Gold and silver highlights from this week…
From David’s Desk
Gold and silver highlights:
Investing — I’ve written before that in order to make big money in the stock market, you’ve got to be willing to take a big position in a given item.
But in this business, nothing’s easy. A big position puts a strain on your nerves; it’s always stressful. One other choice is that you can sit with a modest or small position.
Example — Some years back my son, Ryan, told me that he loved Apple products. He pressured me to buy some stock in Apple. I wasn’t particularly intrigued with Apple at the time; the company had troubles, and its stock was selling at 22. But under pressure, I bought Ryan 75 shares of Apple. I soon forgot about Apple. Had I bought 1,000 shares I’d probably have been checking on the price twice a day, and I probably would have sold it on the first correction.
But through thick and thin, we held onto the stock, finally selling it recently for a fat profit. Lesson — often you will hold a small position in a stock where you couldn’t sit with a big position in the same stock over a long period of time.
Current example: I like the future of rare earths. I bought a small position in the rare earth exchange traded fund, REMX. This ETF looks OK, but nothing dramatic has occurred. The action has been slow. I’ll sit with my small position until either the ETF breaks out to the upside or until it craps out. Either way, I don’t feel under stress holding a limited position in REMX. Actually, although I like the story in REMX, I don’t have the guts to take a big position in this ETF. Wait, if REMX closes at 27 or better, I’ll add to my position. Otherwise, I’ll just sit.
Gold — Here’s a daily chart of gold. Note that gold closed right on its (blue) 50-day moving average. Note also that GLD has tested the (red) 150-day moving average repeatedly, and each time the 150-day MA has acted as support for gold, after which gold has moved higher. If gold can close above its blue 50-day MA (above 1371.50), I would consider this to be bullish action.
What’s with the Wall Street Journal and its idiotic never-ending battle against gold?
Here’s the latest: Smart Money magazine (owned by the WSJ). The cover ofSmart Money is covered in the color of bright gold. The headline reads: “The Power of GOLD, the risks and the rewards.” The article (as usual) starts talking about gold’s rise, and the fact (a bold lie) that millions of Americans are now buying gold. Then the clincher — gold is in a dangerous bubble, it’s too popular, and if you buy gold you take a big chance of losing your shirt.
One of the final paragraphs of the piece. “Of course, a further surge isn’t inevitable or even, in the eyes of some professional investors, probable. Gold, after all, is a commodity (a lie), and its price can rise and fall based on the amount of metal dug from the ground . . . so it’s not inconceivable that gold’s supply could outstrip demand (another lie). Indeed, gold’s supply has been rising gradually since 2007, according to the World Gold Council. Other investors (who?) go so far as to say there’s a gold bubble, inflated by the biggest wave of anxiety since the Great Depression, that will burst the moment people stop being nervous about the economy. Jason Apollo Voss, a former fund manager, predicts a big sell-off in gold, its price falling by nearly one half, sometime in the next two years. ‘I don’t like to invest in things that depend on people’s nervousness.’ Voss says.”
Russell Comment: And this passes as honest reporting, or at least reporting by the gold-hating Wall Street Journal.
Below, maybe this is why the WSJ hates gold. This is a chart of the Dow adjusted for real money — gold. What we see here is the Dow in terms of real money heading down and down.
As for gold, as I write, April gold is priced at 1375.10. This is clearly above gold’s 50-day moving average, while the 50-day MA, in turn, is well above gold’s 200-day moving average. This is the classic bullish relationship with the 50-day MA above the 200-day MA, and the price of the item above both.
Jim Sinclair (www.jsmineset.com)
What would it mean if your business lender no long wanted your paper? That is what China has said here.
The Chinese are not captive by the US dollar. They could pare with vigor and not hurt themselves. Don’t kid yourself.
China is totally dollar hedged by all the dollar deals they have done for minerals and other business entities in the past six years. I know because I am doing business with Chinese corporations that are both publicly and government owned.
Expenses and operating capital are in dollars.
The difference with what you read here is that we are doers, not simply commentators. We are on the front lines in all subjects of your interest.
China pares U.S. Treasury holdings in December
Feb. 15, 2011, 11:32 p.m. EST
By Chris Oliver
HONG KONG (MarketWatch) – China reduced its holdings of U.S. Treasury securities for a second straight month in December, though it maintained its position as the largest holder of U.S. government debt, ahead of Japan. China’s holdings of Treasuries in December totaled $891.6 billion, compared to $895.6 billion in November, according to the Treasury International Capital report, released Tuesday. The drop is the second straight month China has reduced its holdings from October’s recent high of $906.8 billion. Japan, the second-largest holder of U.S. government debt, raised it holdings of U.S. government debt to $883.6 billion in December from $877.2 billion in November.
MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES
(in billions of dollars)
HOLDINGS 1/ AT END OF PERIOD
HERE: http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
Department of the Treasury/Federal Reserve Board
February 15, 2011
1/ Estimated foreign holdings of U.S. Treasury marketable and non-marketable bills, bonds, and notes
reported under the Treasury International Capital (TIC) reporting system are based on annual
Surveys of Foreign Holdings of U.S. Securities and on monthly data.
2/ United Kingdom includes Channel Islands and Isle of Man.
3/ Oil exporters include Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar,
Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria.
4/ Caribbean Banking Centers include Bahamas, Bermuda, Cayman Islands, Netherlands Antilles and Panama.
Beginning with new series for June 2006, also includes British Virgin Islands.
________________________________________________________________
Five Min Forecast (5minforecast.agorafinancial.com)
Gold is holding onto yesterday’s gains, the spot price currently $1,372.
Holdings in GLD, the biggest of the gold ETFs, now sit at a nine-month low. From a record of 1,320 metric tons last June, holdings have fallen to 1,224 as of yesterday. But don’t get the idea investors are abandoning gold. Edel Tully, the veteran precious metals analyst at UBS, doesn’t believe this represents “absolute selling.” Rather, she suspects institutional investors are switching their gold exposure from ETFs to the real thing — numbered bars, held in allocated accounts, deep inside bank vaults.
“The picture painted by recent persistent ETF outflows is not wholly accurate,” she says.
Silver has retreated from its run toward $31, now sitting at $30.41.
Sales of U.S. Silver Eagles have pulled back from January’s record. So far in February, the U.S. Mint has sold just over 1.7 million ounces to its authorized purchasers.
Assuming that tempo keeps up for the rest of the month, that would be a total of 3.4 million ounces — very respectable, but well off the pace of January’s record 6.4 million.
Ed Steer (www.caseyresearch.com)
| If you are interested in Gold, and in particular in its role as money, you will be aware that the primary POLITICAL reason why Gold should be used as money is that it cannot be printed or borrowed into existence. The point is that it is only the political control over what the world uses as money which prevents gold from resuming its function of money on an OFFICIAL basis. On an “unofficial” basis, Gold has never stopped being money.- Bill Buckler, The Privateer, February 12, 2011
If you are interested in Gold, and in particular in its role as money, you will be aware that the primary POLITICAL reason why Gold should be used as money is that it cannot be printed or borrowed into existence. The point is that it is only the political control over what the world uses as money which prevents gold from resuming its function of money on an OFFICIAL basis. On an “unofficial” basis, Gold has never stopped being money.- Bill Buckler, The Privateer, February 12, 2011 I was not impressed with the preliminary open interest number in gold…and I’m expecting to see an increase in gold’s open interest when the final figures are posted on the CME’s website later this morning. Silver’s open interest numbers look more encouraging…and they even might show a reasonable decline. We’ll see. But, whatever they are, they will be in Friday’s Commitment of Traders Report…as yesterday [at the close of trading] was the cut-off for that report. Monday’s open interest changes were, unfortunately, just about as I expected. Gold open interest rose 4,379 contracts…and silver’s o.i. was up a very chunky 4,945 contracts. There were decent rallies in both metals on Monday…especially in silver…and it’s obvious to me that both rallies ran into sellers that were more than willing to go short the metal against all long contract buyers. The bullion banks come to mind, but that won’t be known for sure until Friday’s COT report. Here’s the 1-year silver chart. As you can see, the RSI is heading back into overbought territory once again…and on increasing open interest…which I’m never happy to see.
Click here to enlarge. So, I wouldn’t be the slightest bit surprised if JPMorgan et al weren’t tempted to go after the silver price going into First Day Notice, which is the last trading of February. I’m sure they’d like to ring the cash register and harvest all these new longs that have piled in since late January. But can they…or will they? Gold just broke through its 50-day moving average to the upside yesterday…but probably didn’t penetrate it enough to bring in serious technical fund buying…but the preliminary open interest numbers didn’t make for happy reading, so who knows. As silver analyst Ted Butler has pointed out, a break through this moving average may set off a rally in both metals once the tech funds step up to the plate in gold. So, whatever happens in gold and silver for the rest of February, we should all be psychologically ready for it. The gold stocks have been outperforming the metal during the first two days of the week…and we should find out soon enough if these buyers know something that we don’t. Here’s the 1-year gold graph…and the RSI is a long way from overbought territory here.
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Graham Summers (www.gainspainscapital.com)
The Biggest Lies Ever Sold to the Investment Public
The general public had stocks foisted on them in the 80s with the introduction of stock-based retirement plans (401ks and IRAs). They became further enamored by this asset class with the creation of online discount brokerages, which seduced the DIY spirit.
Stocks have become so popular that there are entire peripheral industries have been built surrounding them: investing books, investing seminars, investing TV shows, etc.
And yet no one has ever asked whether investing in stocks is actually a good thing.
In reality, owning stocks isn’t all that great. I don’t mean during bear markets… I mean in general. When you get done reading the lies detailed in these articles, you’ll likely come to the conclusion that stocks as an asset class are not only highly overrated, but that owning stocks can in fact be a colossal waste of time.
Lie #1: Stocks make money from price appreciation.
Just about everyone talks about investing in stocks from a price appreciation perspective. “Buy low, sell high” so the saying goes.
Well, historically dividends have accounted for 70% of all stock market gains.
According to a study performed by the London Business School, when you remove dividends, stocks have returned a mere 1.7% in average annual gains over the last 109 years. To put this into perspective, this is less than you’d make from owning long-term US Treasury bonds (2.1%) over the same time period.
Indeed, if you’d invested $1 in stocks in 1900 and reinvested your dividends, by 2009, you’d have made $582 (adjusted for inflation). Take out dividends and you’d have only seen $6 from price appreciation. Yes, $6 from 109 years’ worth of capital gains.
Put another way, by focusing solely on capital gains when it comes to stock investing you’re only doubling your money about every 18 years (remember, this analysis simply focuses on the returns generated by the market… which outperforms most professional and individual investors).
So unless you’re buying stocks with dividends, you’re likely not making diddly in the long-term.
Lie #2: A bull market in stocks increases your wealth.
Everyone and their mother likes to babble about whether we’re in a new bull market. The reality is it doesn’t matter. There have been ENORMOUS periods of time in which stocks didn’t make ANY money when you account for inflation… and that INCLUDES bull markets.
Case in point, research from the London Business School shows that stocks didn’t make a CENT in purchasing power in France from 1912 to.. 1977: a whopping 65 years.
Put another way, some three generations of investors in France didn’t actually increase their purchasing power by owning stocks.
Indeed, the US is currently experiencing a similar period in which stocks rise but FAIL to increase purchasing power for investors. Consider that since the Tech Bubble stocks priced in Gold have FALLEN nearly 90% indicating in plain terms that most of the gains we’ve seen in the market are a result of easy money and US Dollar devaluation.
Meanwhile, inflation is on the rise. Food prices are at record highs and only going higher. Executives at clothing retailers are warning that prices could rise by as much as 15-20% by the Autumn. Cotton is up 44% so far in 2011. And even the Fed’s phony measures show that vegetable prices are up 13%!
Make no mistake, higher interest rates are coming and coming fast. The Fed has spent Trillions trying to lower interest rates (more on this in a moment), and it’s now officially lost control of the long-end of the Treasury market and food prices.
This will have ENORMOUS implications for the US housing market and financial system. Housing prices will be collapsing in the coming months as interest rates soar. We could also very well see another 2008-type event (a collapse of the US Financial System) as well.
Why?
Derivatives.
In 2008, the entire financial system nearly went under due to the Credit Default Swap market which was $50-60 Trillion in size. In contrast, the interest-rate based derivatives market is $196 TRILLION in size: more than THREE times larger than the credit default swap market at its peak.
At this size you only need a very small percentage of these derivatives to be “at risk” (meaning real money is bet on them), say 5% to get $10 trillion in potential losses. To put that number into perspective, the entire WORLD STOCK MARKET is only $36 trillion in size.
See the potential risk here?
To say that the US financial system is in danger would be a HUGE understatement. It is the derivatives market, NOT the housing market that has the Fed concerned.
Make no mistake, we are rapidly descending into an inflationary disaster. If you haven’t already prepared your portfolio for this, NOW is the time to do so.
Whiskey & Gunpowder (www.whiskeyandgunpowder.com)
Gold, Silver, Copper and Nickel:
When Money Dies SlowA huge opportunity to hedge against both inflation and deflation is lying out there in the open. There are no transaction costs and right now there’s even a built-in discount. But most people will never realize any of this.
In 1933 President Franklin Delano Roosevelt signed Executive Order 6102, which made it illegal for U.S. citizens to hold gold bullion.
Prior to that, the $20 bill was essentially a warehouse receipt for a one-ounce gold coin. Prior to the Federal Reserve Act of 1914, the $20 bill actually told you this.
After Executive Order 6102, $20 notes weren’t allowed to be exchanged for gold anymore. Americans couldn’t legally own or trade gold as money and savings, only as jewelry or collectible coins.
A year after making monetary gold ownership illegal, FDR revalued gold from $20.67 per ounce to $34 an ounce with the Gold Reserve Act. The Act also required all gold and gold certificates to be turned over to the Treasury.
The dollar was debased. A chunk of the gold it used to be good for was legally removed. Instead of “containing” 1/20 an ounce of gold, each dollar now only contained (or represented) 1/34 an ounce. And of course you couldn’t actually own the gold itself.
In 1971 Nixon severed the last official ties between gold and the dollar. The dollar quickly sunk to its real value, which had been debased by years of money supply inflation.
By 1975 Americans were allowed to own bullion gold again, but during the roughly 40 year’s bullion gold ownership had been illegal, the dollar had been drastically debased. At its former lowest point in the summer of 1980, the dollar was worth only 1/850 an ounce of gold. It regained some value for a while, but for the past couple of years a dollar would only get you less than 1/1000 an ounce of gold (right now it gets you less than 1/1300 an ounce).
That was the story with a piece of paper that was merely standing in for a monetary metal. But what happens in the case of circulating coins actually composed of monetary metals?
Let’s look at quarters, dimes, nickels and pennies…
Prior to 1964, U.S. quarters and dimes were 90% silver. From 1965 to 1970 they were 40% silver “clad” over a copper-nickel or “cupronickel” mix. Like the paper dollar, quarters and dimes were debased in two stages. Now quarters and dimes have no silver in them at all. They are now entirely copper and nickel, but only enough to get a little more than 1/4 their face value.
Prior to 1983, U.S. pennies were 95% copper and 5% zinc. Pennies minted after that are 97.5% zinc with only 2.5% copper plating.
The U.S. nickel has been cupronickel since 1946: 75% copper and 25% nickel with trace amounts of manganese. But that’s probably about to change…
Why are quarters and dimes no longer silver? Why is the penny no longer mostly copper? And why will the nickel likely follow suit fairly soon?
Because the amount of silver and copper and nickel in each case came to exceed the face value of the coin. The debasement of the U.S. currency over time has required the metal in the coins to be replaced with a cheaper substitute.
The average American has no idea what inflation really is or why currency debasement is a problem at all. He figures one metal is as good as another in minting of the currency…that when the face value of a coin falls below the value of the metal in the coin, it’s nothing more than a curiosity. Substitute a cheaper metal, they think. Problem solved.
And indeed the problem is solved for the government, which mints the coins made of real money at a loss after the effects of bouts of the inflation started by monetization of government debt. Savers and the overall economy on the other hand…their problems are just beginning…
But that is a story for another time. For now let’s look at the opportunities to be had when the government makes metals available for a fraction of their market price via coins…And let’s see if there are any opportunities left (Hint: there are!).
If you had seen the writing on the wall in the early 1960′s and started hoarding quarters and dimes while they still were almost wholly silver, you would have found that your dimes were worth a high of $3.57 each. Your quarters would have been worth $8.93 each.
In fact, these 90% coins still trade just like regular silver bullion bars and rounds. They were taken out of circulation – “hoarded” – by those savvy to debasement (Gresham’s Law tells us that good money will be hoarded when bad money floods the market). These coins were collected without any transaction costs. They were bagged up with different face value totals: $1,000 bags, $500 bags, $250 bags, $100 bags and $50 bags. These bags now sell with a transaction cost.
Each of these bags traded for over 35 times their face value because of the silver in the coins. At least they did at silver’s peak in 1980. Even after the peak and during the ensuing 20-year slump they were selling for more than three times face value.
Now thanks to waves of money and credit expansion from the Federal Reserve, silver (and gold) is pushing back toward its old highs. These bags of so-called “junk” silver are trading at more than 20 times their face value. They may hit 30 times face value again…and beyond…
Between 2000 and 2006 I was a big believer in silver as an investment (I still am). I begged all my loved ones to sell their (overpriced because of credit expansion) homes, pay off their credit cards and shove the rest of the money into silver.
No one listened. Here are a couple of graphs that makes them wish they had.
The red vertical lines in both graphs represent the start of 2006.
If you had sold your house at the very peak of the housing bubble in 2006…just before silver took off…you could now sell your silver and buy back your house…plus five more houses like it.
And there’s a lot more potential for that trade to get even better.
Silver shot up about fourfold, while real estate plummeted by a quarter or a third. That’s “so far.” Silver’s price could multiply again – even if does dip in the interim – while housing could drop even more.
Even if you didn’t catch the peak, but just saw the writing on the wall in 2000-2005, you’d still have done pretty well by selling your home and buying silver. You wouldn’t have gotten quite as much for your house, but you would have gotten silver at around $4 instead of $9.
Silver probably has another trick or two up its sleeve. It probably has a lot more upside than gold. It will probably play catch up till the silver/gold price ratio gets larger. Who knows?
Look at the other coin that was debased: the lowly penny…
Prior to 1984, the penny was almost all copper. Now those old pennies have been driven out of circulation and hoarded (Gresham’s Law strikes again). And they’re worth just under three times their face value: Almost three cents for the old one-cent piece.
Copper hasn’t had quite the success that silver has. Non-debased silver coinage has been worth 35 times face value and is currently worth 20 times face value and climbing. Copper coins’ triple-bagger over nearly thirty years doesn’t seem nearly as impressive. That’s because it’s not. But it is telling.
The thing is, silver now has transaction costs. Whether you buy bars, rounds or pre-debasement coins, you have to pay a middleman. You have to pay shipping if you get it online.
Meanwhile, copper pennies are still floating around, but hard to find. It’s really not worth the effort to gather underpriced copper this way.
But nickels? That’s a different story. Every single circulating nickel still has 3.75 pennies’ worth of copper each…along with 1.25 grams of nickel. The silver dimes and quarters and the copper pennies are gone, but the copper-nickel or cupronickel nickel is still the only kind of nickel there is. For now…
What if you could have simply been there to start collecting silver quarters and dimes when they were actually circulating? You’d just have had to walk up to your bank and withdraw your money as quarters and dimes. This would have worked up to 1963. After that you’d have to sort through your quarters and dimes to make sure you didn’t have one of the new, non-silver ones.
The best opportunity with silver coins has long passed. But there is still a similar opportunity with silver’s humble cousin, the cupronickel five-cent coin.
Buy Two, Get One Free
Copper is currently about $4.60/lb. Nickel is currently about $13.00/lb
120 five-cent pieces is $6.00. Those 120 coins contain a pound of copper and 1/3 pound of nickel. That’s about $8.93.
If you deposit $6 in any bank in the nation, then withdraw your money as nickels, you get almost $9 worth of metal. That’s an immediate 50% return. That’s like paying for two thing and getting three.
You can’t legally cash in on it now (anti-smelting laws for pennies and nickels were introduced in late 2006). But the bullion market for cupronickel coins will develop, just as it did for silver U.S. coins. This will happen once the government starts minting five-cent pieces made out of cheaper metals.
To those who doubt this will happen, I refer you to the bags of silver coins trading as bullion for over 20 times their face value. You can easily order such a bag right now by going to any of a number of online bullion dealers. These bags of coins sell right alongside silver bars and rounds.
Right now, the government is subsidizing your copper and nickel purchases…and cutting out the middleman. As much as we complain about government, we ought to stop and offer them a little thanks for this.
The debasement of the U.S. nickel is looking very likely. Right now you have another opportunity to do what the silver coin hoarders did back in the early 1960′s.
Hoarding nickels right now gives you an immediate benefit. You get between $0.07 and $0.08 of copper and nickel for a mere $0.05. Thanks to Uncle Sam. But your good uncle won’t subsidize this forever. He can’t afford it.
What’s even more is that there is a hedge against deflation risk that you just don’t get with bullion. You see this discounted metal is minted. It will always have a nominal value of what’s stamped on it by its issuer.
So if the dollar strengthens and copper, silver, and gold all get cheaper in dollar terms, you can still spend your nickels just like any other money. Your purchasing power stays the same, maybe even increases.
But if the dollar declines, then the value of the cupronickel in the currency will rise against the face value. Eventually – at two or three times face value – these five-cent pieces will trade as bullion just as 90% silver quarters and dimes did and still do.
Again, there is currently no transaction cost to saving in nickels and no risk from plummeting metal prices. There is literally nothing (in case of deflation) to lose and everything (in case of inflation) to gain.
Your only real problem is storage; a few thousand dollars of nickels takes up a lot of space…and it’s heavy. But people had the same problem with silver when it was cheap. I doubt they’re complaining now.
Having “too much” cupronickel won’t seem like much of a problem if inflation continues to drive the cupronickel in five-cent pieces far in excess of face value.
At worse the dollar strengthens and you’ve just saved money whose purchasing power has increased. That is not a bad worst case scenario at all.
The cupronickel is the last bit of honest U.S. currency there is. Right now it’s dying slow, like the others did. But things could speed up quick.
The cupronickel could surprise us all. Gold and silver are having their day. Maybe eventually cupronickel will, too. What cannot be dismissed is the current discount on the stuff (thanks, Uncle Sam) and the extremely limited downside.
Regards,
Gary Gibson
Managing Editor,
P.S.:
Nickel collecting best lends itself to small bits of occasional saving. Getting more than $100 or so at a time from your bank could raise eyebrows. It may not even be allowed.
In fact, I’d like you bar patrons to send me your experiences with bulk savings in nickels. What have you been told by tellers and branch managers about your unusual fascination with nickels? Let me know: gary@whiskeyandgunpowder.com.
~jude says…hmmmmmmm…
Related articles
- Chinese Buy As Much Gold In January As They Did In Half Of 2010 (businessinsider.com)
- Gold demand hit 10-year high last year (guardian.co.uk)
- Gold stocks reverse downtrend (investmentpostcards.com)
- Richard Russell On The Lessons Of Investing In Apple, And Why He Likes Rare Earths And Gold (businessinsider.com)
- An Odd Chart Read on Gold, Silver, and Rare Earths (GLD, SLV, AGQ, MCP, REMX, REE, AVL) (247wallst.com)
