silver

All posts tagged silver

But despite the panic of 2008, the belief that gold is a foolish “investment” still persists.

I’ve been a strong advocate of gold and silver since 2005. Back then, I sold my condo and used some of the proceeds to buy some gold coins. When I started buying, the price of gold was $495/oz. Today it’s hovering around $1,600/oz.

A lot of people I know complained that gold is relic from olden times. That it has no use in the modern era. Of course, this was before 2008 when it seemed like the entire financial system was about to crumble.

Even Warren Buffett, the Oracle of Omaha, took an opportunity to ridicule gold in his latest shareholder letter.

Buffett wrote,

“Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion. Call this cube pile A.”

“Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?”

While I have a lot of respect for Buffett’s views and also own stock in Berkshire Hathaway, I’m going to have to disagree with him on this one.

Gold has always been a store of value. And a valuable hedge against monetary mismanagement – something we (and Europe) are currently experiencing.

David Einhorn, manager of Greenlight Capital, World Poker Champion and author of Fooling Some of the People All of the Time also disagrees. He had an excellent comeback for Buffett’s derision of gold.

In his recent shareholder letter, he referenced Buffett’s analogy, but with an interesting twist.

“The debate around currencies, cash, and cash equivalents continues. Over the last few years, we have come to doubt whether cash will serve as a good store of value. If you wrapped up all the $100 bills in circulation, it would form a cube about 74 feet per side. If you stacked the money seven feet high, you could store it in a warehouse roughly the size of a football field. The value of all that cash would be about a trillion dollars. In a hundred years, that money will have produced nothing. In a thousand years, it is likely that the cash will either be worthless or worth very little. It will not pay you interest or dividends and it won’t grow earnings, though you could burn it for heat. You’d have to pay someone to guard it. You could fondle the money. Alternatively, you could take every U.S. note in circulation, lay them end to end, and cover the entire 116 square miles of Omaha, Nebraska. Of course, if you managed to assemble all that money into your own private stash, the Federal Reserve could simply order more to be printed for the rest of us,”

As gold dropped 21% from its peak of $1,921 last summer, to $1,544/ounce in May, the media was quick to announce that gold was in a bear market, and that the massive bull-run in gold over.

But gold isn’t an investment. It’s a store of value. Just like cash. And over the centuries it is more likely to retain is purchasing power than any currency or business.

And despite short-term fluctuations in its price, gold will always be worth something. If you don’t believe me, just ask the Greeks!

Gold is also uncorrelated with other asset classes like stocks and bonds. Owning some in a diversified portfolio helps reduce your volatility.

In the past week, the S&P500 was down over 3%, while the gold ETF (GLD) was up 4%.

While I prefer owning gold and silver coins, owing an ETF like GLD is an easy way to get exposure to gold.

How much gold you should own depends on your risk tolerance and other investments. But as a general rule of thumb, gold should be between 2.5% and 15% of your portfolio. Although, Harry Brown’s Permanent Portfolio has done exceedingly well with an allocation as high as 25%.

Disclosure: I’m long BRK-B, GDX, and gold and silver coins

Let’s face it, European countries are bankrupt. First it was Greece and Ireland. Now it’s Portugal. Pretty soon it’ll be Spain and Italy.

Politicians will never admit there’s a problem. Portugal’s prime minister just said that they don’t need any financial assistance. Just like Greece’s prime minister said last March, he claims they want to help themselves out of this mess. And like Ireland’s minister of foreign affairs said last November, there’s no need to panic. Of course a couple of weeks later both prime ministers came begging for aid. Portugal will probably do the same.

Everyone wants someone else to bail them out, and pay for their transgressions.  And other nations are rushing in to buy the sovereign debt – using freshly minted money of course. Maybe these saviors know that their own balance sheets are somewhat murky and hopefully someone else will return the favor in the future?

After all, printing more money to buy another country’s debt is a splendid idea. Keeps the world economy chugging along without having to deal with any of the difficult issues. Like reducing debt. (I’ve never quite understood the notion of solving a country’s excessive debt problem by rolling it over in to more expensive debt. But financiers make money selling debt, so that’s what economists (who secretly harbor dreams of working on Wall Street) will advise the governments to do). But there is a crisis of sorts and whenever there is a crisis anywhere, people flock to the US and to the relative safety of US treasuries.

Everyone and their mother seem to be making financial and investment predictions for the rest of 2011. So I’ll do the same.

1. For the first half of the year the US dollar and government bonds will appreciate – especially against the Euro.

2. Also during the first half of 2011, Gold and Silver prices will drop from their spectacular highs as the US dollar appreciates. But I think Gold prices will stay above $1000/ounce.

3. But eventually, probably during late-summer, people will realize that all the major countries are printing money and using it to prop up failing countries and companies by buying debt, the US dollar and treasuries will slide. And Gold and Silver prices will start to rise again.

4. This collapse in treasuries will be precipitated by multiple bankruptcies in the municipal bond markets.
In the past 2 years, 15 municipalities have filed bankruptcy. According to a recent article in WSJ:

Mr. Bernanke downplayed the notion that many state and local governments run the risk of defaulting and that the municipal bond market could be headed for turmoil. The muni market, he says, has been functioning “reasonably well,” with lots of bond issuance and liquidity in trading. “We’re not seeing extraordinary stress,” he says. Some analysts have been warning that a crisis is looming in the muni market. Mr. Bernanke described these warnings as overly pessimistic. He also said the Fed, which has some limited authority to buy short-term municipal debt, has “no expectation or intention to get involved in state and local finance.” If states are to be bailed out, he said, “it would have to be Congress.”

Isn’t that exactly what he said right before Fannie Mae and Freddie Mac went bankrupt? Let’s face it. There will be a muni-bond meltdown, and Bernanke will scare congress into bailing them out. Bernanke is just a bare-faced liar. Actually, he got tired of being called a bare-faced liar which is why he sports a beard. But regardless, the only reason he brought it up is because it is an issue that will become pertinent within the next 18 months.

Incidentally, previous Fed Chairman, Alan Greenspan, said exactly the same about the housing bubble back in 2005. That it wasn’t an issue and there was nothing to be worried about. As an economist, he should have seen it was a bubble, of his own creation.

This collapse of muni-bonds will scare the pants of regular Americans and foreign investors. As the last bastion of fixed income for the retired, the wealthy and global pension-funds, muni-bond defaults will trigger a major panic. Citizens and investors will realize that they’ve been hoodwinked by the government and Wall Street, and they can’t trust either of them.

5. This will cause a flight to gold and silver, possibly the last and most intense run in this bull market.
I predicted back in December 2005 that “the US is going to enter a period of inflation and recession brought on by the trade & budget deficit and precipitated by the devaluing dollar” and that at $508, it was a great time to buy gold. I still believe it is. If you haven’t already established a position, make sure you buy both gold and silver on dips. If you don’t know how to buy, read through the previous posts on gold and silver. Hopefully, this major rush in gold will not trigger the complete collapse of global currencies. And if it does, it’s still a few years away, so it’s not an 2011 prediction.

Disclaimer: I’m short a Euro ETF, long gold and silver (bullion and mining stocks). None of this should be construed as investment advice.

Gold closed at a record high today of $1,237/ounce but surged to nearly $1,250/ounce in intraday trading. The gold ETF, GLD, also reported record inflows this week of $2.3 billion dollars. The ETF also disclosed a record 1,185 tons of gold as distrust in global fiat currencies pushed investors to seek more tangible assets. Gold has hit a high against every major currency, with the exception of the Canadian dollar.

gold-record-price-2010-1250-ounce

Buoyed by gold’s action, silver has also seen some price movement. After dropping as low as $15.13 in February 2010, it has jumped nearly 30% to 19.52. (Silver prices hit $19.70 today in intraday trading).

Seems like Marc Faber was right about gold being a bargain at $950/oz! Since that post about 2 years ago, gold prices are up about 29% versus the S&P 500 which is down about 8%.

According to Robert Zoellick, World Bank President  and former Goldman Sachs head and US Secretary of State, you shouldn’t take the US Dollar’s reserve currency status for granted. Swelling government deficits and the strength of emerging countries is weakening the demand for the dollar. Time to head for the exits?

So how should you diversify out of the dollar?

According to Zoellick, the Euro and the Chinese Yuan are good alternatives (source: BusinessWeek). But a lot of people think that investing in a basket of currencies is a better approach. In the short-term, currency volatility is unpredictable since exchange rates are more likely to be impacted by government policy than fundamentals. In the long term, all fiat currencies devalue and buying gold and silver is probably a better bet. But if you really want to park your savings in cash, consider a currency that has stronger fundamentals the the US dollar, the British pound and euro.

Until 2000, the Swiss Central Bank had a legal requirement to hold 40% of its reserves in gold. This requirement has been relaxed to around 20%, but in terms of volatility the Swiss franc is still one of the most stable currencies. You can purchase the Swiss franc via the Currencyshares ETF (FXF) quite easily.

The Canadian dollar (FXC) and the Australian dollar (FXA) are two more strong currencies. The governments are both fiscally conservative and have, until recently, been running surpluses instead of multi-trillion dollar deficits. They’re also commodity based economies, rich in natural resources with strong ties to the rest of the world. In a situation of high inflation, commodity-based currencies should hold up better than the US dollar.

With China being Jim Rogers’ favorite place, the Chinese yuan (or remnimbi) is a another alternative. As their internal economy grows, maintaining a stronger currency will make imports of raw materials cheaper. Of course, this is probably several years in to the future but with millions of Chinese rising out of poverty, its a likely scenario. Also, China has publicly said that they’re looking to diversify out of the dollar and are considering buying gold as one option. You can invest in Chinese yuan through Everbank.

Disclosures: I own gold, silver, Australian CurrencyShares ETF (FXA),  and a basket of currencies CD with Everbank.

Australian-silver-coins-complete-lunar-series-silver-coinsWith 1 ounce of gold selling for $955 and an ounce of silver selling for only $14.63,  gold is currently about 65 times the price of silver. Last year the ratio was only 50 times. This is significantly above the long-term historical ratio of gold being worth 16 times more than silver. Even in nature, silver is about 17 times more abundant than gold, and unlike gold the quantities above ground are constantly diminishing because of its industries use.

By these standards, silver is undervalued when compared to gold. Check out this Chinese news video advising investors to buy silver!

Going by the historical ratio of 16, silver should trade for nearly $60/ounce. Or conversely gold should sell for a mere $240/ounce. Although I have a gut feeling that one is more likely than the other, if you wanted to trade this without making a directional bet, you could enter a paired trade.

In this case, the pair trade would be to short gold and go long silver, however with all the manipulation that seems to be going on with regards to both of these commodities (see the last post on Fraud in Silver ETFs), there’s no guarantee when the ratios will converge to the historical averages. Unlike the gold-platinum ratio which was a great trade for futures traders in December 2008 (The price of platinum dropped below that of gold for a few weeks creating a great paired trade), this may not pan out for a long time.

Better to just buy silver coins or silver bars directly or Perth mint certificates.

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!

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.

Here’s an excellent video starring Peter Schiff.  He predicts that the US Dollar will be the next bubble to burst. As a corrollary, I think gold will be the next bubble. The dollar collapse seems unlikely, you say? Well he did predict the collapse of the housing market 4 years ago and was met with wide-spread ridicule.

Like I’ve been saying for ages, make sure you buy some gold coinsSilver coins aren’t bad either.

Over a year ago, I wrote about China threatening to stop buying US Treasuries.

According to an article in the New York Times, it now looks like China is losing it’s appetite for US debt :

In the last five years, China has spent as much as one-seventh of its entire economic output buying foreign debt, mostly American. In September, it surpassed Japan as the largest overseas holder of Treasuries.

But now Beijing is seeking to pay for its own $600 billion stimulus – just as tax revenue is falling sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and medium-size enterprises, many of which are struggling with lower exports, and to local governments to build new roads and other projects.

All the key drivers of China’s Treasury purchases are disappearing – there’s a waning appetite for dollars and a waning appetite for Treasuries, and that complicates the outlook for interest rates, said Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland.

By itself, this is a concern for our government. Recently, it sold billions of 3 year treasuries at a 1.2% yield! But when the demand for treasuries eventually dries up, yield should start jumping higher. But to make matters worse, the government will start a slew of public works projects and bailouts, for which we will have to borrow even more money. At some point the demand will simply fall short of the supply.

Here’s an interesting note by James Quinn on investmentrarities.com:

As the politicians scurry to “save” capitalism through the use of communist measures, more Americans are becoming disheartened. The definition of communism according to Webster’s is:

A system in which goods are owned in common and are available to all as needed.

George Bush, Henry Paulson and Ben Bernanke have decided to seize money from the vast majority of Americans who lived within their means, utilized debt sparingly, and worked hard to get ahead, and give it to the most appalling failures in our society. They have shoveled billions to banks that operated their businesses like gambling parlors. They have shoveled hundreds of millions to people who bought houses with no money down, interest only mortgages and fraudulent loan applications. They are now rewarding automakers who made the wrong vehicles, pay 30,000 workers per year to not work, and have only been able to “sell” cars by giving them away with 0% financing to any schmuck who could sign on the dotted line. These acts fit the definition of communism. We are now more communist than China.

So what are the repercussions of our monetary policy? According to Chuck Butler of Everbank.com (which I highly recommend):

US government will have to ratchet the yield on these bonds up so high to attract investors… OR… Allow a general debasing of the dollar to allow those purchases of Treasuries to be made at a discounted clearing price.”

A lot of people will disagree, but during these economic times, we’ll see inflation and not deflation. And gold will continue to be a store of value and a hedge against inflation. Even though its quite popular to bash gold and call it a lousy investment, the fact remains that gold has been one of the best performing assets during the past decade. I’ve been buying gold coins since 2005 and while the price of gold is up around 50% since then, the premiums on gold and silver coins has increased more than twice that. (Premium is what you pay over the spot price of gold). This shows an increasing demand for gold coins.

Gold and silver coins will be the next bubble! The bubble has barely started and should take 2-3 years to play out.

Gold and silver are global commodities with spot prices being the same all over the world (assuming you live in an open society). The only differences are the premiums that dealers charge buyers. One of the surprising things has been the large increase in premiums on gold and silver coins. Even though the prices for both metals have dropped from their highs, the cost of buying gold or silver coins hasn’t dropped proportionately. In fact, there’s been reported shortages of these coins by the US Mint and the Australian Perth Mint, not to mention individual retailers. This seems to defy common wisdom; prices drop when demand decreases. Even though spot prices have increased, the demand seems to have increased and thus gold and silver coins aren’t as cheap as they should be.

Right now the premium on silver coins is a whopping 60%+. For gold it’s a lot lower but still higher than it’s historic 2.5-3%. I just got an email today from a newsletter service that I subscribe to that’s pretty interesting.

If You Want Cheap Gold Coins, Canada Has Them
By Tom Dyson

I don’t trust my bank. And I don’t trust the dollar.

As far as my savings are concerned, I’d rather keep them in gold. And I don’t mean gold futures or gold certificates or gold mining shares. I’m talking about physical gold bullion in a safety deposit box.

My family thinks I’m taking a big risk. But as I see it, they’re the ones taking the risk. I’m the one storing my money in the world’s safest asset… the asset that’s been used as money for 5,000 years… and the only money that’s no one else’s liability.

Besides, what have I got to lose? My bank pays less than 3% on its savings accounts.

I’d advise you to own at least a couple of ounces of gold, too… if nothing else, for insurance purposes.

Coins are the best way for individuals to buy gold. They come in small denominations, they’re portable, and you can exchange them for cash anywhere in the world at gold’s international spot price.

Here’s the thing: Right now, gold coins are hard to find. Even if you can find them, they’re more expensive than usual.

In normal markets, you can buy silver coins below the spot price and gold at a 1% or 2% premium to the spot price. I’ve spoken to at least six gold coin dealers in the last week. Three of them were out of stock. Of the dealers still in stock, the cheapest gold coins I found were selling for a 5% premium to the gold price.

In other words, with gold at $800, you’d have to spend at least $840 on a one-ounce coin. The scarcity of silver coins is even worse. One dealer told me he was paying $16 for one-ounce silver coins, purchased in bulk. Right now, the spot price of silver is $9 an ounce. So the premium’s almost 80%.

The financial crisis is the reason for this mispricing. Demand for coins, one-ounce bars, and other “retail” denominations of gold has outpaced the ability of fabricators to make them.

There is no shortage of physical gold. If you wanted to buy a kilo or a 100-ounce bar, you’d have no problem.

The shortage is just a short-term supply problem at the retail level. Gold producers will take advantage of the premium and ramp up production. So in a few months, the big mark-ups will disappear.

That said, if you want to buy small quantities of gold right now, go to Canada.

The Bank of Nova Scotia is one of the world’s largest precious-metals dealers. If you go to the Hollis Street branch in Halifax, Nova Scotia, or the King Street West branch in Toronto, they’ll sell you Canadian Maple Leaf coins at a 3.7% premium to spot and one-ounce wafers at a 2.6% premium to spot.

Good investing,

Tom

P.S. Gold doesn’t show up in airport security metal detectors. I’ve tested this with gold coins before. But if you’re traveling across the border with more than $10,000 worth of gold or currency, you must declare it at the border. They’ll run your name and make sure you’re not a money launderer. That’s it.

Of course, if you don’t feel like going all the way to Canada just to buy a few gold and silver coins you can always buy them cheaply here:
American & Canadian Silver Coins

American, Canadian French, & Swiss  Gold Coins