Topic: Gold and Silver
Time to buy Silver and Gold Here's why I'm long on silver now. Gold will probably do well too, but silver is where I'm investing.by Walt Thiessen
(libertarian)
Friday, February 6, 2009
Last Fall I cautioned against investing too quickly in gold and silver, saying that the deflationary short-term would be bad for the metals. That proved to be true. Silver in particular languished all the way down to just below $9 an ounce. Gold has fared better, but it did reach a low just above $700 an ounce.
However, since January, both metals are showing distinct signs of improvement. Silver is now up to almost $13 an ounce, and gold is now up to around $900 an ounce. I had wanted to watch the markets more closely for the upturn, but as so often happens I've been distracted by other things in my life. So I missed the market bottom. That's part of the price I pay for being a very part-time (rare, actually) trader.
Also, what I was trading was a small IRA fund that I have. Under IRA rules, I can't invest directly in gold or silver or any other precious metal. (Isn't government regulation wonderful?) So I have to settle instead for the next best thing...ETFs, or exchange traded funds. In particular, I decided to invest in SLV, an ETF that invests purely in silver. It's not a silver mining company mutual fund or anything like that. It just buys silver.
There are risks associated with ETFs above and beyond investing in metals directly, but given the fact that I have no other way to invest in the metal directly without taking a risk on a mining company, I figure it's my best option. So I took the plunge and invested in SLV. I could have also invested in GLD, an ETF which invests in gold, but I decided that I like the potential for silver better than gold.
Why? Because silver got beaten down by one or more huge institutional trader (probably a major bank) far more than gold was beaten down by the ones who were shorting the futures market (and thereby manipulating these metals. Illegally? I don't know, although there have been rumors and even suggestions there would be an investigation.) What I do know is this. At a time when silver was selling for $20 an ounce, the economy fell into rack and ruin, and silver fell below $10 an ounce for a short time. Meanwhile, gold also suffered, but not nearly to the same degree. If there was manipulation going on, it was probably affecting silver far more.
How much did the money supply contract over the past six months or so? It depends upon whom you listen to. ShadowStats claims that we lost $8 trillion or so from the money supply, although their graphs now show that the money supply is ticking upward. On the other hand, it appears that the Fed has dumped at least $8 trillion back into the economy so far according to a CNN article that appeared just after the first of the year, and it also appears that they're not done yet. The Fed funds rate is down to historic lows just above 0%, which signals that they're still frantically trying to pump money into the system.
So if the money supply lost $8 trillion in the form of mortgage defaults and other business contractions, but it simultaneously regained $8 trillion in other forms, that should bring us back to where we were, right? Too bad it doesn't work that way. Most of the money going to the banks is going either into Treasuries or into reserves. Further, reinflating the economy takes time, often as long as 3-5 years (although it can certainly be less).
That's why the Fed is going to continue to create new money, and the net result is bound to be highly inflationary...in the long run. In the short run, it's going to be pretty miserable economically speaking. With national unemployment now running at 7.6% and growing according to widely publicized news reports this week, things are grim.
So why am I investing in silver now? I'm doing it because that's one place where I think money is going to seek refuge as the dollar continues to decline. Make no mistake the dollar is doing better than most other fiat currencies around the world, yet it is still well down from just one year ago. That trend will continue. Most investors took refuge in the dollar as they abandoned the stock market. I don't expect they'll stay there very long.
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Posted By: Jake, the champion of the constitution
Date: 2009-02-06 16:34:52
Dear Walt -
I hope you don't have a lot of money since there is a strong likelihood that if you study gata.org's evidence or read the prospectus very closely that SLV helps out the very market manipulation that you refer to and people like me are protesting to the CFTC about.
Nice things about SLV
SLV is very good for measuring investor sentiment - for instance, right now a lot of people are piling in.
SLV has also tracked the price of silver extremely well.
Its easy to invest in and sell
Bad thing about SLV
However, one of the main reasons to buy physical silver (and gold) - the kind you can hold in your hand - is that there is no counterparty risk. SLV and GLD have plenty of counterparty risk.
As you may not be aware, the silver market is under investigation for fraud by the CFTC and the very same banks that control SLV may be counterparties to fraud. I stress there is no way to know this for sure at this time - only the CFTC has access to the actual data.
Here is an excerpt from Jesse's Americain Cafe, a popular blog. If you read the lengthy prospectus I think you will find the advice correct:
One more point to emphasize here, HSBC is the custodian of GLD. (I am using the S1 prospectus filed with the SEC on 11/16/04). If it is the case that GLD is leasing out the gold in GLD, and if HSBC were to go bust, the GLD Prospectus clearly states on page 13 that "gold held in the Trust's unallocated gold account and any Authorized Participant's unallocated gold will not be segregated from the Custodian's assets. If the Custodian becomes insolvent, its assets may not be adequate to satisfy a claim by the Trust or any Authorized Participant. In addition, in the event of the Custodian's insolvency, there may be a delay and costs in incurred indentifying the bullion held in the Trust's allocated gold account." The unallocated gold accounts are the accounts used to hold gold being deposited into the Trust, or being redeemed from the Trust. That is not "segregated" from the Custodian's assets means that bars of gold are not specifically identified at gold that belongs to the Trust vs. assets that belong to HSBC. The prospectus further states that in the event of insolvency by HSBC, the Trust becomes an unsecured creditor of HSBC with respect to unallocated gold. Leased gold would either be held in unallocated accounts moving in and out of the Trust, or the physical gold might not even be in the Trust, as subcustodians as described below, could lease out the gold and no one would know or would have the legal ability to find out.
As for the "allocated" gold - that which has been specifically identified as property of the Trust and held in a segregate account - in the case of HSBC going insolvent, the Trust can claim ownership of the properly allocated gold, but will be subject to the liquidator freezing access to ALL gold in ALL accounts held by the Custodian, including gold held in the Trust Allocated Account.
It gets worse. HSBC has the ability to appoint subcustodians to hold gold for the trust, and the subcustodians can appoint further subcustodians (page 12-13). From page 12:
Because neither the Trustee nor the Custodian oversees or monitors the activities of subcustodians who may hold the Trust's gold, failure by the subcustodians to exercise due care in the safekeeping of the Trust's gold could result in a loss to the Trust.
Worse yet, the Prospectus states that there will be no written contractual agreements between subcustodians and the Custodian or the Trustee (page 11-12). AND the Trustee has no right to visit the premises of the subcustodian to inspect the gold or examine the subcustodians records.
Essentially, what all this says is that in the event of insolvency by HSBC, the shareholders of the Trust may in fact have no ability to capture ANY part of their investment in GLD shares. I have further work and analysis to do, but given what I have researched so far, I am quite stunned that anyone would invest money into GLD, as there are absolutely NO shareholder protections against the gold in GLD not being there, or for the shareholders to assert specific claims of ownership. Given that HSBC may be on the brink of insolvency as per Jessel's source, anyone who buys GLD thinking they are buying gold is risking losing everything - that is, being "Madoffed."
Posted By: Jake, the champion of the constitution
Date: 2009-02-06 17:13:06
Remember, when you buy SLV you are really getting AT LEAST 20% discount compared to the US physical market (at >$15 now). This, of course, is because SLV can take its silver directly off the futures market at the spot price.
Also SLV shares also depreciate in value in time (GLD is actually pretty bad, when you buy a new share its only roughly 95% or so actually metal). The fee goes to the fund's owners and theoretically pays for the storage+insurance of the silver to the custodians as well. This is also something to check out closely.
Since from the tone of the article it seems you are equating physical silver with SLV, please be wary when it appears you are getting something for "free"- a good lesson for anything in life.
As to what exactly happens when its maxed out - that I don't know, but I suggest you find out.
My guess is that since SLV has taken up a lot of demand that otherwise may have been directed at physical metal, it makes sense that it will increase the privately-held demand for silver, especially as SLV closing its doors to new investors may shock some into a bit of a panic. However, since buying physical is not as convenient, - SLV definitely IS - it may result in a net decrease, I'm not sure.
Posted By: Walt Thiessen
Date: 2009-02-07 07:06:26
Jake...did you even read the part of my article where I said that SLV has problems as an investment, but because you can't buy silver directly with an IRA account, I figured it was my only option?
Posted By: Jahfre Fire Eater
Date: 2009-02-07 07:43:39
Like you, Walt, I am an occasional metals buyer rather than a regular trader. I don't watch the market for trading signals. I buy when I have the cash. I sell when I need something besides metals...like a Jeep. I'll keep doing this until gold is approaching a price where one ounce (Troy) will "buy the Dow". With the Dow at 8000 and gold at 900 the ration is @9:1 -- down from a peak near 17:1.
While my long position reversal is determined by measuring gold against the Dow, I prefer to hold silver. It is not likely the government will confiscate AG but AU is a goner, eventually. It is likely that gold will be confiscated once all the wealth that can be tapped by inflation and artificially set interest rates has run dry.
How likely? That is the "golden" question. Of course, I don't know but I think it is inevitable, 100% likely. For me the question is when? I don't know that answer either so...I buy when I have cash and don't worry about the timing.
I don't believe the State will round up every coin individuals may have squirreled away but large, obvious stores are ripe for picking.
Why inevitable? I've written about this a few times and said it in various ways. Briefly, an empire based on the illusion that perpetual growth can and should maintained requires a continuous source of funding. When one source withers, another will take its place...without regard to consequences. Our empire is an unstoppable junkie. It will have its next fix regardless of any human action or expectation. Only when there IS NO OTHER source, will the empire stop liquidating wealth. After the confiscation of gold comes the oppressive wringing of the value from individuals. Labor will be confiscated...after the gold.
Besides one's choice about where to store purchasing power for future use, another thing to consider is having some coins on hand for emergency use. I consider a small cache essential. I call it my food and water insurance. I wouldn't trade any of that cache for anything but food or water and then only when it was essential to my survival. Two gold ounce coins and a dozen one-oz sliver coins is what I recommend as a bare minimum. A two thousand dollar (or so...today) insurance policy against the initial wave of calamity seems like an obvious precaution to me but it isn't so common out in the community.
This is good....for me.
The reason my positions might sound extreme to most folks is because I do not view the current situation the same way most people do. I do not see this as an economic down-turn, recession, depression or a normal business cycle. I believe we are experiencing a rapid and deliberate collapse of Empire. An epic event.
...and if I'm wrong? If this is really just a normal business cycle? No problem. I'd prepare to weather a recession in the same way I'd prepare for an epic collapse...just I'd stop preparing once the recession ended...these days I expect to never stop preparing.
Posted By: Walt Thiessen
Date: 2009-02-07 08:23:21
Jake: You avoided answering my question. Some of us don't have lots of available cash like you do. Some of us live virtually hand-to-mouth. Perhaps you don't care about that. I wrote the article for people like me in my position, not for people like you in your position.
Posted By: Jahfre Fire Eater
Date: 2009-02-07 08:46:50
Yeah Jake! Come on, what gives? :-)
Ohh....as strong as schadenfreude pulls I have to point out that I think Walt mistook my recent comment as a reply from Jake...unless I'm the one who is confused...which is often the case.
Posted By: Walt Thiessen
Date: 2009-02-07 10:35:41
By the way, Jahfre, regarding your claim about the end of empire...I suppose it depends upon how you define your terms. I wouldn't call the business cycle "normal," so I'm not sure how to evaluate your claim that this is an end of empire scenario rather than a normal business cycle.
To me, the business cycle is abnormal in that it is based upon the violation of individual rights, which is for me an abnormal kind of activity. So for me, the seeds of the end of empire were sown in 1913, the same year we could also argue that it began. It's a curious paradox that the thing which helps build an empire ultimately destroys it at the same time.
On the other hand, since individual rights are routinely violated both here in the U.S. and also around the world, I supposed that in a perverse sense such violations could be considered "normal."
Will the current crisis lead to an end of American empire? It's certainly a part of the overall process, but it will likely be a long-term event rather than a short-term event. Certainly, the British empire ended long before it actually was recognized to have ended, yet even to this day the British extend an enormous influence beyond the size and scope of their tiny island in modern world society. Is that not a residue of empire?
Posted By: Jahfre Fire Eater
Date: 2009-02-07 13:43:51
Hi Walt,
I don't know how anyone should evaluate my opinions. :-)
By normal cycle I mean one in which a correction is acheived without a nation crushing calamity. Even the Great Depression was normal in this sense. I believe our current situation will continue to appear as a "normal" economic downturn, in that most people will expect a bottom and a resumption of growth and for life to go on as before. I don't believe that at all. I'm more in the vein of James Howard Kunsler's view of the possibilities but I don't make predictions about how things will happen, what order, what kind of lifestyles will be possible. I just believe change is coming. I have chosen to proceed with the expectation that tomorrow may be nothing like yesterday economically, politically, culturally or in any other way. I do what I can to ensure that I'm OK with that.
If nothing bad happens, a bottom if reached and prosperity returns, great. I've lost nothing. If the bottom never comes and our civilization collapses, I intend to be a catalyst for recovery in my area.
My primary influences are Rothbard, Hayek, von Mises, Bastiat and Ron Paul. The way I choose to behave in response to my beliefs is influenced by J. Krishmanurti, Norman Vincent Peale, Paul Bunyon, Bill Bonner and Richard Bach.
Specifically regarding the my belief that the current situation is not going to have a recovery, at least not one in the world as we now know it, I always refer to Empire of Debt, by Bill Bonner and Addison Wiggin for the big picture correlation and Jared Diamond's Collapse: How Civilizations Choose to Fail or Succeed as a reference for several very specific instances of total collapse of society.
All of those past situations happened in isolation. Today's situation is the first time simultaneous collapse on a global scale is possible and likely. On a global scale the collapse could be massive yet on regional scales there will be a lot of variations.
Even as short as a year ago I'd have said 3-5 years or longer before collapse would be generally recognized as the ultimate outcome. Now I'm thinking that the information age is going to hasten this process beyond my imagination based on the past 6 months. I'm nearly in shock at the speed at which this disaster is unfolding. Not at what is happening, but at the pace. Typical American, I had no idea what was going on in other countries. I assumed there would be countries to carry the baton when the USA fell. Now I don't think that will happen.
Posted By: Jake, the champion of the constitution
Date: 2009-02-07 19:01:33
Dear Walt -
I am sorry you confused my comments as offensive, sorry, - I did read your whole article and its more like concern - one of the tips I've learned over the past few years is to know exactly what you are buying. I am not smart enough to figure out the prospectus of SLV after I read it. Lesson was provided free of charge at the school of hard knocks over here with the street vendors in China :)
Sorry again, you may have been aware of what I wrote but others might not be. I really don't know what will happen when SLV fills up - perhaps it will just close to new investors, or start up SLV2.
Like I mentioned, one strong buying point for precious metals is as insurance or to completely avoid counterparty risk. SLV has counterparty risk with the custodians and sub-custodians, and I just happen to be extremely distrustful of the big banks that run the funds. I wouldn't buy their stock, so why would I buy their underlying investments?
Just for reference, there is another way to hold precious metals with a lot less counterparty risk - albeit there's always some as the only real way is to have it in hand - AND in an IRA. Take a look and investigate if you like.
I can certainly understand and appreciate your thinking on the empire thing. When empires collapse, its best to follow a rule of body in one country, citizenship in another, and your money in a third - as best you can anyways. However, I have read Collapse as well, and certainly in the past you could always flee to another country, perhaps there won't be that option this time around.
I do think that the powers that be (some of them, especially Volker!) fully understand that appreciating the price of gold - a luxury item - is a last-ditch of defense. This is really the only way for the FED to avoid defaulting a 2% loss in its balance sheet besides monetizing it per this price by Mises.org
http://mises.org/story/3281
Lastly, I don't have all that much loose cash laying around, I think I did infer that in a recent article. I just don't like banks too much at the moment - although I still use their services. I apologize if I sound condenscending at all, its completely, completely not my intent. whatsoever Just trying to present my views for others to consider.
Posted By: Jahfre Fire Eater
Date: 2009-02-08 09:38:22
Hi Jake,
I'm afraid I'm more like most Americans with regard to your advice. No matter how good your advice might be for some, your point is moot for me, and for most folks. My body, my citizenship and my money are all in one place and I don't see that changing any time soon.
In the world I see coming my advice is this, if you can't defend it, it isn't going to be yours for long. So, I prefer my body, my assets and my citizenship all to be in the same, very defensible place.
Where ever one might live, it is good practice to get to know the local sheriff and fire fighters and charity organizations, especially food banks...they will remember who supported them when times were good. They will be the first to organize and the most effective defense for a neighborhood. They are the best armed, best stocked and most authorative voice in any locality when crisis hits. During an unexpected calamity, unknown individuals are all suspects until proven innocent. It pays to be known by the right people as a "friendly". Many sheriffs resent the undermining of local authority by state and federal legislation. These folks will welcome the opportunity to truely protect and serve the community that elected them.
Posted By: Jake, the champion of the constitution
Date: 2009-02-08 16:48:39
Jahfre -
Yep, believe it when I say I see your point quite clearly. @ "very defensible" - envisioned your front lawn booby-trapped, lol but maybe I wont stop by to say hi :)
For a long time, gold and silver were seen as pretty manufacturing metals, like copper and aluminum. They dropped in value, along with stocks, because of the world-wide destruction of demand. My US Steel stock went from $160 down to about $30 this past year. I made a bad bet on scrap steel demand. I have a gold mining stock that's still down 40%, like the rest of my IRA. The demand just isn't there for gold-plated toilet seats, I guess.
It can't hurt to have some gold in a portfolio. I don't see it dropping in price anytime soon. Diversificaion is always a good idea. Unfortunately, I'm hoarding my cash and paying off my credit cards first, like everyone else.
It seems like everything I do...I get RIPPED OFF ON.
I lost 37% in my defered compensation plan in 2008 (when I should have trusted my instincts in Oct. 2007 when I called my broker and told him to put the monies in guranteed interest account).
I have been thinking about buying some gold or silver for the past year....but and affraid if I do I will loose my shirt?
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