The GREAT Arbitrage Opportunity Written by Jeff Nielson, Sprott Money News 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. ...
Sprott Money considers the following as important: Alan Greenspan, Arbitrage, B+, Bitcoin, Business, Business cycle, Central Banks, Economic bubble, Economy, Finance, Financial economics, financial markets, Gold as an investment, Gold Standard, inflation, Japan, money, Precious Metals, Real Estate, Sovereign Debt
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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.
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.
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.
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.