THE REAL REASON TO INVEST IN SILVER… It’s The Fundamentals

The best reason to own silver is based upon underlying market fundamentals.  However, most of the markets today aren’t being valued by fundamentals, but rather on Fed and Central Bank interventions.  This has destroyed the ability for investors and markets to properly value most assets.

I, as well as many precious metals analysts have received some ridicule for getting it wrong on the price movements of gold and silver since 2012.  Of course, no one was complaining when the silver price moved up from an average $6.67 in 2004 to $35.12 in 2011.

Sure, we precious metals analysts deserve some criticism for not foreseeing how much monetary printing the Fed and Central Banks would do as well as the massive corruption and deceit conducted by the top banks in the world.  For example the recent announcement that Deutsche Bank Confirms Silver Market Manipulation In Legal Settlement, Agrees To Expose Other Banks.  And… this is just what we know about.  How about the stuff we don’t know about?

NOTE:  If you haven’t checked out our new PRECIOUS METALS INVESTING PAGE, please do.

People need to realize the financial markets and global economies are in serious trouble.  When I took a drive to a major city this weekend, I noticed that Nissan is financing cars for 0% for 84 months.  I imagine there are plenty of other auto dealers doing the same thing.

When I was a youngster, the normal financing for vehicles was for 24-48 months.  Anyone financing a car or truck for 60 months was a real REAL LOSER.  Today, you are a LOSER if you ask the car salesmen for a 24 month plan.  The last new vehicle I purchased, I put down 60% of the settled price and financed the remainder for 24 months.  I gather I was a LOSER back then too because they said that sort of payment plan was rare (most put very little down and finance it as long as they could)… and this was only a little more than ten years ago.

I don’t buy new cars anymore.  I drive an old beat-up Ford ranger.  Oh sure, I could go buy a brand new car for cash, but why??  I’d rather own physical precious metals and drive a beat-up old car.

Anyhow, my point is this…. the majority of Americans are living a very highly leveraged pay-for-it-later-&-later lifestyle that isn’t sustainable.  The U.S. economy has been propped by one bubble after another for the past 3+ decades.  However, the present bubble since 2008 is much worse.  It’s a bubble being propped up by extreme leverage by getting Americans to buy things they can’t afford for nothing down with longer and longer payment plans.  This has DISASTER written all over it.

So, it’s extremely hard today to forecast what the market will do based on fundamentals when most Americans have thrown sound financial planning out the window.  That being said, we can look at some underlying fundamentals that offer the precious metals investor some important clues.

World Silver Bar & Coin Demand Explodes Since 2008

One of the fundamentals that tells us something just isn’t right in the financial markets is the explosion of Silver Bar & Coin demand since 2008.  As we all remember, 2008 was the year the engine stopped and the wheels came off the economy.  This was due to the mortgage-backed housing bubble that allowed many Americans to buy houses they couldn’t afford.  Furthermore, if Americans weren’t buying homes they couldn’t afford they were using their homes as an ATM machine.  Basically, they were extracting the supposed equity from their home to buy more garbage they didn’t need.

So, to keep the U.S. and world economy from imploding and entering into a new Great Depression, the Fed and Central Banks starting the digital printing presses and pushed Trillions of Dollars (liquidity) into the system.  This had a profound impact on the value of most assets… such as silver.  The price of silver jumped from $13 in 2007 to a high of $49 in 2011.

Savvy investors realizing the Central Banks were insane, starting to purchase record amounts of physical silver.  If we look at the chart below, we can see the difference between the two periods:

World-Physical-Silver-Bar-&-Coin-Demand-2000-2015

From 2000 to 2007, total world Silver Bar & Coin demand was an estimated 375 million oz (Moz).  However, from 2008 to 2015 it nearly quadrupled to 1,422 Moz or 1.42 billion oz.  The World Silver Survey only provided Silver Bar & Coin demand since 2004.  So, I had to estimate the figures for 2000-2003 as they only provide Official Coin sales.

Regardless, this is one of the fundamentals that gets better every year…… just like a gift that KEEPS ON GIVING.  Even though the price of silver has declined from a high of $49 in April 2011 to $17 currently, demand for physical Silver Bar & Coin continues to be in record territory.  For example, Silver Eagle sales will likely reach 19 Moz by the end of April compared to only 15.9 Moz during the same period last year.

That being said, many investors are more concerned about the short-term silver price movement than its long-term fundamentals.  We can see this from the conflicting analysis:

Silver Commitments of Traders – Halloween is Arriving Early This Year

The Chances of a Comex Default…..

Silver Bulls Should Beware Metal’s Spreading Tarnish

Silver Price Forecast: Silver Rally Will Bring Bond Market Collapse

Silver’s On Fire

…. and so on and so forth.

In one article, Dan Norcini is stating that the record Commercial shorts on silver will be like a Halloween Horror show.  Then we have Bill Holter discussing the reasons for a Comex Silver Default.   In another silver article it explains the metal may “Tarnish” due to more base metal supply coming on the market which supplies more by-product silver destroying the annual deficits.  One of the remaining articles explains why the coming surge in the silver price will cause a bond market collapse.

Of course, someone could add my past articles on silver to that list.  However, I like to focus on how the fundamentals will impact the value of silver over the mid-long run.  My analysis on the future value of silver is based on energy.  This is much different from the forecasts by most of the precious metals analysts.

U.S. Economy In Serious Trouble As Domestic Oil Supply Declines

U.S. domestic oil production from the top four Shale Oil fields is forecasted to decline to 4.6 million barrels per day (mbd) in May 2016.  This is down nearly 700,000 barrels per day from its peak of 5.3 mbd in April 2015:

Top-U.S.-Shale-Oil-Fields-Production-APR-2016

Some analysts believe the decline in U.S. Shale Oil production is due to the lower price.  This is only partially true.  Several oil analysts that I follow were forecasting a peak in Bakken and Eagle Ford shale oil production by 2016 even with high oil prices.  This is due to the limited number of sweet spots available to be drilled in the fields.  Once these are exploited, then the companies have to move outside to the less productive areas.

One analysts that provides sobering estimates for the Bakken and Eagle Ford shale oil production is Tad Patzek.  Mr Patzek wrote an article on his blog titled, Is U.S. Shale Oil Production Peaking? Part II: Oil Production.  In the article he published the following charts:

Eagle-Ford-Tad-Patzek

Bakken-Tad-Patzek

Tad has received criticism from some official sources because his forecasts are not as positive or ROSY as theirs.  Tad Patzek is Professor of Petroleum and Chemical Engineering, currently teaching at the Earth Sciences Division and Director of the Upstream Petroleum Engineering Center in KAUST, Saudi Arabia.  Before that (2008-2014) he was the Leadership Professor and Chairman ofPetroleum and Geosystems Engineering Department at The University of Texas at Austin.

In the second article on Peak U.S. Shale Gas Production, here was the criticism by an EIA, U.S. Energy Information Agency official:

Here is the letter signed by Mr. Howard Gruenspecht, Deputy Administrator of the U.S. Energy Information Administration.  In that letter I was called a relatively minor player in the definitive UT BEG Shale Study and, much worse, President of ASPO, the Association for the Study of Peak Oil.

Never mind that the BEG study used this model of shale gas production in all of their calculations.  Our model was published in the Proceedings of the U.S. National Academy of Sciences (NAS) and was awarded by NAS the 2013 Cozzarelli Prize for best paper in engineering.  And never mind that in early 2011, I made an accurate prediction of gas production from the Barnett shale, based on the model originally proposed by Dr. M. King Hubbert, who was the original pre-ASPO researcher.  Of course, early on, in 1956, Hubbert was called a lunatic and idiot. But I wrote on this subject many times, see here and here and several other posts, and do not want to repeat myself.

As we can see from the quote above, Tad Patzek’s work speaks for itself.  If Tad’s forecasts of the Bakken and Eagle Ford are correct, shale oil production from these two fields will be down 80+% by 2020…. that’s only four years away.

If U.S. oil production declines in a big way by 2020 and then is down 70-80% by 2025, Americans are going to be in a world of hurt.  I highly doubt we will be able to trade U.S. Dollars for oil at this time.

This is the most important fundamental reason to own physical silver.  I believe the value of most paper assets will implode over the next several years.  Sure, we could see a hyperinflation bout, but that wont last long.  Without cheap and available domestic oil production, the United States will disintegrate into a much smaller economy.  Or worse yet, a third world Banana Republic.

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13 Comments on "THE REAL REASON TO INVEST IN SILVER… It’s The Fundamentals"

  1. The economic globalization experiment is over. It was a grand scheme destined to failure, simply because the originators failed to take into account that energy availability and supply is finite.

    Populations have started to work closer to home with less travel. Farm products are being diversified and produced/sold closer to their customers, as are most consumer goods. The globe is moving to what James Kunstler terms; “World Made By Hand”. This is the future, not because people want it, but because energy availability will force it on societies.

    Both physical gold and silver will once again take up their rightful economic place as true money. This will occur not because people want it, but because confidence will be totally destroyed in anything fiat.

    • lastmanstanding | April 27, 2016 at 7:43 am | Reply

      Outstanding comment brother.

      I see both sides (of “The economic globalization experiment” working in high gear here in Montana. People returning to the land and those with a ton of money leaving the city and investing in a final landing/resting spot…I believe most of those with money have sense enough to realize what is going on but will not admit it to themselves or anyone else. Normalcy bias.

      Farming is up and growing. Construction is booming…for the last time…at least in my lifetime!

      I think only (some of) the farmer recognizes that the jig is up…who really knows how many of these folks get it.

      Meanwhile, I increase my food production area and maximize my local connections to get that which I can’t produce. I buy local when at all possible and do not support most of corporate America. I seldom venture more than 50 miles from home anymore…and love it. Never gone overnight. I do love my truck and fuel to run my business though! While I can.

      Again…great comment…wish you were my neighbor. 🙂

      • lastman –
        Thank you for your kind words.
        I shudder when contemplating those poor souls who populate large urban centers, when “push-comes-to-shove”. For that matter, anyone who lives within a 100 mile radius of such big cities will be at risk, as the deprived/starving, overcrowded population moves out into the surrounding areas to scavenge. Nine meals from anarchy.
        Localized support groups – an association of family, friends, and church group allies, along with proactive contingency plans, are the key to not only surviving, but thriving. Good Luck.

        • MillenniumWright | April 27, 2016 at 11:25 pm | Reply

          I may live in an overdeveloped urban area, but it only takes me one tank of fuel in my mechanically injected diesel to get 450 miles outside the radius of 9 meals to anarchy. I won’t be coming your way though, because on zero tanks of fuel my sailboat will take me round the world. Still, if I weren’t going to run as far and as fast to sea as I can if things get nasty, I would hope for ya’ll to welcome me into your community. God bless.
          Michael

          • lastmanstanding | April 28, 2016 at 8:04 pm |

            Amen Michael…good folks will recognize good folks.

            “don’t go down without one helluva fight”

  2. Networking a communication support system will be key in finding successful ways to stay connected. Forums such as SRSrocco are good for this. The physical world of precious metal has been attached to the hip of the make believe , play paper world of so called gold and silver for far too long. This is where America ranks in the “FAIL” category. For being so stupid that persons such as Mark Dice can find a constant stream of clueless and careless souls who someday most likely will find that they are hanging out by the curb wondering where their next meal is coming from.
    The warning sirens are getting louder. The general population are beginning to become aware of the bums who threw them overboard 40 some years ago ! The sad part is that they were led astray by the system who used them for everything that they could squeeze out of them.
    One can only hope and pray that a good number will wake up and find some sense to better prepare their life circumstances within a reasonable period of time cuz there ain’t much left of it !
    Stack on !

  3. Steve, excellent article, here’s why: I am getting sick and tired of reading upteen articles that show charts and claim technical analysis to show what silver or gold will do. Of course markets are manipulated. But I am not a trader worried about just price action in the short term. I am looking for understanding, something technical analysis doesn’t provide to me. When one understands why paper assets will lose value, why cheap and abundant oil will not be around forever yet if you have to move tons of rock if you want to mine a particular metal, then either the price goes up or the mine shuts down (talking long-term). Thanks for giving us additional insights. Once you decide to accumulate, frequently, short-term moves can provide buying opportunities, but they are not the reason to invest in and keep some precious metals.

  4. Glad to read another article getting back to oil/energy fundamentals.

  5. Do NOT show Keith Weiner this article. He’ll freak about “stocks to flows”.

  6. Speaking of fundamentals…

    Market rigging with the approval of governments and the organizations charged with the responsibility to investigate market manipulation [that won’t], means silver and gold are undervalued and will remain so until they are no longer able to control the prices. But that makes for a buying opportunity.

    http://news.goldseek.com/GATA/1461510611.php

  7. Steve

    As always, you bring important Facts not seen in the “catttle media” that most of the herd follows. Unfortunately for them , they are being led to the slaughter house of financial destruction. Being in financial services for 38 yrs I have met many seemingly “smart” people . When I mention buying phys G&S , 99.5% they give various comments/ blank looks and probably think WTF am I talking about. Over the last 10 yrs Very few have seen the light and they rest are moving closer toward their demise. I believe the Worlds Largest “paper asset” BonFire has been lit and it will be spectacular to watch if you are a pyromaniac.
    I know we will witness a monumental rise in the metals that few have been preparing for.. I certainly do not wish that to happen as the price increases mean more suffering for the masses. Once more people start to “get it” and panic – it will be to late. My approach now is “Quiet confidence ” in what I am doing.
    Thanks for trying to help and enlighten as many who will listen Steve

    • “I know we will witness a monumental rise in the metals that few have been preparing for.. I certainly do not wish that to happen as the price increases mean more suffering for the masses”

      It’s going to mean suffering for almost all. Even those that think they have insulated themselves well. We are “a family of mankind”. Only misery no joy to watch people’s lives destroyed, even if or when they did it to themselves.

      enjoy the calm before the storm

    • TB,

      I appreciate the positive comments. Yes, I do believe the Falling EROI and declining overall oil production is the death-knell of the U.S. and world economies. That being said, it seems to me that the United States will go first because of its massive infrastructure system that is now a serious burden. A burden with no real solution.

      Furthermore, we are going to see some nasty quarterly results from the oil industry over the next several weeks, starting tomorrow with Exxon. Even though the price of oil has risen from its lows, most companies are still not making any money.

      steve

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