In his informative two part series, Jeff Christian of Bullion Bulls Canada does a good job of predicting the run on precious metals should India and China inevitably ramp up their physical demand. When this event occurs, it could be very rapid and not even our resident naked shorts will be able to suppress the massive buying that all juniors will attract immediately afterwards.

Enjoy - VHF

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What If Precious Metals Mania Hits India or China? Part I

Jeff Christian

April 18, 2011

A common refrain with many precious metals commentators (including myself) is that “one day” there will be an investor “mania” in this sector, where prices will finally explode into some sort of parabolic “top”.

For those who have wasted any of their time reading the gold-bubble babble currently on display on a daily basis in the mainstream media, “no” the day when gold and/or silver reach “bubble” status is not even currently visible on the most distant horizon. Put another way, as John Williams of Shadowstats.com tells us, just to “equal” its 1980-high (in “real”, inflation-adjusted dollars), gold would have to rise to $7,500/oz. Meanwhile, at its historic 15:1 price-ratio with gold (the average for the last 5,000 years), that would put the price of silver at $500/oz.

Naturally, the fundamentals for gold and silver are much, much, much more “bullish” today than they were in 1980 – when our economies first had their ties to “good money” totally severed. Thus, $7,500/oz for gold and $500/oz for silver should not be seen as any kind of “price ceiling”, but rather more of an intermediate price target.

With the bankers doing everything they possibly can to drive the values of their fiat currencies to zero, then the “long-term price targets” for gold and silver are simply “infinity”: the “price” of gold and silver, when defined in terms of worthless paper. However, there is one event which could interfere with this progression: if investor “mania” should hit the sector before the bankers’ fiat-paper has been deemed worthless by the masses.

Ironically, I view such a “mania” as the worst thing that could happen to this sector, should it take place before the final implosion of the bankers’ paper empire. The reason such a development is to be thoroughly dreaded is because of the inevitable progression of all manias.

As prices explode to what seem to be excessive levels (even though those prices are defined in already-worthless paper), there would/will be a clear, intermediate “top” in the market. By definition, that peak would represent “irrationally” high prices for gold and silver. In the current context, for gold and silver prices to be “irrational” that would likely imply a sudden spike to a five-digit number for gold, and a four-digit number for silver.

Expanding on this irony, such a price-explosion in the precious metals sector would present precious metals investors with a terrible dilemma. On the one hand, all such manic peaks are followed by a “crash” – even in the case of precious metals, where “mania prices” would still undervalue precious metals versus worthless, fiat paper.

Thus over the short or even medium term, investors would know that they would be about to experience an horrific plunge in the value of one of their assets. The obvious, rational response to such a parameter is to sell – and take profits.

Conversely, those knowledgeable investors in this sector would also know that after the inevitable crash, that precious metals would immediately boomerang back up again – eventually exceeding any “peak” experienced during the original mania. This would cause precious metals investors to want to hold onto their assets – and simply absorb a crash.

Having already been through the Crash of ’08, and having watched my portfolio plunge toward zero once, I can say on behalf of all investors who were subjected to this that it is not a pleasant experience. And yet it would still likely be preferable to the “danger” of taking profits at the peak of the mania.

The problem with liquidating any of our precious metals holdings, even if we realize enormous (paper) “profits” is the paper. Making a 1000% gain, or a 10,000% gain in our precious metals holdings means nothing if that paper plunges to zero the next day. Thus anyone attempting to lock-in profits during a mania-phase runs the enormous risk of not being able to convert their paper back into precious metals – before the paper loses its remaining market value.

In talking about any potential, premature “mania”, Western commentators like myself are implicitly referring to their own domestic markets (along with the other Western markets with which we have more cultural and analytical familiarity). However, I would argue that if there is a premature mania in the precious metals sector, that it is much more likely to originate in the East than in the West.

There are three, very persuasive reasons to view an Eastern “mania” as a much more probable event:

1)Asian cultures (most notably China and India) have much stronger cultural and economic attachments to precious metals.

2)Asian cultures (most notably China and India) are currently buying gold and silver in much greater quantities, and with much greater enthusiasm than the average Westerner.

3)Asian cultures (most notably China and India) have vast pools of savings and incomes which are steadily rising (in real dollars), in contrast to the four-decade slide in the real incomes of the average Western citizen.

Expanding on this reasoning, the “herd” behavior which all market manias represent is obviously a much more likely phenomenon when the target of the herd is a good to which the herd-members already have a deep cultural and economic attachment. Looked at from the opposite perspective, with the average Western citizen having “forgotten” our own cultural attachment to precious metals, and having totally severed our own economic connection to precious metals, it would be much more improbable to see “gold and silver mania” sweep through Western cultures.

Indeed, despite a ten-year bull market which already represents one of the best bull-markets in the last half-century, precious metals represents roughly a 1% holding in the average, Western portfolio. You cannot get any more oblivious to the obvious appeal of gold and silver than that. Thus clearly on this basis alone, Asian “mania” is a much more likely event.

This is reinforced by the extremely robust (near-rabid?) buying of gold and silver by Indian and Chinese citizens, especially over the last year. While the gold-buying of Indians isn’t necessarily overwhelming in terms of total quantities, what is extremely bullish (and impressive) for the sector is that for once Indians have kept up their buying of gold even as it pushes to one new high after another. Typically, Indians have been extremely price-sensitive to this market, and demand often plummets when prices spike. This decisive change of behavior by the Indian gold-buyer is certainly a highly noteworthy development. Meanwhile, Chinese gold-buying simply moves relentlessly higher, quarter after quarter.

With silver, the explosion in Asian interest is even more remarkable. Last year, silver-buying in India sky-rocketed by over 500%, while silver-buying in China soared by roughly 400%. This has had a huge impact in the dynamics of the global silver market, where (as Eric Sprott tells us) China has gone from being a net exporter of roughly 100 million ounces per year to being a net importer of 112 million ounces in 2010. This change in behavior in one market by itself accounts for 25% of global silver production.

Let me repeat this, to ensure that people understand this precisely. I am not saying that “Chinese demand” totals 25% of global silver supply. I am saying that the recent increase in Chinese demand represents 25% of global silver production – on top of all the silver which China was consuming before this spike in silver demand. With the total Chinese appetite for silver representing around 1/3rd of annual, global production, that doesn’t leave much for the rest of the world – especially when the silver-lovers in India are ratcheting-up their own buying at an ever faster rate.

Most importantly, with the vast savings and sharply rising incomes in China and India, this huge surge in gold and silver buying has taken place without any leveraged-debt being accumulated. This is of tremendous significance, since all bubbles (by definition) require large amounts of leveraged-debt to exist – otherwise there is simply not a “bubble”. This allows an enormous building of momentum to take place in this market, over a long period of time. It is ultimately the momentum itself which takes on a life of its own in a “mania”, and thus the longer and stronger that the buying momentum from China and India persists, the more likely that this “momentum” will evolve into mania.

Concluding that China and India would almost certainly represent the origination of any “mania” in the gold and/or silver markets is literally only half the story here. The other half would be to hypothetically examine how such a mania would evolve – and what would happen once it had concluded.

I’ll cover those topics in the conclusion to this piece.

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What If Precious Metals Mania Hits India or China? Part II

Jeff Christian

April 20, 2011

In Part I, I explained in detail why a “mania event” in the precious metals market is much more likely to occur in India and/or China before such mania ever reached Western markets and investors. I also briefly touched on why such an occurrence should be greatly dreaded, if it should occur before the inevitable collapse in the bankers paper, fiat-currencies takes place.

I will now examine how such a mania would likely play-out in these markets. The Indian market for precious metals is somewhat more straightforward, so I will begin there. Any investor with even a modest amount of knowledge about precious metals will already know that Indians are the most-ardent lovers of precious metals on the planet.

Bullion-dealers are almost as common as “corner stores” in Indian cities. The result of having such a deep and established market for bullion is that the “premiums” which buyers must pay to purchase bullion (and the “discounts” for sellers) are arguably the lowest on the planet. With low premiums, wide availability, and an extremely strong cultural attachment to precious metals, the Indian people would be ready/willing/able to much more broadly participate in such a mania event than anywhere else in the world.

Those at the higher end of the income-scale would/could focus their purchasing on gold, while even India’s large peasant population can continue to buy silver (and smaller quantities of gold). However,what separates a precious metals mania from a similar event in any other commodities market is what such an occurrence implies: the collapse of paper money.

Gold and silver are currencies even more than they are “commodities”. As such, a “rising price” for gold and/or silver is literally the same thing as saying the value of the bankers’ fiat-paper is falling. Thus the rapid price-acceleration which (by definition) must occur in any “mania phase” translates directly into the value of peoples’ paper currencies plummeting in value.

Given these parameters, this means that a precious metals mania would have two equally strong drivers. Obviously there would be the emotion of greed positively motivating buyers to scoop-up as much gold and silver as they can afford. The mirror-image to this is that there would be a commensurate panic as people (rightly) fear that their banker-paper could go to zero.

The only emotion which drives investor behavior more strongly than greed is fear. With a precious metals mania inspiring both these emotions in people (in roughly equal proportions), the vehemence of a precious metals mania in India would be like nothing the world had ever seen before in commodities markets.

“Physical” bullion would rapidly dry-up and disappear. First this would take place with local bullion-dealers. This would quickly be followed by the international bullion dealers being cleaned-out of inventories – as demand skyrocketed, while supply slowed to a trickle. India’s well-established network of international dealers would “harvest” every ounce of gold and silver they could lay their hands on.

In a matter of days (or perhaps hours?), this “mania” would move to the fraudulent, paper-bullion markets of New York and London. The current “cash settlement” game, where large bullion traders request “delivery” on their contracts – and then quietly accept very large cash-bribes to take only banker-paper rather than metal – would instantly end.

This could be thought of (in metaphorical terms) as “the tide going out” in the bankers’ fraudulent world of paper bullion, epitomized by Jeffrey Christian’s confession that the bankers’ “bullion market” was one hundred times as large as total quantities of available bullion. Bullion-traders who had been happy to play the paper game month after month, would suddenly become fearful of the actual value of their “contract” – as the paper markets for bullion were quickly exposed as being “naked”. Traders would either simply flee these markets entirely, or make one, final “trade”: demanding every ounce of gold or silver left in the near-empty vaults in New York and London.

April 20, 2011