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Precious metals price correction

Precious metals are now three years into what I believe is a correction in a very long bull market that has still further to go.  Yet suffering through such dismal price action after ten years of rising prices is trying, despite predictions of higher prices.

I have one client who regularly emails me with questions like, “What would it take for you to throw in the towel?” and “How can you remain a precious metals bull with manipulators in total control of the markets?”

First, I do not believe that the manipulators (bullion banks) are in “total control.”  I believe that they have driven down prices at opportune times, mainly with their huge balance sheets and via the media flooding outlets with bullish stories while the bullion houses were selling (going short).

Further, I believe that the US government issued bullion houses “Get Out of Jail Free” passes.  Had gold prices continued uninterrupted rises, it would have reflected poorly on the dollar and would have drawn still more investors to gold.

Second, I’m not about to throw in the towel while massive money creation is going on around the world.  Consider this from

Over the weekend, one of JPM’s best strategists, Nikolaos Panigirtzoglou, looked at global liquidity and concluded that “the current episode of excess liquidity, which began in May 2012, appears to have been the most extreme ever in terms of its magnitude and the ECB actions have the potential to make it even more extreme.” Curious why? Read the key note excerpts here.

But more to the point, for anyone lamenting “stingy”, tapering central banks or whatever, here is one chart that should put everything in perspective, and explain why the world has reached a plateau of permanent addiction to monetary liquidity injections, and why nothing else matters.

Oh, and good luck with that “Fed is about to raise rates” stuff…

Source: “JPM”

The general price level rises (and the dollar loses purchasing power) because of excessive money creation.  Now, this is not the same financial climate that we had in 1980 when gold collapsed after rising to $850.

In 1980, when Ronald Reagan summoned then Fed Chairman Paul Volcker to the White House and asked him what he could do about the 13 percent inflation that had been inherited from Jimmy Carter, Volcker had the answer.  He increased interest rates, with the prime rate moving up to 21 percent, which shut down price inflation.  Basically, Volcker cut back on money creation by making credit expensive.

Today, Janet Yellen is the Chairperson at the Fed, and she holds views vastly different from Volcker.  Whereas Volcker had some fears of money creation, Yellen seems to have none, and other central bankers around the world seem to have no fears of excessive money creation.  In fact, two percent inflation is a target for most central bankers.

With this thinking, price inflation in the US is not a problem, being right around two percent on an annualized basis.  So, why worry?  Because massive increases in the money supply eventually lead to price inflation.

No way of knowing when, but price inflation always follows massive money creation.  Here’s what Ludwig von Mises in Human Action said about credit expansion:

If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders.

I’m not ready to throw in the towel on gold and silver because I see nothing on the horizon that suggests that the world’s central banks are anywhere near changing their ways of attempting to solve all problems with freshly printed money.  Actually, I’m bullish on gold and silver.

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