$50 Silver: Bubble or New Norm?

Hi Winged, you've had some interesting posts. Keep em coming! With regard to the 3 choices:

1. they can tax more (which is political suicide so few politicians want to do that)
2. they can spend less (don't hold your breath)
3. they can inflate the debt away

We cannot tax our way out of the problem without killing the foundation of our economy. Spending less is an important part of the equation but man that seems impossible with the mess we have in Washington. Choice #3 is clearly the chosen strategy because it avoids any really difficult choices and the eventual impact is too hard for most to anticipate and assign blame for. All of this is good for metals and the reason why I think we are about 50% of our way through a 20 year bubble. There will be some short term corrections but the run will end in a crash as it has in years past.

Bluesboy65

 

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Like you, I have a combination of gold & silver (I'm about 50/50)

The silver is physical, up to today, the gold position was in a mutual fund.

Today, I sold 36% of the mutual fund and will be purchasing gold bullion with the proceeds next week.

Since the silver is more volatile, my objective is to reduce the volatility in the gold position. The gold mutual fund has a large position in mining shares. Because I started investing in this fund in 2004, I've realized substantial gains. I've also noticed that on the run up to $1500, the mining shares have begun to lag physical gold.

Also, as a recent post by Cloudsweeper in another thread suggested, the holding of physical gold may be a more desirable option than holding derivatives such as a mutual fund. As well, various central banks will likely continue to accumulate gold bullion.

Due to my employment at a large Swiss financial institution, I am fortunate that I will be able to buy this gold position at spot with less than a 1% commission and extremely low storage costs.

Based upon the opinions of people I respect, including some on this forum, I expect that I will be holding both silver & gold positions for the indefinite future given the macro economic forces that will be in place supporting PM's for a very long period.

 

This is a great thread. In my opinion silver and gold will continue to climb. I base this on what the president said in his speech the other day. his main topic was jobs. He almost seemed to avoid the debt and it's stifling on the economy. Sure a massive employment surge overnight would strengthen the economy but that is not going to happen. The market totally saw this as a president without a plan and answers. And no one believes Ben Bernake or Gertner, pardon the spelling. They don't have a believable Plan A. We are in deep financial waters.
The dollar dropped and the stock market saw this as trend to higher and longer lasting inflation. The dollar is weakening as I print this. So where do we all go to protect ourselves from the crumbling dollar. Precious metals of any kind: gold, silver, platinum, palladium, rhodium, and more is the answer. We may be in a bubble, yes, an inflation bubble. And as long as it lasts PM's will continue to climb. I whole heartedly dislike buying PM's to make a profit on the belief the U. S. dollar is faltering and soon will become a secondary currency. Like it or not even on CNBC they admit this inflation will be a long lasting one. Someone mentioned ten years. I truly hope that won't become the truth. zeke

 

One of the most thought provoking theories on the US's financial situation. A long read but definately worth the time.


http://fofoa.blogspot.com/2011/04/deflation-or-hyperinflation.html

 

I was thinking this morning, a few years ago high interest rates were a good thing for savers. But the gov't can't afford to hike the Fed funds rate for years, and it keeps inflating the Fed balance sheet, so the dollar goes lower and lower. Many of us have made a lot of (paper) money betting against the dollar -- and we have turned it into real assets, gold and silver. They are functioning alternative currencies to my view. The coming inflation will be intractable, not temporary as Bernanke said this past week.

 

Big Goverments didn't get "rid" of silver they just stocked it all away and have been hoarding it ever since. I recall reading A book where Bernard Barusch gave Curtis B. Dall his thoughts on silver. I forget the exact year, but it was sometime in the early 30's. Barusch stated at that time HE owned 5/16ths of the worlds visible silver. I don't know how much that was then compared to now, but I'll dig up the book sometime later. From what I recall it's a facinating story.

 

I don't think we're in a bubble. Bubbles happen when people are speculating the price will go up and they're going to flip the item. I don't think much of the silver being bought is for resale. I think the dollar is becoming worthless, and I don't see that trend changing for the next 2 years. I think silver will be $100 in 2 years, which is where it belongs.

 

My prediction is that gold will continue to rise in relatively consistent manner as long as the gubment & federal reserve, continue their absolutely reckless, destructive, and IMO criminal economic policies that are tearing the USA apart with the objective of enriching a few at the top. I don't see any political situation developing where, after the next election, there will be much change to this. If by some miracle, Obama comes to his senses, forces the Congress to pass some real finance industry reform, have the justice department throw a lot of banksters and CEOs in jail, place a 25% import duty on imports from China, end the wars, and develop a true industrial policy, then you will see the price of gold fall rather quickly. Is it going to happen? hahahahaha. So gold will continue to rise as they continue to destroy what's left of the economy. Remember gold is a hedge against the $.

On the other hand, I think silver is going to make many investors pee in their pants. If you have balls of steel and thus can endure wide swings in pricing, I think the net is that it will rise as well, but how much is anyone's guess, and the timing is unknown. I don't have any issues with owning silver, but understand it doesn't move for the same reasons as gold. My preference in silver is to go more towards numismatic silver as this will have a certain bottom to it that bullion won't have.

I really don't know why the world governments don't hold silver as an asset. Maybe its the complex arrangement between the $, gold and oil and there is no room for silver in this arrangement. This does bring up an interesting observation. The US (military) guarantees that any country can buy a barrel of oil in US dollars. Every country in this world consumes oil so this does give the $ an advantage that continues to give other countries a reason to hold it as an asset.

 

This sounds more like conspiracy theory. There would be no reason for them to hide a stockpile of silver, and there is no silver listed on any asset sheet of the US Treasury and Federal Reserve. In comparison, gold is clearly there as an asset of both.

In any case, the silver they did have was sold off for $1/ounce in the 1960s. People were able to redeem $ silver certificates until 1968 and during the last days, there were long lines of people lined up at the Treasury offices doing just that. It's pretty clearly documented versus the known reserves of the US silver supplies of the time.

In any case, my advice to investors is to stick to known quantities and don't invest based on rumors of secrets supplies of pms hiding somewhere.

 

I smell an agenda here, but you won't divulge it. You and a couple of others here.

Are silver American Eagles and gold Double Eagles considered legal tender? One has "One Dollar" stamped on it and the other has "Fifty Dollars" stamped on it.

Where does the US Mint get silver and gold to press these coins if there is no stockpile? Does it just go to the local shop on the corner when it decides it's going to stamp 30 million silver eagles?

You threw out the "conspiracy theory" thing, which we all know is code for "tinfoil hat". When somebody tosses that expression out there, I immediately smell an ulterior motive.

 

We are definitely in a silver bull market. If we rise to historic levels and then fall precipitously to much lower levels, say $20's, history will judge it a bubble. If we just establish and maintain new long term higher price levels ($50, $75, $100 ...) then it was not a bubble. I think most people feel there is currently a good deal of speculation in the silver market and expect a steep and sudden decline in price. Timing of the decline could be in two weeks or two years.

Bluesboy65

 

This is the official statement from the US Mint. Keep in mind that I didn't say there was no silver production in the USA. I said the USA does not hold silver as a monetary asset.

"By law, the United States Mint's American Eagle silver bullion coins must meet exacting specifications and must be composed of newly mined silver acquired from domestic sources. The United States Mint will continue to make every effort to increase its acquisition of silver bullion blanks that meet these specifications and requirements to address continuing high demand in the silver bullion coin market."​

Clear enough what the mint does to get silver blanks. No secret stockpiles of silver, the local coin shop, or even walmart is needed. Until the secret stockpile of silver is exposed, or a good reason given for why they US would even maintain one, then it isn't something I will use to make investment choices. This is what this topic is about.

 

Wingedlib, I commend you on a well thought out, well articulated post. You've covered the pros and cons from several different angles. I tend to side with those who believe that we are in a bull market, but that the new floor will be much higher than the sub $20 level, where it resided for the last 30 years.

Don't know how high it will climb, but I don't think we've seen the top yet, even for this year. Plus I believe that many macro-economic factors are contributing to PM's, and in particular silver's rise. People are losing confidence in the dollar, as our government and the Fed continue QE2, near zero interest rates, and other inflationary monetary policies. You've got a growing middle class in China and India, who already value precious metals, and they will put more of their disposable income and savings into PMs. And finally, I believe that the herd of American investors has finally caught some silver fever, lending to the psychological factors which are really the drivers behind speculative bull markets like the one we are witnessing today in silver.
The shrewd investor can make a killing in this environment. I'm more of a collector and buy and hold kind of guy, but it sure is fun to watch!

All that being said, I think we're due for a near term correction, maybe down to $35-40, followed by the real boom, in which we may see $75 or more, then another correction with the new floor being around the $50 level. I base this on pure guess work and rectally extracted speculation.

 

I am curious, due to the statements that people have lost confidence in the USD, What currency would you immediately without reservations, change all of your current USD? The closest one for me is the Swiss Franc, but I would still be hesitant.

So I ask those who dislike the USD so much, honestly now, if someone offered it today only, what currency? I am curious how many have really thought this out. No PMs, no Liberty, etc. ~ a regular exchangeable currency.

Jim

 

I'm not sure if exchanging the $ for another fiat currency really means much unless you are planning to live in that country. The problem with holding foreign currency is it's worth when they find they have to revalue or reissue the dollar. You may end up SOL, because any such move by the American government also means they are going to default on foreign obligations. (assuming at this point the international bankers are sitting in jail)

I think holding PMs are a better alternative.

 

To be honest I really dont follow other paper currencies that closely, but I think the swiss franc is thought of as one of the "hardest" paper currencies in the world. Still a paper currency is just that ... paper. Would I trade my dollars for francs right now? No ... I would rather be in gold, platinum, palladium, silver, and copper.

 

My vote - it's a bubble and a big one. That's contingent on some type of turn toward sanity with respect to our fiat currency. No turn, no bubble. Simple.

 

If you are actually holding swiss francs, the US defaulting ( and I don't believe it will happen) on the USD will make your deal a good one, as long as the swiss don't default on the franc, you will have the exchange value, and still buy PM with them. If all paper money is the same??? then why does one worry whether their paper money is weaker than other countries' paper money? It just doesn't make sense, as much as one might like PM, I don't know anyone who gets paid in them, pays bill with them, so a person has to have a "paper currency" to function? But I guess I am getting off the subect, and will cease this line.

Jim

 

Good question...Vis a vis currency, I wouldn't put all my eggs in one basket. A combo of strong Euro currencies (Swiss, Scandinavian countries) plus an ETF type investment holding a basket of the stronger Asian currencies should work. This doesn't mean I would abandon the dollar all together. Extremes have a way of biting you...eventually.

Personally, one of the positions I hold is a mutual fund that invests in highly rated foreign corporate bonds denominated in the local currency. The fund manager generally chooses bonds where the currency is likely to appreciate. So, in the case. of a Brazilian bond you get paid the coupon on the bond and if the currency appreciates, it kicks up the total return. The coupon on the bond provides some downside protection if the local currency depreciates against the dollar or is stagnant.

 

But there is already precedence for this. Nixon defaulted on the dollar in 1971 when he told European countries that he would no longer exchange their excess dollars for gold. It was the first bankruptcy of the US dollar because what was promised for the paper was not delivered. These days, the USA can't for example, ever pay China back the US debt it holds, can't pay Japan back, can't pay back the ever increasing debt and obligations being run up in secret by the Federal Reserve. It's rising geometrically and when just the interest on this money exceeds real GDP it's done. (or actually long before that) They will default again, it's mathematically impossible for it not to happen.