The GREAT Arbitrage Opportunity

Sprott Money's picture


The GREAT Arbitrage Opportunity

Written by Jeff Nielson, Sprott Money News

The GREAT Arbitrage Opportunity - Jeff Nielson

 

For the past several years, readers have seen these articles focus on the primary reason for accumulating and holding precious metals: to protect ourselves from the monetary/financial frauds of the banking crime syndicate. These frauds are aimed squarely at stealing our wealth.

 

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.

– Alan Greenspan, 1966

 

This flawed warning (from an extremely flawed individual) is incorrect. In the absence of a gold standard – and Honest Money – we can still protect ourselves from theft-via-inflation by converting our worthless paper currencies into gold and silver money.

 

This is, by far, the most important reason for accumulating precious metals: playing defense against the rapacious crimes of History's worst crime syndicate, the One Bank. But it's not the only strong argument for accumulating precious metals. Ironically, it is the banking crime syndicate itself that has created this major additional incentive to hold gold and silver.

 

Any precious metals investors with any degree of sophistication understand that gold and silver prices are permanently suppressed by the banking crime syndicate. It has a multi-trillion dollar motive to do so: to hide all of its theft-by-money-printing.

 

If gold and silver prices were soaring alongside all this monetary/financial fraud (as they should be doing), the One Bank's theft-by-inflation would be completely unmasked. Indeed, suppressing gold and silver prices have been the single most-intense serial crime committed by the One Bank in all of our markets.

 

Gold and silver prices are not merely suppressed these days, these markets have been completely crushed. Prices are so low that the gold and silver mining industries are both in a permanent depression. Mine reserves for gold mining companies have sunk to a 30-year low. The silver market has had a supply deficit for 30 years.

 

The flip-side of this extreme, serial market crime is that gold and silver represent (by far) the most-undervalued assets in the world today. And that spells the world's greatest arbitrage opportunity.

 

Investors are generally familiar with the concept of arbitrage in terms of buying an asset in one market where it has been mis-priced (under-priced) and then selling that asset for full value in a different market. This is market arbitrage.

 

However, this is a concept that can easily and naturally be extended into different forms. Today, we have some assets (gold and silver) priced at unprecedented lows versus all other asset classes – asset-class arbitrage.

 

Then we have assets priced at extreme highs versus other asset classes.

 

1) Western bonds – These are the unsecured debts of bankrupt governments, presently priced at the highest prices in history.

 

2) U.S. equities – These are the most over-priced equities in the history of markets. Since 2011; there has been virtually zero earnings growth in U.S. markets – while valuations went straight up. For five of the last six quarters, corporate earnings have been falling.

 

3) Western real estate – What do you get from nearly a decade of the lowest (and most-fraudulent) interest rates in History? You get the worst real estate bubbles in history.

 

Including Japan, there are roughly $50 trillion in worthless sovereign debt that is priced at the highest prices in History: the greatest arbitrage opportunity in History. The insane equities bubbles of Wall Street now have total market capitalization of over $20 trillion. The real value of most of these stocks is a tiny fraction of that amount.

 

Then there is Western real estate. Low interest rates are the single strongest driver of real estate bubbles. The lowest interest rates in History, frozen for an entire decade, represent rocket fuel for real estate bubbles. Real estate in many major urban Western markets has never been more over-priced: another $10 trillion or so in grossly over-priced assets.

 

What would happen if even a small portion of these holders of $80+ trillion in History's most over-priced assets attempted to take advantage of the world's greatest arbitrage opportunity? At current, depressed prices, there is less than $5 trillion in gold and silver across the entire planet. Total market cap for all of the ridiculously suppressed gold and silver mining companies is under $1 trillion.

 

If less than 10% of the holders of these grossly over-priced Western assets tried to get into gold and silver they would have to buy up every gold and silver asset on the planet. And in trying to buy up every single gold and silver asset on the planet, that demand pressure alone would send gold and silver prices skyrocketing.

 

Think Bitcoin. The difference? Bitcoin is a virtual currency with no intrinsic value – i.e. an enormous gamble. Gold and silver are hard assets with humanities highest pedigree: nearly 5,000 years of retaining their value. No gamble at all.

 

Investors with their own crystal ball could have written the Bitcoin Rollercoaster to incredible heights. That's true for any gamblers with their own crystal ball. Gold and silver provides a similar investment opportunity, where we can see the upside today, and which represents a 0% gamble.

 

In general terms, gold and silver represent the greatest arbitrage opportunity in History. However, within these assets, the opportunities are by no means equal.

 

Gold


At the end of the Crash of '08, the price of gold was driven below $800/oz (USD). In the Rally of 2009 – 2011; it increased in price by roughly a factor of 2.5. However, as explained in previous articles, even that price level represented only a fraction of any rational valuation for the price of gold.

 

More importantly, there was no capital fleeing into this asset class in the Rally of 2009 – 2011. Quite the opposite. Gold had stronger competition for investor dollars than at any time in History.

 

– Western bonds were being pushed to all-time record highs

 

– U.S. equities had just begun their 9-year bubble run to new bubble-highs

 

– Western real estate markets were near the beginning of the largest/fastest bubble spiral in History

 

With $10's of trillions flooding into these other asset classes, the flow of capital into gold was a relative trickle, and most of that was the gold-buying of Eastern central banks. In any significant “flight of capital”, the increase in the price of gold would be orders of magnitude greater than in the Rally of 2009 – 2011.

 

Silver


All of the previous arguments that apply to the gold market also apply to the silver market, accept to an even greater degree. This is because the level of price suppression with silver is even more extreme than with respect to gold.

 

The immutable price ratio for silver and gold is approximately 15:1. Not only does this reflect the natural supply ratio of the two metals (17:1), it has stood the test of time. For more than 4,000 years; the silver/gold price ratio closely gravitated around 15:1.

 

Today, this ratio is an ultra-absurd 75:1, five times the legitimate ratio – even under normal circumstances. However, circumstances are anything but “normal”.

 

Most of humanity's stockpiles of silver, accumulated over roughly 5,000 years, have been consumed. Somewhere in excess of 80% of all the silver ever mined has been used up (in tiny quantites) in billions of consumer items, and then strewn across the world's landfills.

 

The price of silver would have to increase by an additional factor of five simply to return to historical norms. It would then have to increase by (at least) an additional factor of five to reflect the new supply ratio between the two metals. In other words, whatever potential price one attaches to gold, the price of silver would/could/should rise by at least 25 times that amount.

 

Gold and silver mining companies


The current arbitrage opportunity for gold and silver (as metals) is already astronomical. However, the (more speculative) potential of gold and silver mining companies dwarfs even that opportunity. There are two very important upward drivers of the valuation of mining companies that don't exist with respect to the metals themselves.

 

a) Share prices of the mining companies are more depressed than even the price of silver, in relative terms. On that basis alone, the miners should be expected to appreciate significantly more than the metals.

 

b) Leverage.

 

As has been explained in many previous commentaries, all commodity producers provide natural leverage versus the price of the commodity they produce. Readers who require an explanation of this principle of arithmetic (and markets) can refer to previous articles.

 

While the degree of leverage will vary from mining company to mining company, the existence of such leverage is a constant. Whatever fantastic price potential exists with respect to gold, gold mining companies will provide multiples of that potential. Whatever price potential exists with respect to silver, silver mining companies will provide multiples of that potential.

 

In the Rally of 2009 – 2011; gold and silver junior mining companies as a class were roughly a ten-bagger (i.e. +1,000%). In the Next Rally in this sector, with $trillions in investor capital fleeing for safety, these companies represent nothing less than lottery tickets – in terms of their reward, not their risk.

 

Why assume there will be a flight of capital when the Next Crash arrives, when there was no such flight between 2009 and 2011?


  • Mass insolvency. The Crash of '08 drove the Western world into bankruptcy. These governments have simply been feigning solvency since that time, by using their countless $trillions in reckless money-printing to buy each other's (worthless) bonds. Even with the lowest interest rates in history on their debt (that can't go any lower), few if any of these governments can survive another financial shock.
  • Much bigger bubbles.
  • U.S. equities are at even more extreme valuations, despite rising for the past six years on zero profits
  • Western real estate bubbles have already expanded well beyond the levels at which most residents can live in their own markets. There is only one direction for these prices to go.
  • Western bonds are already at much higher prices than at any time in History, before the (next) crisis begins. As with these other asset classes, there is only one possible direction for prices.

 

 

    Using its propaganda machine, the One Bank was able to create a veneer of normalcy after the Crash of '08. Such a propaganda campaign will not be feasible after the Next Crash, when our economies are already in total ruin.
    The Great Arbitrage Opportunity approaches. What makes this opportunity even better is that all we need to do to take advantage of it is what we are already doing: playing defense.

          Questions or comments about this article? Leave your thoughts HERE.

           

           

           

           

          The GREAT Arbitrage Opportunity

          Written by Jeff Nielson, Sprott Money News

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          AnarchistRex's picture

          Governments have manipulated the price of gold and silver massively to keep people from 'seeing' it as an investment ... they have been very successful at this and they will continue to do this even to the detriment of any and all business that rely upon gold and silver - essentially the market be DAMNED ...

          Gold and Silver will eventually return to real market value - but that won't be until WELL AFTER the collapse of the economy ... not until well after the average joe has had to sell nearly every last ounce at the low price in order to feed themselves and their families.

          As such Gold and Silver are horrible hedges against the coming collapse. Horrible.

          Instead, at the very minimum, buy long life foods. After you have enough of that to last you a month, buy more. When you have enough to last six months, buy more. When you have enough to feed yourself and to trade with your neighbors (for their gold and silver) ... THEN you have enough.

          Once you have ENOUGH to trade your excess food for things that will later on become valuable - then you've engaged in successful arbitrage.

          oneno's picture

          If nationalization is the end-result (by fascist governments), what use does arbitrage provide when the obvious end-result will be confiscation. The CANADA Constitution (writ by the Corporate Crown) already gives the CANADA government the legislative right to confiscate (tax) assets from "citizens/persons" of CANADA as a "citizen" is no different than a slave. They can do this legally via the NAME GAME fraud.

          The NAME GAME can be summarized as follows:
          ------------------------------------------------------------------------
          1. The NAME appearing on any Certificate issued by a Crown Agent is the intellectual property right of the issuer (Crown/State Corporation). See bottom of page 29 in download version of “Crown Copyright in the Information Age” and page 32 in print version for confirmation that copying the NAME opens to fraud.

          2. The Certificate of Birth is a securitized bond containing the sugnatures of one of the child’s parents and the Crown Agent. (All contracts without full disclosure are fraudulent and thus null and void.) The parents have seven years to declare their child alive in front of a Judge under oath and for the record. Otherwise, the child will be deemed a decedent.

          3. The Certificate of Birth is only a receipt copy given to the parent that offerred the signature as “Proof of Title”. The original Title is retained by the Crown and entered into the Crown’s Register of Births. All certificates are only “Proof of Title” and do not constitute Title. Children have Crown protection and can use the NAME without penalty.

          4. Most continue the use of that Crown-owned legal identity NAME upon entering the age of majority allowing presumption and assumption that they have “voluntarily” attached themselves as an accessory to that Crown-owned legal identity NAME. Then by legal maxim “accessio cedit principali” (an accessory attached to a principal becomes the property of the owner of that principal), they are now deemed to be property (slaves) of the Crown. Now all legislation (written or not) can be imposed upon them to harvest the fruits of their labour and for confiscation of any assets in their possession.

          5. It is therefore necessary for each man (male or female) to make reference to that legal fiction NAME without allowing presumption or assumption of theft. This is done through the signature with either of the following examples:

             Scribe for JANE DOE

             I, commonly called “jane of the family doe”, for JANE DOE, for Her Majesty, in right of Province/State

          6. The relationship of the legal fiction NAME to the living free will man is only as AGENT holding and collecting in-trust assets belonging to the undisclosed principal, commonly called <“jane henry of the family doe”>, under private contract of agency to allow that principal to sustain his/her life  under the rule of private necessity.

          7. Any challenge to the signature offerred should be reflected with a three document response demanding proof of property right where you the living free will man became a slave to the Crown or State (via Freedon of Information Act):

             ASSEVERATION                    (Will need three witnesses for this document)
             NOTICE OF UNDERSTANDING AND INTENT AND CLAIM OF RIGHT
             NOTICE AND DEMAND

          If they cannot offer such proof – usually your proof is ‘no response’ – acceptance by ‘silence being acquiescence’ by them of your assertion that you are not a slave owned by the Crown or State.

          Summary from detaxcanada.org

          Source files for site can be found here.

          ------------------------------------------------------------------------

          Experience has shown that if a man in Canada or the US tries to acquire government issued ID using a signature that differentiates between the man and the Crown-owned NAME, such ID is denied leaving the man without access to a Passport, Driver's Licence, and a bank account.

          The man is forced (actually coerced) into attaching the crown-owned NAME to himself for his survival thus allowing the Crown to impose their legislation on the man.

          So now, the Crown can legally confiscate through the NAME any possession lawfully belonging to a man.

          So PM arbitrage in an environment of government coersion and fraud remains a big question.

          Helicopter Rides's picture

          Is there... market manipulation... or just neurotics trying to explain shit.

          PMs are not rising as everything else because these commodities are not targeted by central bankers QEs. Could be just that.

           

          That and that most people are utterly ignorant about gold. Even most normies steping into bitcoin, metals r something alien to them.

          1.21 jigawatts's picture

          Wait, so the Kikes are going to stop printing ETFs at warp drive as needed? 

          Wow, I'm so glad those Kikes are finally giving up on manipulating the PM market. 

          They're handing the power back to us stupid Goyim because its the right thing to do. 

          Bless those Kikes!

          Conax's picture

          To apply as an arbitrage opportunity somebody, somewhere has to pay up the difference. We all know that's not going to happen with the sentiment as it is and silver dealers putting it on sale.

          It is, however a potential windfall opportunity.

          And it is still real money, no matter how many pundits pontificate otherwise.  Reality should reappear at some point, and we will finally be vindicated. The only question is when.

          TheRedScourge's picture

          The problem with this reasoning regarding the gold to silver price ratio is the assumption that the supply and demand dynamics are the same between the two. They are not. Just because there is 15 times more of it does not mean it should be worth 1/15th as much. In reality, silver is a mining byproduct, and so more of it is mined than would otherwise be mined according to demand. If the demand for silver increases, or the supply decreases, then the price will rise, but if neither change from their current levels relative to gold, there is no reason to believe that the ratio should ever change from where it is today.

          Infinite QE's picture

          Ban Sprott for his racist action against Marc Faber. In less than PC terms, fuck Sprott.

          S.N.A.F.U.'s picture

          Fuck Sprott Inc.  Fuck that racist Peter Grosskopf.  And fuck the oppressive "politically correct" mob.  May their allergic reaction to facts and logic as well as their penchant for tyranny be their own undoing.

          (Not your downvoter, but I'm not sure Sprott Money Ltd. has any real relation at this point to Sprott Inc.  Eric Sprott owns/operates Sprott Money Ltd., but stopped being chairman of Sprott Inc back in May.  Maybe he's still connected to Sprott Inc beyond just holding shares, but a quick check didn't turn anything up.)

          LawsofPhysics's picture

          Precisely why the public "markets" will never be allowed to crash again...

          Sprott now argues we should spend more of our fiat currencies investing in a market that he openly admits is being "crushed"...


          Hikikomori's picture

          If you own "worthless paper currency" - I am here to help. I will trade - your one million dollars of worthless paper currency for my one gram of gold.

          HotelBread's picture

          When silver popped to $45 an ounce in 2011, I shrewdly bought.

          I laughed at Bitcoin, then trading at less than a dollar. Ha, ha, ha. Silly Bitcoin.

          Silver today: $18 an ounce.

          Bitcoin: Over $5,000.

          So shrewd I was.

          Snaffew's picture

          do you accept zimbabwe notes?

          hedgeless_horseman's picture

           

          I don't care how great Sprott thinks is the arbitrage opportunity.

          Because I support Free Speech, I will never do business with Sprott...

          http://www.zerohedge.com/news/2017-10-17/sprott-demand-marc-fabers-resig...

          From the comment votes, it appears that most ZH readers agree with me.