No Silver Lining for Precious Metal Bugs 24 comments
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When I posted a few days ago that the prospects of gold stocks are tied to the direction of the stock market, few gold stock investors reacted positively to that idea, despite the fact that it was intended to benefit those who felt inclined to invest in precious metals. This post will further irritate those who, understanding the monetary pressure we're up against with huge government spending, refuse to heed the warning of long established facts.
When examining the investment thesis for precious metals, there are two distinct classes. The first is the gold camp while the second class is the silver camp. The gold group is the truly hardened investor with wealth, in dollars, to support an expensive habit. On the opposite side of the precious metal spectrum is silver. Silver is known as the "poor man's gold" and for good reason. Silver is what is purchased when the price of gold has run up so much that it is essentially out of reach of the johnny-come-lately "poor" precious metal investor.
For the purposes of investment analysis, silver has one advantage over gold and that is the fact that silver has been allowed to freely "float" in the open market. This is a major reason why it has been difficult to observe the relationship between gold and gold stocks from the period of May 1781 to August 1971. The last time gold didn't have some sort of government control in the U.S. was the period from December 1861 to January 1879. Silver tells us what many hope that gold could.
During the period from 1929 to 1932, the price of silver ranged from $1.29 down to the level of $0.24. This was a decline in the precious metal of 81.4% in a period of 3 years. Gold on the other hand was fixed at $20.67 as it had been, with a few exceptions, from the period of June 1834 to January 1934. It stands to reason then, that if your silver was falling during the declining years then gold, at a fixed price, would be in greater demand. However, silver was the true reflection of what the market attitude toward gold would have been had the price been allowed to float freely.
"The Dines Letter was openly baffled by the failure of the golds to rise during the 1966 bear market, and, again during the 1969 bear market."
- James Dines author of Technical Analysis. 1974.
Today, the price of silver is telling us something very important that should not be scoffed at or ignored. Because of the fact that silver is going up, on a percentage basis, more than gold, it is telling us that the speculators have taken over the market and are therefore buying at any price rather and at the best price.
On November 21, 2008, the London Fix for silver was $9.17. At the end of the day November 24th, silver closed at $10.04 a gain of 9.49%. Contrast the silver move with gold's 6.20% move and we've got a potential problem. After all, why would safe haven investors fore go the "ultimate" safe haven of gold for the unloved step-child silver?
This answer lies in the the fact that small investors and speculators are running amuck. Take a look at the stock of silver producers Coeur d'Alene (CDE) and Hecla Mining (HL) rising 72% and 78% respectively in the last two trading days.
Another quirk in the precious metals arena is the current rush to buy one ounce gold coins. The very fact that supply is limited has emboldened many precious metal fans to feel that the only direction for the price is up. From an investment standpoint this isn't the case. What is happening is that coin investments are being mistaken for having the same quality and impact as institutional or central bank bullion buyers. Unfortunately, the lack of coin availability allows the small investor to believe that there must be an economic reason for the high demand even though we are clearly experiencing worldwide deflation. Further proof of a speculative market is the wide bid and asking price of the coins. Dealers, knowing the market and the lack of liquidity, aren't willing to be in the position of being left holding the bag because of speculators.
Sadly, the small investor goes out and buys what they can afford without realizing the history of precious metal prices during the Great Depression which resulted in the destruction of all wealth. The current demand for gold coins and the rapid rise in silver above that of gold is similar to low-priced, low quality stocks going through the roof near the peak of a bull market or the real estate equivalent of Fresno, California properties appreciating 30% in a single year. The time for gold and silver will come when the markets have hit bottom. As demonstrated in the failed acquisition by BHP-Billliton (BHP) of Rio Tinto (RTP), now is not the time.
"Every bear market has its surprises, and the one area that puzzles us is the refusal of precious metals in the last few months to act contra-cyclically with the market."
- James Dines, editor The Dines Letter October 21, 1966
Sources
- Fisher, Kenneth. The Wall Street Waltz. Contemporary Books. 1987.
- Dines, James. How the Average Investor Can Use Technical Analysis For Stock Profits. Dines Chart Corp. 1974.
- WIT Financial Publishers. Common Stock Price Histories 1910-1987. 1988.
- Turner, Sarah. "BHP Billition: Rio Tinto Deal No Longer in Holders Interest." Marketwatch.com. Nov. 25, 2008. viewed on Nov. 25, 2008.
- Zhou, Moming. "For Gold, A Tussle Between Two Groups of Investors." MarketWatch.com. Nov. 19, 2008. viewed on Nov. 25, 2008.
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This article has 24 comments:
You may have considered this prospect, but because you do not walk us through why the increase of silver is not a TRUE reaction to massive deficit (inflationary) spending, and must be speculation--you fail to convince.
I would like to hear your reasoning for why a jump in the price of silver is not an actual reflection of the demand and value against the manipulated price of Gold.
Some examination of the current monetary inflation and global currency debasement is in order here, though. Deflation in prices may prevail, but history shows that fiscal injections (if velocity gets moving and the economy can be reflated) will ultimately impact prices. At this magnitude, it could well undermine public trust.
A 10%-30% position in matter free of counterparty risk is still a smart move, methinks.
Read the article miningmarketwatch.net/
On Nov 25 11:29 AM Dale N wrote:
> If you are correct. The price of oil drops as the US dollar rises.
> Therefore you want to pay attention to Canadian miners as their input
> costs drop they receive a higher Canadian gold price with the exchange.
The government/system has the majority of our society right where they want us, believing that Federal Reserve Notes and Treasuries equal safety for wealth. Just as the majority of participants move into these asset classes, the system will inflate them into despair. Likewise, we have managed to make the notion of debt taboo, when in fact arranging low interest debt now might just be a most lucrative move going forward as it is paid off with severely inflated dollars. Interest rates skyrocket when inflation looms, take advantage over the next several months before the system figures this out. Government downward pressure on interest rates as 'stimulus' should help out this plan for a little while.
I for one will be most satisfied to convert real wealth into inflated dollars into a nice little pirate den on an island with no name. I hope to see you there...just not too many of you:)
regards
Deflation? Really? Where? Name one area that is "Deflating" that hasn't undergone massive "Inflating" first. Every area you tell me is in danger of deflation has already been inflated dramatically in the past.
I go the store. Food is up. I go to pay rent. Rent is up. I go to pay utitlities. They are up. I go to pay the doctor. His rate is up. I go to pay the dentist. His rate is up. I go to pay the lawyer. His rate is up. I go to the mechanic. His rate is up. I have a cellphone. The rate is up. I have cable TV/internet. The rate is up. I go to a restaurant. The menu prices are up. Everywhere I go, everything I do, the prices are higher, not lower. WIth the exception of gas. It's now back to where it was not that long ago. Woopty.
The only things that are under potential "deflationary" threats are the assets (like a home, stock prices, etc) that have been BID up and up and up by people that had access to extraodinary levels of debt. Now the debt is drying up and people can't bid as extravagantly on a home. Why should a home that was $100,000 now be worth $700,000? It's still the same home!!!! So what if it deflates back to $500,00? It's still dramatically inflated from where it originally was. Now the Fed is putting $7.7 T into the system anyways, which makes sure deflation won't be a problem. Inflation will be the problem, watch.
In the last hundred years... all we got was massive inflation. Once in a while we get a TINY amount of deflation - a pittance compared to the inflation we already went through... and yet you scream deflation? You worry we will have deflation? For what my parents paid $0.05, we now pay over $2. If it went back down to $1.90, or $1, is that "the problem"? Why did it go up to begin with? ANything to do with teh USD being a poor store of value? In terms of storing wealth (not creating it, just storing it), I'd choose metals anyday of the week over USD's. If I want to create wealth then I'd invest. I consider buying gold/silver a STORE of wealth, and nothing more, but it sure stores wealth better than dollars. You can't deny that. We know the track record.
Especially the small investor part. Look at those silver rallies.
This week I'm even one of them speculators...
Those who held gold rather than dollars during the Great Depression did pretty damn well. Especially after Roosevelt devalued the dollar. I'm not sure what you're talking about. I think maybe it is you who doesn't understand history.
Those in the large cities will kill each other off,just for a drink of water or a bite of food! If you dont think it could happen,go to Shadowstats.com & read the true Stats of the Feds actions & what the End results will bring! It aint pretty & its coming to us sooner that we might think! God Bless you all,please use the brain he gave you & do some planning now!
By the by..silver has many advantages over gold that may well show themselves soon..It's a highly respected tech metal..including water purification, ultra demanding mirrored surfaces, ad infinitum...It also is, and will continue to be, a very economical way for those who don't have the $1500 an ounce gold will soon command to participate in something like real money.
Real economics will tell you that this downturn had to happen. We are getting the weak out of the homes they could not afford, and back into the style to which they will become re-accustomed to. We will get the banks lending again soon, because without their vicarage, they will not eat as they have become accustomed to. The people of the world are building up a pent up demand for "toys" of every kind, that this new economy will come back with a vengence. (good vengence this time) we will have weeded out lots of criminals, both political, bank, and businessmen who have preyed upon the unwary. The new economy will be an inflationary (simply means rising prices) demand based world. New products will flood and be fruitful, [that means make a profit] and stock holders will continue to feed the money gin, as before their wallets swelling with new found wealth, and will quickly and greedily have those same wallets vaccumed out by mistakes in investments by those waiting for the least error in judgment or timing. New laws are forming as we sleep to protect us from ourselves and legal crimes". We will all move forward, and this demand will make prices rise inclucing silver. All one has to do is some simle math homework and find out how much silver is being used, (even consumed not to be recovered) and how much is being hoarded, and how much new silver is entering the market. I have done such math, and with 2 trillion printed dollars swelling our money supply so greatly, that they quit mentioning the M1, M2 etc because it would scare everyone too much, besides the zeros would fill up too much print space. Printing money is simply inflationary. Inflation = rising prices and silver will not exempt. So, if have any silver you don't want, send it to me, I will buy for spot on the spot. So there, grins to all.
I come here to learn ,not to listen to the gibberings of an idiot.