Railroads Are Getting Cheaper (vs. Gold and Silver, at Any Rate)

The primary purpose of these posts is to educate on monetary science and basic economic law and not to provide valuation opinions but occasionally I do. In my most recent post I gave some valuation opinions on real estate. This seems to have generated some discussion throughout the Interwebs but most of the assertions in these discussions are fairly ignorant of even the basics of monetary science.

I did receive a comment from a reader and good friend:

I have a question. You indicate that you would look to purchase real estate when prices reach 500-1000 oz of silver or 75-80 oz of gold. With metals prices where they are today, it would be whole lot cheaper to buy 1,000 oz of silver than 80 oz of gold. Does this make silver a better investment at today’s prices (assuming of course that the price manipulation game ends)? What do you think?

Despite this website’s name I receive many questions about silver. Perhaps it is all the traffic to RunToSilver.com being directed here.

My opinion is that silver is particularly cheap. The price of silver in gold confirms this. This is particularly related to silver’s hybrid status as a primarily industrial commodity and quasi-monetary metal.

While this topic could use a few posts for greater clarification, in summary because house prices, and all real estate both commercial and residential, will continue to fall in terms of gold and because silver will continue to rise in terms of gold therefore house prices will fall faster in terms of silver than in terms of gold.

The Cambridge House’s 2009 Phoenix Resource Investment Conference will be teaming up with the Silver Summit. This is a new show in Phoenix on February 20-21 will be much smaller than the usual Canadian shows. As I will be presenting and the environment should be fairly small I will most likely be able to address many of your questions. While I have not chosen or prepared my topic yet I suppose ‘Silver’s Role in The Great Credit Contraction’ will be as good as any.

RAILROADS

At the end of December in ‘Railroad Costs and Their Value‘ I wrote: ”Based on current performance and balance sheets and assuming no significantly material changes I would consider purchasing the railroads at the following prices: CSX (CSX) at .276gg, Burlington Northern Santa Fe (BNI) at 1.042gg, Norfolk Southern (NSC) at .544gg, Union Pacific (UNP) at .617gg, Canadian Pacific (CP) at .252gg, Canadian National Railway Company (CNI) at .235gg and Kansas City Southern (KSU) at .152gg.”

I think it would be good to consider an update:

Ticker	26 Dec 08	26 Dec 08 in gg	Target	2 Feb 09	2 Feb 09 in gg	% Change $	% Change gg
CSX	31.87	1.175gg	0.276gg	28.70	0.976gg	(9.92)%	(16.93)%
BNI	74.09	2.732gg	1.042gg	65.06	2.214gg	(12.19)%	(19.00)%
NSC	43.91	1.619gg	0.544gg	37.58	1.277gg	(14.39)%	(21.04)%
UNP	46.33	1.708gg	0.617gg	42.77	1.450gg	(7.94)%	(14.91)%
CP	32.00	1.180gg	0.252gg	30.26	1.027gg	(5.66)%	(12.80)%
CNI	35.39	1.305gg	0.235gg	34.56	1.175gg	(2.32)%	(9.95)%
KSU	18.17	0.670gg	0.152gg	18.10	0.615gg	(0.44)%	(8.14)%

It appears that over this short period of a mere month the general trend is continuing. The railroads are getting cheaper in gold and getting cheaper faster in silver. Of course, there will be fluctuations but I will not be surprised if my price targets are hit eventually within the next several years. For now the railroads are still fairly expensive.

The latest podcast was about using gold to perform mental calculations of value with a focus on the Down Jones Industrial Average. As the guest on the show said, gold does functions as a ‘secret decoder ring‘ to dissipate the derivative illusion.

USE OF GOLD FOR MENTAL CALCULATIONS OF VALUE

On my article ‘How the Treasury Bubble Will Burst and Why‘ at Seeking Alpha I received a comment from Alan Brochstein, CFA and fellow Gold Standard Contributor who provides analytical services for hire. He said, “Trace, sorry, but this makes absolutely no sense…” This is not surprising considering his 8 Dec 2008 article ‘OwnGold? Time to Fold‘ where he stated, “If you still are concerned about inflation, learn about Treasury Inflation Protection Securities (TIPS). Gold remains a sucker’s bet…”

I would stay away from TIPS. I have a friend and reader I went to accounting school with who is at KPMG and if he would hurry up and finish the article he is contemplating on TIPS I would quickly publish it. Bloomberg has reported that TIPS are showing quite the activity quoting Mark MacQueen, “When the Fed gets finished here they will have an inflation nightmare on their hands. There is a lot of downside in conservative government bonds.”

For comparison purposes on 8 Dec 2008 gold closed at $767.25 and is trading around $900 on 2 Feb 2008. Gold has reached new all-time highs in various currencies including the A$, Real, C$, Euro, Pound, Rupee, Mexican Peso, Ruble, Rand, etc. Unencumbered gold, silver, platinum and palladium are sovereign wealth. Those who own it never have to fold. When it comes to safe and liquid assets gold and silver are the penultimate.

Disclosures: Long physical gold and silver; no position in the railroads.

Comments

[know nothing:]

Great article, you are accurate.

Feb 03 09:17 AM

[auto44:]

Thanks, As the changing relativity of one asset to another as well as one currency to another, is the essence of investing this article helps bring home that point in a clear fashion.

Feb 03 11:18 AM

[thesnowjob:]

Great article. I think the idea of buying a house for 1000 oz of silver is powerful. The short term has been frustrating to predict, but long term gold has never lost purchasing power.

Feb 03 01:08 PM

[makou:]

The statement earlier above "For comparison purposes on 8 Dec 2008 gold closed at $767.25 and is trading around $900 on 2 Feb 2008" I believe the author wants to say
2 Feb 2009 instead of 2 Feb 2008.

Feb 03 11:01 PM

[chiker:]

if you bought gold in january 1982 the dollar deflated by 2x and you just got back to even in gold ie u lost bigtime. so gold is no easy trade to hedge inflation.

the TIPS comment makes no sense - if rates skyrocket they treasury's get killed yes? but the principal value of tips adjusts as per the cpi which must also scream. you wont have rates higher with deflation, therefore tips will hold value in inflation or deflation.

Feb 03 11:41 PM

[GeminiAtlas:]

If I did my math right, you say to buy real estate when it is worth $12,000 (~at current silver price). Did I miss a zero somewhere, or is it at 10,000oz. silver? Or is it in value/area? If it is 1000oz per house, that is a ridiculously cheap house, or silver is ridiculously undervalued.

Feb 04 09:15 AM

[123:]

To Trace:

I've been thinking about this and would appreciate your opinion:

How does one know what the intrinsic value of an ounce (or whatever mass) of gold is? Isn't gold just as prone to a bubble as any other asset?

For example, say gold goes to $2,000 an ounce. How does one know whether that is the proper price for the metal, or whether it is the result of lots of money pushing up the price? If asset inflation that pushes prices past reality (i.e. real estate, stocks), why can't this happen to gold or metals as well?

I mean, two hundred years ago, or whatever, tulips were considered a good store of value for a short period of time. That's an extreme example, but still.

Feb 04 10:13 AM

[liparo:]

We predict CSX and 58 other stocks and currencies using multi-market Artificial Intelligence System:
Our current predictabiliy rates:
CSX … CSX Corp … 0.619
Predictabiliy~average correlation, see explanation on web site: braindot2.com
Other stocks and currencies:
Crude Oil … … 0.699
Platinum … Platinum … 0.585
NIS/$US … Israeli Shekel-$US exchange rate … 0.581
X … United States Steel Corp … 0.529
EWC … iShares MSCI Canada Index … 0.523
DD … EI DuPont de Nemours & Co. … 0.514
VDE … Vanguard Energy ETF … 0.501
WDC … WESTERN DIGITAL CP … 0.494
VWO … Vanguard Emerging Markets Stock ETF … 0.471
NSC … Norfolk Southern Corp. … 0.457
VUG … Vanguard Growth ETF … 0.455
DOW … Dow Chemical Co … 0.451
^TA100 … Tel Aviv Stock Exchange 100 index … 0.448
ESLT … Elbit Systems Ltd … 0.441
FCX … Freeport-McMoRan Copper … 0.428
WMT … Wal-Mart Stores Inc … 0.426
CAT … Caterpillar Inc … 0.426
IRL … New Ireland Fund Inc … 0.42
EWG … iShares MSCI Germany Index … 0.42
VGK … Vanguard European Stock ETF … 0.408
EWA … iShares MSCI Australia Index … 0.398
VNQ … Vanguard REIT Index ETF … 0.394
IFN … India Fund Inc … 0.393
KO … Coca-Cola Co … 0.39
VXF … Vanguard Extended Market Index ETF … 0.388
N/A_ad … … 0.387
S&P500 … S&P500 … 0.385
JNJ … Johnson & Johnson … 0.383
JY/$US … Japanese Yen-$US rate … 0.374
LMT … Lockheed Martin Corp … 0.374
GTI … GrafTech International Ltd … 0.372
HAS … Hasbro Inc. … 0.366
K … Kellogg Co … 0.355
VPL … Vanguard Pacific Stock ETF … 0.345
CSCO … Cisco Systems Inc … 0.323
TEVA … Teva Pharmaceutical Ind. … 0.322
AAPL … Apple Inc. … 0.321
^VIX … CBOE Volatility Index … 0.315
^HSI … Hong Kong Index … 0.314
PPG … PPG Industries Inc … 0.309
TKF … Turkish Investment Fund Inc … 0.304
INTC … Intel Corp … 0.304
UN … Unilever NLG 1.12 ADR … 0.303
VTV … Vanguard Value ETF … 0.299
BAC … Bank of America Corp … 0.273
F … Ford Motor Co … 0.272
GLBL … Global Industries Ltd … 0.259
BA … Boeing Co … 0.249
CHKP … Check Point Software … 0.235
PFE … Pfizer Inc. … 0.227
ADM … ARCHER DANIELS MDLND … 0.194
GM … General Motors Corp … 0.182
NIS/EUR … Israeli Shekel-Euro exchange rate … 0.162
We just started posting year ahead predictions. They are only week-old but they are free!.

Contact: [e-mail]

Feb 04 01:11 PM

[Trace Mayer:]

Yes, that is a correction for the typo. Hope the typo did not confuse unnecessarily. Thanks makou.


On Feb 03 11:01 PM makou wrote:

> The statement earlier above "For comparison purposes on 8 Dec 2008
> gold closed at $767.25 and is trading around $900 on 2 Feb 2008"
> I believe the author wants to say
> 2 Feb 2009 instead of 2 Feb 2008.

Feb 04 02:38 PM

[Trace Mayer:]

@GeminiAtlas, no, one thousand ounces of silver is the correct forecast. Given the degree of amplified misallocation of capital due to the Federal Reserve I would not be surprised if it were less than five hundred ounces.

For comparison and based on the Case-Shiller the price of homes in silver:
1915 – appx 9,000 ounces
1922 – appx 4,000 ounces
1933 – appx 22,000 ounces
1935 - appx 8,000 ounces
1971 – appx 15,000 ounces
1980 – appx 800 ounces
2002 – appx 38,000 ounces

Please note these are approximations as I do not have the spreadsheet handy so please mind the immaterial differences as I think it gets the point across for a comment. Perhaps I should write an article with the appropriate research on this topic?



On Feb 04 09:15 AM GeminiAtlas wrote:

> If I did my math right, you say to buy real estate when it is worth
> $12,000 (~at current silver price). Did I miss a zero somewhere,
> or is it at 10,000oz. silver? Or is it in value/area? If it is
> 1000oz per house, that is a ridiculously cheap house, or silver is
> ridiculously undervalued.

Feb 04 02:39 PM

[Trace Mayer:]

@123, I think the tulips is a perfectly legitimate example because they are a tangible asset. Under the Austrian school value is an individual decision based on human action and determined by personal utility preferences and with in aggregate the market determines price.

Tangible assets, like gold, silver or tulips, are subject only to exchange-rate risk whereas fiat currency illusions or money substitutes are subject to both counter-party and exchange-rate risk.

Therefore, in essence and hopefully without being too circular, when performing the pricing mechanism it can be stated that the intrinsic value of 1oz of gold is 1oz of gold or 1 tulip is 1 tulip. Exchange-rate risk is then present when 1 tulip costs 1oz of gold versus .5 oz gold. Bubbles do develop and currently I think fiat currency illusions, with US Treasuries, are the biggest bubble of all. Gold will get expensive one of these days.

These questions get at the point I think you are attempting to make: Do I think it merely possible that our fiat dollar illusion will someday collapse? If yes, then I should own gold as the safest and most liquid asset; as cash. How much? As much as I can comfortably rationalize, perhaps using some sort of calculation of the gravity of the harm -- i.e., financial wipeout -- discounted by my sense of the probability of its occurrence. Do I think it inevitable that our fiat dollar will suffer the fate of all paper currencies throughout history? If yes, then it is one’s dollar exposure, not gold “investment,” that must rationalized.

But to reiterate my statement at the beginning of the post “The primary purpose of these posts is to educate on monetary science and basic economic law and not to provide valuation opinions”. In other words, I have no idea whether one derives the utility and value from owning gold to rationalize to themselves the price. Whether one should buy gold is a *completely separate issue* from whether one should use gold to perform mental calculations of value. The use of gold as a mental calculation of value allows one to determine whether gold is expensive or cheap.



On Feb 04 10:13 AM 123 wrote:

> To Trace:
>
> I've been thinking about this and would appreciate your opinion:
>
>
> How does one know what the intrinsic value of an ounce (or whatever
> mass) of gold is? Isn't gold just as prone to a bubble as any other
> asset?
>
> For example, say gold goes to $2,000 an ounce. How does one know
> whether that is the proper price for the metal, or whether it is
> the result of lots of money pushing up the price? If asset inflation
> that pushes prices past reality (i.e. real estate, stocks), why can't
> this happen to gold or metals as well?
>
> I mean, two hundred years ago, or whatever, tulips were considered
> a good store of value for a short period of time. That's an extreme
> example, but still.
>
>
>

Feb 04 02:41 PM

[123:]

I don't know if this is on your website, but

How do you recommend buying commodities, especially the metals?

I don't trust the ETF/N's, I was thinking Ebay might be good for example where there are people selling 10 oz of silver bullion for around $155.

What sources do you trust for quality and also a price close to the spot price (not big premium in excess of spot)?

Feb 05 11:09 AM

[123:]

The other thing I was wondering:

You say "real estate" is attractively priced at 500-1000 ounces of silver. What sort of real estate are you referring to, say a house that currently costs $400,000 around the suburbs of New York, or what? I didn't read ther real estate article but "real estate" is not very descriptive.

The second thing is, this website: www.zealllc.com/2008/c..., the third chart from the top, gives the nominal and real prices of silver from 1970 to 2006. The prices in today's dollars are in blue, and the author notes 7 silver price "peaks": $30, 130, 60, 31, 19, 10, and 15. Absent some extraordinary years in the 1970's, silver has rarely traded at or even twice as much as its current price. What are your thoughts on this. I have heard the inflation argument, but purely based on supply and demand where do you think silver stands, and what numbers/facts/data do you use as the basis for this?

Last are you at all concerned about the metals' liquidity - ie will there always be someone to buy that silver bullion or whatever form it is in which you hold your metals.

I checked out those sites, thanks for that, unfortunately they do take a nice hefty premium to spot since ie 10 oz of silver they want around $160 after including the price of shipping. But it's something to consider anyway.

Thanks either way.

Feb 07 08:32 AM

[123:]

I disagree with one aspect of your comment (copied and pasted below). The spot is the spot, anywhere in the world, for anyone. I think what is happening is these dealers, even Apmex, are taking advantage of buyers. For example at Apmex THEY buy silver for $13.60 and turn around and sell it for $15.7. How can they do that? They are taking 15%...not a bad business to be in, probably. They are taking a page from the brokerage houses and Wall Street. Adding shipping that is close to 20% sucked up of potential returns just because of transactional costs...this is quite bad.

"I agree; getting physical metal in your hand carries quite a premium. Those who follow the market know the 'real' and 'paper' metal prices have been bifurcating for months now. I wrote an article about it months ago in October..."

Feb 15 10:20 PM

[Trace Mayer:]

123, I simply disagree with you on this issue so long as we define the spot price as the price for immediate delivery of a commodity. The reason I disagree is because there can be and are multiple markets of varying sizes throughout the world. Markets include the 1/10th ounce coin sold by dealers and the 400oz LBMA bars. The settlement price in a transaction is the gold price. A market price is usually computed and accepted by current market participants based on an aggregation of settlement prices. Because there are so many settlements and because the standard deviation of those settlement prices is widening therefore macro 'gold prices', such as either COMEX or London Fix, are losing their correlation with micro settlement prices. But even the macro prices have variations; this is how markets function. Therefore, there is no single gold price and what functions as 'the gold price', COMEX or London Fix, etc., is really a fuzzy number. In other words, the spot is the spot but the spot changes in every transaction and there are numerous transactions at once.

I also disagree with the Efficient Market Hypothesis. Because of inefficiencies arbitrage is possible. Dealers like Apmex are profiting from these inefficiencies to fulfill market demand. The spreads can actually make it much more difficult on dealers to remain profitable though; if you know anything about the coin business. The commission, bid/ask spread and shipping are only additional 'spot costs' when viewed as getting the commodity immediately delivered. When the COMEX fails then 'the gold price' determinant will shift. I wonder where?


On Feb 15 10:20 PM 123 wrote:

> I disagree with one aspect of your comment (copied and pasted below).
> The spot is the spot, anywhere in the world, for anyone.

Feb 17 01:23 PM

[123:]

Go to Apmex. They buy silver AT SPOT and sell it ABOVE SPOT.

www.apmex.com/APMEXTop...

(Buy price column, sell price column).

Feb 18 11:00 PM

[bassmaster17:]

This is pathetic...NSC @ $27...we have definitely reached rock bottom.

Mar 08 01:27 AM

[bassmaster17:]

Citi, a bankrupt/insolvent company still has nerves to make a judgement...A Citi broker told me to buy Bank of America at $30 a few months ago...thank god I did not listen to him. These rail companies are sooooo, cheap, remember trucking is going to go the way of Citi.

Mar 08 01:33 AM