Those who read my material know that I am a bull on precious metals and have been for some time. The main reason is because over the long-term the Federal Reserve intentionally devalues the dollar, its buying power is down some 95% since 1914. The most recent reason to be bullish on commodities as a whole is because of Obama’s plan to double exports within 5 years. This is a lofty and unachievable goal unless you plan on devaluing the dollar. Based on our debt load the devaluation of our currency will happen whether we like it or not.
I have been more bullish on silver and palladium over the recent months. I started buying silver at $9/oz and palladium at about $230/oz so I have hefty gains already, but I believe this is only the beginning. With both of these metals you are playing both a global recovery, which I see happening, but not as robust as the talking heads claim, or if you believe the world is going to end. Either way, you should own these metals, perhaps wait until they selloff in the near future, but nevertheless, why wouldn’t you own them?
Silver is used in almost everything you have in your house, from your TV to your cell phone. Silver is also going to be under tremendous pressure in the near future as the global population grows and people are lifted out of poverty because everyone wants a cell phone, computer or even a mirror, yes silver is used in mirrors as it is the most reflective metal in the world. Silver is a dual purpose metal as it is used in industry and as a store of wealth. The Chinese and Japanese used a silver based currency in the 20th century along with the U.S. as a bi-metal currency. Regardless, whether you think the world is going to end, own silver, or whether you believe in a global recovery, buy silver. Surface supplies are dwindling and all the easy silver has been mined. Combine that information with a growing population and we are bound, rather soon I suspect, to have a shortage in the supply/demand curve. Silver is an easy sell.
Palladium has been on fire lately moving up from $420/oz to $545/oz as of today, it was up $25 today alone! Palladium is used as an industrial metal first, mainly in catalytic converters, but it also is used in jewelry and as a precious metal, it was only recently that this usage has grown. Palladium is also a “green metal” as it can be used in several clean energy items, hydrogen cars for example. In short, it is a cheap alternative to its bigger brother platinum. Believe it or not, palladium is rarer than platinum and the largest world supplier of palladium is Russia.
I personally believe Russia is a pretty volatile place, I think history proves that point, which means the supply of palladium can be reduced if Russia throws a temper tantrum. There is always the possibility that Russia does something we do not like, like go to full war with Chechnya or invade Georgia, the country not the state. We could also upset Russia as well by invading, say, Iran, North Korea whoever which could create tension between the U.S. and Russia which could lead to less exportation of palladium to the U.S. If that happened prices would go through the roof.
The big story with palladium is the growth of automobiles in India and China. Between the 2 countries there are over 2B people who are being lifted from poverty to the middle class. As they ascend from poverty they will want what we have, cars. This means lots of catalytic converters in lower cost cars. Ultimately this means they will use less platinum and more palladium, regardless of where it comes from. All of this is a bull case for the metal and I think it could go much higher over time.
I believe the metal will be volatile, silver as well, because of the ETF’s designed to buy both metals. These ETF’s are likely the reason we see prices climbing recently so it is tough to know if the demand for the metals is organic or artificial, for investment purposes. Eventually people will sell PALL or SLV which will cause the prices to drop and that is the time to buy, IMHO. Also, if the dollar strengthens, which is what I think will happen, prices will drop then to. However, long-term I believe both metals are the trade of the century.
I am in no rush to sell what I have and am an active buyer, even at these levels. If you do a Google search for palladium coins or bullion you will see the supply is tiny. You can get palladium bullion, but you will pay a hefty premium for it. This is because supply is so limited and, as we know, you cannot just make more natural resources so the supply is finite. The price action is very exciting to those of us holding the metal already and what I like is the media never pays attention to either metal, never palladium though. Today with a 5% rise in value, no one said a thing, but if it was gold we would hear all about it, mostly negative things and gold bug jokes.
Silver and palladium are no joke and one should consider owning them. At the very least it is diversification especially if you own PM’s already. I am sure there is a bear case out there for both these metals, but I cannot find one that is reasonable.
Many people question whether or not they should own precious metals, gold, silver, palladium or platinum, in their portfolios for the long-term. Many are concerned about inflation versus deflation with the former being bullish on metals and the latter being bearish. In my opinion, neither situation should influence you to own or not own metals.
My thought process is fairly simple, what is the Federal Reserve’s ultimate goal? To keep a stable monetary policy along with full employment, but the way they do this is through keeping inflation alive and well in the U.S. In fact, the Fed would like to see annual inflation of about 2-3% every year. How they get inflation into the system is through the printing of money and over the long-term this devalues the dollar. The real question is whether or not the latest printing of some $2T will create inflation and, in my opinion, it will at some point in the near future. However, ignore what is happening now and let’s take a look at what the Fed has done to the U.S. dollar over the long-term.
The need for the Fed to maintain its 2-3% rate has led to the dollar to have a very clear long-term trend, down. I think this point is irrefutable based on the 30+ year chart. Given the Fed’s bloated balance sheet, which is not going anywhere for the foreseeable future, it is only a matter of time before the dollar goes even lower. I can hear everyone now, but Ray, there is no money velocity and deflation is here to stay. You would be correct, for now, but what we know is that longer term this money the banks and the Fed hold will make it into the economy, we just don’t know when that will happen. When that money reaches you, the end user, we will see inflation, eventually.
At the very least we will see the dollar devalue moving forward given the projected deficits and treasury supply. We also know that the Presidents plans to double exports, which is highly unlikely to happen I might add, would mean an intentional devaluation of the dollar. It seems that FDR’s policies are alive and well in the current White House, but there is no gold to confiscate this time to revalue the dollar. Instead they have Ben’s printing press to take care of that. However, an intentional devaluation of the dollar in today’s world is bound to go wrong as there is more money in the system now versus 1933-34 and there is no gold backing to stop the downward trend of the dollar.
This is not a partisan issue as Bush did much damage to the dollar and one can say that the bull market from 2004-2007 was because of his reckless spending and bringing the dollar down to new lows. I do not believe there is any real way to save the dollar at this stage. Either we need to bring interest rates up from the ZIRP and implement austerity actions that would mean no politician would ever get elected, from either party, again. There is also no way they will cut spending, ever, as both parties have spent way beyond our means and who would campaign on higher interest rates, higher taxes and cutting social programs? Obviously the answer is clear.
It is because of this belief that I know holding precious metals is a wise decision. You may have the timing wrong on when you buy them, but if you hold them long enough you will do just fine, in my opinion. I am a big fan of silver because it is a dual purpose metal, industrial use as well as a precious metal. It is my belief that all the easy silver has been mined and this is a simple supply and demand issue. If we examine how much silver is mined in the U.S., it is roughly 40M ounces, and the U.S. Mint has produced about 9M American Silver Eagles last quarter, annualized out that is 36M ounces of silver. The Mint along is sucking in most of the U.S. mined silver alone. Considering silver is not recycled as much as most other metals this means a new supply will have to be found in the next few years.
Considering a new mine takes months to open and no miner only concentrates on silver, typically silver is a byproduct of copper, gold or other metals, this means new mines are not on the verge of opening anytime soon. Some estimate that all the above ground silver will be used within the next 6-10 years which means supply will continue to dwindle lower and prices should move higher. Frankly, silver is the easiest sell in the world because if you believe in an economic recovery you have to won silver, because of increased demand, and if you believe the world is ending you have to own silver, to preserve your wealth. Either way, the case is bullish, but one should also invest in other metals as well. My other “favorite” metal is palladium, it is a green metal and has many uses from catalytic converters, hydrogen cell cars all the way to being used in jewelry.
What about deflation? Yes, we are in a deflationary spiral right now, but we have had deflation for how long? A couple of years, almost, and what has precious metals done during that time frame? They have risen, why? Obviously people are concerned about another complete financial meltdown and precious metals are a safe haven because they will always be worth something. Others think there is a global economic rebound and sees the use of some metals for industrial uses about to explode, but one must remember that there was also more gold sold in 1999 than in 2001 because people do buy gold when times are good, I am not sure of the exact reason. Others see inflation coming our way in the future and are using metals to hedge against that bet.
No one knows what is going to happen in the future, but the one thing I am confident about is the governments and Federal Reserve’s ability to devalue the dollar, on purpose, to keep up with the population growth. This makes metals attractive over the long-term, in my opinion. Since we have had such a long bout of deflation and PM’s have gone up just imagine if we get any real inflation. I am not worried about deflation or inflation for that matter, both will happen over time. What I concentrate on is buying silver every month and I have recently started buying gold again as well. If you buy some every month you are dollar cost averaging in. I also fully expect some selloff in the metals market when these sovereign debt issues blows up and money pours into the dollar, but the dollar will sell off because in times of stress it is merely the least junky asset to buy, only because it is liquid and you will get your money back.
However, if that does happen you can also rest assured that the Fed will do its part and print more money. Politicians will do their part as well and spend more money. Both of which devalue the dollar and make metals go higher. The fact of the matter is gold and other PM’s are a safe haven which performs better than equities during times of stress. Yes, I realize their prices sold off in 2008 during the crisis, but considering that was because banks and hedge funds needed cash, not metals, and sold everything they had. If you look at the performance in the beginning of 2009 prices were on the rise again when liquidity and the need to raise cash were over because PM’s hold real value and there was a fear that banks would all implode. That proves that PM’s are a safe haven.
Obviously one can invest however they choose, but to ignore PM’s, in my opinion, is a huge mistake. Silver is the obvious metal to own for those in doubt since it serves that dual purpose of a PM and as an industrial metal. I am a buyer of silver at these prices and will buy all the way up to $20 an ounce, maybe higher depending on what is happening. My current cost basis is very low, I bought most of my holdings at $9-13/oz, because it was at the cost of production so I will raise my cost basis, but if silver does what I think it will do over the next decade, I do not care because it will be the ultimate homerun.
Finally there are Platinum and Palladium ETF’s available for US investors. Starting today, January 8th, 2010, PALL, the palladium tracking ETF, and PPLT, the platinum tracking ETF, are available to trade. It is no secret that I am a fan of the platinum group metals, especially palladium, and while I did not buy these ETF’s today I do plan on buying them in the future.
One must consider the taxation of owning a commodity based ETF because they are taxed as collectables, 28% on gains versus 15% on equity or bond gains, and whether they want to own physical or paper versions of the metal. I lean towards physical ownership for personal reasons, but the paper version is a good option for retirement accounts that do not want to go through the hassle of setting up physical ownership of owning the metal.
Palladium has been on fire over the past 12 months, up from $180 an ounce to over $420, and platinum is up from about $900 to $1550 or so. Because of these hefty gains you should carefully consider how and when you decide to invest in these metals. I think long-term, 5 years +, you will probably do just fine, but there are no guarantees. I see the beginning of the recovery in the auto industry, as meager as it is in the US, as one of the driving forces in the price recovery of the platinum groups metals, but the applications for green technologies and jewelry, especially in the BRIC economies, should help demand with these metals.
I am a gold bug, there is no question about that, and I am a long-term bear on the USD because I know that Washington will never reverse their ways of the last 30+ years of fiscal irresponsibility. However, I feel that gold has made a huge run in the recent months and the USD has made a big move to the downside as well. This will not continue as stocks are beginning to struggle and earnings are not as good as many have expected.
This means that the dollar will more than likely see some strength in the short run which will drive stocks and commodities lower. This will certainly drive gold below the $1,000 level which will bring about a much better buying opportunity for those looking to buy. Not to mention, other metals have largely been ignored in the recent run up in gold prices, i.e. silver, palladium and platinum are well below their 2008 highs.
Whether or not this equity rally was liquidity induced or not is really irrelevant as the one true correlation that we can draw is that the dollars losses were stocks and gold’s gains. This will stop as we see a reverse in this trend in the near-term. I see this happening based on the trading patterns over the last few days and the market rally losing its ability to sustain itself. It is really unreal that the market could simply continue to move higher without much skepticism from participants on this fantastic move, but it is what happened.
The one thing we know is that at no point in history have we ever seen such a snap back in equity prices in such a short period of time while we shed jobs and credit continues to contract. Not to mention economic growth is anemic at best, subtract government activity and it is downright ugly, but buyers in the USD will come back as the bearish trend in the short-term is actually bullish. Also, its inability to maintain a new low makes me think a rally is in store in the next few days, which is bad for stocks and precious metals.
Because of this, I am not buying any metals right now with the exception of palladium, it is my favorite and, in my opinion, has the most to gain no matter what happens. My feelings on the USD in the short-term is also why I am short the market right now, a position I opened 10 days ago and added to on Monday, and will more than likely add to. No matter how I run the numbers I am coming up with a fair value of the S&P 500 of between 800-900, but that is my opinion and what makes a market. Eventually, valuations will have to matter in equities and a stronger dollar will force a revaluation quickly, on the flip side a major devaluation would do the same thing I might add.
On a long-term basis, until Washington changes its ways there is no way anyone can be bullish on the dollar. Therefore, I am a buyer of metals on a longer term basis, but I prefer to use my head and unless something happens over the next few days I see no reason to change my mind. An important note is I already have a healthy position in all metals and I am not a seller, I am just not committing new money at this time.
According to the group’s voodoo economics, or survey data, 80% of their group declares that the economy is growing again. However, I beg to differ since whenever the majority of economists agree on anything they are typically wrong. Case and point, 2002 and several other times all throughout history, not to mention that the vast majority of economists CNBC and the major media outlets parade have this recession confused with the typical inventory recession, which this is not. This is a credit collapse recession, not the typical recession that we have experienced most times all throughout our history.
In fact, the closest example I can draw upon for a correlation to what we are going through is the Great Depression. During other recessionary periods we have not suffered the same symptoms that we have today and anyone who claims we have is simply not looking at the facts. During the 2000-2003 recession did credit collapse along with major banks and investment banks? No. How about in the early 1990’s? Kind of, but that was limited to smaller, much smaller savings and loans and we still did not see the sheer size of institutions fail like we have over the past 2 years. In fact, the credit contraction is astounding if we examine this period to the early 1990’s and nullifies any real comparison.
Other than that period we literally have to go back to the 19030’s for anything close to what have seen in the markets or the banking industry. It was/is that severe and the global impact that profound. It is also vastly different from the consumer prospective because the consumer is so leveraged compared to the 1930’s, now we have credit cards, mortgages of all flavors and consumer debt like we have never seen. Back in the 1930’s consumer debt was limited to the wealthy or upper middle class, mortgages were much different than they are today and HELOC or home equity loans were basically non-existent back then. All of these newer things makes today’s problems actually much worse than the problems of 80 years ago. Not to mention the derivative dangers, according to some experts these products basically guarantees the worlds GDP almost twice over.
How these experts, and I use that term loosely, determine that the recession is over with consumer credit contracting at a record pace, home prices contracting, government stimulus supporting GDP, banks still on the government life support system, the suspension of mark-to-market still hiding major losses and a host of other painfully obvious items indicating there is much more pain to come is beyond me. We know that the market has gone nowhere in real returns when we look at it priced in gold or subtract the dollars losses from the S&P’s return’s, but then again the market is not the economy and should never be confused with the economy.
I think that is the disconnect that economists have as they view the market as the indicator of recovery. If the market is the great forecaster that everyone thinks it is and truly looks 6 to 9 months out then why in 2007 did it hit all-time highs? In fact, stocks are horrible indicators of the economy and history is on my side on this one. See 2002 when the ISM gave a false impression of a recovery and stocks rallied only to hit new lows a few months later, the same thing happened several times throughout history. Before the 87 crash, during the 73-74 decline, in the 1930’s there were spectacular rallies. The Nikkei has had 420,000 total point rallies during the 1990’s, the so-called “lost decade”, some of which we 60% plus rallies. Many of these events were correlated with economic recoveries when, in fact, they were technical events and had nothing to do with economics.
Rising stock markets are not always a measure of economic stability or recovery. In many cases it is simply technical’s or, in our case, HAL9000 buying, since volume is at an all-time low and fund flows suggest it is not the retail investor. This is a traders market and only a fool would buy to own this market. I am not even sure I would rent this market since we had weak volume today and the market could not even hold a 60 point rally with the second string traders in today. The economic data is weak, bank earnings are probably going to be mixed and we know commercial real estate is collapsing, $22B in defaults in August of 09 versus $3B in August of 08 come on that’s a problem.
I may have missed a few points, 60 on the S&P to be exact, but I have done OK this year. Not to mention I bought silver at $9, gold at $880, platinum at $900, and palladium at $225. I don’t do everything right, but I realized I could not fight the liquidity bubble and I do know that this same liquidity bubble will implode eventually taking the US dollar along with it.
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