No Excitement by $800 Gold

Silver Stock Report

by Jason Hommel, November 2, 2007

Well, gold just hit over $800, and nobody is excited by the precious metals.   Even those in the industry are amazed at why there is so little excitement.   Or, they are already trying to “call a top”, because instead of doing any real research on the major fundamentals over the course of decades, they are too busy looking at little daily price wiggles over the course of months.  And people are wondering why, or whether, silver is lagging or leading. (It depends on the time frame.)

But remember, the reason why there is no excitement is simply due to the tiny size of the silver and gold markets.  It is axiomatic, and has a corollary.

Axiom: There cannot be public excitement about a market when the public is not in it. 
Corollary:  The public can not get into the silver and gold markets that are still too small, and too cheap!

Here’s my note, from 2003, in most of my reports:

Long before 1% of U.S. paper dollars tries to buy gold, gold will be going up well over $1000/oz., and silver will be headed up over $50/oz.

Again, the reason why the public cannot be excited about gold, is because the public is not in gold, and cannot get in silver and gold when prices are this low.

Here’s the math:

(Numbers in metric tonnes, 32,151 oz. per tonne.)

5,000 tonnes — the official number admitted that the central banks have sold.
15,000 tonnes — the number GATA research shows that central banks have sold or leased.
30,000 tonnes — the number of official central bank gold, (minus either the 5000 or 15,000 tonnes).
155,000 tonnes — all the gold mined in the history of the world.
2,500 tonnes — annual mine supply
4,000 tonnes — annual demand

M3, money in the banks?  $12.2 trillion. 
1% of that is $122 billion.

Gold at $800/oz?  Let’s do the math!  How many ounces can $122 billion buy, assuming the gold price does not go up due to the demand?

$122,000,000,000 / $800 = 152,500,000 ounces.

If 1% of M3 bought gold in a year, what would that do to the price of gold?  How many tonnes is that?  Let’s do the math.

152,500,000 ounces / 32151 oz. per tonne = 4743 tonnes.

Now, you can clearly see what would happen to the gold market if 1% of the money held by the public of the US went into gold over the course of an entire year.  The gold price would go nuts!  How so?  Because the central bank selling of a mere 1500 tonnes is what caused the gold market to dip to $250/oz in 1999 and 2001, and that’s still taking place today!  The central banks sell gold hard on certain days to drive away any excitement.

Therefore, there will be no real excitement about the gold price until the gold price is well over, oh, say, about $2000 to $3000/oz.  Then the public might start to get interested again.  Or maybe, it will be above $5000/oz. by then.    Anyway, we have a long way to go before things start getting “toppy”.

Even in this run up in the price, I’d expect things to go to about $1200 to $1500 for gold, and to about $30 for silver.  And then, maybe a pullback to about $850 for gold, and about $17-18 for silver.

Again, proof of no public participation can be found in the following stats.

Silver is not like gold.  Almost all gold is investment demand, even jewelry, most of which, in Asia, is sold at the price of the metal.

Annual gold demand is:
2500 tonnes from mines
1500 tonnes from central banks
= 4000 tonnes purchased by investors – 5% for industry. x 31,151/oz.

128,604,000 ounces of gold x $800 = $102,883,200,000  — world wide investment demand for gold (Most of the buying is from Asia, specifically India.)

Nearly 95% of silver is consumed in industry, photography, and jewelry, with no room for any investment demand.

650 million oz. produced by the mines (supply)
250 million oz. recycled. (supply)
900 million oz. consumed completely (demand)

40 million ounces of silver x $14 = $560,000,000 — investment demand for silver.  

So, Investment demand for gold is $102 billion, and for silver, it’s just over $0.5 billion.

There is 183 times as much investment demand for gold, as for silver!  

(That’s today, now, when nobody is interested.)  In fact, I could argue that there are more “investors” selling silver now than buying.  See the 250 million oz. of silver “recycling”?  Much of the recycling is 90% silver, or silver commemoratives sold to the coin dealers by the public, and the dealers sell it to the refiners because there are so few investors!

Do you see now why silver is so special?  When gold gets too expensive, over $5000/oz., the public will buy silver.  And what will happen then?

No math can show you.  But you can intuitively see that the silver to gold ratio will probably narrow from about 55:1 where it is today (because there are no silver buyers) to less than 15:1, the historic ratio, and the odds are that it may even hit 5:1, or even 1:1 when the world wakes up to the realization of why silver is so special.