In declining markets such as the current one for gold and silver, it is important to examine the cause of the decline. This helps determine whether the downside volatility is temporary or implies a systemic change in fundamentals, reversing the longstanding trend.

Since December 8, 2011, gold declined from a high of $1760/oz. to a low on December 15, 2011 of $1560/oz.—a stunning $200/oz. decline (-11.4%)-- in merely a week. Over the same time frame, silver fell from a high of $33.25 to $28.25—a $5/oz. decline (-15%).

Some prognosticators like Dennis Gartman, whose publication The Gartman Letter caters to hedge funds, claims that the 11-year bull market for precious metals is over! If so, then it begs the question, “What has suddenly changed to push fiat paper money, which governments print ad nauseam and has nothing but “confidence” behind it, to the forefront ahead of rare, intrinsically-valued currencies like gold and silver?”

Well, to keen observers one thing has definitely changed--the gold lease rate. Suspiciously, the short-term 3-month lease rates of gold have suddenly turned negative and declined to a historical low of -.5%. This means that central banks (European Central Bank, Bank of England, Bank of International Settlements, and probably the U.S. Federal Reserve) are now paying European commercial banks .5% annually to borrow their gold. That would be like you and I walking into a BankAmerica branch and being paid to borrow money!

Now, we know there has been a dollar shortage among the large, stressed European commercial banks, which prompted the Federal Reserve to implement swap lines recently, providing liquidity relief. Evidently, this was insufficient. So, the western central banks have enticed the European commercial banks to borrow gold, providing collateral that they could sell into the market in order to raise additional desperately-needed dollar liquidity. Ironically, this maneuver temporarily reverses the recent trend whereby governments have collectively been increasing their gold holdings.

Of course, none of this activity is disclosed by the “officials” because transactions involving gold are rarely revealed by western central banks. As Chris Powell of GATA often points out, one is more likely to be able to obtain information on building a nuclear bomb than disclosures regarding central bank gold activity. Presumably, the gold leases and subsequent sales into the market amounted to several hundred tons and was enough to cause such a sharp sudden drop in the gold price. Already the 3-month lease rate has turned neutral (0%) and gold has recovered back to $1600/oz., indicating a reduction in the lease/sale activity. However, a continual recovery over the next few days/weeks will be necessary to determine whether this pressure has subsided for good.

In all probability, another objective for this covert action is an attempt to maintain a lid on the gold price—after all, it is a political metal. With massive borrowing requirements in both Europe and the U.S. next year, quantitative easing (printing of money) will be a necessity. This will undoubtedly drive gold and silver prices much higher and cause “officials” continual concern about a rising gold price setting off the sirens of economic and financial stress. Reflecting on this recent central bank maneuver, John Embry of Sprott Asset Management reflects, “I’ve been through this (takedown) so many times whereby the gold cartel can take the gold market apart and scare the life out of many investors, and its just noise. It’s gone on over and over again. In the end this will pass like they all have and gold will move on to new highs.”

According to famed gold prognosticator James Sinclair, who believes that gold will ultimately reach a price of $4500/oz. or higher during this bull market, “As the deflationary forces (recession, rising unemployment, decline in asset and commodity prices) continue to surface you will see the absolute opposite. I firmly believe you are more apt to have QE (quantitative easing) to infinity than you are to welcome rising unemployment and declining business activity.” In other words, given a choice between deflation and inflation, politicians will always choose the latter. Sinclair’s website contributor and analyst Dan Norcini adds, “Central Bankers are going to panic if a deflation mindset takes hold and will be forced to act.” Perhaps Fed Chairman Ben Bernanke tipped his hand on December 15th when Bloomberg reported that he “signaled he’s concerned Europe’s crisis will hobble a 2 ½-year U.S. expansion that may need another boost from the central bank.”

Marshall Auerback of Pinetree Capital concurs with Sinclair and predicts that as the recessionary winds blow across Europe and the UK early next year, China and the U.S. will also slow down. Then, he expects “one last global inflationary push driving gold parabolic to $3000-4000/oz. in the first half of 2012.”

Even the Technical Analysis Group at bullion bank Citigroup believes that gold will reach $2400/oz. in the latter half of 2012 and $3400/oz. over the next two years! (Presumably, the gold shorts have been covered at Citigroup.)

Jim Rickards, Senior Managing Director at Tangent Capital Markets and author of Currency Wars: The Making of the Next Global Crisis, points out that, “The European Central Bank will print when they see some deflation, and the Fed will print if the dollar gets stronger because the Fed needs the dollar to be weaker. With all of this printing coming on stream, you can rest assured the price of gold is going a lot higher.” Rickards ultimately believes that central banks will be forced to return to a form of gold standard and the price may rise as high as $7000/oz. or higher.

During 2012, all three respected precious metal prognosticators, James Turk of goldmoney.com, Bill Murphy of GATA, and David Morgan of Silver Investor, believe that silver will reach $70/oz. John Embry adds, “As much as I love the gold story, the silver story is much stronger because of the lack of above-ground supply. In the future, there won’t be enough silver to fill the demand for investment purposes and the price is going to go berserk to the upside.”

With so much potential price escalation for gold and silver in 2012, mining equities, which had a horrible 2011 and diverted from the bullion price increase, should rebound sharply. John Corcoran, Manager of the Oppenheimer Precious Metal Fund, says, “Mining stocks are as cheap as they’ve been in a generation.” He points out that these divergences have occurred three times in the past 28 years and every time, mining equities have snapped back the following year.

Reflecting further on mining equities is Richard Russell who has written the newsletter The Dow Theory Letter since 1958. While recently advising his readers to sell all traditional stocks, he claims, “Personally, I’m staying with my gold mining stocks until the bitter end. I continue to believe that we’ll see a final hysterical blow-off in gold that will carry the mining stocks with it.”

John Embry points out, “I have never, ever seen a number of these good quality juniors (exploration companies) as cheap relative to the price of gold and silver as they are now. If I’m correct and the gold and silver prices are on the cusp of a major upward move, I think the potential in these stocks is staggering!” He adds, “Basically, it’s just a matter of patience.”

Patience is something we have been encouraging for a long time because we ultimately believe that the reward will be significant. The past few years have been frustrating ever since JP Morgan crushed the metal prices in late 2008, reversing the positive market sentiment existing in the mining sector. Now that the global economies are facing the massive difficulties anticipated when we originally entered the precious metal sector in 2001, we feel that we are on the verge of an explosive upward move.

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