$500 SILVER & Hyperinflation

You can say it as many times as you like, but is has little to do with price of tea in China. In addition, your comment about Numismatist's being ticked with $1000 silver has missed the mark... BY A LOT. That is about the nicest I can put it.

 

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Well, I am a numismatist myself, so I'm not knocking on coin collecting. I think it's a great hobby. But I suspect there is a melting freak-out behind the attacks on bullion investing by some. In any case that's neither here nor there. Silver and gold have been among the best performing assets over the last decade, and, as with internet stocks and other bubbles, there could be mini-crashes on the way much higher.

 

You are 100% right, it is exactly like Internet stocks. They both dropped because they were over valued. To back up my point, read an ECON. book. It will tell you, While there are MANY factors that determine a Commodity price, the cost of production is the most relevant and eventually the commodity will settle near that price.

The cost of production for Silver is around $22/OZ give or take, so $50 silver made it an overvalued asset. Of course that is not something Eric Sprott or Ted Butler will tell you but hey, they need to make a living too, so why should the truth get in the way.

 

Well, at least we found some common ground. :smile

My point, which you agree with though grudgingly, is that we are living in bizarre economic times in which the laws of mathematics are thrown out the window. The fiat paper scheme, which the fiat bulls appear to support, is obviously not backed by math or logic -- the Fed just prints trillions of dollars, and journalists speculate on the creation of a trillion dollar platinum coin.

So, in this environment, anything can happen. Silver may not reach $500 per ounce, though I think it will as all of this printed money seeks new sources of perceived growth.

As for my knowledge of economics? I write about economics and get paid for it weekly, so while I'm not a guru, I can probably hold my own on economics issues compared to most nickel- and copper-hoarders.

Notably, I recently heard that the marginal cost of silver production is actually $30 per ounce, which implies the current price is below it. Either way, with the declining quality of mines and with the rising cost of fuel (this year is predicted to be the second-highest year ever), the marginal cost of silver production is bound to rise significantly over the next decade or two. So bear in mind that this cost is a moving target, and the market adapts to future expectations.

Anyway, I'm not God, and neither is anyone in this forum, so we'll just have to wait and see over the next few years how silver and gold perform. I think most agree they will be significantly higher -- and yes, that implies many of today's numismatic coins will get melted. There will be a frenzy of melting. I expect there will be numismatic blowback!

 

Not sure you mis understood my comment it is investor demand due to Fed policy that played a factor as investor sought other alternatives not our growing debt. If that is case Japan the 2nd largest economy (at one time) had growing debt for last 20 years Silver to Yen was flat during that time. Also Silver rose due to many reasons that is not taken into account: Increasing industrial demand and Increased Production costs. Same thing happened to copper notice how both charts behave

 

For example:

Now, over time, starting now, which asset is likely to yield better value -- one that's already been "best performing" (and therefore pumped up by additional investors) for the last ten years, or one that's been underperforming and neglected by investors during that same period?

It's a non-trivial question, even if it's phrased rhetorically. Some investments are best-performing because they represent something with a consistent history of generating value or returns, sometimes over a period much longer than ten years. (I'm looking at you, Procter & Gamble.) And some are neglected by wise investors because they represent something mismanaged or ill-founded from the beginning.

If it were simple, we wouldn't argue so much about it...

 

To add to that list I would say if you have the means to stock up on items you should first acquire things for your immediate survival, then stockpile items that benefit you in some way and can be used as leverage.

So first few things should be food for a few months, silver and gold to trade with initially, guns and AMMO to protect what you have plus hunt for food, and in the case of AMMO, trade like silver for what you need, water supply or purification should be high on that list somewhere too.

Then the next things you stockpile are society crutches. Prescription medicines, tobacco, alcohol, etc. Things people go ape-$h!t3 when they dont have access to it. For instance pain medicine. People who are addicted to those pills will do ANYTHING for that next fix, so you have the advantage in several ways, first off you have what they need so you can calm them down by providing it for them, that earns loyalty to some degree if they know they can keep getting what they need from you, and secondly you have now forged a worker who will quite literally do most anything you need done so they can keep getting high. Plus, you also have a stockpile of pain meds if you happen to fall and break an arm or something, AND most addicts will sell their valuables CHEAP for a fix, so the upper-hand in acquiring other useful materials. Same goes for alcohol, when people get depressed or lose their job or marriage they frequently turn to alcohol to 'forget things', I could see a similar situation playing out if they lose everything, so alcohol becomes useful, plus its also a great disinfectant and sterilizes, not to mention potentially helps as a mild anesthesia during mild operations if no real access to true medicinal alternatives. Learn how to make and use a still, its value could be great!

Anyway in short be as prepared as you logistically are able and in a terrible situation like that dont be afraid to play off of other folks addictions and stupidity. MY survival is what matters most to me and protecting my people and family, short of that, everyone else is fair game unless they are trying to band together as a group to help. As it stands right now, EVERYONE has the opportunity to prepare themselves in some way for a worst case scenario, even $100 bucks can go along way in ensuring your survival so dont expect much help from those that prepared IF YOU DIDNT

 

Yes, I think we have a lot of common ground. As you said we are living in bizarre economic times. I agree and as you said "anythign can happen" That is really my point. I don't know and you seem to admit you don't either. Very sensible approach. Since I really don't know, nor does anybody, it does not make sense to me to overweight in PM's
or in the case of a lot of stackers, make the big all or nothing bet in PM's. I mean really, what if they are wrong. IMHO the proper course of action is diversivication and not a religious like dedication to a single asset class

Now, I am not going to quibble over whether the marginal cost of silver is $22 or $30. The fact is at $50 it was overvalued, and this was not some guess or specualtion. It is an accurate statement based on a fair economic definition of valuation. With that said there still was still no guarantee it would have gone down from $50, but a reputable Silver bull, at $50, really would have needed to ackknowedge this overvaluation and base his position on why he feel an overvalued asset would still appreciate. As you probably are aware of, this was not what happened, either on the street or the myriad of stackers on this forum. It was much more common to hear, SILVER is going to the moon and you are really stupid if you don't thinks so, because we are printing lots of money. Not really much of an agument

Now of course Silver COULD have kept rising from $50, but IMHO the ODDS were good it would slide down. Of course I did not know, but I liked the ODDS, so I shorted. This was not an emotional decision becasue I "hated silver", but a logical one based on my percieved odds. I have since covered the position with a nice tidy profit.

Flash forward to now. Even at your marginal cost numbers, you cannot say Silver is an undervalued asset. You can call it fairly valued at best. I am still not liking Silver at this point since I feel there are other asset classed that are truely undevalued, so my portfolio will be weighted towards them. I will however keep some balance in my portfolio, since " Hey I could be wrong" I have a hard time finding logic in the mindset of most Stackers who's approach seems to be more along the lines. " I am right, I am sure I am, Teb Butler told me so and you are stupid."

I found that in life a little bit of arogance can help you in a lot of situations, it can help you get the good table at the restaurant, it can help you "get the girl", but in the world of investing it will just get you broke. Diversify you investments.

And one final word, even if you are totally convinced that the USD is destined to total destruction (I am not), never underestimate how long TPTB can kick this thing down the road. It just may not even happen in your life time, there are thousands of high powered, well funded, connection individuals who will be doing their best to make sure it doesn't happen. At least not on their watch
Mike

 

Stackers please re-read this. You will not find better advice than this at the Wharton School of Business where you pay 10's of thousands in tuition and here it from an unbiased source for FREE. Go Figure........

 

The question is, will safe haven investment demand pick up the slack in such a scenario? Coin demand would need to at least double for that to be the case. Considering how much potential there is for new investors to enter the silver market (silver is too small of a market for billionaires to get in on, and the average Joe isn't buying silver at this point), either way seems possible. No way to know for sure unless it happens.

 

Because monetary inflation and price inflation are not the same thing. Monetary inflation has occurred, but price inflation depends on that money having velocity in the open market which has not occurred because all the QE money is sitting in bank vaults. At some point that will either need to be unwound (destroyed) or hit the open market. Since deflation is the specter they fear the most I don't put a very high likelihood on it being unwound, especially since any leverage will create compounding deflation. Either way it's a waiting game for now.

 

This is true of paper silver. Obviously it was overvalued because the price fell off. However, this does not speak to whether physical silver was overvalued because paper silver is only 2% backed by physical. It is not giving an accurate picture of the physical market, and while you are correct we will never know what the physical value should be so long as there are proxies diverting and skewing demand.

With only 2% physical backing the paper that means that there are about 50 times as many contracts in the supply pool as there should be, 50 times as many places for demand to go, and thus the paper price could be 50 times lower than it should be. Using that example, something 50 times undervalued being overvalued by around 60% is still 30 times undervalued.

Of course I am rounding and this is not intended to be used for valuation as it is not nearly so cut and dry in reality, but simply to illustrate what is truly being measured and to put it in context.

 

Coins make up just 10% of overall silver consumption so coin sales have to increase significantly to make up for slowdown in industrial and consumer product demand for Silver.

http://www.silverinstitute.org/site/supply-demand/

 

This is why I said "at least" double because I didn't bother doing the math, but the math doesn't matter because we have no idea how many potential investors there are either.

However I should have included jewelry and silverware instead of simply calling out coins, since they are all investment demand which add up to more than half of the industrial demand. In that context, double is about right.

 

Ah, we're back, just when you thought it was safe to go back in the water.

Sorry InfleXion, that just not how it works, that just sounds like something the bullion pushers are spewing. It really makes no difference how many puts, calls, etc., etc., there are, the folks are still making decisions on how they are calculating the value of the underlying asset and the potential for growth or lack thereof Just to give you a very simple example. Lets just say someone wrote, 100 Million puts for the ETF SLV. As a silver bull, would you buy any of those contracts? Didn't think so, why not? Its all skewed right, there is 100 Million Puts and it is only paper silver right? No you wouldn't touch those contracts because the fact is if Physical Silver were to go up, which you believe it will, because you believe it is undervalued, you would lose money. That is how it works.

 

OK, now I see, what you just said is even with reams of money being printed, under certain circumstances, PM's can still go down in price.

That is exactly how I see it too. QE is not a guarantee for higher PM prices.

 

Hey man, it's cool that you did not jump at me over my opposing view. I am personally all-in with precious metals due to my philosophical belief, recently cultivated, that precious metals are real money (I know, people like me will get heat in this forum). But let me emphasize I am much younger than the average poster here and therefore can afford to take more risks, and have experience with internet stocks, so my gut feeling tells me at some point this thing will launch. If it does not, well, again, my view is that gold and silver are money, or at least a store of value. While silver may drop below $30, I am not feeling one bit of anxiety. I just know, based on its fundamentals and the state of the global economy, that silver has a floor not too far down, if it indeed drops in price. Like any volatile asset, silver will work its way up again anyway. So no big deal. Also, and this is key, stacking silver encourages me to save. Very few Americans save.

I also believe, with the growth of emerging Asian economies, that precious metals will play a major role in the global economy, given the value Asians place toward precious metals.

 

Things not looking too good in China, could result in further pull back for PMs.
http://www.reuters.com/article/2013/02/21/markets-china-stock-close-idUSB9N0A106U20130221

 

You've made half of my point. It's a bet, not a purchase. The fact that the price is impacted by bets means that the price action is skewed. Now I did not say silver was 50 times undervalued, I said it could be. It could be 50 times overvalued for that matter based strictly on what the paper price actually means. Although with a 50x diluted supply it stands to reason due to the laws of supply and demand that demand would also need the same boost to keep things even keel. If this mechanism allows for 50x leverage then it could be a wash, or it could be skewed by a magnitude of 2500. We have no idea because the price is not based on people who are buying and selling, but rather betting on whether it will go up or down.

Now if it actually involved putting up 100% margin for a 100% physical backed contract then I would have no issue. At least then the bet is truly representative of the item being impacted, but allowing for leverage means people playing futures get more bets for the same price than a normal buyer. Allowing someone to buy something with money they don't have skews the price (artificial demand or artificial selling depending on the desire of the gambler). Allowing something to be sold in lieu of the actual item skews the price (diverted demand when buying or ownership not required when selling). Put aside the numbers for a moment, and it's obvious that this cannot be accurate.

 

With that outlook you would have to conclude that the real estate market is skewed now, and will always be skewed as is it very common to buy homes with 10:1 leverage. Is that your position?