James,
Could you or someone you trust please explain why spot silver has dipped below $20 per Troy ounce? Those of us who don’t have the experience or ability to ferret this knowledge out for ourselves would be grateful. In addition, a forecast for how long this dip might last, would be greatly appreciated. – D.W.N.
JWR Replies: The short answer to your question is that Ben Bernanke spoke and the markets panicked. All that it took to spook the markets was an indication that Quantitative Easing monetization might end in the next year, and suddenly everyone realized that the FREE MONEY game might be coming to an end. The absurdly low interest rates (a product of the ZIRP since 2008) no longer looked like a sure thing. To explain: When interest rates rise, the ability of speculators to carry on with highly-leveraged investments is threatened. There was just a faint chill of a potential credit crunch (a la 2008) and it induced and involuntary shiver throughout the markets. Suddenly there was a rush toward liquidity. There was widespread selling of just about everything, to generate cash. Consequently the market price of nearly all investment vehicles took a hit. Across the board, stocks, some bonds, precious metals, and nearly all agricultural commodities dropped between 3% and 20%, overnight. Within 48 hours the 10-year Treasury Note yield rate jumped 40 basis points. And mind you, this was not a full-blown market crisis–just the foreshadowing of the real credit crisis, to come.
When the credit bubble eventually does burst, we will see a huge jump in interest rates–perhaps as much as 8 percent increase in just a few days. The derivatives casino that has built up in the past five years that has been playing off miniscule moves of a few basis points are going to be wiped out by any such large swing in rates. And when rates jump we can kiss the artificial “recovery” goodbye. The easy money speculative markets will implode. It will suddenly become nearly impossible for the Federal government to service its massive debt. This will force one of two escape strategies by the Fed and the Treasury Department. They will either choose: Option A,) Go Cold Turkey and institute Greek Tragedy-style austerity measures. They will see no choice but to radically raise taxes, slash government spending, and loot the bank accounts and pension funds of the citizenry. The economy will crash and there will be huge layoffs.
or…
Option B.) They will attempt to re-inflate the Big Dang Bubble once again, with massive monetization. If they choose this route they will destroy the value of the Dollar through mass inflation. And the economy will crash and there will be huge layoffs. (Note the common outcomes of both Options.)
Buckle up folks. Diversify into barterable tangibles, I’m betting that the spineless worm bureaucrats will go Full Mugabe and choose Option B, because it is more politically expedient. But regardless, in the long run the U.S. Dollar is doomed.
In answer to your second question: The dip in precious metals may continue for several months. But I anticipate that in October or November of 2013, the prices of gold and silver will recover, and the bull market will resume.
Don’t let the current dip in the metals spook you. Rather, look at this as a buying opportunity. When the inevitable crisis arrives, regardless of which escape strategy is attempted, precious metals should recovery nicely. And if Bernanke and Company selects Option B, then the upside potential for the metals is tremendous.