Silver's amazing rise… The two reasons precious metals are moving up… How to value gold and silver… Berkshire's silver… The conspiracy angle: Why gold never goes up very much…
In Friday's Digest, we take a break from our normal casual review of "the passing parade" and dig in a little on some particular investment topic or strategy.
We do so in a mostly vain attempt to share the knowledge we've gained the hard way over our 15-year career in finance. Today, we take on yet another windmill… the unanswerable question about an appropriate price for precious metals. Has silver run too far, too fast? Has gold become far too expensive? Is it too late to buy precious metals? Is it time to sell?
There are no "right" answers to these questions. Unlike stocks or bonds, there's no reliable way to judge the intrinsic value of an ounce of metal. The value of gold and silver quite simply depends on the security of the U.S. dollar. In other words, when you talk about valuing gold and silver, you're really evaluating the quality of the world's reserve currency – the paper U.S. dollar.
Judging by the market action in silver, the dollar has serious problems. The price of silver has gone completely hyperbolic. In only 60 days, silver has gone from the mid-$20s to over $40 per ounce.
There are two explanations. These answers aren't necessarily mutually exclusive – they could both be happening. So let me tell you what I know, what I can prove… and what I believe about silver…
You may recall I first recommended silver to investors in the May 2006 issue of my newsletter. I explained why I believed we were in the early stages of an enormous monetary crisis. I explained why the silver ratio was likely to fall – a move that would send silver prices soaring. That's exactly what has happened.
If you're not familiar with the silver ratio or what it means, you've simply got to go back and read that May 2006 issue. It explains many of the primary forces moving the silver market.
To summarize, I believe the price of silver is set to explode higher, to well over $100 per ounce. The price will be driven by demand for silver as money, something we haven't seen since the inflationary days of the late 1970s.
Believe me, I know how "kooky" this will sound to many people. Frankly, I'm a bit embarrassed by my ideas about silver. I truly don't like to talk or write about silver because I know what I must sound like – just another nut job conspiracy theorist. But… when I look at America's debt load and I witness what's happening right now at the Federal Reserve (which continues to buy 70% of all our new Treasury debt), I don't see any other logical alternative to vastly higher silver prices.
In my mind, the final endgame, where the dollar truly collapses, is unavoidable now. Nevertheless, I recognize this is unthinkable to most people. Even folks in my own company would tell me not to bring up the "silver stuff." I can't help myself, though… I think it's critical to understand why silver is going up so much and what it means about our money. At one investment conference after another, I warned silent and stony-faced audiences that the prosperity they believed in – a prosperity made "real" from soaring real estate and stock prices – was only a monetary mirage. Let me show you a great example of what I mean…
You might recall Warren Buffett bought 130 million ounces of silver in 1997 – roughly 37% of the world's supply at the time. It was rumored Buffett sold his stake in 2006, providing supplies to the newly formed silver ETF managed by Barclays. But because Berkshire shipped its silver to London warehouses, where there are no reporting requirements, the truth about Buffett's silver hoard can't be confirmed.
We don't know if Buffett owns silver today or not. But… whether he should own silver or not is, in our minds, the far more interesting question.
What would you guess has done better since 1997 – silver or the shares of Berkshire Hathaway? The answer, as the chart I made this morning makes clear, is silver. Almost three times better.
- 1.JPG (20.76 KiB) Viewed 638 times
This chart tells the real story of what's happened to our money over the last decade. Not even Warren Buffett could keep pace with the debasement of our paper dollars.
Most investors today probably don't know the U.S. dollar was originally silver – 24.1 grams of fine silver, to be precise. Our founding fathers demanded sound money from their government and they got it. In fact, the 1792 Coinage Act that established the value of the dollar in silver also called for the death penalty of any U.S. Mint employee who was found guilty of debasing the currency. To enforce these laws, the Secretary of State, the Secretary of the Treasury, and the Chief Justice of the Supreme Court were tasked with overseeing an annual assay of sample coins.
What if we still used silver as money today? What if, instead of paying Federal Reserve Chairman Ben Bernanke to print more money, we executed him for debasing the currency? What if the coins in our pockets were actually worth something… what would the stock market have looked like over the last decade? If you measure the S&P 500 in terms of sound money (silver), it has declined 88% since 2000.
- 2.JPG (19.31 KiB) Viewed 638 times
What most people still don't understand is that ALL the prosperity we believed was occurring after the big "tech" bubble of 2000 was nothing more than a lie. It wasn't wealth at all. It was actually debt. And rather than pay these debts back in sound money, our monetary authorities have chosen to debase our currency, by massive amounts.
These facts are obvious and irrefutable… But they're still hard to believe. And they're impossible for most people to accept – even experts.
Consider what Dennis Gartman – probably the world's leading expert on currency trading – wrote recently about the Fed's inflationary policy:
As for the Fed itself, the adjusted monetary base continues to rise skyward. Since the end of last year when the adjusted base was approximately $1.95 trillion it has risen to a stunning $2.475 trillion. This is high powered, and we fear inflationary, money of the first order, and we wish not even to annualize the number for it is mind-numbing in its implications without being annualized…
It is as if some psychotic physician had gotten hold of the patient and first starved him to near death and now has chosen to force him to eat preposterous sums of food.
Why is the Fed doing this? The answer is simple: It's the only way out of the massive obligations we owe. In all, Americans owe over $50 trillion today. Our total debt continues to increase, mostly because of government borrowing. There is no conceivable way to actually repay these debts, so they must be inflated away by printing more and more money.
The question is… how much inflation will the system tolerate before people simply abandon the dollar?
Silver's recent explosion began last summer, with the announcement of the Fed's second round of quantitative easing. Silver is warning the Fed that it has gone too far. Silver is warning that the euro is unlikely to survive a bailout of Spain, which after Portugal, is the next major economy that's likely to fail because it can't pay its debt. Silver is warning us that the Fed won't stop with "QE2" – that it will be forced to continue buying Treasury bonds as the only means to finance our soaring debt load.
Silver is warning us that the day the dollar dies is fast approaching.
Jeff Winn, a stock broker I've known well for 20 years and one of the few people in that business I completely trust, passed along an email yesterday. It's a bit of anecdotal evidence of the things I've been writing about for years…
As I was picking up our younger son this afternoon, one of the moms was having a cell phone conversation with someone (I gathered by the 'I love you' at the end it wasn't her broker) about buying gold or silver…
Her story today was that they have money sitting around doing nothing and have been in that position for 'a while now,' so they feel like they need to get that money doing something again. Lo and behold she suggested to this person on the phone that they buy gold or silver and then stated her simple case for silver – 'it doesn't cost as much as gold, and well, it seems like the right thing to do.'
Anyway, there you have it. It is the very first time I've heard anyone in public even breathe a word about gold or silver… Of course, this probably means nothing, but it was interesting to me just the same. Wow, could metals actually be starting to make their way into the mainstream…?
And so we've come to a critical point… Our monetary authorities have little time left to get control of the inflation they've been brewing. If the facts behind this silver run do become widely known and embraced by the mainstream… if more and more people realize what's happened to our money… there could be a huge run, dwarfing all the gains we've seen to date.
This is the factor I believe is driving silver now, and I expect it will continue – with plenty of volatility – until something fundamentally changes with America's monetary philosophy.
Think about it… today… even after all we've been through, even after our national debts have doubled in just over three years… still neither political party can produce a balanced budget – ever. Obama's budget never even comes close to being balanced. And Paul Ryan's doesn't get us back to even either. Why would anyone hold our currency under these conditions?
There's one other, more sinister, reason to believe silver will continue to rally…
For many years, there have been serious allegations – including a major lawsuit filed in 2010 – that the world's biggest investment houses were manipulating silver and gold prices in an effort backed by central banks to control the prices of these alternative currencies.
I have never known how much to believe about any of these things… but… according to many silver market experts, JPMorgan has a very large short position in the metal and faces massive delivery demands in June. It is possible silver's recent rally is being caused by the fundamentals of this short squeeze… Or it's possible this rumor is false, but powerful enough to motivate buying. We simply can't know.
One word of warning about these rumors… When you hear these kinds of claims, you almost always eventually discover the people behind them had some kind of vested interested in seeing the markets move in a certain direction. In this case, we're talking about folks who have enormous holdings of gold and silver. So you have to take these claims with a grain of salt. On the other hand, the trading of gold, in particular, seems very peculiar…
Over the last decade, the price of gold has gone up by more than 5% on only three occasions – one of which was September 11, 2001. Compare that to copper, which has been up 5% in a single day 25 times in the same period… or oil, which has climbed that much 53 times… or nickel, which has moved that much higher 67 times.
Now… the unusual trading history of gold might be caused by nothing more than central banks selling gold when they see the metal moving higher. Like any other seller, they might simply be trying to get a good price for their metal. It's well-known that central banks were selling gold regularly during much of the 1990s and 2000s. But they've since reversed course, becoming net buyers in 2009.
We'll have to see what happens from here… but one thing seems certain to me. The world's monetary authorities must, by now, realize the danger of holding dollars. They must realize the euro is not a viable alternative. And they must realize Japan will not allow the yen to rise, as it attempts to rebuild from the earthquake. That leaves only one safe haven: gold.
What should you do about all these risks? Well, the answer is pretty simple. You ought to own some silver and gold. Even if you haven't bought any yet.
Doing so isn't risk-free by a wide margin. It is possible our monetary authorities will get their act together, like Paul Volcker did in 1979. If our government ever got serious about saving the U.S. dollar, you wouldn't want to own gold or silver. Unfortunately, I don't think there's any chance that will happen for some time… and by the time it does, I think it might actually be too late.
The other thing I'd suggest doing is trying your best to make a little extra return on your portfolio.
As you can see from the Berkshire/silver comparison, it's difficult for investors (and impossible for savers) to keep pace with the debasement of our money. On the other hand, you have to try. You can hedge your portfolio with gold and silver. You can own agriculture stocks, energy stocks, and precious metals miners – all of which tend to perform extremely well under these conditions.
The last thing you can do, if you have some experience, is options trading. I'm not talking about buying naked options and gambling your savings away like a day-trader on speed. I'm talking about safe and conservative options deals that can add 4%-6% per month to your returns. Doing things like covered calls. Doing things like selling puts. I strongly recommend learning how to safely use options. It's the best way I know for retired investors in particular to get a bit more income out of their savings in this era of high inflation and low interest rates.
: Short silver, long USD medium term. "Long" Gold/Silver ratio, betting against small caps short term with FAZ.
