Silver and Oil: Shiny and Rare

Our two main topics today are silver and oil. Silver is a precious metal, but much more. It is in almost every electronic piece of equipment produced in the world. Oil is in everything produced in the world, period. Energy, without it, you would need a horse walking in a circle. I have called crude oil the trade of the year. We may be facing a soft period ahead for a week or two, but who cares?

Silver has been jumping like a thoroughbred at the starting gate for the last two months. Would you rather own silver and oil, or some biotech company that is one FDA letter away from oblivion? Nobody said investing was easy. Like I used to say in the construction business, "If you want a friend, get a dog."

George Kengott sent a note with a few important points to keep in mind (I have added a few of my own):

• Silver is a by-product of mining in many copper and other industrial ore mines. Industrial metals are under pricing pressure, reducing the amount mined, which means less silver.

• Silver mining has not met demand for the last 16 years.

• Silver is an industrial metal and a precious metal.

• Silver is consumed, almost all the gold ever mined is still in existence.

• Silver is cheap compared to gold. 900/13=69 ratio

• Historically this ratio should be between 16 and 30

• Silver increased in price almost three times as fast as gold from April 17 to June 2. Gold = 13% vs. silver 34.8%

• California is going bankrupt in July!

Buy silver to own, or the SLV ETF to trade.

We have constructed a buy on silver that will pay us over 10% while we own it and capitalize when the price reflects the money being printed in Washington.

Exxon (XOM) was the high bidder for one of Iraq’s oil fields offering to increase production tenfold to over two million barrels per day. Exxon bid a concession of $4 per barrel, Iraq offered $1.90 and gave them 45 minutes to consider modifying their bid. Exxon rejected the lower concession structure, so the Chinese were given the option of accepting $1.90 per barrel. The Chinese rejected the price also.

Iraq opened bids for eight oil fields, accepting one. A consortium of British Petroleum (BP) and China National Petroleum won the sole contract awarded. Iraq will assess the political willingness to deal with the multinational oil companies and viability of long term contracts.

There is political opposition to letting the international oil companies participate in the 20-year contracts. Keep your position in USO. Oil may get cheaper for a short time, but it is still the trade of the year.

The U.S. economy shrank at an annual pace of 5.5% in the first quarter, the second worst quarter in 27 years. Britain’s economy shrank at annual rate of 9.6% for the first three months, their worst since 1948.

Subscriber R.L. sent this e-mail about an economics professor:

The professor told me he had never failed a single student, until last fall, when he failed a whole class.

A class insisted that Oh! Bama’s economic plans would work for America. No one would be rich, but none would be poor! In exasperation, he agreed to an experiment. The test grades for the whole class would be averaged. All students would get the same grade. The first test, everyone got a B. The A students were upset; they did not get the grade they deserved. The poor students were excited; they did not have to study and got a better grade. The next test everyone got a D. The good students did not study as much, because they were not rewarded for their work. The poor and average students did not study at all, because they were counting on being carried. The third test, everyone failed with an F. Test scores progressively got worse throughout the semester. All students failed the class, as will our experiment with Socialism under Oh! Bama.

Moral of the story: When there is no reward for hard work and risk, why would anyone try or want to succeed?

I wonder how many of these Oh! Bama voters like the class results any more than we like what is happening to our country?

Remember to protect yourself, as the U.S. becomes more like the country portrayed in ATLAS SHRUGGED. Are we already there? Watch this video, and let me know what you think.

John Boehner told reporters “people deserve to know what’s in this pile of shit.”, after he spent over an hour reading excerpts from the climate bill as it was being debated in the house on Friday.

Rarely do we get such accurate language to describe proposed legislation.

Disclosure: SLV, GLD, USO, DXO

Comments

[Chandragupta:]

Good article. Thanks!

Jul 01 07:10 AM

[nobby73:]

CFTC looking at steps to crackdown on "speculators" in the commodity markets. If a speculator is someone who buys something believing the price will rise, but doesn't actually intend to consume it, surely this would apply to those who want to use gold and silver as a store of wealth.

Are they trying to deter people from buying gold and silver because they have run out of the physical stuff to back the paper stuff?

www.bloomberg.com/apps...

Jul 01 07:52 AM

[Jimbo:]

The professor's story reminds me of a joke told in the former Soviet Union: " I pretend to work and they pretend to pay me".

Jul 01 11:24 AM

[Larry House:]

I agree that silver and oil are good holdings, but silver has hardly been "jumping" lately.

Jul 01 01:23 PM

[-N-:]

It is so pathetic that people are willing to accept claims forwarded to them over email without checking sources or validity of those claims first.

www.snopes.com/college...

Jul 01 01:33 PM

[5142152-337:]

Thank you for a terrific piece!

My reaction to it was the same as this yarn:

A fourth grader sitting in the back of the room in English class, looking out the window, was abruptly startled out of his day-dreaming by the teacher. As a remedy she asked him to use 'Beautiful" in a sentence. The student complied. A short time later, the teacher again had to bring the student back to reality. She asked him to use "Beautiful" twice in a sentence. The student hesitated, rolled his eyes, then had a surprised, but contented look on his face. He then replied. "This morning at breakfast, my 15 year old sister told my parents she was pregnant". The teacher's mouth dropped open, what has THAT got to do with what I asked you to do, scolded the teacher? Its what my father said when my sister gave him that news. My dad said: Beautiful, f*king beautiful!

Jul 01 02:16 PM

[Steve Ward:]

Lech Walesa, the former President of Poland, once said, "communism ( read socialism) is such a lousy system that if you put it in the middle of the Sahara Desert, that within 3 years the commissars would be telling you that they have run out of sand.

Jul 01 02:19 PM

[market mojo:]

Indeed.

Urban legends created to promote an ideology. Quite common.

I don't see risk/rewards changing much. Having a good social safety net might actually increase people's willingness to take risks.

If people knew that even if their start up business would fail they would stil be covered by health insurance for example or not end up broke on the street I'd bet more people would be willing to take a chance on their own.


On Jul 01 01:33 PM -N- wrote:

> It is so pathetic that people are willing to accept claims forwarded
> to them over email without checking sources or validity of those
> claims first.
>
> www.snopes.com/college...

Jul 01 02:51 PM

[market mojo:]

John,

You get a big "F" for publishing a hoax.

Jul 01 02:58 PM

[G. L. Turner:]

The reason Oil is the Trade of the Year is simply, since US Big Oil (the illustrious 3) and Government Sachs aare hard at work using OIL and RBOB as thier main tools to siphon off what ever recovery can be generated, Oil will turn out to be "THE ONLY TRADE of THE YEAR" by the end of the year...

Speculative Futures trading would be a good thing if it was not controlled and manipulated by these two greed meisters!

Jul 01 11:21 PM

[overtaxed42...:]

What most people don't know is that the banks have letters from the government allowing them to speculate as much as they want in commodities in order to protect themselves against client speculation. They do this not to hedge though. they do it to create bubbles to pop. Then they are there to collect the fallout. The next bubble to be created that will be the biggest ever wil be the carbon credits swap market. That thing will get so big and burst into oblivion anyone with any wealth not connected to Goldman Sachs or any other huge player in the banking industry. When I say huge I mean huge huge. They put Lehmans out, AIG, Bear Sterns, and Merrill plus a hundred other smaller ones. Just look at who has been running the country for the last 35 years. They are a list of top officials from Goldman Sachs. Cap and trade will ruin this country and so will forced health insurance on people. I am expecting to go broke and will need your assistance before long. Too bad for me though, so will you.
I think the article was a good one for people who, like me, think the US is headed down the wrong path to fix its economic woes. Although I don't think owning precious metals is worth it due to the tax consequences when cashing out of them. the only way they are profitable is if you earn at least a 35% return on the purchase price. Since the government views metals as collectibles, they tax them that way. Not as ordinary income.

On Jul 01 07:52 AM nobby73 wrote:

> CFTC looking at steps to crackdown on "speculators" in the commodity
> markets. If a speculator is someone who buys something believing
> the price will rise, but doesn't actually intend to consume it, surely
> this would apply to those who want to use gold and silver as a store
> of wealth.
>
> Are they trying to deter people from buying gold and silver because
> they have run out of the physical stuff to back the paper stuff?
>
>
> www.bloomberg.com/apps...;sid=aGgrOsW.SAZA

Jul 02 09:32 PM