In terms of silver’s investment demand, the bullish metric at Sentimenttrader.com is currently at 39%. This is a low point that has not been seen since the mid-1990s.
Furthermore, The Hulbert Gold Stock Newsletter Index or HGNSI recently fell to a new low of 43.8%, which is a record by a longshot. What that low reading indicates is that, of the stock newsletters that include coverage of mining stocks, 43.8% of them are now recommending short positions in gold stocks.
If these indicators are not yet signaling a bottom in precious metal prices, it really has to be close.
These lows are further exacerbated by undervalued market prices that are pushing suppliers of precious metals to sell their stocks below the current cost of production, thereby resulting in further destruction of an already devastated mining sector.
Remember, only 15 or so primary silver mines remain after decades of artificially low prices created by what, in effect, was a massive lobby to offload cheap silver into the market and the use of paper futures contracts that can be easily manipulated by money printers to maintain low commodity prices.
The Macro Confidence Picture
Confidence dipped considerably in the wake of the MF Global disaster, Peregrine Financial bankruptcy, and the Libor scandal. Confidence in the Obama administration is now also challenged by recent controversies, such as the IRS’ added tax scrutiny for conservative groups and the Justice Department obtaining several months of phone records for Associated Press journalists.
Failing institutional confidence often leads to political turmoil, which in turn can spark up the hyperinflationary tinder box. Exceptionally loose monetary policy is the set up for this scenario, but a political crisis will probably trigger the loss in confidence that will set inflation alight.
Despite a notable preference among the mainstream investing public for looking the other way, rather than facing such coming financial disasters head on, confidence in financial institutions is slowly being chipped away at by the inconvenient reality of what a fractional reserve banking really means for the security of one’s wealth.
This worrying backdrop is further exacerbated by the present state of currency warfare, as countries print money to debase their paper currencies, as well as by regular scandals and what appears to be a false equity rally based on little more than thin air.
Moving Out of the Dollar into Gold and Silver
A trend has been established toward major countries like China off-loading huge dollar-denominated foreign exchange reserves. Few people know much about this because no official announcement has come out since 2009, although China has very likely accumulated a large quantity of gold.
Also, China has been a net importer of silver for a few years now, which was a major turn of events. It now seems safe to say that the BRICS are attempting to buy whatever hard assets they can with the substantial amount of intrinsically worthless U.S. dollars they have accumulated without upsetting the commodities market and/or fomenting a political crisis. Nevertheless, recent tensions between Japan and China seem like a classic example of how this could be unavoidable.
Also, the United States has been, and will likely continue to be, very protective of its own industries. This coddling of U.S. businesses partly involves incubating and protecting them with tariffs, but this artificial life support is also being done to prevent the virtually inevitable flood of paper Dollars from returning home.
In other words, it would not be welcome for China to start purchasing large portions of major U.S. producers or even buying them outright. Of course, you can be quite sure that the Chinese are doing that just about everywhere else, including buying companies located in Australia, Africa, South America and the Middle East.
What's fascinating about this process is that the Chinese have been setting up swap or currency trade agreements whenever they go shopping for assets among the places mentioned above. This seems like the real fly in the ointment, largely because it is the U.S. dollar’s predominant and historical reserve currency status that provides the last remaining leg of support underpinning its value.
Mining Production and Supply Factors
The great challenge facing miners involves verifying and proving enough ore through drilling that they are finally able to risk the construction, mining and stockpiling of overburden that is required before they finally turning the rocks they mined into tangible, real income and long lasting storable value.
Another persistent worry for miners operating in foreign jurisdictions, as many of them need to, is that their findings and operation may be nationalized once production starts in earnest. Also, if the foreign country fails to provide adequate police protection for safe operations, the end result may be nothing at all or just a big deficit where a profit was anticipated and money was spent.
Furthermore, inflation can be a two edged sword since mining and processing costs tend to go up faster than the end price of finished gold and silver does. Delivery delays for key construction and production supplies and equipment also start to arise when prices are moving sharply upward.
Most miners and investors would probably rather see a gradual long term price rise in the precious metals than all of these sudden up and down price swings, but those significant price swings have now become a fact of life in this business that miners simply have to deal with.