THE GREAT PRECIOUS METALS MARKET DISCONNECT: A Ticking Time Bomb

SRSrocco's picture

SRSrocco

By the SRSrocco Report,

The Great Precious Metals Market Disconnect that took place four years ago is now a ticking TIME BOMB.  While the Fed and Central Banks have been relatively successful in propping up the broader stock, bond and real estate markets, time is not on their side.  The more the highly inflated markets continue higher, the more breath-taking will be the inevitable collapse.

Now, I am not just pandering hype here, there is plenty of data to support the evidence that the precious metals suffered a serious disconnect from the broader markets in 2012 and continue to be held down like a coiled spring.  One of my readers forwarded me this excellent chart which shows this perfectly:

Silver Gold SP chart

The chart is a Silver-Gold ratio (RED LINE) compared to the S&P 500 Index (BLACK LINE).  Take note, this is not a Gold-Silver ratio, but the opposite.  As we can see, the Silver-Gold ratio line has paralleled the S&P 500 from 1997 to 2012... very closely.  However, when the Fed announced QE3 at the end of 2012, something quite interesting took place.  The Silver-Gold ratio continued lower towards its bottom level, but the S&P 500 Index surged upward to a new record high.

While many precious metals investors realize that this disconnect took place, this chart shows it with more precision.  Furthermore, if we look on the right side of the chart we can see the percentage level of this disconnect is 65%.  This is off definitely off the charts... literally and figuratively.  Again, I appreciate my reader for forwarding this chart.

After looking at this chart, I did some additional research on the S&P 500 and the silver price.  If we look at the S&P 500 divided by the silver price since 1981, we have the following chart:

SP-Silver rato chart

The current S&P 500 Index-Silver ratio is 130/1.  Basically, 130 ounces of silver would buy the S&P 500 today.  When silver reached nearly $50 in 2011, the S&P 500-Silver ratio was 28/1.  However, if we go back to 1981 or in 1983, we can see the S&P 500-Silver ratio was 10/1.

If we applied the same 1981 S&P 500-Silver ratio today, the price of silver would be $230.  That being said, the value of the S&P 500 is severally inflated.  So, it is difficult to determine a realistic silver price based on a highly inflated stock index.

Regardless, the YELLOW ARROW in the chart shows that the S&P500-Silver ratio should have continued lower, not higher towards the 130/1 ratio it is currently.  Unfortunately, the precious metals were not allowed to be apart of this GREAT INFLATION because there just isn't enough physical metal to go around.. if the public started buying hand over fist.

Market Volume Indicating Something Is Really Wrong With The Markets

Not only have the precious metals disconnected from the broader stocks markets (shown in the first chart above), if we look at the volume at the S&P 500 and the silver price, we can spot another troubling sign:

SP Long Term Chart

After the S&P 500 hit its low of 666 points in 2009, overall trading volume continued to decline.  While I have mentioned this before in a previous article, I have looked at this trend in a different way.  We must remember, a healthy stock or index rises along with its trading volume.  This is precisely what took place with the S&P 500 from 2000-2009.  However, the opposite has taken place since 2008-9, when the U.S. financial system suffered a severe heart-attack.

Now, if we look at the Silver price chart, we see a much different picture:

Silver Long Term Chart

As the silver price trended higher since 2000, so did its trading volume.  While its trading volume spiked in 2011 (along with the price) and the fell lower, its overall trend has been higher.  Again, this is nothing new, but what I realized is this important factor:

While the S&P 500 Index has been moving higher on a declining amount of trading volume, this has seriously INFLATED its true value.  On the other hand, as the silver price has been moving lower or sideways as its trading volume has increased, its value has been severally DEFLATED.

Basically, the S&P 500 Index is moving higher on lower and lower volume, thus INFLATING its value.  Now compare that to the Silver price which is being DEFLATED by an increasing amount of paper trading contracts.

Yes, it is true that a Future's Market was designed to properly hedge producers and buyers of commodities, metals and energy.  However, gold and silver do not behave like most commodities that are consumed.  Gold and silver also perform as monetary assets or stores of value.  By increasing the paper trading volume of gold or silver, it diminishes its role as a monetary or store of value asset.

Of course, this is being done on purpose.  While the Fed and Central Banks continue to prop up the broader stock, bond and real estate markets with money printing, debt and derivatives, the ENERGY that they are relying upon to continue BUSINESS AS USUAL, is in serious trouble.

If you have not read my article, THE BLOOD BATH CONTINUES IN THE U.S. MAJOR OIL INDUSTRY, it provides clear evidence that the big U.S. oil companies, ExxonMobil, Chevron and ConocoPhillips are going into serious debt to pay for capital expenditures or pay shareholder dividends.  This is not a business model that is sustainable in the long run.  Something is going to give... and in a BIG WAY.

The Great Precious Metals Market disconnect is a ticking TIME BOMB.  Even though it is impossible to forecast when the bomb will go off, logic suggests the S&P 500 will head LOWER, while the price of silver (and gold) will head HIGHER.

Lastly, if you haven't checked out our new PRECIOUS METALS INVESTING section or our new LOWEST COST PRECIOUS METALS STORAGE page, I highly recommend you do.

Check back for new articles and updates at the SRSrocco Report.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Silver Savior's picture

I am now starting to buy bismuth bullion too. It's even more undervalued than silver and more rare. 

meterman's picture

In Gold & Silver the Hucksters rule. Stay away.

blahzay's picture

Economist Dent of the demographics economic school writes that gold and silver prices are based on the demand from the ever-aging baby boomers and as they continue to superannuate the price of both will continue to recede 'til silver is at $5 or $6 an ounce.  He has written this several years in a row and I've seen it myself in just the past six years go from close to $50 to $12 with a few bumps here and there (knowing it is at about $18 now).  I hate to say it but Dent seems to be correct.  After the last of the baby boomers are gone Dent says the price will rise with the exception of a temporary huge increase in case of a collapse.  This analysis I find interesting.

Games Without Frontiers's picture

Dent is making a HUGE assumption that central banks won't print money until their eyes bleed to avoid deflation. Deflation makes our monetary system unsustainable, and it won't happen. They will get their inflation.

Doug Eberhardt's picture

Games, Dent is an extremist, but you might be missing something that many one sided Austrian economists miss too (not all). Yes, the printing presses will be cranking. But 2 things; 1. The Fed reacts as they are not proactive. 2. The printing is miniscule in size to the decades of "credit" that will be unwound. The printed dollars do some plugging, but as the crack in the credit dam grows bigger, there are no tools to stop it in its tracks quickly enough. 

I sell gold and don't just take one side like Willie, Schiff, Rickards. I am presently bullish as the dollar falls, but we have one more deflationary "credit" contraction to come, then gold will take off like never before in a chase for "real" wealth, not an illusion of it (paper assets). 

Fathead Slim's picture
Fathead Slim (not verified) blahzay Feb 19, 2017 1:42 AM

You sound like someone who has no PM at all . Why do you care anyway?

HANGEMHIGHER's picture

Paper money is turning to shite, how much shite will it take to buy a solid silver coin?

Ajax_USB_Port_Repair_Service_'s picture

$18/oz. And if silver doubles in price, it will STILL be below its all-time high.

Hope Copy's picture

When China and Russia demand that trades be backed by gold or silver for insurance for balance of trade, then you will see a scramble that will pop the markets for the metals commodities, but with the pushing of cashless purchases (with the 'invisible' percentages in the payment) the trend for gold and silver as investment is offset by bank earnings.  It is the breaking of the trade agrements that will set the bonding of overseas trade in real SDR units that will punch up the market, and death of the T-bill.

Ex-Oligarch's picture

Questions from someone (me) who does not understand the precious metals markets.

1.  That top chart is pretty, but I don't understand why the silver/gold ratio is being compared to a stock index.  Wouldn't it make more sense to compare a PM price rather than a ratio?
2.  If the author is right that PM price anomalies are linked to demand outpacing physical supply, shouldn't his analysis differentiate statistics for paper from physical prices?
3. If the silver-gold ratio has disconnected from its historical pattern mirroring the stock index by dropping, doesn't that suggest silver is undervalued relative to gold -- rather than suggesting (as the author seems to) that both metals are undervalued?

Any help appreciated.

blahzay's picture

Oli, you and I are in same boat so to speak.  You wrote, "2.  If the author is right that PM price anomalies are linked to demand outpacing physical supply, shouldn't his analysis differentiate statistics for paper from physical prices?"  See, what is happening is the big screw-job from Wall Street because even though they know much of the paper silver is NOT backed by real silver Wall Street still counts it the same.  Much of the paper is actually just a long-shot Las Vegas-style craps table bet.  Nothing more.   I think if there is now (and I don't know it to be true or not) a separate valuation for physical and another for paper silver that the physical should be much higher.

sacredfire's picture

Willie has been saying the same thing for years and it has not come true and doesn't appear that it will. No one has been able to answer this simple question. If fiat goes to hell what are you going to buy with an ounce of gold or silver? Commodities are manufactured for mass distribution not limited bartering reduced to haggling over a piece of gold or silver in your neighborhood. There will be no food to feed the masses whether you have gold, silver or nothing. Those of you that live off the grid can't read this because you are off the grid! Those of us who don't live off the grid , like 99.9% of us are screwed when this house of cards falls. Am I wrong?

slicktroutman's picture

When the SHTF Some will last longer than others. Those without silver and/or physical gold and guns will not survive.

Fathead Slim's picture
Fathead Slim (not verified) sacredfire Feb 19, 2017 1:46 AM

Of course you're wrong. Gold and silver are not commodities. They aren't used for barter. Any further on this is wasted on you and those who think the way you do.

tuetenueggel's picture

Yes you´re wrong.

With precious metals you can buy ground to supply yourself if you need to.

You always can buy half a pig with an gold-eagle, as my grandparents could after 1945.

Even my Grand grand parents after WW1 could buy food for my parents with those years´ money that was called Gold Mark  ( a coin that containes 7,3 gr, pure Gold ).

After WW2 cigarettes, alcohol where the goods to pay with and of course Gold.

So Gold and Silver are an insurance against FIAT money.

 

 

 

 

HermanVanCuckold's picture

PM is insurance against fiat risks. Considering the shitty yield and overpriced stock market it is a no brainer to hold some. If everything goes completely to shit you might be fucked anyway, but better to insure against some risks than none.

Dragon HAwk's picture

Well scenarios do exist, where the speculators die off and starve, and the producers can survive.

a lot of scenarios exist where the Elite/Speculator types get hunted down and roasted on Spits

Survival Skills come in many styles. Selling your trophy Wife will only work for a little while.

Silver Savior's picture

Silver is the cornerstone of my existence. I live for silver! Gold is ok too but you get hardly anything when you go to buy it. The stock and real estate markets can both just go to hell.

tuetenueggel's picture

Ok with dollares and shares you at least can start your chimney.

antidisestablishmentarianismishness's picture

complete stone-age mentality horseshit served up on a platter for the ZH bunker dwellers

EddieBurgerPie's picture

An other downvote. haha Things sure have changed since ABC Media took over this site. Keep on stacking & Illegitimi non carborundum.

EddieBurgerPie's picture

antidisestablis I have a few questions for you to think about. No need to reply because I have thought these things through and have lived, traveled, seen and studied enough to have my opinion. This should be a fun exercise! Do you understand the principles of sound money? Do you know about the history of fiat currency? Do you think gold and silver will go to an intrinsic value zero as have currencies? Do you believe in having insurance in case the future is not as rosey as the media predicts? Do you have any reasonable alternative hard asset that has no third party risk that is better than PMs?

I have only about 2% of my net worth in PMs which is still in the top 1% of people in the world. I've been aquiring slowly and not buying a new car every 3 years or going on vacation as much as I would wish. I see myself as a realist in a extremely volitile world. I also had businesses in Venezuela and have seen the once wealthiest nation in Latin America turn into a virtual Mad Max dystopia with the worst economic growth and worst inflation of any nation in the world. Let's not talk about murder rate. I've seen people's pensions that once paid for a meager monthly living expenses go to not being enough for one meal. People who got out early did ok and if they stayed but had thier savings in PMs gained purchacing power... Don't think it can happen where you live? Are you so sure that the people at the Federal Reserve have your best interests in mind? Or is there a small possibility that they have other plans that don't include making you wealthier? Don't think people value PMs Have you traveled to the east (which dwarfs western societies poplulation) or know how they all value PMs? Do you think the richest people in the world don't own any or will want to aquire more? Do you think that price surpression of PMs is still only rumor? Do you think there could be a conspiracy to keep the general population economically illiterate and why it would be done and by who?  Hope you enjoyed my ZH bunker dweller spiel. 

Fathead Slim's picture
Fathead Slim (not verified) EddieBurgerPie Feb 19, 2017 1:49 AM

Eddie, the asshole you're responding to will probably never read your post, but I read it with interest. Keep it up.

Fred C Dobbs's picture

The professor I had in the 1970's when I was doing undergraduate work in an investment class said to keep at least 3 percent in precious metals at all times.  Today that would mean if you have a net worth of 1 million dollars you would have 20 gold coins and are a crazy to do so. 

Lies All Lies's picture

I gave you an up-tic for a nice turn of phrase...

SILVERGEDDON's picture

Go suck some more FED and banker dick for your digital taxed fiat currency reward, you rama lama ding dong skittle shitting rainbow unicorn Klingon from Uranus special school bus hockey helmet wearing fucktard. 

ZH FNG's picture

Eddie's comment above is excellent but you, Silver, win the Blazing Saddles Rivulets of Thought prize of the day! 

https://youtu.be/37v-6Zs5T10

Conax's picture

"Well... we're waiting!"

~Judge Smails

https://youtu.be/hWJX9yUKJeQ?t=18

Dragon HAwk's picture

Just keep telling people to buy just an OZ or two  " Just In Case " as more people get educated, the better off the world will be.  the more owners in small quantities, the easier it is to sell and trade with it at a fair price.

tuetenueggel's picture

For small purchasing there´s silver. For larger one gold will be the new money.

TeamDepends's picture

Silver will catch, then blow past gold in value over the next decade.

tailgunner's picture

Jlm Willie continues to show Gold headed to 3000, then 5000, and ultimately 10,000 dollars per once in todays dollar value.  The date of all of this will get into gear when the reset begins in earnest, and the collapse shows fiat to be worthless.  Silver is in very short supply in large purchases and the lid on that will come off in the above situation.  Small volume buys fall into line with the lie of plenty of silver.  This information is from his last few letters and the current one.  He has been right on a large percentage of his predictions, a few took more time, but came through. 

 

Oh, I own no stock in Mr. Willie, but have followed him for years.

sparksmass's picture

Willie is a liar, who's con game includes making up crazy lies to spout, so listeners and readers hear things they have'nt heard anywhere else, (because they are completely made up), and then think he must have some exclusive sources, and figure its worth it to buy his newsletter.

Obadiah's picture

I like to listen to him just to place a little bit of what if in my mind... sooner or later gold and silver WILL be the final plays

Lies All Lies's picture

Jim Willie totally missed deflation. For years he was going on & on about how hyperinflation was going to hit. WRONG! (oh wait! a stopped clock is right at some stage - so Jimbo may get his hyper sooner or later. Just wouldn't want to invest based on his timing) 

PS one of the few who really nailed it was Stoneleigh of The Automatic Earth. Pity she's gone off with the fairies or commune dwellers in  deepest, darkest NZ.

kahplunk's picture

Have you seen the price of real food? not that corprate ran cancer junk food. My coast over the last 10 years has doubled. Grass fed beef pasture chicken and eggs all went through the roof. not to mention tree nuts and organic greens. Last time I checked pine nuts shit was around 40bucks a pound. So yes inflation has killed this household. I refuse to let my family eat junk so I sold my house and moved into an apartment.

Obadiah's picture

Metal and/or Commodity Backed Treasury Dollars will fix the Petro-Dollar I.O.U.'s once and for all.

 

BITCHEZ

JTimchenko's picture

In my opinion, the situation in precious metals is very clear and in line with Mr. Goodman's analysis of the market found here, and updated in subsequent articles:

http://averybgoodman.com/myblog/2016/11/22/making-sense-of-elections-the...

He says, basically, we are seeing an upward drift in prices due to the cutoff, or impending cutoff, of the banksters from the supply of physical gold they were using to fill the shortfall between supply and demand. If you read the article, and the followup articles, you'll see that he's been right, virtually to the day, on the price movement over the last three months, which is impressive, and leads me to believe he is correct.

Prices are supposed to continue moving steadily upward, with a few pullbacks, in line with price now being driven by physical demand rather than the sentiment of the dimwit hedge fund managers who try to get rich quick on COMEX.

tuetenueggel's picture

It´s not the physical demand which drives prices up but production cost which reaches

almost 1100 $/oz Gold. There´s no space downwards any longer.

kahplunk's picture

sweet I grabed 20 oz/ of the stuff when it hit 1050 paid 1150 per eagle I got my eye on a beach house along Orgone coast ~~

SuperVinci's picture

SRSDumbo is the one to follow. EROI, ldo!

Obadiah's picture

+1 very good  quoting Avery

 

The dollar is now nothing more than 95% electronic digital notations on a banking ledger.

 

shit no wonder the value is 5% of first issuance

 

those lil bitches

kahplunk's picture

Just read AVERY B. GOODMAN BLOG great read seems he hit the nail.