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May 2011

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Strap on your silver crash helmet...

May 14, 2011 – Comments (4) | RELATED TICKERS: C , BAC , AAPL

OK, lets pretend that silver is the home of the savvy investor... its not to be sure. It is cluttered with a lot of weird buyers like hair dressers, cab drivers and most recently the bag boy at the grocery store. But let's assume this is not the case that instead these are smart money. I am not talking Goldman smart looking for the largest flock of fresh mullet to steal their assets. That's what we have now. I am talking about what it would take to make silver viable to a good solid investor not a dope or bloodsucker. 

First we have to assess the value of silver. But it has no real value other than intrinsic. Since that is the case, then we have to compare its relative price to something else, like gold which is also valueless since it too is intrinsic. However to compare it to something else would be applies and oranges. For example copper. Copper is freaking useful. In fact, demand in copper drives copper. And copper cannot easily be substituted thought aluminum is often considered. So silver is no JFK... I mean no copper. 

So if we play the game of comps just as they did in the housing bubble where value went intrinsic before it collapsed and still is, then we find a historical ratio of about 60 to 1. That is gold is roughly 60 time more valued intrinsically than the red haired step child silver. 

All of the alteration of this ratio is where the true mental illness comes in. In the late 30s when gold ownership was banned in the US, it briefly went to 15, but even earlier the ratio was 100 to 1. So any discussion that silver will one day drop back to the 15 to 1 ratio is pure insanity, since that lasted only a couple of year v. the 100 to one ratio which lasted for centuries. So I say we stick at 60 to 1 which is a reasonable intrinsic comparison. 

If gold sells for 1496 at bubble, then silver at bubble would be comparatively intrinsically bubbled at 24.9. 

In order to value something, anything, we have to measure it in the here and now. The silver bug and gold bugs hate reality. They love instead wild projections. For example some gold trader on the talking heads stupid shill network cnbc had the audacity to say gold "could" go to $5000 an ounce. And he said it with a straight face. But what about the here and now. If we are to believe that gold has actual value rather than intrinsic, then it could never go to $5000 an ounce. Not ever. Only tulip bulbs sell for that much in the 1500s. 

Real value is easy to calculate. Let's say you buy a house. How much is the house worth? The cost to rebuild it should it burn down. Its that simple. Just pure cost accounting. What's the land worth. Who knows but that's intrinsic. Whatever some sucker will pay you is what its worth. Now you get the comparison. Silver bugs never get this comparison. They are dim witted and can't reason. 

So what matters is not the grotesque manic projections of gold's intrinsic value but the here and now. 

In vary simple terms if you are paying more than 24.9 dollars and ounce for silver this day this minute, you are getting ripped off. Projections are meaningless because they don't exist.. This is like the projections of the obama economic team. Unemployment will stay below 8% if the stimulus package of 880 billion is passed immediately without reading it. Ok that sounds reasonable. The projection was a bit off. 

So that is how simple it gets. 

Now with equities and bonds, value is easy to figure. It is not a shill game unless enron accounting is used. But with gold and silver, there is no standards by which gold or silver content is regulated. It is a free for all just like tulips. So even if you wanted to compare silver and gold with each other, what's the purity, whats the warranty of conforming goods? There is none. Plus you have to pay for gold and silver storage. So this is back to mortgage based securities where the costs of home ownership had to be meet an appreciation of 16% just to break even. Then you have the commissions and the taxes

Thanks to Obamacare gold coins and silver coin traders and collectors are taxed. Oh yeah... that was another fabulous gov bill that was not read before they signed it. 

So what is silver worth? NO MORE THAN 24.9 dollars an ounce in the middle of a gold bubble. So in relative historic terms, it is very expensive and this is why only the gullible are buying it, other than the blood suckers that like to bilk the dumb money as they did in the housing bubble. 

OK finally we turn to the words of Warren Buffett who owns no gold and no silver because he thinks its worthless and dangerous. 

My first question, as I sit there on the couch in his office, is: "What about gold? Is this a classic bubble or what?" 

"Look," he says, with his usual confident laugh. "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?" 

Okay, so gold is not a screaming buy to Buffett. What should a typical upper-middle-class person in the U.S. buy to prepare for retirement? 

"Equities," Buffett answers without a moment's hesitation. 


Could Buffett be wrong about Gold and Silver. Sure. However, since he is the most successful investor in US history, I give him more weight than I do that guy that was hawking gold saying it could go to $5000 and ounce. My thought is simple reasoning. If this guy sellinggold really thought it would go to $5000 why the heck would he be selling gold at $1496? Shouldn't he be a buyer? On the other hand Buffett is in fact buying massive quantities of equities at this time. He's not selling them to others. 

So in the end it all comes down to who you believe... my bag boy at the grocery store who told me to buy silver or Warren Buffett who told me to buy equities and avoid intrinsic junk. 

One other thought I would like to mention... When QE II ends in june, that is akin to a tightening of the currency. The dollar will rise. If you believe that gold and silver are somehow related to the dollar, it and all commodities will fall. Although I must say that such reasoning is flawed. 

Why is it flawed? It is flawed because the dollar futures are speculative and driven by speculators. The actual dollar value is determined by the M1 money supply which in spite of the Fed acting as a back stop has not increased to any perceptible amount. The M1 supply, the actual driver of inflation, only occurs when banks loan money. So the excuse that silver and gold are hedges against inflation are flatly wrong on two counts. One, the M1 supply is relatively stable whereas gold and silver are parabolic and in a euphoric bubble. Second, speculative bubbles break, they do not produce real inflation because they are removed from the supply demand metrics entirely. 

In the case of gold, it is lightly traded by only about 5% of the investor population, Silver is 1%. This is exactly what the hedged funds like, thinly traded intrinsically valued stuff. They aren't in gold for the long term, they are their to take heads when the moment is right. They may have already done this in advance of June. 

But as my bag boy says, "Hey dude, with your money, you ought to be buying silver; its going to go to 150!" 

"And you son, should be working for a hedge fund until they go broke then you can always come back to the grocery store." 
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