Managing Editor

Jeffrey Christian: Gold and Silver Could Spike

Jake -

Keep in mind the format of this article was an INTERVIEW, not an analysis. The "star" in an interview is the interviewEE, not the interviewER.

An interviewer's goal is to get the interviewee to offer his/her insights and opinions.

There's plenty of analysis elsewhere on HAI. As examples, I direct your attention to "Consumers Buy Into Inflation" at www.hardassetsinvestor... and "Venti-Sized Gains For Coffee" at www.hardassetsinvestor....


On Nov 16 01:31 AM Jake2 wrote:

> "HAI: Everyone I talk to is bullish on gold. I wonder: What could
> go wrong? What could keep gold prices down?"
> You"ve been talking to the wrong people. What's wrong is no one is
> buying. Didn't someone tell you? Gold is down 14% in the past few
> weeks. How about some hard headed analysis from Hard Assets once
> in a while instead of tendentious twaddle.

Cheap Silver: Whither the Ratio?

Chux -

Yes, indeed, there was a big run-up in precious metals prices in 1980. The average nominal price for silver that year was $20.98 per ounce. Adjusted to 2008 dollars, that's the equivalent of $56.01.

From that alone, you can tell how far silver's got to go to provide a real return to fellows like Ernie.

As for the S&P 500 index, its real rate of return since 1970 has been 2.8% per annum, more than a full percentage point better than silver's.

Precious metals may indeed offer portfolio benefits, but that's more a diversification artifact than a return enhancement. Put plainly, silver and gold zig when stocks zag. Overall portfolio volatility may be reduced with an allocation to metals, but at a cost.

Siince 1970, though, the reward-to-risk ratio for silver has been 0.19; for S&P 500 stocks, its been 0.58. To allocate capital to silver, you have to decide what other asset class(es) have to be diminished and what effect that diminution will have on expected returns.

Cheap Silver: Whither the Ratio?

Ernie -

What advantage is obtained by buying an asset that has provided a 1.7% real return per annum since 1970?

The inflation-adjusted breakeven for silver bought at the $4 level between 1974 and 1977 would be $18-20. The breakeven for gold bought at the 1981 average price of $10.49 would be $25.38.

Taking inflation into account, you haven't broken even on your $10 purchases after 27 years. Isn't THAT an example of losing one's shorts?

52-to-1 Just Right for Gold/Silver Ratio?

There may, indeed, be no predictive value of the gold/silver ratio, but that doesn't mean it doesn't get watched. The ratio is closely followed by the value investors of the metal world (see "What's Better: Gold or Silver?" at hardassetsinvestor.com...).

Those Stubborn Silver Investors

For the week ending Thursday, the gold/silver ratio widened 1.4% to 52.6-to-1. The ratio last peaked at 57.3-to-1 in December before tumbling to 47.4-to-1 in early March as silver and gold reached their record-setting zeniths.

Those Stubborn Silver Investors

The "trend" to which I refer, silver wink, is the price action that puts an investor underwater.

Silver's price appreciation, prior to the break in March, was more robust than gold's. Even though silver's subsequent decline was steeper, silver was still holding on to a respectable year-to-date gain through April 30 (10.3% vs. gold's 0.7%).

If THAT differential closes, I'd expect to see SLV redemptions rise.

Those Stubborn Silver Investors

The point of the article? Simple: to add context to the stories circulating about the trusts' vault levels. People have been latching onto ideas without much perspective.

That's all.

The Long and the Short of Silver and Gold

Nate, the HAI article linked to this story ("What's Better: Gold or Silver?": hardassetsinvestor.com...) contains a table tracking the gold/silver ratio through the 20th and 21st centuries.

If you want finer grain detail of modern-day prices, try the historical statistical archives of the London Bullion Market Association at www.lbma.org.uk.

The Long and the Short of Silver and Gold

Misterchan, DGZ and DZZ are exchange-traded notes (ETNs) issued by Deutsche Bank that track the 1x (DGZ) and 2x (DZZ) the inverse of the Deutsche Bank Liquid Commodity Index – Optimum Yield Gold.

ETNs differ from exchange-traded funds (ETFs) in that they are senior, zero-coupon debt instruments rather than representing a portfolio of futures like the PowerShares DB commodity funds.

As zero-coupon notes, they pay no interest. Issued at $25 pe back in February, their value fluctuates based upon the return of the underlying index. The are tradeable intraday and price-transparent as are ETFs.

At present, there's no tax consequence for holding these ETNs (until liquidation, that is), giving them a decided advantage over gold ETFs like DBG and grantor trusts such as GLD or IAU.

More information can be found at: dbfunds.db.com/notes.

The Good, the Not-So-Bad and the Ugly Commodites ETFs

No worries. UCR and DCR are novelties as far as oil ETFs/ETNs go. They're issued in tandem as complementary sides of a trust made up of credit instruments.

When you deal with the MacroShares products, you're taking on a huge tracking error risk. Tracking spot WTI can be hard enough for "old-fashioned" oil ETFs/ETN when the market's in contango.

The Good, the Not-So-Bad and the Ugly Commodites ETFs

Thanks for your insights.

Look back on the article, though. It says: "SOMEDAY (emphasis added) the commodities tower will topple leaving imprudent investors who've OVERSPENT (again, added emphasis) on commodities vulnerable ..."

Note I haven't said WHEN the reversal of fortunes will occur. To think that commodities will remain in the ascendency indefinitely denies history. Commodities prices and inflation are cyclical, to wit:

Commodity vs. Stock Bull Markets

US Stock Market Producer Price Index
Composite (All Commodities)

1898-1920 61% 228%
1920-1929 196% -38%
1929-1951* -12% -58%
1951-1965 256% 6%
1965-1981 49% 204%
1981-2001 828% 37%

*Includes anomalous effect of the Great Depression (1929 – 1940)
(Source: Legg Mason)

Without market timing, overexposure to the asset class can be deleterious to a portfolio with a date-certain horizon. And how good are any of us in the timing department?


I'm not saying one SHOULDN'T have commodity exposure, only that the allocation be prudent.