WHEN THIS MASSIVE BUBBLE POPS… What Will Happen To The Precious Metals?

As the Mainstream financial media continues to promote the biggest market bubble in history, only a small fraction of investors are prepared for the disaster when it finally POPS.  The markets are so insane today, it seems as if fundamentals don’t matter any more.  However, they actually do if we look at the numbers closely.

In order to invest in the correct assets going forward, one must choose between those with a low RISK and high REWARD versus assets with a high RISK and low REWARD.  While this may seem like common sense, I can assure you, the market makes no sense whatsoever today.  And most investors are doing quite the opposite.  Go figure.

If we look at the following charts in this article, we can clearly see which of the following assets, the DOW JONES, GOLD or SILVER, enjoy the lowest risk and highest reward.

This chart shows the price action of the Dow Jones Index, gold and silver.  Since its low in 2009, the Dow Jones Index is up 229%, from 6,500 to 21,400 currently.  Even though the Dow Jones Index experienced a brief 17% correction in 2011, it hasn’t endured a healthy 30-50% market correction in over eight years.  It is most certainly overdue.

However, after the precious metals prices peaked in 2011 and then declined, silver is only up 22% from its low in 2015 and gold is up 20%.  Thus, the Dow Jones Index has surged higher for eight straight years, while gold and silver are still down considerably from their peak prices in 2011.

If we look at each asset class separately, we can see how over-valued the Dow Jones Index is compared to gold and silver.  The next chart shows that the gold price fell 46% from its peak in 2011 to its low in 2015.  Now, even considering the 20% current rise in the gold price from its low in 2015, it is still 35% below its 2011 peak:

Looking at the silver chart, its price movement is much more volatile than gold.  The silver price fell a whopping 73% from its peak in 2011 to its low at the end of 2015.  Currently, the silver price is still 66% below its 2011 high:

As I already mentioned, the silver price is only 22% up from its low in 2015.  Now, let’s look at the Dow Jones Index:

While the precious metals have experienced a healthy correction since 2011, the Dow Jones Index continues higher towards the heavens.  It is up a stunning 229% from its low in 2009.  If the Dow Jones Index fell 5,000 points, that would only be a 23% correction.  However, if it fell 11,000 points, down to 10,400, it would have fallen 51%, less than its 54% market correction decline from 2007 to 2009.

To get an idea of how overvalued the Dow Jones Index is, I am going to use the S&P 500 Index as an example.  Why?  Because the S&P 500 Index is up just about the same percentage as the Dow Jones Index since the low in 2009:

You will notice that the Dow Jones and S&P 500 charts are nearly identical.  So, what happens to one, will happen to the other.  To determine the fair value of the S&P 500, we look at the Shiller PE Ratio.  Basically, the Shiller PE Ratio (PE = Price to earnings ratio) is defined as the price (Index price) divided by the average ten years of earnings…. adjusted for inflation.

This historical Shiller PE Ratio mean is 16.8.  That means S&P 500 price is 16.8 times the average ten years worth of earnings.  So, if the Shiller PE Ratio has averaged around 16.8 in its history, what is the ratio today?

According to Gurufocus.com, the present Shiller PE Ratio is 30.2, or nearly 80% higher than the mean.  Not only is the current Shiller PE Ratio in bubble territory, it is even higher than the 27.4 ratio the last time it peaked in 2007.  Well, we all know what happened in 2008 and 2009.  During the first quarter of 2009, the Schiller PE Ratio fell to a low of 13.1.

Furthermore, before the stock market crash of 1929 and the ensuing Great Depression, the Shiller PE Ratio reached a high of 32.4 in September 1929….. only a few points higher than it is today.

So, what does that mean?  It means that the Dow Jones and S&P 500 Indexes are now in record bubble territory and their future reward is LOW while their future risk is quite HIGH.  However, if we look at gold and silver, we see quite the opposite.

Not only did the gold and silver prices experience a huge correction from 2011 to 2015, the current price of silver is very close to the cost of production.  Here is a chart of one of the largest primary silver mining companies in the world…. Pan American Silver:

This chart shows Pan American Silver’s estimated profit-loss per ounce (GREEN LINE), versus the average spot price (WHITE LINE).  As we can see in 2011, Pan American Silver made a $9.02 profit for each ounce of silver it produced when the average spot price reached $35.03.  However, as the price declined over the next five years, Pan American Silver lost money in 2013, 2014 and 2015. 

Even though Pan American Silver made an estimated $1.54 for each ounce of silver it produced 2016 YTD (last time I did the figures), it fell to about $1.00 and ounce during the first quarter of 2017.  With the average spot price of silver at $17.42 Q1 2017, my rough estimate is that Pan American Silver needs abut $16.40 +/- to breakeven.  With the current price of silver at $16.50, Pan American Silver isn’t making much money.

Moreover, my estimation for the average break-even for the primary silver mining industry is between $15-$17 an ounce.  I have not done any recent calculations for the estimated breakeven for gold, but it looks to be between $1,100-$1,500.  While the gold price has a bit more cushion than silver, we can plainly see that both gold and silver are much closer to a bottom than the Dow Jones Index.

According to this analysis, the HIGH RISK, LOW REWARD easily goes to the Dow Jones and S&P 500 Index, while the LOW RISK and HIGH REWARD belong to gold and silver. 

We must remember, when the Dow Jones Index suffered a mere 2,000 point correction at the beginning of 2016, the gold and silver price surged:

If the gold and silver price jumped 15% when the Dow Jones only fell 2,000 points in 2016… how high will their prices move when the Dow Index falls 5,000-10,000 points and suffers a 25-50% correction?  Because the entire market is held up by so much leverage and debt, I do believe the precious metals will enter into a new market of much higher prices.

Lastly, even though the Cryptocurrencies are getting hammered today, this is just an overdue correction.  Bitcoin and the other cryptocurrencies probably have a great deal more to fall before bottoming.  However, I do see some of the top cryptocurrencies to hit new highs in the future.  I mentioned this market because the same thing will happen to gold and silver.

All of a sudden one day and out of the blue, the price of gold and silver are going to surge higher.  Then the next day… they will have jumped even higher still.  Before investors or the public realizes it, the gold and silver prices will seem like they are too expensive to buy at this point….the same way when the cryptocurrencies shut up 200-1,500% in just brief period of time.

This is why an investor CANNOT TRY TO TIME WHEN TO GET INTO THE PRECIOUS METALS.  If one does not have a decent amount of physical gold and silver, it will be extremely difficult or likely impossible to acquire the metals when the prices have skyrocketed.  Sure, you might be able to get some metal, but the prices or premiums could be very high indeed.

So… as the folks who purchased Bitcoin and sat on them for several years before the huge move higher, the same thing will happen to gold and silver.   While retail gold and silver sales have fallen significantly, as well as precious metals sentiment, the fundamentals point to a LOW RISK and HIGH REWARD… if we are patient.

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36 Comments on "WHEN THIS MASSIVE BUBBLE POPS… What Will Happen To The Precious Metals?"

  1. Do you think there will be a deflationary dip before they print the money into oblivion Steve?

    http://www.zerohedge.com/news/2017-06-26/end-growing-consumer-base-and-beginning-decline

    I think we still have a few years (maybe until 2021 or so) to load up on precious metals at these low price ranges before the correction happens as a result of Central banker money printing. FIAT currencies cannot endure deflation. Existing debts take on more value as currency supply decreases. Bankruptcy, foreclosure and unemployment climb. Then one day, you and everyone else gets a check for $100,000 in the mail, and the hyperinflation begins. After that, it’s too late to buy metals. The physical supply is gone.

    That’s the scenario I see.

    • Eric Bauer,

      I don’t know the timing of the EVENT, but it seems to me that it will be well before 2021. There’s just way too much leverage. If you listened to Harry Markopolos on KWN, he puts it all into perspective. Not only do we have a Pension System on the verge of meltdown, we also have China and the Insurance Industry as well. Markopolos believes either China or the Insurance Industry could be the factors that pushes the entire market over the edge.

      steve

      • DisappearingCulture | June 27, 2017 at 8:21 am | Reply

        “…we also have China and the Insurance Industry as well.”

        China I get. Rickards and others have pointed out the problems there. What specifically about [what part of] the insurance industry?

        • DisappearingCulture,

          If you haven’t gone to King World News and listened to the Harry Markopolos interview, I highly recommend you do. He discusses how the Global Insurance Industry that has huge multinational companies aren’t really being regulated. If we realize that the Pension plans are in trouble because they need 7-8% annual return, the Insurance Industry also needs a high interest rate as well. So, it seems as if the Insurance Industry is also chasing HIGHER RISK, HIGHER YIELDING Investments to keep Business As Usual going.

          steve

    • Even though 2021 is only four years away, I don’t think there any way they can hold it together that long. EVERYTHING points to an economic melt-down sometime in the next 18 months. The cracks are now everywhere and it seems to me that they are quickly losing control.
      I think we are very close because the war drums are beating louder and louder and when the collapse is imminent, they will take us to war.

  2. Hans-J. Schmid | June 26, 2017 at 3:03 pm | Reply

    The shit will hitting the fan! Cannot wait!

    • Careful what you wish for, this could get really ugly including a world war that would decimate life as we know it.
      Sadly that is exactly what the globalists want.

  3. Hi Eric,

    I agree with your scenario. I think Mike Maloney calls for this as well.The whole ordeal will be a bitter pill to swallow, or more like castor oil while we wait for the final dump. A brief deflationary attack which will be responded to with a pathetic, last gasp attempt to QE. Who knows what and when the precious metals “kick in”, but it probably won’t be fast enough for those who have been quietly stacking, and cussing. Guaranteed to piss off everyone who has been sitting smugly and blissfully unaware with their pensions and 401Ks.

    Put it another way, even though you think you have prepared and anticipated, you are going to still wind up being more pissed off than you can imagine.

  4. Good charts Steve… You will find the Dow Jones trend from 2009 is increasing along an EXPONENTIALLY TREND LINE equal to 100% every 5 years. Gold and Silver from there lows in late 2008 are increasing along an EXPONENTIAL TREND LINE equal to 100% every 10 years. So the Dow Jones is increasing at twice the momentum of Gold and Silver over roughly the same time period.

    History shows the Dow Jones will not be able to maintain that momentum AND I think it is struggling now!

    Bitcoin is not looking to good at the moment either! The next few days or weeks should indicate if it is on the slippery slope.

  5. Bought a small amount of gold and some more silver this morning….. My wife gave me that look AGAIN! LOL and I said WHY NOT? She went and bought a new second hand 4WD 🙂

    • Remember that look. You’ll need it.

    • I don’t really look at it as “buying” Gold and Silver anymore but rather as diversifying out of fiat trash to “save” real money. I don’t really care how much fiat it takes to obtain real “savings”, I just do it routinely whenever I have enough fiat that I don’t need to pay bills.

    • Chaplain Dave Sparks | July 5, 2017 at 12:45 pm | Reply

      A 4WD may not be such a bad investment, though. That and food, firearms, ammo, etc…

      It’s hard to predict the scenario that would ensue if “the dollar fails”.

  6. One should consider that there can be almost an infinite amount of different cryptocurrencies even though each one might have “limited” coins. Precious metals have the same supply no matter how many sell or own them. It takes resources to mine the dwinding supplies of precious metals while cryptocurrencies can be created by a computer stroke.

  7. Yeah, Yeah, Yeah, we’ve been hearing this same old song and dance for the last 6 months or more. It’s like beating a dead horse. The guru’s at Stansberry are telling me to invest in China! I remember Steve Sjuggerud recommended buying the renminbi prior to the chinese devaluing its currency; but wait, for a small initiation fee, he’ll give you the inside scoop! Yeah right, all these people sell is a pipe dream and they get rich on the scheme. I think I’ll take my chances on something I can touch and feel, Silver & Gold! With 7 billion people on the planet, it doesn’t appear to be a bad investment. After all what is money? Bonds, Money market accounts, 401K, Annuities! Oh yes, my pension, that I will never see! Time is accelerating! All it takes is a snowflake…

    • Ahhh! – a snowflake. Anyone reading Andrew’s comment that doesn’t understand the significance of this will likely not have read Jim Rickards The Death of Money or The New Case For Gold. Basically, like straws and camels backs, every snow avalanche is started by one snowflake. Long-term holders of precious metals and their related stocks are willing it to snow very hard sometime soon!

  8. amen Warren Buffet is still pushing stocks . He doesn’t want the party to end until he can get off the pyramid.

  9. I know that the boy that cried “WOLF” has been resonating. There seems to be a meeting of the minds for sometime around the 21st of August , 2017. We shall see.

  10. Those who seek World Domination have no intention of sharing their power or wealth.

    Baring a 3rd WW and our descending into a post 18th century world in my humble opinion something like the following will happen:

    Metals will continue with their ups and downs but in the end will dramatically drop.
    Then laws will be implemented (as in the past) for government to confiscated gold and silver.
    Those not turning in their metals at the lower price will be subject to fines and or imprisonment.
    Cash will be consigned to the dustbins of history along with our freedom.

    There will be a new financial system to replace what we now have. It will be digital/electronic in nature and monitor all financial transactions in real time.

    • Love your gloom and doom scenario. How does the government get the manpower and resources to do all these confiscations with the amount of energy available in the 18th century? I don’t even know if they’ll be able to run their huge databases. You know servers need to be replaced every 5 years or they start failing. Have you ever been to the megalopolis known as D.C. ? They will be focused on feeding all those people. Food riots, armed citizenery, a military and alphabet soup of armed enforcers will be vying for what’s left of a shrinking pie. The Dollar will be a historic artifact by that time. I think the only thing we know for sure is that life will be a great challenge. Your garden and clean water might have more value then your gold. They might confiscate ATVs, or food, or induct all able bodied men into the fields. Different world unknown reality.

    • No doubt the globalists will try to push their world domination agenda but the harder they push, the more likely they will fail!
      The globalist scum are being exposed and I doubt they will ever get that far to outright confiscate real wealth, but if they were to try, it would be the final nail in their coffin.

    • A few things to keep in mind.
      – The Chinese are not aggressors and are not looking to take over the world.
      – The Deep State are aggressors and are comprised of 8000 to 8500 in number. They’ve already lost on a number of fronts with their war efforts in aggression , Syria , Hillary Clinton getting elected , Ukraine , Russian bullshit, etc. .
      – The way things are today with people holding physical gold and silver in the United States , it is completely the opposite from the 1930’s when confiscation made sense under such conditions. Confiscation won’t happen The U.S gvrnmnt will have much BIGGER problems to be dealing with.
      – If you want to sniff out any huge amount of physical you’ll have to go to China , Singapore , India , and Russia (mostly under Gov. controls)
      – There is a real possibility that the Deep State will try and take control of cyber currency and anything that has to do with it knowing that the masses of brain controlled slaves will follow marching orders through it’s ability to dictate power.
      – Physical gold and silver will play an important part in black market transactions as they are and will always be true money.
      – Anyone who is holding either of these PRECIOUS metals will in short order realize the strength of what it is that they have in their hands. Something that never really has lost it’s true meaning for value.

  11. This bubble cannot pop. When cb’s don’t intervene we’ll have bartertown within 2 months. CB’s have created so much liquidity it has to go somewhere. When currencies blow up they come up with their new and improved fiat 2.0, with or without blockchain tech. Plans are on the shelves. Wealth will go down of course, the exponential way.

  12. Great article again Steve,
    The only point I’d like to make is that silver and gold are in a manipulated market whereas crypto currencies are not. We will only see a large spike in the metals when manipulation ends which is impossible to predict. In the meantime, I would suggest being invested in both.

  13. Patients is Key.

    I have learned this the hard way. In 1980 when gold was doing a moonshot, I bought when it hit $650 per oz. then hung on too long when the price fell. I was stuck with, what looked like to me at the time, a real stinker!
    I swore that would not happen to me again, being a neophyte investor. For years I learned everything I could glean from the gold Guru’s and industry publications. So much so that I could “see” gold was VERY cheap at the turn of this new century and began accumulating again.
    In retrospect, I regret not backing up the truck! As for that “expensive” lesson learned in 1980? I still have that gold as a reminder to be patient. Out time will come.

    • Bad money drives out good money, AND vice versa. The pendulum swings for thousands of years, and its near its tipping point again. Without cheap energy though we cannot keep up our current system. In 2008/9 they managed to extend & pretend, next time 80% of paper ‘wealth’ will vaporize imho. If we’re lucky we go back 100 years in time. We’ll see. They have to maintain the current system as long as possible, 7+ billion people depend on it.

  14. If history is a guide, precious metals will likely go down at first because people will need immediate money, but after that they’ll spike up and out perform the stock/bond/real estate markets by leaps and bounds.

  15. GrahamB, I liked your exponential trend line observations. Patience, patience… Thanks, Steve, from your pen to Creator’s notebook. And don’t forget, Planet X is predicted, soon, too. I think no body really wins. We live in interesting times. I watch those cryptos from the sidelines, manias are so much fun and beautiful Elliott wave chart patterns.

    • Virginia….. You might have a look at the following as well. If you open up a quarterly chart (Semi-logarithmic) on the Dow Jones and run an exponential TREND-LINE from the low in September 1932 and increasing by 100% every 10 years; you will find the Dow Jones sits atop that trend line and has done so for 85 years.

      If the “Dow” pulls back to that trend line, it will have to pull back to around 11500. A 50% pull back from the high would be around 10767. And remember the number 90 in Gann’s view of things is a strong number; September 2022 will be the “Ninetieth Year”.

      If you understand “Elliot Wave” you should understand the significance of Gann 🙂

  16. Steve

    First, I love reading your articles. Your website is highlighted on my Chrome Bookmarks.

    Quick question. When I look at the FANG stocks, Facebook, Google, Amazon, NetFlix and throw in Tesla, Microsoft, LG and you see the power players of today’s economy. What you don’t see is Levi Strauss as an example. Each of these power players have one thing in common, electronics based technology infrastructure. Again, not a clothing name in the group. Based on past articles, technology is a big consumer of silver. So where are they getting all this silver at $16.50 an ounce? Or is the amount of silver consumed by they power players minor in comparison to other markets? We hear about silver being in deficit, but I certainly see no proof of that. What is your thoughts? How much silver is used in an iPhone, how many iPhones are sold, etc? Any ideas or thoughts would be much appreciated.

    As always, thanks for reading and thanks for writing.

    • Tas,

      While technology does use a lot of silver, industrial silver demand trend has continued to decline… even with higher Solar PV demand. I don’t really consider increased industrial high-tech demand to be a driver of the price of silver in the future. Rather, it will be investment demand when investors start fleeing STOCKS, BONDS & REAL ESTATE.

      steve

  17. Forse e vero
    Ma, since piu di 5 anni e falso
    – Aktien verlieren an Wert
    – Goldaktien verlieren an Wert
    – Alle Publikationen von Ihnen werden falsch sein
    Sincerli H.

    TRANSLATED:

    Maybe it’s true
    But, since more than 5 years and false

    – Shares are losing value
    – Gold stocks lose value
    – All of your publications will be incorrect
    Sincerli H.

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