Silver: The Canary in the Gold Mine

Silver, the Canary in the Gold Mine was my talk at a Gold Standard Institute symposium in Canberra, Australia in November 2008. The topic could well describe today’s gold and silver markets.

Today, both silver and gold are achieving record highs but silver’s accelerating price indicates silver may indeed be the canary in the gold mine, the leading indicator for gold’s long-awaited explosive move upwards, a move the Fed and major bullion banks have colluded since the 1980s to prevent.

In 1979, the price of silver accelerated along with the price of gold. Silver had spent 1977 and 1978 hovering between $4 and $5 but in 1979 silver began to move upwards – as did gold.

In late January, silver moved to $5.94. Six months later, silver tripled, trading in the $16-$18 range before beginning a meteoric ascent in December, doubling from $17 to $34 , rising 33% on the first trading day in 1980 and peaking January 21st in intraday trading at over $50 per ounce, almost a 1,000 % rise in a year.

Silver=black: gold=red (source)

On January 21st, gold also peaked at $850. The simultaneous top of both gold and silver is all the more metaphysically coincidental because the factors driving the two metals were far different, i.e. the gold price was being driven by inflation while the Hunt Bros.’ squeeze attempting to corner the silver market was responsible for the spectacular ascent of silver.

Now, three decades later, a similar scenario is about to unfold, albeit with a different ending. The current decade will not only repeat what happened in the 1970s but it will bring to its inevitable end that which was set in motion in 1971.

The end of paper money is now in sight.

1970s REDUX

On August 15, 1971 President Nixon announced that the US would no longer convert US dollars to gold. For the first time in history, money was no longer gold or silver or convertible to either. On that day, because of Nixon’s actions all money everywhere became but government issued coupons with unknown expiration dates.

The reason behind Nixon’s extraordinary action was that US gold reserves had been virtually emptied by US overseas military spending. The massive outflow of US dollars needed to maintain America’s global military presence had far outweighed any corresponding inflow from America’s significant positive balance of trade.

By 1971, it was clear the US owed more far gold than it possessed. The closing of the gold window by Nixon constituted the largest monetary default in history. Now, thirty years later, the final consequences of that default are unfolding.

After 1971, governments everywhere borrowed, printed and spent even more money as gold no longer was a constraint on the global money supply. Additionally, gold was no longer exchanged in order to rectify global trade imbalances.

It was Milton Friedman – the monetary poster boy of the right – who advised Nixon to cut all ties between the dollar and gold. Friedman, like Keynes – the monetary poster boy of the left – was a strong believer in fiat money and Friedman advised Nixon that floating exchange rates would balance global trade flows. Friedman was wrong.

The 1971 cutting of ties between money and gold instead led to increasingly unbalanced trade flows, rapid increases in government debt, and by the late 1970s, increasingly high rates of inflation.

In January 1978, US inflation measured 6.84%. In January 1979, it was 9.28% and by January 1980 inflation had risen to 13.91%. Gold, the traditional refuge from monetary inflation, rose accordingly. In 1978, the average gold price was $193.40. In 1979, it was $306; and in January 1980, gold spiked to $850 with inflation peaking two months later at 14.76% in March.

In August 1979, President Jimmy Carter appointed Paul Volcker to head the Fed hoping to control inflation. Volcker’s aggressive rate increases brought down both inflation and the price of gold (note: Volcker was also responsible for the demonetization of gold in 1971).

Today, aggressive rate increases to prevent high inflation are almost impossible. As inflation moves higher – and irrespective of distorted US figures, it is already doing so – higher Fed rates would end the Fed’s liquidity-driven recovery and cause payments on the now astronomical US debt to rise to unsustainable levels.

Expect, then, that gold will move far higher before the Fed is finally forced, if ever, to raise rates. This long-delayed reaction will cause gold to move even higher as a slowing US economy would more than offset any potential rise in the US dollar until the US dollar crashed; and, in such an event, gold would be the only safe haven left standing.

The reason why gold is not rising as rapidly as silver as in the 1970s is because since the 1980s the Fed has focused on keeping the price of gold low à la Gibson’s paradox; and, as a consequence, instead of rising equally with silver, gold is lagging and silver is leading.

Silver, however, is clearly the canary in the gold mine and as the below chart shows, silver has now broken out.

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