''$120 Silver Was Only the Beginning'' - Michael Oliver

”$120 Silver Was Only the Beginning” – Michael Oliver

Every equity bear market of the past 25 years began somewhere other than the government’s own balance sheet. The dot-com unwind was a private bubble. 2008 was a mortgage problem. Both were private debt. What is straining now is sovereign debt — and Michael Oliver, founder of Momentum Structural Analysis, argues markets have no recent template for it. His evidence is what the intervention has failed to do:

• Last November the president of the New York Fed said the central bank would begin buying bonds to provide “liquidity”. 30-year Treasury futures were near 118 at the time

• They are lower now and yields are higher. Last month’s close on that contract was the weakest in 25 years • Treasury has since expanded its buybacks of longer-dated debt

• Oliver’s reading: the authorities can slow the process, not reverse it — and being forced to intervene “with guns blazing” is itself the bullish case for gold, because intervention means printing On what sets the gold price, his answer is not geopolitics. It is the money supply. His illustration: a house that cost a grandfather $4,500 cost the father $45,000, and the median American home today runs $450,000. Housing did not appreciate a hundredfold. The unit of account decayed. The consequence for allocation is that the traditional alternative has closed:

• US consumer credit metrics — delinquencies, past-due balances — are back at 2007 levels • Should equities take 20% off a retirement account, the historical response was to rotate into Treasuries • Morgan Stanley’s CIO has already retired the 60/40 portfolio in favour of 60/20/20 — equities, bonds, and gold That rotation appears to have started, and not among retail. The largest gold and silver producers have returned to all-time highs over roughly three weeks. Oliver’s read of the tape is that large asset managers are the buyers — institutions that will not touch futures or junior names and go straight to the biggest listed producers. On silver he is more emphatic than on gold. For half a century silver was confined to a single price band while base metals and gold quadrupled. Copper, on his figures, averaged about a dollar a pound in the 1980s and trades near $6.50 now. Silver broke out of that half-century box late last year, ran to $120, and has held the breakout through the correction since. The measurement he points analysts toward is the ratio of the Philadelphia gold and silver miners index (XAU) to an ounce of gold. From the 1980s through 2008 it averaged about 25%. It collapsed to 4% by the middle of the last decade and has ranged between 5% and 8.5% since. It now reads 9.1% — above a 13-year base. On his arithmetic, a return merely to the bottom of the old range implies a doubling in the relative value of the miners against gold.