U.S. economy in 1932, the price of oil declined to $0.87 and silver fell more than half to $0.25.

Dow Jones 1929-1935

As conditions in the economy started to recover (supposedly), we can see both the price of silver and oil increased in 1936.  This next chart takes the ratio of the price of silver compared to a barrel of oil during these same years.

Price of Oil vs Silver 1928-1937

In 1928, an ounce of silver (not its denominated coin value), was worth 50% compared to the price of a barrel of oil.  By 1932 this declined to 29% and then rose back up to 41% by 1936.  Keep in mind these ratios, as we will compare these to the present ratios a little later in the article.

What took place during this time was the typical textbook definition of deflation — a decline in the money supply.  As economic activity decreased so did the money supply as well as the value of silver, oil and commodities.

Furthermore, in the first chart you will notice that as the Dow Jones average declined from 250 points in 1928 to 50 in 1932, the price of oil and silver declined along with it.  Also, as the Dow Jones average rose up to 130 points in 1936, both the price of oil and silver increased as well.

Again, what occurred during the 1930’s depression was typical of a deflationary outcome in an economy that was based on sound money.  Unfortunately, today, we have a much different animal.

This chart below shows how a fiat monetary system, controlled by central banks can totally distort values of the physical economy.

Dow Jones 2013 Divergence

This chart compares the present Dow Jones average to the GLD, SLV and USO (oil ETF).  The SLV is shown in RED, the GLD is in GREEN, and the USO oil ETF is in BROWN.  After the QE3 announcement by the FED in Sept 2012, you will notice how all the indices increased with silver and gold outperforming both the Dow and the USO.

However, something changed at the beginning of Dec, 2012.  You will notice that the SLV and the GLD peaked and have continued to decline as of the date of this chart, July 9th.  In contrast, the Dow Jones average is much higher by gaining 2,400 points or 19% in the same time period.

The huge divergence especially takes place after the April 12th take-down of both gold and silver.  Here we can see that the USO, which was paralleling gold and silver’s move lower, abruptly disconnected and headed 15% higher since April 12th.  On the other hand, the SLV was knocked down 30% and the GLD 22%.

Now, getting back to the silver-oil ratio, this next chart shows how much the buying power of silver in regards to oil has changed presently.

Price of Oil vs Silver 2004-2013

In 2004, the average price of silver was $6.67 which was 17% compared to the price of a barrel of oil ($38.26).  As the world’s economies fell into a severe recession, the average price of oil declined from nearly $100 a barrel in 2008 to $61.74 in 2009.

However, the price of silver declined much less in percentage terms from $14.99 in 2008 to $14.67 in 2009.  Thus, the silver to oil ratio actually increased to 24% where it remains presently in 2013.

If we compare the prices of silver and oil from the 193o’s to today, we have the following:

SILVER-OIL RATIO

1936 = 2.4 oz of silver to purchase a barrel of oil

2013 = 4.1 oz of silver to purchase a barrel of oil

For the price of silver today to equal the same ratio to oil as it was in 1936, an ounce of silver would be worth $44.09.   However, that price will turn out to be very conservative in the future when we factor in the huge amount of industrial demand as well as the smaller above ground available stocks today compared to gold.   Now, if we do the same with gold, this would be the result:

GOLD-OIL RATIO  (Gold at $20.67 in 1932 & $35 in 1936)

1932 = 24 barrels of oil would equal an oz of gold

1936 = 32 barrels of oil would equal an oz of gold

2013 = 14 barrels of oil would equal an oz of gold

Here we can see that an ounce of gold could purchase 10 more barrels of oil in 1932 (before the revaluation in 1934 to $35) than it does today.  If gold had the same buying power in regards to oil in 1932 as it does today, the price of gold would be $2,576.  To get the 2013 ratios for gold and silver, I used the current average 2013 price per Kitco (silver was $26.29 and gold was $1,503)

Gold & Silver are Regaining their Monetary Status

Now, these last two charts will show evidence that gold and silver are in the process of regaining their monetary status.  From the information provided from the charts and figures above, gold and silver could purchase a great deal more oil in the 1930’s than today.  Here again are the gold and silver ratios for quick reference:

1936 = 2.4 oz of silver to purchase a barrel of oil

1932 = 24 barrels of oil would equal an oz of gold

(Note:  I selected 1936 for the silver ratio as it was a more normal ratio after the lows  reached during the depression, and 1932 for gold because it was before its revaluation in 1934)

In the first chart we can see how the price of silver and oil are rising together, but if we look at the ratio shown in the red bars, it has been trending lower.

Silver vs Oil Price & Ratio 2000-2013

In 2000, it took 5.8 ounces of silver to purchase a barrel of oil, but by 2012, this had fallen to 3.6 ounces.  In 2013, after the 40% take-down in the price of silver while the value of oil increased, it now takes 4.1 oz of silver to buy a barrel of Brent crude.

The same thing is also taking place with the value of gold.  In the chart below, gold is also rising along with oil, however its gold-oil ratio is increasing in value.  The higher the ratio, the more barrels of oil can be purchased with an ounce of gold.

Gold vs Oil Price & Ratio 2000-2013

The ratio of gold to oil increased from 9.7 in 2000 to 15 in 2012.  Thus, a person holding an ounce of gold in 2012, could buy more than 5 barrels of oil than he could with the same ounce in 2000.  Furthermore, if the price of gold wasn’t taken down severely in 2013 (as was silver), its present ratio to oil would been nearly 15 to 1.

Even though the precious metals oil purchasing power was greater in the 1930’s we are seeing that the average trend is moving higher.  I believe what we are witnessing here is the remonetization of both gold and silver shown by their ratio to oil.

The Fed Can Print Money, But not Barrels of Oil, Gold or Silver

While it’s true that markets can be manipulated for a while, ultimately the fundamentals win out in the end.  As I mentioned in the beginning of the article, most economists have no idea how energy impacts the markets.  Oil is by far one of the most important energy sources and without it the world’s economies would grind to a halt.

The world is presently experiencing a plateau of global oil production and it looks as if the downside of the inevitable slope of depletion is not too far at hand.  This is a serious problem when we consider that the majority of investments in the world are actually HUGE PAPER DEBTS (energy IOU’s) that are masqueraded as assets.

Yes, I do realize many analysts (even those from the Austrian School) believe the U.S. and world has trillions of barrels of unconventional energy resources that we can easily tap into.  Unfortunately, these analysts do no understand the concept of the falling EROI – Energy Returned on Invested, and its impact on these low quality energy sources.

Furthermore, the U.S. Shale Industry has been a total “Commercial Failure” as the top shale energy companies are spending 2-4 times their cash flow on CAPEX just to keep the illusion of sustainable growth.  I am completely amazed how analysts think shale oil & gas wells that suffer 40-50% annual decline rates are going to be the key to solving our energy problems.

I keep reminding readers, that in order for an individual’s 401k, retirement plan, pension plan, annuity, long-term bonds or etc to be satisfied or repaid in the future, energy has to be burned to create profitable economic activity.  Furthermore, this has to predicated upon a growing energy supply, or global GDP will decline and the whole paper house of cards comes tumbling down.

Unfortunately, we will not have a growing energy supply for much longer, which means the days of the Fiat Dollar are numbered.  This is precisely why the present FED policy of printing money, buying bonds and other assorted pieces of paper garbage will not work for much longer.

The FED is not only pushing on a silly string, it’s also coming up against the GREAT ENERGY WALL.  Energy is the precious metal investors greatest secret weapon because the Fed’s fiat monetary powers become increasingly worthless in a peak energy environment.

Without trying to sound like a broken record, energy is the key to understanding the true fundamental values of gold and silver.  All I can say to the people of the world who are still holding onto upwards of a $100 Trillion in paper assets, time is running out to make the switch into physical assets such as gold and silver.

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22 Comments on "The Precious Metal Investors Greatest Secret Weapon"

  1. Hi Steve

    The other day you mentioned that one barrel of oil is equivalent to 18-20,000 hours of labour. That statistic surprised me so I asked a friend of mine, who likes numbers, to comment. Below is his response and I thought you might be interested.

    Keep up the supply of solid information.

    Thanks, Norm

    “That’s about right.

    1 barrel of oil = 6.3 billion joules (average; difference between light & heavy)

    hours of human labour in a barrel of oil
    a person generating 100 watts / hour (comparable to seriously pedalling a bike)
    working a normal 8-hour day, working the full 8 hours

    barrel oil = 7.6 years of such work (250-day work year, allowing for holidays, weekends)

    that would be about 15,000 hours of work .. hard peddling a bike for 8 hours / day
    but most people couldn’t do that .. so yes, 18,000-20,000 hours is about right to allow for some rest periods.

    Consider slave labour, which would be about twice that amount of work in a year:
    filling up a vehicle with 21 gallons of gas = ~ 2 slaves for a year
    filling up every week = 100 slaves full time = (200 regular day workers)

    1 rocket launch = 1 trillion joules = 159 barrels of oil
    = 635 slaves for a year = ~1200 day workers for 1 year.

    1 pyramid = (10k workers x 20 years) = ~ 32k barrels of oil
    a typical city (Toronto) 400k vehicles ~ 100k fill up / week = 100 pyramids / year.
    Canada 20 million vehicles .. ~ 5 million filling up each week = 5k pyramids / yr
    World oil consumption 30 billion barrels / year = 1 million pyramids / year

    Total energy consumption is about twice that .. so
    Our civilization is burning enough energy each year to build 2-million pyramids each year!”

    • Norm… thanks for the reply and I appreciate the additional data and information from your friend. It is truly amazing how much work a barrel of oil does for $110. At a decent skilled labor wage of say $25 an hour, the price of one barrel is good for 4 1/2 hours work…LOL.

      It will be interesting going forward to see how the declining oil supply will impact the overall economy. I really think the majority of analysts are simply clueless as to what is coming.

      steve

      • Good article, but I have problems…
        With totally manipulated prices, how can one compare or find the info useful. We might as well be comparing jelly beans in a jar.
        Dirty oil will one day run out, but if the world isn’t destroyed by radiation or psychotic bankers, humans will find other power sources, free energy, etc.
        I strongly believe in gold being the delivery vehicle of wealth from this paradigm to the next, but one shouldn’t naively expect to trade metal coins when RFID, face recognition, retina scanners, etc are becoming more prevalent.
        Let’s just hope PM’s can be ‘cashed in’ for something legit when the time comes…

        • Modern Alchemy | July 26, 2013 at 9:12 am | Reply

          This last comment had me thinking… Lets say everyone had an RFID chip, just how much silver would that take?
          from http://www.silver-investor.com/blog/silver-market-update/silver-in-the-next-decade/
          “Our preliminary research into this area produced some rather startling results. The minimum use of silver for an RFID is 1/100 of a gram of silver. However, our sources indicate about 100 billion RFIDs will be produced on an annual basis. This would produce a consumption rate of over 30 million ounces of silver annually, and most of this silver would end up in the waste dumps as silver from RFIDs can’t be recycled”
          CAN’T BE RECYCLED!
          🙂 That only makes the amount of silver left to invest in smaller. What is it they say about supply and demand?
          And so, even in your scenario, there would be purchasers of those silver coins for their use in industry. If we are all chipped, they will be willing to put a little extra currency on your chip for the supply of silver to make more chips. (or one of the other countless industrial applications)

  2. Steve

    Another great article. There are analysts that state miners will continue even with prices below production costs. I can see this for a short time as certain accounting issues are not based on current cash needs such as depreciation and amortization. Also, tax refunds from losing operations can also be used to continue mining. However, as you point out, the cost and availability of fuel needed to fund these mining activities does require cash. Wages, insurance, fuel are just some of the cash outlays faced by the miners with every ounce produced. Also, each mine has a finite number of ounces so the decision must be made to either leave metal in the ground waiting for a fair price OR mine every ounce you can below costs to keep the mine open and, of course depleting future revenues as the ounces mined today are sold for fiat dollars. I guess the miners will until they go broke.

    • Tas….. when these analysts say that the miners can produce silver below their “production costs”, they mean below their total costs. This includes depreciation, depletion & amortization. Cash costs exclude D,D & A as well as other items. While many can produce silver below their production costs, most cannot produce silver at their cash costs for long.

      If the price of silver remains this low, or declines below $18, it will put severe pressure on the high cost silver miners. It is a shame that the actions of the FED & Central Banks have really destroyed the real wealth producers… the gold and silver miners.

      steve

  3. Great Article. What you say is so accurate. What I cannot believe is how can Indian Government Impose so many taxes on import and sale of Gold and blame current account deficit, when the Finance Minister and the Prime Minister of India are both economist (I think so). Being an Indian I am pure gold lover but have lately shifted my focus on Silver and have started increasing my inventory for the same.
    Keep the poor poor and get the rich richer seems to be the mantra in the long run.

    • Aditya… thanks for the reply. It is very interesting that the Indian Prime Minister & Finance Minister are concerned with the account deficit. At least their citizens are exchanging paper for gold and silver which will be worth a great deal more in the future.

      I wouldn’t be surprised that the Western Central Banks made sure the Indian Heads made those changes due to the fact that we were seeing a RUN on the GLOBAL GOLD BANK.

      steve

  4. tonight, shanghai silver futures volume is insanely big, 2 and half hours, 10000 tons, 60000 comex equivalent volume has changed hands.

    yesterday, night and day session totaled 20000 tons, 120000 comex equivalent.

    this is much bigger than comex volume.

    but in the case of physical silver, shanghai has still much less silver than new york.

    china’s per capita silver ownership is a tiny fraction of US’. china used to be a silver empire, but its people have totally forgotten about what silver is.

  5. First rate article, Steve.

    I used to use inflation adjustments to the price to show “dollar shrink”, but other commodities work just as well…

    My only fear is that the efforts of empire (preserve the USD tyranny) will become so extreme that the market institutions may guarantee a total collapse…Loss of confidence danger is not CONfined just to government vs. citizen…Institutional damage beyond government extends to the market institutions as well…And this is just what I see embodied in the scandals of Wall Street.
    FWIW,
    G.

    • Galearis… I couldn’t agree more with what you said. There’s a lot of problems coming down the pike and the number one is ENERGY CONSTRAINTS.

      Funny, the United States showed positive GDP figures for 2011 and 2012, even though our oil consumption declined those two years. Nothing like a little “Accounting Magic” to make it look like we are still growing, when indeed we are not…LOL

      steve

  6. Good stuff as always. I love the new conceptual angles that you bring to readers in your articles.

  7. Spot on Steve! The thought crossed my mind that the fed can print currency, but they cannot print money. What I mean by that is the fed printing dollars is not increasing the wealth of the nation as the dollars have no intrinsic value. Therefore, excessive money printing above the expansion of the economy is a wealth transfer program, transfering wealth from those that hold dollars and dollar denominated assets to those that hold tangibles like precious metals, equipment, comodities of all sorts, etc.

    Quite possibly one of the distortions or noise in the anticipated response is contraction of debt issued by banks. with fractional reserve banking increasing debt allows the banks to “create money” but when contraction of debt is occurring, so is the money that debt created.

    • Dave… excellent points. The one thing I might change is, I don’t believe banks create MONEY…. they CREATE DEBT or CREDIT. We can interchange either one. We must remember, the global oil supply has been growing about 1.5-2 % per year. This would also be about the same rate of increase of the world’s gold supply if we average it out over a long period.

      This is the REAL MONEY CREATION. … about 2% tops per year. The whole system has been corrupted from the TOP DOWN, and we have no idea anymore of what is real and what is not.

      Derivatives have destroyed the ability to find the true market value of goods, commodities or services.

      Meanwhile, the Global Oil Production rate has been flat for nearly 6-7 years (with a little bit of an increase the past year due to shale oil in the U.S.). Some countries like China are still growing because they are still showing an annual increase in oil consumption. However, many countries are still showing decreases in oil consumption each year even though they state a positive GDP.

      As I mentioned in a comment above, this is due to ACCOUNTING MAGIC.

      steve

  8. Have been reading your articles for some time over at Silver Doctors and am impressed by your tenacity in tackling the primary driver of how our societies function. Personally I have harped on about this since the late 90’s and through the work of Colin Campbell, Kjell Aleklett, Ken Deffeyes, Matthew Simmons, Michael Klare and Richard Heinberg have attempted to elicit awareness to friends, family and colleagues concerning our impending energetic scarcity and ultimate collapse.

    Most, however, are far too caught up in work, and various entertainment or vice based distractions. And plainly enough really just don’t care. There is no so called immediate crisis impact on them, not yet anyway, thus big picture and mature assessment of reality and pattern observation is of little interest. Both intellectual and emotional laziness stunts a great majority of the population inclusive of greed, vanity and self-serving motivations.
    Reality as you foment in your site is an unwanted and distasteful pill to swallow. It would require work, sacrifice, discipline and due diligence. Not virtues held in high esteem in our society. I’m a Canadian and North Americans are just North Americans. Virtually energy and fresh water are everything. These are two resources that we as humans and our progeny cannot do without.
    And yes I fully agree Gold and Silver are true stores of value, but I even think on a more personal and community based level as they are modicums of exchange that you work for and can earn your share undiluted or owned/manipulated by another party.
    And despite all the money printing in the world that will take place, gold and silver will in most probability be chosen by the citizenry of the world due to an obvious breakdown of centralized government as we accelerate down the other side of the oil peak. Oil depletion will virtually be the end of centralization and fiat paper currency since there will not be the societal, social and energetic order to maintain such a system.
    Anyway, thanks for your time and effort in your site, and I look forward to the broad scope of big picture thinking you offer here and the articles you produce.

  9. Another “open your eyes” article Steve! Thank you.

    One human frailty, is to not notice what is openly and plainly visible to all. Because oil based energy has been with us humans for over 100 years now, enough generations have passed that all thought of how it used to be before the advent of oil, is lost to the mists of time. A rude re-awakening coming!

    We have had very hot weather recently and I purchased a one liter bottle of AquaFina water for $1.69 including deposit. Just doing some basic math; 1 US Barrel = 119.24 liters, which means a barrel of water costs $1.69 x 119.24 = $201.52 and how much is a barrel of oil going for today?

    Which is over priced and which is under priced? Food for thought.

  10. The same spec or Slinger crowd that has liquidated and shorted gold and silver is heavily long oil, at almost a record level. It is in effect a super-crowded paired trade that will come undone. Therefore I expect gold to surge higher and oil to drop. And guess who benefits the most from that trend? Answer: MINERS AND JUNIORS. Their number one input cost is FUEL, they will be turbocharged. Therefore the huge gains will be made in advanced stage deposits and miners, especially emerging miners like ANV, BRD, TGZ, Detour, Osisko.

    Hedge Funds and Investment Funds Manipulate Oil Prices:

    http://winteractionables.com/?p=4534

  11. ENERGY

    [ . . . whose simple quiddity has been eluding me for years …

    (even though, clearly, All Work = Energy
    and, asamattafact, All Matter IS Energy
    stored, in-whatever-form, from particles
    to planets, and however strenuous
    the xertion and effort to free = work.
    yet …

    pay me. money.
    to move = value

    Values

    which there’s alotta talk about …
    paid for: as there is also alotta talk about
    how Money-moves-Mountains: every muscle
    and each machine @_?_ hr being … what:
    a WorkingWage …

    {paycheck?salary; 0, remuneration.compensation
    and paid accordingly; MetaMinds, telekinetic,
    finding themselves even+Bonused+for what they
    love or someone loves done; monetized}

    Motivation.

    … back to The Mines, rocco
    stone. back to the boulder.
    moveit)

    … ok. gotit. again. almost. at least as close as ever a mind like mine might come, to grips,
    with such concepts as necessity, like moolah, being the 1bad mutha
    fadda of all Intentionality . . . consciousness . . . the very ignition of whose self-awareness
    these past coupla centuries seems equaled but perhaps only best reified by that mathematics if
    not just physics which’s in modern thought yet in fact and indeed real: it’s The Economy. stoopit.

    gotit. and won’t forgetit, again, as long as this first xample of your fine site continues to elucidate that which, as said, otherwise eludes . . . and/or fades, in&out, of its own accord. shadow. as if, well, almost, kinda like . . . ghostly* . . . the sense of, apparition. ghost. who knows. even for mostly being maybe just algos in the HFTmachine which’s switched somehow from the mere fiscal2metaphysical, dialectical, kinda, spiritually. materialism. yeh, like their Hegelian sorta
    spirit-of-history zietgeist typa thing, inspiring, everybody. everything, even if only as just a long drawnout prolegomenon towards what’s otherwise simply Econ

    E = E
    Everything is Everything
    gotit.
    E E
    can’t forgetit]

    Energy = Economy

    and as for POWER . . .

    * ‘go ahead and kick that rock, sam johnson. break your bones
    . . . but cloudy, cloudy is the stuff of stones’
    -wilburrrr rrrr
    1hp

  12. I stopped at a local food chain this evening. I wanted to buy a dozen chicken wings. Typically those wings sold for ten bucks a dozen. Today they cost ten bucks for eight wings. All I said was…It ain’t going to happen today buddy. As a matter of fact, it’s never going to happen. I will starve before I pay that much for a bunch of bones. We still have some leverage, and I plan to use it.

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