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speedybure (< 20)

Window of Opportunity Opens Again for Gold and Silver: Why this may be the last time

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36

April 06, 2009 – Comments (29) | RELATED TICKERS: GLD , SLV , UDN

 Gold and Silver will put in their lows we will likely never see again: 

 

 China and Russia will more than negate any IMF sales as they have announced their desire to increase gold resrves substancially. China wants to increase the currenct 1% of 2 trillin to 10%. Russia also wishes to increased their reserves to 10%.  The dollar is coming into question more every day. The chinese announced they will increase Yuan Swaps so their trading partners can use the yuan instead of USD for trade.   

 

The dollar will not remain the world reserve currency, no matter what press reports came out from the G-20.  The monetary base will start to increase substancially merely due to the debt monetezation the FED has embarked on. For those who don't know they announced such actions because no one wants to buy our debt.  

 

 The CPI has been increasing while asset prices have been falling. Imagine the inflation or even the gov't manipulated CPI numbers once asset prices have bottomed.  The Fed will not contract the money supply and 2% long term inflation is a pipe dream. Has bernanke ever been right? 

 

 Earnings season likely to be dismal, mortgage default rates will continue to accelerate as many reset, consumer credit will be riddled with defaults.   Finnally the dagger in the heart is the bond bubble, most eloquently said by peter schiff:

 

"A few weeks ago when the Fed announced a strategy designed to bring down long-term interest and home mortgage rates through unlimited Treasury bond purchases, government debt staged a spectacular rally. To the unschooled market observer, the spike may be difficult to understand. After all, why would the value of Treasury bonds rise while their underlying credit quality is deteriorating faster than Bernie Madoff’s social schedule? The move is actually a perfect illustration of the tried and true Wall Street strategy of “buy the rumor and sell the fact”.

If it is well known that Fed will be a big purchaser of Treasuries, those buying now will be positioned to unload their holdings when the buying spree begins. If the Fed pays higher prices in the future, traders can earn riskless speculative profits. If the traders lever up their positions, as many are likely doing, even small profits can turn unto huge windfalls.

The downside of course, is that all of the demand for Treasuries is artificial. Treasuries are now in the hands of speculators looking to sell, not investors looking to hold. These players are analogous to the mid-decade condo-flippers who flocked to new developments for quick profits. They did not intend to occupy their properties, but rather flip them to future buyers. Once these properties came back on the market, condo prices collapsed, as developers were forced to compete for new sales with their former customers.

This is precisely what will happen with Treasuries. Just as the U.S. government issues mountains of new debt to finance the multi-trillion annual deficits planned by the Obama Administration, speculative holders of existing debt will be offering their bonds for sale as well. In order to prevent a complete collapse in the bond prices the Fed will be forced to significantly increase its buying.

However, since the only way the Fed can buy bonds is by printing money, the more bonds they buy the more inflation they will create. As inflation diminishes the investment value of low-yielding Treasuries, such a scenario will kick off a downward spiral. But the more active the Fed becomes in their quest to prop up bond prices, the bigger the incentive to hit the Fed’s bid. The result will be that all Treasuries sold will be purchased by the Fed. But with the resulting frenzy in the Treasury market, and with inflation kicking into high gear, we can expect that demand for other debt classes that the Fed is not backstopping, such as corporate, municipal and agency debt, to fall through the floor, pushing up interest rates across the board.

In order to “save” the economy from these high rates the Fed will then have to expand its purchases to include all forms of debt. If that happens, run-away inflation will quickly turn into hyper-inflation, and our currency will be worthless and our economy left in ruins.

To avoid this nightmare scenario, the Fed should pull out of the bond market before it’s too late and let prices fall to where real buyers, those willing to hold to maturity, re-enter the market. Given how high inflation will likely be by the time this happens, my guess is that long-term Treasury yields will have to rise well into the double digits to clear the market.

But we should know that the bursting of the bond market bubble will have even more dire consequences than the bursting of prior bubbles in stocks and real estate. Significantly higher interest rates and inflation that will result will severely compound the current problems. Imagine how much worse our economy would be if we faced double digit interest rates? In addition, not only will homeowners be confronted with record high mortgage rates, but the Government will be staring at trillion dollar annual interest payments on the national debt, making interest by far the single largest line item in the Federal budget. Just like homeowners who relied on teaser rates, the Government will face a similar problem when all its low-yielding short-term debt matures.

The grim reality of course is that when the real estate bubble burst the Government was able to “bail-out” private parties. However, when the bond market bubble bursts, it will be the U.S. Government itself that will be in need of the mother of all bailouts. If U.S. taxpayers or foreign creditors are unwilling or unable to pony up, and if the nightmare hyper-inflation scenario is to be avoided, default will be the only option. If misery really does love company, Bernie Madoff’s clients might finally find some comfort. "  Buy gold, silver, miners and don't hoard cash  

29 Comments – Post Your Own

#1) On April 06, 2009 at 6:13 PM, XMFSinchiruna (27.46) wrote:

I agree wholeheartedly! Excellent post!! I see you're fairly new to the CAPS blogs, and after appreciating the quality of this post, I want to encourage you to remain active here! :)

It seems that those who get the big picture despite the confusing array and dizzying speed of developments in macroeconomics at present are few and far between, so I am thankful that you're sharing your views with the community. 

Great Post! :)

Fool on!

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#2) On April 06, 2009 at 6:57 PM, Jimmy2008 (< 20) wrote:

Excellent post!

I am curious what could happen to Canada (and Canadians) when hyperinflation occurs in US. In that case, imports from US to Canada will become more expensive. There will be high inflation in Canada as well. Am I wrong?

For Canadians: I called Scotia Bank today. We can buy bullion from it at much lower premiums than from Kitco or apmex. However, it privides allocated accounts only for registered accounts (RESP, RRSP).

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#3) On April 06, 2009 at 7:01 PM, soycapital (< 20) wrote:

TMFSinchiruna and others

Can you offer us some opinion/guidence on where gold and silver might be headed? Support levels? Etc. I agree that soon will be a good opportunity to increase our PM holdings. Timing correctly would be good and that tends to be a weak point of mine. I'm looking at CEF and SLV not sure what else. Already have some physical gold/silver, a goat, and of course momma!

Thanks, Dave

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#4) On April 06, 2009 at 7:04 PM, grimboy24 (58.45) wrote:

Good Post, and excelently written.

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#5) On April 06, 2009 at 7:04 PM, soycapital (< 20) wrote:

Speedy, Meant to say great post, hope you will continue to do so. You and I on same page for macro trends in dollar, gold, etc.

Thanks, Dave

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#6) On April 06, 2009 at 7:08 PM, speedybure (< 20) wrote:

I think they are both going through the roof. I'm not a chartist or technichan, but i think silver to reach the 30's-40's and gold in the 3k-4k over the next 2-4 years. This of oucrse is in USD which isn't much. I personally own slw, which has 13 royalty streams from which they can buy at an average cost of $4/oz taking input costs out of the equation. it is truly a brilliant model and i think the management team is top nitch. In addition they pay no income tax as they are run through the caymen islands. Royal gold is the equivalent to slw, but they do pay income tax. Hope that helped!

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#7) On April 06, 2009 at 7:15 PM, soycapital (< 20) wrote:

Speedy, I agree they will both go up massive. Where to buy was more of my question I guess. Where are the support levels and where is the rough bottom forecast. We are still dealing with deflation here and gold/silver taking a hit. Seen any info on this or anyone care to comment?

Thanks, Dave

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#8) On April 06, 2009 at 8:37 PM, speedybure (< 20) wrote:

It is impossible to say, inflation is a function of many things most notably expectations. Predicting human action is impossible. i think gold may see $800 at silver may hit $11. Give or take 10% is the bottom in my opinion. I expect gold to be over 1000 by the end of the year and silver around 18-20. That however is just an estimate. I can say that by the end of 2010, gold will hit an all time high and its very possible for it to be past 2000. All i can say is you don't wanna be on the sideline when these metals make parabolic moves. Actually the CPI is slowly turning positive, which i expect will gain steam each month. There are way to catalysts to not own these metals. 

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#9) On April 06, 2009 at 8:44 PM, speedybure (< 20) wrote:

By the way if anyone wants the miners equities I'm holding along with valuations just let me know. Don't rely on analysts, just remember the tech bubble.

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#10) On April 06, 2009 at 10:18 PM, BullMktAg (< 20) wrote:

Speedy -

I'd like to know what miners you're holding.

You make an impelling arguement - one I've been trying to make to my father who's been less than ready, and now only a bit reluctant, to come to the same conclusion.

Thank you for your post!  Excellent, indeed.

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#11) On April 06, 2009 at 10:34 PM, speedybure (< 20) wrote:

I have: silver wheaton (slw), silver standard resources (sso), Yamana (yri), royal gold (rgl) , Newcrest mining (ncm), kinross gold warrants for 2013 and redback mining (rbi.to)

I don't buy on us exchanges so the tickers in the USA would be slw, ssri, auy, rgld and kgc, the others trade on pink sheets which i don't recommend buying. 

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#12) On April 06, 2009 at 10:42 PM, speedybure (< 20) wrote:

Silver wheaton is my largest holding and was lucky to initiate half my position near the bottom last november, but this company has good news coming out weekly. I wish i knew how to post an excel spreadsheet to show you the intrinsic value of slw at different silver prices. They will never be just to inflationary pressures for their inputs costs as they have accumulated royalty streams over the years allowing them to purchase silver at an average of $4/oz, plus they are run through the caymen islands so they don't pay income taxes. This is the most dynamic model in the mining industry and many are now trying to replicate their capital structure.

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#13) On April 06, 2009 at 10:48 PM, Seano67 (82.64) wrote:

I have: silver wheaton (slw), silver standard resources (sso), Yamana (yri), royal gold (rgl) , Newcrest mining (ncm), kinross gold warrants for 2013 and redback mining (rbi.to)

 

Nice. I was going to ask how you felt about Yamana (I'm assuming you meant AUY there, not YRI?).

 

Great post. Thanks for your thoughts.

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#14) On April 07, 2009 at 12:53 AM, RVAspeculator (29.04) wrote:

Although I agree 100% with the post and wish I could rec more than once, I urge all the posters here to realize one thing.   Timing on this whole event is the critical key.  

I bought all the miners I could buy, even used margin back in November but I sold almost all of them when GDX hit $38 and gold was near 1000. 

At this point the technicals are still looking weak for the miners though and I want to wait for another bottom to get back in.

You can believe everything in this post but it still pays to be prudent about exits and entries.  Everyone says "When it happens it will be too late to get in".   I say, "if it starts going parabolic and I am not on board I will GET ON BOARD.  

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#15) On April 07, 2009 at 1:11 AM, speedybure (< 20) wrote:

I totally agree but don't like giving entry/exit advice. I should have mentioned the more conservtive plays would be silver wheaton, royal gold, franco nevada, etc. The point I was trying to get across is to have some exposure to these miners as they are overlooked by the market in general for their history of being unprofitable. I do believe when confidence in the dollar is lost there will be parabolic moves in Gold. I'm also not a technician but rather advocating putting positions on for the long haul. This didn't start out for reccomendations, rather just to point out the numerous catalysts that could pull the floor out from under the dollar.

 

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#16) On April 07, 2009 at 1:43 AM, RonChapmanJr (93.89) wrote:

we'll see these levels again.  its funny watching people create bubbles that they think are completely different from every other bubble before...

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#17) On April 07, 2009 at 2:37 AM, maxhoffa (< 20) wrote:

i agree with ron, we'll see these levels again. i don't buy the end-of-the-world or end-of-the-economy arguments from either side, the deflatinists or the inflatinists.  the economy and markets in general will stabilize sooner rather than later. 

<> however, that's all beside the point.  PMs will bubble, sure, only questions being how far out from now the bubble pops and how high PMs run in the meantime. 

i agree with the OP, gold and silver have a lot of run left in them and will put in highs we've never seen before.  but as is always the case with gold/silver, timing your exit will be every bit as critical as timing your entry. 

i'm going to start adding to our PM holdings (physical gold, physical silver only so far) again here.   i don't care so much about hitting the absolute bottom as i do about buying at what i see as a fair price given my long-term expectations for gold.  at $875 i'm fine with adding color here. 

<> of course i'm also pretty high on equities right now too.  low on the dollar though, big trouble ahead for the buck. Report this comment
#18) On April 07, 2009 at 3:54 AM, DemonDoug (85.04) wrote:

fed needs to print more than is lost for real inflation to take hold.

with trillions of losses every month and quarter, no high inflation for the near future.

also: announced cutbacks in defense and government spending is the highest deflationary act you can imagine.

Do you know how inflation took hold in zimbabwe?  It started with a 300% raise to all government and military personnel.

yeah, so when we start seeing that here, then you are right, until then i'll keep buying milk for less than i did 2 years ago. :)

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#19) On April 07, 2009 at 6:17 AM, kaskoosek (70.89) wrote:

I agree with RVA on this one.

You are a fool if you want to buy gold now.

The fundamentals for gold, silver, platinum and other commodities are unblemished, but it is very important to choose your entry points.

I have sold all my gold and silver miners a long time ago.

(dec 2008) made a hefty gain.

I beleve that we can dip back into the 700-800 range now that the economy is "stabilyzing" wink wink.

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#20) On April 07, 2009 at 10:27 AM, Rehydrogenated (32.56) wrote:

I'll buy silver when it hits $.05/o and gold at $1.00/o and copper is $500.00/o cause you cant makes bullets out of gold and silver. I also just bought a cask of premium tequila for investment purposes, i figure when the world ends everyone will be afraid to go to mexico for booze and we still gotta get these girls drunk...

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#21) On April 07, 2009 at 10:32 AM, Rehydrogenated (32.56) wrote:

I'll buy silver when it hits $.05/o and gold at $1.00/o and copper is $500.00/o cause you cant makes bullets out of gold and silver. I also just bought a cask of premium tequila for investment purposes, i figure when the world ends everyone will be afraid to go to mexico for booze and we still gotta get these girls drunk...

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#22) On April 07, 2009 at 11:23 AM, EnigmaDude (94.14) wrote:

Now hold on - we're gonna need some silver bullets, too!  When those drunken ho's go all vampire on us...

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#23) On April 07, 2009 at 12:41 PM, speedybure (< 20) wrote:

I'VE BEEN BUYING WARRANTS ON KINROSS, YAMANA AND SILVER WHEATON. ANYONE INTERESTED IN ANY ONE OF THESE THREE SHOULD TAKE A LOOK. THE KINROSS WARRANTS ARE TRADING FOR 1.14 WITH AN EXCERSIZE PRICE OF 32 (CANADIAN) OUT TO JAN 2013?

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#24) On April 07, 2009 at 1:12 PM, dudemonkey (40.43) wrote:

also: announced cutbacks in defense and government spending is the highest deflationary act you can imagine.

What they say:  cutbacks in defense and government spending

What they do:  DoD budget increased.  Biggest governmental budget in history.

No matter how I turn this over in my mind, I don't see how the US dollar gets out of this one.

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#25) On April 07, 2009 at 2:16 PM, speedybure (< 20) wrote:

Ponder this: even when the top commoditty traders turn huge profits as well as retail investors, hedge funds, etc, there will be so many tax loss carryforwards which will negate the tax revenue the government plans to reduce the deficit with. Additionally imagine if the FED did attempt to raise rates like volker did in the 80's, that will cause so much employment thus wiping out even more tax revenue.

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#26) On April 07, 2009 at 4:15 PM, mustbepatient (29.41) wrote:

RVA, my advice to you if you are a long-term gold bull is to always keep some gold exposure.  We often think we are smarter than the market, but nobody is 100% correct short term.  Since I recognize that my short-term bearishness may be wrong, I still keep exposure.

P.S.  You seem to like the royalty companies.  For a sleeper gold royalty play, you might want to look at ROY.  Right now they are valued as a nickel royalty, but in a few years they will have a RGLD-style premium due to their gold assets (IMHO).

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#27) On April 07, 2009 at 4:15 PM, mustbepatient (29.41) wrote:

RVA, my advice to you if you are a long-term gold bull is to always keep some gold exposure.  We often think we are smarter than the market, but nobody is 100% correct short term.  Since I recognize that my short-term bearishness may be wrong, I still keep exposure.

P.S.  Speedy - You seem to like the royalty companies.  For a sleeper gold royalty play, you might want to look at ROY.  Right now they are valued as a nickel royalty, but in a few years they will have a RGLD-style premium due to their gold assets (IMHO).

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#28) On April 07, 2009 at 4:33 PM, speedybure (< 20) wrote:

What do you think of silver wheaton? In my opinion they have the ideal model. The market was worried about their debt, but after and equity and debt offering and an aquisition which brings 3 additional streams online this year, silver would have to go to under $4 for a prolonged period of time (8-12 months) to pose any problem. They have about 600-650m oz of reserves now with almost 1 trillion ounces in inferred and indicated. Their royalty streams average mine life is near 20 years. meaning they could continue to produce without any capital expenditures. In addition they run through the caymens= they don't pay income taxes so operating income= free cash flow. I am very bullish long term about this. 

I will definetly look into it, my reasoning behind royalty companies is that even these miners can only hedge input costs such as oil for so long, whereas royalty companies may be subjuct to a 1-2% increase on their agree purchase price depending on the contract.

Have you looked into Franco-Nevada? I have a small position, its a diversified royalty company (gold, silver, oil, potash) it has 88 online streams and 300 total. Im still gathering information as it usually takes me a week to do the neccessary research.

Any thoughs on pennwest? it took a huge blow and i put half a position under $12 canadian. They cut their dividend from 17% to 8.6% which is smart, but the market killed it. They are still going to produce 180,000 barrels of oil

-Thanks Chris 

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#29) On April 08, 2009 at 6:57 PM, XMFSinchiruna (27.46) wrote:

speedybure

As my longtime readers know, SLW is my favorite equity after CEF. :)

It is my second largest holding, and will remain so for the remainder of the multi-year secular bull market for precious metals.

An Asset More Precious than Gold?

Silver Wheaton: The Breakfast of Champions

The Best Stock Pick of 2008

Silver Selling for $1 per Ounce

A Great Time for a Slowdown

No Need to be Blue; Get Some Silver

 

I own Penn West as well, and consider it the best of the Canroys

You have solid taste in equities, dear Fool. :)

 

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