Gold Is Better Protection than Silver

April 18, 2013 Leave a comment

On March 6, I wrote about how gold holds up far better than silver when a panic hits.

Recent events seem to provide confirmation of this.

Silver at its peak was $48.70 in 2011. It is now at $23.29. This is a 52% loss — ouch. That is very painful for someone who bought near the top.

Gold has weathered the panic with much more success. In 2011, gold hit $1913 and it now is trading at $1391. This is only a 27% loss. Harsh, but not so harsh that you would want to throw yourself off a cliff.

As a speculative play, you could see big profits if you buy silver near the bottom. That’s because, relative to gold, silver is tremendously volatile. But you need to be careful: you may recall that during October 2008, silver traded below $9. Panics hits silver hard. Unless we enter Great Depression 2, I doubt silver will fall that low again — but I think it could certainly drop below $20 before this shake-up is resolved.

Advertisement

Filed under Commodities, Gold, Inflation, Investments, Precious Metals Tagged with , , , , ,

Is Now the Time to Get Out of the Stock Market?

April 15, 2013 Leave a comment

Last week gold and silver got killed, especially after the rumor hit that Cyprus would sell gold to get a big fat bailout (honestly I doubt that will happen).

The slaughter continued today. I am writing this with gold at $1365. Margin calls are probably dropping left and right.

Other commodities have fallen, including oil. Bonds have rallied recently. The 30-year Treasury offers less than 3%, which is pretty much completely crazy. Meanwhile, Canada lost 54,000 jobs in March — the worst employment update in four years.

To me, these are pieces of data which imply an economic correction trying to work itself out, rather than a rippin’ recovery. If these developments justify concerns about a slowing economy, then you want to be careful about the mainstream coverage about this gold panic, and their general frenzy about  buying stocks.

US stocks, which are the hot ticket these days, seem to me dangerously high. Corporate earnings in the US are 70% above their historical average due to massive fiscal profligacy by government and citizenry, and aggressive cost-cutting post-2008. Periods of strong corporate profits are never permanent and eventually regress towards the mean. Therefore it should be expected that future earnings and dividends will disappoint.

The Fed is struggling to perpetuate the error cycle and keep the ‘recovery’ going.

Meanwhile, the TSX is not performing well this year, after being one of the world’s worst stock markets in 2012. And the TSX-V — which is where all the most exciting action is — is going to get smaller. The average level of cash held by TSX-V-listed stocks has fallen from $4.3 million in mid-2011 to about $2.8 million now. This might not sound too bad because it is still several times higher than pre-2008 levels, but on a per-share basis, it is terrible. TSX-V companies have only about 2.8 cents per share as of last quarter, a drop of more than 50% in two years. Remember, these companies don’t usually generate their own cash flows from any operations, and cash is frequently their only good asset. All the while, TSX-V companies have doubled their liabilities per share — so when the nearly 2.6 cents per share is paid off, they are basically broke. So while this says nothing about any individual companies, it suggests the junior resource sector is going to come up on some hard times.

I absolutely expect Canada and the US to join the other developed nations suffering from recession.

If you hold stocks at this time, you should seriously think about just selling most or all of them. Be ruthless about keeping only the absolute best ones. Keep the balance in cash and patiently await buying opportunities as prices fall.

If you are a long-term believer in gold, this is clearly a huge buying opportunity. Gold could still fall another 10-15% before hitting a bottom, and it could take a 6-12 months to recover. I would like to point out that during the previous gold market, there was a 20% price drop in late 1978.  We know how that turned out. Yet, if the fundamental argument for gold is still sound, then today’s prices are a godsend.

Filed under Banking and Finance, Central Banks, Commodities, Economics, Gold, Investments, Oil, Precious Metals, Stock Market Tagged with , , , , ,

Is the gold price being manipulated?

April 4, 2013 Leave a comment

When oil prices rise, many economically illiterate people will say something like this:

“Speculators and oil companies are manipulating the market to drive up the price of oil.”

When there is a price change that people don’t like, it’s often blamed on “manipulation.” Did the price of gas rise in the summer? It’s those monopolistic oil companies.

Of course, no one ever blames the manipulators when the price of oil falls.

When it comes to gold and silver, people behave in a similar way. The difference is that people decry the “manipulators” and “conspiracies” when the price goes down.

I read Ed’s Gold and Silver Daily in the morning because I like the charts. I find it hard to read his commentary, because he is always blaming “da boys” for any price decline. Price declines which, he claims, are “impossible” in the free market. (For example, it’s claimed to be utterly incomprehensible that gold would fall in the post-Cyprus crisis, unless the cause of the decline is manipulation.)

Yet you will never hear Ed, or anyone like him, use manipulation to account for a price increase.

Gold and oil often move together. If gold is down, see if oil is down as well. If you think manipulators are driving down oil prices, then at least you are being consistent if you claim manipulators are driving down gold also. Yet no one ever blames manipulators for driving down oil prices.

In my opinion, people should not worry themselves over gold manipulation. So short-term futures traders might cause the market to move around a bit. But every short has a long. Futures traders do not want to manipulate the price downward if prices “should” be going up with massive shorts, because if so the market will rape them when price rises. Secondly, the banks that are supposedly manipulating gold prices lend huge amounts of money to gold producers. None of the board members of mining companies that I know believe there is manipulation.

And really: if the price of gold is being manipulated to a lower-than-otherwise level, why not just buy more? If someone drives the price of a commodity below what its market price “should be”, it would be… below the price at which it should be. Good deal. If some idiot like Gordon Brown (who sold half of Britain’s gold at hilariously low prices) wants to drive the price down, good luck. They obviously can’t keep it the price down forever.

Forget the manipulators. Here is why I think the gold price is falling: the economy is slowing down. Europe, Japan, and China are in recession. I believe North America is fighting hard to avoid one, but by the end of the year there will be nowhere left to run.

A panic will cause central bankers to inflate even more, and gold will move up in response to new monetary expansion. Otherwise, slowing economies are rough on investments. People want to avoid losses and gather cash, so they sell stuff like gold and stocks. When  demand deteriorates, prices drop. This is totally normal and not at all related to “manipulation.”

Filed under Central Banks, CMR, Commodities, Inflation, Intervention, Investments, Precious Metals Tagged with , , , , , , , ,

Investing: Silver vs. Gold

March 6, 2013 1 Comment

Many people want to know about silver. They want to know how it compares to gold as an investment.

Some call silver a “poor man’s gold.” In other words, the average man on the street is more able to go to a dealer and buy a few ounces of silver than he is a few ounces of gold. Yet “poor man’s gold” is not a fair characterization, because it assumes silver and gold belong in the same category simply because they are both precious metals. The reality is that silver and gold are different in important ways.

I recommend that one’s precious metal holdings be MAXIMUM 25% silver. 15% is probably better. Gold should make up the rest.

First, I invite you to check out the Kitco charts and look at recent price behavior.

In April 2011, silver reached a high of $49. But by June 2012, it hit $27. As I write this, it is $29. Measured from the 2011 highs, this is a massive loss. Nearly 50%.

Now look at gold. In September 2011, gold hit a high of $1895. In May 2012, it bottomed at $1540. As of right now, it is $1580. Measured from the 2011 highs, this is a moderate loss. Nearly 20%.

The idea reflected here is that silver is much more volatile.

Look back to 1980. Silver fell from $50 to $3.60 in 1991. Gold, at its worst, fell from $850 in 1980 to $255 in 2001. It’s like losing your house and all your money, instead of just all your money.

So when gold sells off, silver will sell off  harder and faster. Silver bulls will argue that the potential gains are much, much higher with silver than with gold. This is plausible, if only because silver is 40% down from its all time high and gold is 17% down from its all time high, and there are strong reasons to believe that both will move upwards.

Why the volatility? The primary reason is industrial demand, which for gold is very small. It is significant for silver, however. During a panic, the price for raw materials plummets.

Gold is different. You could say it commands a premium. This is essentially because gold is regarded as a monetary metal even though it is not money. Central banks buy and sell gold. They have it in their vaults. Central banks don’t stock silver. Wealthy people want gold in a crisis, and silver is much less interesting. Indian families buy it when their daughters get hitched. Asians use it to protect against inflation.  Silver really doesn’t serve that purpose, and I do not believe it will in the near future.

Silver will probably have a bigger bull market than gold by the time Great Depression 2 hits. But if you want to buy precious metals because you are afraid of people like Bernanke and Carney, then you want gold. Silver is a higher risk trade. Gold will perform better in a panic, which is when silver will perform horribly.

In either case, your objective is to hold until the error cycle reaches its final moments before we enter a deflationary depression. Because at that point, you want to unload all your gold and silver and get currency and bonds from institutions that won’t go broke. It’s a trade that would be harder to time correctly with silver than with gold.

All this being said, there is one other important advantage gold has over silver: your wife or girlfriend will like gold jewelry more than silver jewelry.

Filed under Banking and Finance, Central Banks, Commodities, Gold, Inflation, Investments, Precious Metals Tagged with , , , , , , , ,

Gold and silver versus paper promises.

November 30, 2010 Leave a comment

Head on over to this site and take a look at the tables presented. The data speaks for itself.

Filed under CMR, Gold, Precious Metals Tagged with , , , , ,

%d bloggers like this: