"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Tuesday, March 1, 2011

The Industrial Metals Trade vs The Safe Haven Metal Trade

One of the by products of the surging crude oil price has been to create a bid underneath the precious metals markets of gold and silver and to put a damper on expectations of future growth in the overall global economy.

Copper, a base metal, and one which thrives when the economy is improving or growing, has been the beneficiary of the improving economy theme since late last year and had been outperforming gold as the market was becoming more convinced that the worst of the economic problems were behind us and that the entire global economy was on the mend.

The surge in crude oil prices associated with the outbreak of unrest and social instability across the Middle East has caused a dramatic reversal of that recent sentiment. The concern is now focused on how long crude oil prices will stay near current levels and whether or not there is additional upside should events there further deteriorate.

As such, players are dialing back their expectations on global growth a bit and this is leading to some reassessment in regards to copper exposure. Investors and traders are basically saying, "Why own copper which could be hit if things do indeed slow down and why not increase my exposure to gold and silver".

This shift is reflected in the charts presented below. The line indicates the spread between gold and copper. As such, it tends to give us a peek into what the hedge funds are doing with their funds. Since the beginning of February, money has been coming out of copper and into gold. The same holds true for silver which has exploded against copper although it was outperforming the red metal for the last few months of 2010.

As long as crude oil continues strong or works higher, this trade should work and will help to shore up any downside in both gold and silver. It could be a very volatile trade however should crude oil prices reverse sharply for any reason. If that were to occur, the "improving economy" sentiment would see money flow back into copper and perhaps out of gold and silver. That is not to suggest that gold or silver will top; it is merely to say that there might be some reallocation of hedge fund money back into copper and out of gold and silver.


  1. Now I get it. I didn't understand why oil is considered so important to PM price. Now I do!

    Thank you Dan

  2. Dan, I'm a long time admirer from jsmineset charts. It's all interconnected, isn't it? I went all into silver on Oct 26, 2010 when Bart Chilton said the silver market was clearly manipulated. That was my bat signal. Today, I went to 60 percent cash, 40 percent silver investments. I've just got a bad feeling about "things". Silver needs a pullback, but we may not get much of one. Thanks for all your hard work and sharing of what you do. My retirement is a little closer because of your work.

  3. Thanks for the insight into what the smart money is doing and why.

  4. Wow, from a contrarian prospective, this could be a huge move. Where are the bulls? Hell, even I sold 45 ozs today. The guy I sold too wants a monster box, but only on a correction. There is the comment above and a comment from a silver chart a few days ago to that were both bearish.

    I've learned not to try to time markets, just buy, and when you have to, sell. Excited for what is to come.

    Love everything your doing here Dan, if I was a trader, this would totally be worth $500 per year.

  5. Not enough metal to put dollar back on gold, Bernanke says

    Submitted by cpowell on Tue, 2011-03-01 23:47. Section: Daily Dispatches
    And plenty of derivatives to keep the dollar off gold.
    * * *
    Bernanke Unfazed By Gold Standard, Currency History Queries
    By Michael R. Crittenden
    Dow Jones Newswires
    via The Wall Street Journal
    Tuesday, March 1, 2011

    WASHINGTON -- Federal Reserve Chairman Ben Bernanke defended the central bank's effect on the dollar Tuesday, pushing back at the idea that policy makers should consider alternative proposals like the gold standard.
    Bernanke, appearing before the Senate Banking Committee, was pressed by Sen. Jim DeMint, R-S.C., on the viability of a return to a gold-backed economy or the idea of the Treasury Department issuing bonds payable in gold.
    Bernanke, who has studied the issue, said a return to the gold standard wouldn't work.
    "It did deliver price stability over very long periods of time, but over shorter periods of time it caused wide swings in prices related to changes in demand or supply of gold. So I don't think it's a panacea," Bernanke told DeMint.

    Additionally, Bernanke said there were a number of practical issues that would prevent the return of gold as the world standard. Namely, there's not enough gold in the world to effectively support the U.S. money supply.
    "I don't think that a full-fledged gold standard would be practical at this point," Bernanke said, declining to opine on the gold-backed bond issue because he was not familiar with the idea.
    Sen. Mark Kirk, R-Ill., also engaged Bernanke on the currency issue, questioning whether the Fed's $600 billion bond-purchase program is in effect monetizing the U.S. debt. Bernanke noted that the U.S couldn't have currency outstanding if there were no Treasury securities to back it up, and that even the most steady economic times the Fed engages in the buying and selling of U.S.-backed securities.
    Kirk, however, noted that the United States did have currency not backed by federal debt at one time in its history: under the administration of President Andrew Jackson, the nation's seventh president.
    Bernanke, appearing amused, was quick to respond.
    "So this was before the Civil War. This was during the period where individual banks issued currency. We didn't have a national currency," Bernanke said.
    Not to be outdone, Kirk asked whether it was possible for a country to have a currency without a trillion-dollar debt. Bernanke said that was the case"


    As I read this, I couldn't help but thinking to myself that his arguement is very one sided. Either gold and other PM's are grossly overpriced or substantially undervalued. It would appear from that the Bernanke has his philosophy wrong, as his true fiat banker mentality shows. He is thinking of Gold relative to current price with a relationship to money supply. AS he sees it, there is not enough gold "at it's current price" to back the massive money supply of the US alone. In real terms he has just supplied the basis for the argument that Gold, Silver and other PM’s are grossly underpriced within this relationship. We can have a gold standard and you do not need more metal to achieve it, the metal just needs to priced in real terms as a relationship to the money supply. This underlying fundamental would imply that the PM's need to be 10's of times higher than their current value. We may very well see this as more citizen's around the world flee their current currencies for the safety of precious metals.

    Jack C.

  6. JC - I agree - if they let the price of gold rise to a natural equilibrium level, they would have plenty of gold to bring some sort of gold backing - it would not need to be direct convertibility, but some sort of ratio clause. That of course would cause gold prices to soar.

  7. Dan, thank you for the insightful post!!! In fact I enjoy checking your blog on a daily basis.

    In your post you regard SLV more as a PM and make the point that hedge funds shift from copper into silver and gold. Still due to its industrial use SLV is also more volnurable to overall economic downturns - one can see that during the 2008 crash silver crashed way more than gold but the times now are different. So the short question is - if the economy slows down do you expect gold to significantly outperform silver as it did back then?



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