Exters Pyramid & the Rush

We often talk about the supply, demand, price equation in a market where hundreds of trillions of dollars worth of ‘paper assets’ try to buy the meagre (now) $8 trillion of gold or more importantly $1.5 trillion of investable gold.  You can’t simply change the supply of gold.  Period.  That leaves price as the only parameter that can adjust to fit that all in.  It has been some time since we shared Exters Pyramid but it is timely to do so again now.

Below is (a somewhat out of date, but only worse) Exters Pyramid that pictorially captures what we often talk about in terms of the 5000 year old bedrock asset of gold that has no counterparty risk, is no ones liability, and has throughout those 5000 years, been the one surviving monetary asset.  Silver can be inherently included in the gold tip but against the $8 trillion of gold, is only $0.025 by comparison. (but as we discuss later that makes it even more enticing).

One needs to look at the above diagram (or this more detailed version we shared in 2020) and consider the grotesque distortions throughout financial markets today and how that impacts all those intertwined derivatives.

The key word there is derivative.  Derivatives introduce counterparty risk or so called “paper promises” to various underlying assets.  Check out the following chart for silver on the COMEX futures markets showing the number of silver contracts added to March deliveries since they began.  Now imagine if they all demanded delivery…

That’s futures… there are reports too that there is 20-25 million troy ounces of physical silver owed to the world’s largest ETF, SLV….

Silver is a relatively tiny market and such early signs of demand supply distortions cannot be ignored.  Eventually something can snap and the price adjusts to reality of demand masked by the ‘big shorts’.  A small market is easier to hold down like that…until it can’t. Then it’s same supply / demand / price equation get REALLY exciting with that small supply parameter.

Another way to imagine Exters Pyramid is as a funnel.  Imagine when all that above gold tries to exit the funnel.  Think of the price of gold and silver as how big the funnel exit hole has to get to let it out quickly…