Silver and Oil

I'll start talking about silver by talking about oil, the price of oil and the theory of Peak Oil. In my opinion, the price per barrel of oil is currently the singular most important value in the financial arena, and affects all other values in the broader markets.  If one is not recognizing this, then one is missing the axis around which everything is spinning... oil.

Light sweet crude oil is energy, an extremely condensed energy, easily extracted, cheaply processed and adaptable to many, many uses. The key word in this sentence is 'energy' and the cheap, abundant energy in oil has afforded humans on the planet to grow at a relatively unchecked, runaway pace in terms of population, food, industry, trade, wealth and so on since about the late 1800's and the discovery of fossil fuels. Simply put, energy equals growth, and without a growing base of energy, all related values start to slow, stall and decline.

All charts courtesy of Stockcharts.com

The theory of Peak Oil, more widely recognized each day passing, is the consideration of the idea of how much oil is available to us, how difficult and expensive is the existing resource to extract and process, and what is the current ratio between demand and supply. The theory simply states that a top in the amount of easily gained oil will be met by an increasing demand for it and translate into a steadily rising price with relatively weak 'corrections' or retracements in the price, which from a strictly price point of view is certainly suggested by the current chart.

A rising price in oil forces the reallocation of capital funds throughout the financial world, meaning if a set amount of money is available throughout the overall financial world, which is the underlying reality in a non-growth environment, and the cost of oil rises, then prices elsewhere will have to decline to pay for the shift of values into oil pricing.  This is most evident in the way the stock market has recently been trading inversely to the price of oil. Interpreting this in fundamental terms, a rising price of oil adds to the cost basis of producing companies, and without pricing power, most companies are forced to absorb the higher production costs which translates into less profit and subsequent lower stock prices.

A rising oil price is not inflationary, not in the truest definition of inflation, an often misunderstood concept in popular media.  The only true definition of inflation is an increase in the amount of currency created against an existing basket of goods, and it is a relationship.  When currency is created faster than the growth of goods, you have inflation. While no doubt our current monetary system is experiencing substantial inflation, and the price of oil is certainly reflecting that to some degree, the majority of the oil price is simply supply and demand, (not evil oil sheiks, motherless futures traders, government conspiracy or corporate greed although everybody has their part to play). As higher oil costs draws values away from prices elsewhere in the economy, the result is in fact, deflationary or at least depressive in terms of other values.  The only counterbalance to this trend is true inflation, which buoys values throughout the system, but ultimately will fail to keep up with the true supply / demand characteristics of the oil equation.

When you are looking at the current price of silver, much of what you are looking at is a combination of these factors; the price of oil and its' impact on production costs, the price of oil and its' deflationary effect on general market valuations, and the counterbalance of the amount of inflation being introduced in to the overall monetary system to support current bond, stock and real estate nominal values. The price of silver represents to a large degree the current balance between these pressures and in an inflationary environment or trend the price will rise, and in a deflationary environment or trend will fall.

Another consideration in the relationship between oil and silver is the concept of Peak Silver. Again, without an expanding energy base, and few industries are as energy consumptive as mining, it is reasonable to assume a peak in the production of mined silver, if not presently, then certainly a possibility in the not so far future. While one cannot exactly overlay a price chart of oil over a price chart of silver and have them match exactly, both exhibit a similar upwards trend, and if one had to, one could probably trade silver based solely on the price movement of oil, as the market action of both these commodities is similar, perhaps both displaying similar supply / demand characteristics.

Peak Oil - What is Peak Oil? - by Graham Strouts

Peak Silver - Roland Watson