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.
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.
I have been reading this all over the internet over the past couple of days mostly from folks who receive the Webbot Prediction alert, or whatever it is called. Essentially, this program scans the internet for predictions of the future based on some algorithmic method. It was first developed in the 1990’s to find hot stocks, but then was used for such useful things as finding out the end of the world.
Now, do I believe such predictions? No. Basically, the creator even says its accuracy is as about as good as flipping a coin, so I guess we are all just as good as this multimillion dollar program if we just have a mere quarter in our pocket. Could something happen on October 25, 2009? Sure, who knows. Certainly the news today is not encouraging and the DXY is in dangerous territory again, but a complete collapse is not really likely in the near-term. There is simply too much liquidity in the market right now.
However, the value of that liquidity is a completely different question and issue. The value of the USD can fall to zero in one tick, we know that to be a fact, but even that is unlikely. As stated before, I believe we are in more danger of a bank run than a collapse of the currency in the near-term, but even that seems to have sorted itself out. In fact, what has saved all the currencies of the world, including the USD, is the fact that they all printed their way out of this mess almost equally debasing their own currencies. Even though that is a true statement it is also true that the US is definitely guilty of printing more money than most other countries and it is also true that we have poor leadership and dismal fiscal policies which is why the USD is the poster child of a weak currency.
Super power or not, we are in the last throws of glory days thanks to decades of selfishness and political indifference to fiscal sensibility. You cannot borrow and spend your way to prosperity, regardless of what Ben Bernanke, Barney Frank, Nancy Pelosi and Obama thinks. This means that we will eventually suffer the decay of currency collapse, perhaps “soon” and that depends on your definition of soon, but it is unlikely on October 25, 2009.
I would encourage you to be prepared for currency devaluation, because we are experiencing it now in a very small way, by investing in hard assets such as gold, silver, palladium, and platinum. I believe that silver and palladium represent the best value at this time, silver is at $17 when gold just made a fresh high, the last time gold was at $1030 silver was at $20/oz. Palladium could easily be trading higher given the green push we are in and the rarity of the metal. Either way, if you won it and things do get worse and the headlines are true, you will have your wealth preserved and protected.
Everyone is talking about gold over the past 24 hours mostly because it went parabolic today. Those who follow me know that I am a big gold fan, but we are seeing many others jumping onto the bandwagon about the yellow metal. The big question is why is it having these giant leaps and will it continue.
I believe you are seeing gold increase because of economic uncertainty and the fact that it has strong fundamentals right now. I am not sure if it will break above the $1,000 mark and hold, it has always sold off when it reaches this area. However, based on the action we are seeing I do believe now is the time it will break and hold that threshold. I believe that China is the driving factor behind the sharp increase lately as they diversify their holdings and are hedging their dollar assets.
Another rumor, strictly a rumor from where I stand, is that the Chinese will revalue their currency and perhaps peg it to the Euro as the EU is now China’s largest trade partner. People cite the movement in the CNY for the latest rumor, but I do not know if that is really going to happen. I do think it could happen, but who really knows, rumors are just rumors. If this did happen then gold would go parabolic overnight and the dollar would take a bath, but I do not foresee this happening. Regardless, what we do know is that if you owned gold for some time you have done very well.
I think what we are seeing is a lot of short covering and the Chinese middle class stepping up to the plate and buying gold. All throughout history China and India have been huge fans of gold and many believe it brings luck, but more importantly they see it as money. Whether it brings luck or not, who knows, but what we do know is that the population of both China and India could easily suck up existing supplies if they are indeed buying the metal.
Surprisingly we saw gold and silver hold up very well in the face of a strengthening dollar, which is unusual, a few days ago. Usually when the dollar increases all precious metals take a nice nose dive, but not lately, although the strength in the dollar is not very impressive to say the least. I think that people are moving towards gold as a safe haven as they realize that gold has maintained its value this year and that the crisis is still not over yet. Having gold during uncertain economic times has always been a good bet and that, in my opinion, is what we are seeing.
In the recent past I said I liked gold and recommended picking it up under $960 an ounce. It did go below that mark so I hope people did buy it, but I am not so wild about buying it after such a sharp move upwards today. I think we will see a selloff tomorrow for those taking profits and after the selloff I would then consider buying it, no specific price target, but I would dollar cost average in. While I am bullish on gold, I am more bullish about silver.
Traditionally the gold to silver ration, GSR, has been tighter than it is right now. From 1792-2002 the GSR has a mean of 31, 31 ounces of silver to 1 ounce of gold, but currently we have a GSR of 63. That means that silver just about half the price it should be according to the traditional GSR. If the GSR returns to its traditional average silver should be trading at about $31.40 an ounce, double its closing price. To me that looks very bullish especially because the fundamentals are there. All the easy silver has been mined and we do not recycle it while every piece of electronics you have contain silver in order to make them work.
My point is, yes buy gold in a cautious manner, but also buy silver as you will get more bang for your buck. Essentially, silver can double in price when gold may only go up a few percentage points. It is also about diversification and if you buy precious metals then you need to diversify between them. I am currently a buyer of all precious metals in this order; palladium, silver, gold and platinum. While gold usually gets the spot light, silver and palladium usually get ignored which makes them a good buy as their prices will follow the majors, gold and platinum.
I am sure you are familiar with precious metals like gold, silver and platinum, but there is one more metal that gets ignored, palladium. Palladium is a member of the platinum family and is, actually, much more rare than platinum. This metal just might be one of the best options for those looking to invest in precious metals, but it is often ignored.
The metal is ignored because it is viewed as cheap, at $290 an ounce, but it is cheap for a reason there is no demand right now. That, I believe, is about to change as automakers are looking to save money and make their products cheaper. Palladiums big brother, platinum, is used in catalytic converters to lower emissions, but at almost $1,300 an ounce it is extremely expensive. However, palladium does the same thing at 25% of the cost and it is rarer than platinum. The fact that there is a very strong possibility that automakers will dump platinum for palladium is reason enough to buy the metal, the last time this happened palladium went to the moon.
However, the story just gets better because palladium is used for other things too. For some reason palladium can hold up to 9 times its weight in hydrogen which makes it useful for those exploring hydrogen powered cars, but its ability to lower emissions also makes it desirable for those industries looking to go green. For that reason it is a nice green play, for now, while it is cheap. Also, the major suppliers of palladium are Russia and South Africa, with Russia being the primary supplier. As you know Russia can be hard to deal with so the supply could be cut off at anytime, making the case of ownership of the metal even stronger.
The metal is also used in jewelry, which may not excite you right now, but consider this, China has emerged from the economic slump and platinum is very popular there. As I just said though, platinum is very expensive which makes palladium, which has many of the same characteristics as platinum, attractive for its low cost. So far palladium has performed very well this year coming from a low of $185 to $290 at the moment, it was up today when other metals were down which makes me think Detroit is moving in its direction now.
So, this metal is a green play, an automobile play, a jewelry play and, essentially, a recovery play which makes now a very good time to be a buyer. Last year the metal was twice as expensive, but like with all metals last year it got pummeled. The biggest problem is how do you buy this metal, there is no ETF and most people do not want to buy futures contracts. The only real way to buy it is physically, which is how I own mine, or through buying companies that manufacturer it, like Stillwater Mining.
If you want to buy the physical metal it is a bit tougher because there are only 2 forms to buy it in, the Canadian coin or the Pamp Suisse bar, both are sold in 1 ounce increments. Unfortunately, Canada does not make the coin anymore and they only had 3 years of production, 2005, 2006, 2007, and the 2007 version is considered ‘rare’ and sells for a premium. Actually all Canadian palladium coins sell for $100 premium, but the Pamp version only sells about $30 to $50 over the spot price. For the best place to buy these products go to a reputable dealer either locally or on the internet, like Apmex.com, GoldenEagleCoins.com or BullionDirect.com. You can get them on Ebay, but if you do not know what you are doing go to a dealer.
Like I said, I believe that the transition to palladium is on its way and I have no idea if that is a fact or not, but what I do know is I like the price action lately. I believe that if you get in and hold it long-term you could potentially do very well. It gives you inflation protection, but you do not need inflation to profit with all the alternate ways the metal could appreciate just makes this metal too good to be true, in my opinion.
Disclaimer: I do not own any of the stocks listed, nor do I have any agreement with any website listed in this article. I do own the physical meatal and am actively adding to my position.
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