Gold/Silver

Thanks to a link on ZeroHedge, I read this report by Project Mayhem Research Inc. According to the report, the iShares SLV and London-based ETFS physical silver funds both have inaccurate records regarding the levels of physical silver inventory. The report states that there is significant duplication of silver  and the actual amounts are lower than reported. This indicates a high statistical likelihood of “systematic fraud or gross neligence” in the accounting of both silver ETFs. Since silver ETFs are now accepted forms of delivery on the COMEX (futures trading exchange) proper accounting is the only way establish proper silver price discovery. No wonder prices of silver are so low! There’s fraud everywhere!

Silveretfs 1 PDF

If you’re buying silver or gold as an insurance policy against financial disaster, it makes sense to hold the actual commodity in its physical form rather than a piece of paper. If you’re buying such humongous quantities that you  must buy paper, buy the Perth Mint Silver Certificates instead.

For the rest of you regular folk, just buy silver coins like peace silver dollars or silver bars.  And if you like to collect pretty shiny objects, silver coins are the way to go! Collecting American silver coins is a great way to introduce your kids to the value of money and savings!

I just finished reading John Mauldin’s weekly newsletter. He has a very interesting graph that I’m reproducing below.

5-trillion-in-sovereign-debt-issuance

This year there’s an expected $5.3 Trillion dollars in new sovereign debt issuance!  He asks a great question – where is this money going to come from? Most of this money is going to bank bailouts and increased government spending.  The resulting decrease in imports and increase in government spending will of course make our GDP look rosier than it actually is. So there’s a good chance we’ll hear news reports of the economy improving even though there’s absolutely no improvement whatsoever!

So even though I’m concerned that the US is printing money hand over fist, it seems everyone is just doing the same thing. Unfortunately, we’re “winning”.   I still think we’ll see hyperinflation during this cycle and even though the USD may not weaken against foreign currencies, it should depreciate against real assets like gold and silver, and towards the tail-end of the cycle maybe real estate too.  I strongly doubt we’ll see any sort of quick recovery any time soon.  And if you want to read an entertaining article on why you should short the US, proceed on to Ahlgren Multiverse.

According to a recent report from Bloomberg, Northwestern Mutual Life Insurance Co., the third-largest U.S. life insurer, has been buying gold. This is the first time in its 152-year history that Northwestern has purchased gold.

According to Northwestern CEO Edward Zore, “Gold just seems to make sense; it’s a store of value. In the Depression, gold did very, very well.”

According to Bloomberg, Northwestern has accumulated about $400 million in gold. CEO Zore believes that the price of gold could double “or even rise fivefold” if the economy continues to weaken. “The downside risk is limited, but the upside is large,” Zore said. “We have stocks in our portfolio that lost 95%.” But gold “is not going down to $90.”

Despite the rise in “cash for gold” TV ads and billboards, people are still generally skeptical about buying gold as an investment or hedge against inflation. As I’ve said before, I think gold will be the next bubble as people eventually lose confidence in the dollar and US governments ability to repay its debt.

Check out the increase in the money supply over the past year.

Exploding Money Supply

A lot of you will protest that it hasn’t really increased and that the banks that got the money from the Fed have just given back to the Fed to shore up their reserves. True, and the Fed is paying the banks interest on this money too. But as some point the Fed is going to stop paying interest, and the greedy bankers are going to start lending this money out. The Fed hopes that this money will work its way into the economy in a slow and orderly fashion, so it takes maybe 5-10 years to enter the system and not rush in all of a sudden, because if it did the result would be similar a massive drug overdose. But in smaller amounts, its more palatable with contained inflation. But it will result in inflation nonetheless. And when it does, gold prices are likely to keep on rising.

If you interested in buying gold coins check out my previous posts on gold/silver and coins, as well as my personal list of favorite gold coins.

I’m a fan of Jim Rogers. He wrote a book ten years predicting a run in commodities. He also wrote one of my favorite books, Adventure Capitalist, a fascinating story of his journey around the world where he talks about the macro-economy of each place he visits.

Here’s a recent video on Bloomberg. He thinks US stocks suck and the US Bond market is the last bubble left and mentions TBT. Here’s my post on my short bond trade. There may even be a currency crisis in the US and other countries. I still think its a good time to buy gold!

Last week, an 1804 Adams-Carter Silver dollar sold at auction for a whopping $2.3 million.  That’s a pretty good amount for  1 ounce of silver worth about $12! There are only 15 such coins known to exist and they’re quite popular.

1804_silver_dollar_adams_carter

The buyer was New Jersey dealer John Albanese, who said that the price was “basically a half-million down from last year because of the recession. It was a good opportunity. These don’t come around all the time.” The coin, the finest Class III 1804 dollar outside museums and available to collectors, had been expected to fetch $2 million.

The varieties of 1804 silver dollars are known as Class I, Class II, and Class III. The Class I pieces are sometimes called Originals, although that name is inaccurate, since they were struck in 1834 rather than 1804. The Class II and Class III pieces are sometimes called Restrikes, also an inaccurate name since there were technically no Originals.

1804_silver_dollar_adams_carter2

A single obverse die and two reverse dies were created for all of the 1804 dollars, and it is virtually certain that the dies were all made at the same time, certainly no later than 1834. The dies were also produced by the same engraver. The two reverse dies have been designated as Reverse X and Reverse Y, following past literature on the subject.

Assuming these were minted in 1834 and are thus 175 years ago, that means the coin appreciated 8.731% a year. Not a bad rate of return!  Hopefully, someday my collection of Morgan Silver Dollars and Peace Silver Dollars will be worth something too.

Today’s guest post comes from Bruce, CEO of Superior Gold.

Last year I wrote an article for Living Off Dividends & Passive Income outlining 10 reasons why gold would break $1000. It was a conservative estimate at the time, which was achieved later in the year. Since then the Dow has touched 6400 points, many major U.S. banks have collapsed and the U.S. economy is searching for sound footing during a recession that may or may not be half way completed.

At the time of my article Gold was around $880 and some good people at LivingOffDividends.com made it seem as though I was predicting an imminent U.S. led invasion of China.

The president of Superior Gold Group thinks I should buy gold? Shocker.

– The Writer’s Coin

Alan Greenspan (Federal Reserve), Jim Cramer (Stock) and Ron Paul (Congressmen) have all recently recommended gold for diversity and protection.

When I invest, I only invest with the long-term in mind, so I’ll never drop any money into gold. It’s too volatile, simply because it relies on the economy and stock market to be in a slump.

– Erick Folgate

I would consider a Dow that swings from 13,000 to 6,500 in 14 months the definition of volatility, but then again I am no stock expert.

These guys have a right to their opinion and I have a right to mine. In the article I mentioned various reasons for Gold’s ascent and those reasons have only strengthened in the past year. Unlike the Wall Street Investment Bankers of now defunct financial powerhouses or Ponzi scheme Billionaires, as the president of the Superior Gold Group I actually have to look at many of my clients face to face. I have a vested interest in making the best analysis of the financial markets so that I can relay them to my clients and guide them into sound financial decisions. On to this year’s predictions:

Gold Prices in 2009

Clearly when you read the charts, government reports or listened to politicians it is clear that the United States and prominent economies around the world are searching for an end to their economic troubles. Gold is headed to $3,000….. or so the Gold bears would love for me to predict so that they can label me a Gold Bug or Gold Zealot ala Harry Dent and his 35,000 Dow projection. I am not in the projection business I am in the wealth protection business.

Any “expert” can make a prediction. At the Superior Gold Group we focus on understanding trends and making conservative projections that allow our clients to maintain a balanced and diversified portfolio that will never consist of 100% exposure of any one single asset class.

Wall Street trained financial planners never discuss physical gold/silver. Real Estate Brokers/Agents never discuss owning physical gold/silver. What they discuss is how this stock or this house will double in X time, but rarely discuss diversity. True diversity is the only way to protect your assets from turbulence and calamity in the markets.

We educate each of our clients on the importance of diversifying their portfolios. You would not believe the amount of American workers and investors that our company has had to console because their IRA and 401(k) are worth 40% less than it was just 18 months ago thanks to a severe deficiency of alternate investment forms.

Why Buy Gold in 2009?

One takes a position in Gold/Silver for many reasons. Just like any other investment, one size never fits all. We have recommended that our clients purchase Gold for wealth protection. Historically, the price of gold “does not change”. In reality, gold remains a constant price in relation to the currency it is compared to. In other words as the dollar gets weaker, the price of gold goes up. The inverse is true as well, but consider this; In 1932, the price of gold was roughly $20 for an ounce of gold. Today that same gold ounce sells for $925 (3/17/09). Gold is the hedge against inflation for your portfolio.

So the decision to own gold is really simple. If you believe that the U.S. Economy is growing, real estate prices are stable and your retirement account is performing smoothly, DON’T BUY GOLD. However, if you like me and countless financial strategist have loudly predicted that economic recovery is years in the making, protect your Portfolio today by taking a position in Gold of at least 10% of your total exposure.

– Bruce Sands.

The first question you’re probably asking is whether gold is a good investment to begin with. Take a look at the performance of gold prices over the past 5 years versus the stock market.

gold_prices_vs_dow_jones_5_years

[Updated on June 2011] As you can see, gold is up more than 250% since 2005, while the Dow Jones Industrial Index is up about 15% for the same period.  In fact, gold has been the best performing investment for the past decade.

Of course, the best time to buy gold was few years ago, but its still not too late.

The Federal Reserve is doing its best to devalue the US Dollar (buying $600 Billion in US Treasuries will do that). As the dollar, and other currencies continue to drop in value, gold prices will continue to rise.

So how does one invest in gold?

It isn’t difficult and there are 3 main ways:

  1. I like buying gold coins. You can choose between collectible and bullion gold coins.  As the price of gold has increased, the spreads on the collectible coins have increased as well. Check out this list of my favorite gold coins. You can also buy gold bars, but the coins are more interesting and are likely to appreciate more as gold awareness increases.
  2. You can also buy the Gold ETF (GLD).
  3. You can also buy the Gold Miners ETF (GDX). I’ve also invested in this. Gold doesn’t offer any yield, so I periodically sell covered calls against this position to generate some income. Since gold stocks are incredibly volatile, the calls haven’t expired in the money yet. (which means they expire worthless and I get the keep the premium).

So whats your favorite gold investment?

May be I’ve been posting too much doom and gloom in the recent past. Do I really think we’re on the cusp of a global financial meltdown? No, I do not. But Telegraph does. Here’s an excerpt from an article which says the meltdown has already started:

If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.

Austria’s finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria’s GDP.

“A failure rate of 10pc would lead to the collapse of the Austrian financial sector,” reported Der Standard in Vienna. Unfortunately, that is about to happen.

Europeon banks may face write-downs of $25 Trillion dollars! In compaison, Nouriel Roubini’s estimate of $1.8 Trillion in write-downs for US banks seems like chump change.

Whether it takes months, or just weeks, the world is going to discover that Europe’s financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.

Under a “Taylor Rule” analysis, the European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics – a German-Dutch veto – and the Maastricht Treaty.

But I digress. It is East Europe that is blowing up right now.

The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.

This doesn’t sound very encouraging. If there was ever a time to start investing in gold coins, it’s now! If you can’t afford gold, you might want to consider silver coins. Silver prices have been on a tear over the past 3 months. The graph’s been up linearly over 40%!

Looks like I’m not alone in my enthusiasm for gold. For the first time ever, annual demand for gold exceeded $100 billion! According to the WSJ:

Demand for gold surpassed $100 billion last year for the first time ever, amid increased industrial and jewelry consumption and investors’ purchase of the metal as a safe haven, the World Gold Council reported Wednesday.

Gold demand — including jewelry consumption, industrial demand and identifiable investments such as bars, gold coins and gold exchange-traded funds — hit $102 billion in 2008, up 29% from a year ago.

In tonnage terms, gold demand rose 4% to 3,659 tons, the WGC said. Gold holdings in SPDR Gold Shares, the largest gold exchange-traded fund, rose to 1,008.80 tons Tuesday, surpassing the 1,000 ton level for the first time, according to the latest data from the fund. The total was up more than 200 tons from a month ago.

Gold is now about $26 below its all-time high above $1,003 an ounce, hit in March 2008. Talk of “gunning for the $1,000 level” should keep buyers at the helm, said Jon Nadler, senior analyst at Kitco Bullion Dealers.

Helping gold prices hold firm Wednesday was more gloomy news from the U.S. economy.

Doesn’t seem like the market has any faith in Obama’s economic recovery plan. Gold and silver prices have spiked and the stock market’s declined.

In the previous post on Peter Schiff, some of the commenters suggested diversifying out of the US dollar and economy and instead investing in natural resource rich countries like Canada and Australia. One person who supports this theory is Marc Faber. He thinks there’s a strong possibility that the US might see 200% inflation. Right now he says its reversible “in theory”, but he’s confident that we’ll follow Zimbabwe down the road of Mugabe economics and devaluation of the dollar (which will be bullish for gold!).

“In the US, we have a totally new school, and it’s called the Zimbabwe school. And it’s founded by one of the great leaders of this world, Mr Robert Mugabe, that has managed to totally impoverish his own country. And that is the monetary policy the US is pursuing.”

Faber also thinks that US government bonds should have junk bond status!

Another person who’s bullish on gold (and therefore by default, bearish on the dollar) is David Einhorn of Greenlight Capital, who correctly predicted the fall of Lehman and other financial companies. In his recent newsletter to his shareholders, he was almost apologetic about investing in gold mining stocks right now.

We never thought we would ever buy gold or gold stocks. David’s grandfather Benjamin was a goldbug… And it was a lousy investment. Being a patient investor is one thing. Being ‘wrong’ for three decades is quite another.

To everyone’s dismay, we believe that some of Grandpa Ben’s predictions are playing out. Our current chairman of the Federal Reserve, Ben Bernanke, is an ‘inflationist.’ … The size of the Fed’s balance sheet is exploding and the currency is being debased… Our instinct is that gold will do good either way; deflation will lead to further steps to debase the currency, while inflation speaks for itself. We have bought gold, calls on gold, an index of gold mining stocks (GDX) and calls on higher long-term U.S. interest rates.

You can read his entire shareholder letter here. It’s informative and very easy to read.

[Note: I’m bullish on gold and own GDX.]