$35+ an ounce! $50+ soon??

Yeah, it's simply atrocious there are essentially no attempts at all to regulate what is going on with Wall Street and the TBTF Banks. This is why I tell people to be very cautious about investing in anything having to do with Wall Street, including stocks, because this sort of thing goes on now. As this example shows, anything can pop instantly and there is no way to judge the risk. Gold and Silver are the hedge against it.

 

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I agree that gold and silver are a hedge against what you've described, but the paper markets are what drives the price and can also fall into the same pitfalls. If the market tanks I wouldn't be surprised to see gold and silver go along for the ride like in 2008 when people needed to come up with cash and everything sold off. So from a hedge against inflation standpoint the protection they provide may not be evident right away as that is more of a longterm trend, but if the institutions fail then gold and silver will fulfill their role of money again until something else comes along.

 

The market tanked in 2009. The prices for it that you see now are the result of $trillions being created in all these schemes to keep it inflated. I've contended all along that a market that isn't supported by real industrial output is nothing but a sham as this one is. This is why there is such volatility. Volatility not seen since the 20s.

It sounds as if people who had money in this firm may lose it. Lots of it. They had no way to determine this before it happened beyond what I said. Owning gold and silver instead would not have had this exposure.

 

Well I guess this makes you the foremost expert in silver only trading. Looks like you have had a traumatic experience in your previous silver buying charade. Did the 1980 selloff make you lose the shirt off your back?

Besides, any smart investor know you have to keep a diversified portfolio. Just to invest in silver, let alone PM's is an amateurish move. Still enjoying the raman?

 

I guess that's how it always goes. When it goes up, we kick ourselves for selling some. When it goes down, we kick ourselves for not selling it all.

 

NOS, how do YOU define bubble? is it anything that has gone up in price? Do you think that commodity prices are affected by the cost of production? You have told everyone what your fearless forecast is for the future, but haven't said anything about the methodology you use to come to that conclusion. Care to elaborate for us to defend your prediction?

 

Good questions Cloud. The one thing I would caution NOS about is getting hung up with nominal values. They can mess with your head, since humans are preprogrammed to lock in numbers in their head.

What I am talking about, (I am sure most of you are wondering), is humans tend to "learn" what something is worth, and that number simply sticks. If you started buying silver 9 years ago or so you "learned" $9 was a fair price, and built your world view around that. I was guilty of it, buying all of mine around $4 and believing that was, while a good price, not unusual.

The extreme danger of talking about what silver "should" be worth is that the number has to go up every year. We are not programmed to do that in our head, but its true. If we talk about $4 in 1992, well that was 20 years of inflation ago. Talking about $9 in 2002 was 10 years of inflation ago. This is not even getting to market manipulation, bank sales, increased demand, etc. Even if a person believed $9 was a fair value for silver 10 years ago, he would need to adjust that for inflation to even BEGIN to discuss what is fair today under current markets. Under such a scenario, even assuming 5% inflation, (I think that understates true inflation), your $9 is now $14.66 today.

Don't know how much sense that makes, but there it is.

Chris

 

This is a very good example of how a policy of inflation ends up destroying everything. In your example, the very innocent looking 5% inflation resulted in a cumulative inflation of 62% in just 10 years. In 10 more years the figure rises to $23.87. Now 165%. Not so innocent after all. This is due to the very simple fact of math.

Any system expanded at a constant linear rate will experience exponential growth.​

A graph of it looks like a hockey stick laid on its side with the puck end pointed up. i.e. You get a long period with little change then boom, the system goes vertical and eventually collapses as it heads to infinity. It's Federal Reserve policy to grow the US money supply by a fixed rate every year. Lately they have been exceeding this rate. It's the fundamental flaw of any fiat system that has to expand the system to pay the interest owed on the currency. (why they do it)

This is why I would say that silver or gold isn't in a bubble. They are the hedge against $ printing and especially as it heads to the break in the graph.

 

Not disagreeing with you, just pointing out that metals may not behave how one would expect right away for anyone down the line asking "Why are precious metals going down when they should be going up?", but the overall trend should do so regardless of the day to day bumps.

 

Notwithstanding the paper market, it's relatively absurd to insinuate that gold or silver are in a bubble. You can't have a bubble with a finite resource. Now, can there be a bubble in the paper market? Sure. However, to me it's more likely that what some would call a bubble in the precious metals market (although it's far too longterm of a trend for that to hold much water) is actually the deflating of the dollar bubble which there is a much stronger case for with the inflationary monetary policies we have been under for decades. Gold's function is simply a measurement of currency value. Gold doesn't get more valuable, but rather our currency buys less of it as the supply is expanded. Silver is a bit more rambunctious, but overall follows gold. A price of silver maintained below $25 could signal the end of the bull market, so I highly doubt we will see that for any length of time without monetary policy reversion.

 

I agree with you there could be a great deal of short term gyrations in metal prices. It's already happened this year.

For physical PM buyers, the outlook should always be the long one. Anyone who has made it past all the routine FUD put forth against PM ownership should at least understand this. How long is long? Until the status quo gets hit by a discontinuity that it can't recover from and change is forced onto the system. This could be the collapse of Greece, MF Global becoming another Lehman or if the OWS evolves into the classic battle between the growing Proletariat/disappearing middle class VS the Bourgeoisie. (hint, the Proletariat always wins) Or it could be a combination of these and/or something else. Whatever it is, it won't be pretty, but when it's over, then it will be time to re-evaluate this strategy.

 

This is where I beg to differ. You darn well have a bubble in any market, commodity, derivative, or otherwise. What do you characterize 1980 PM as? The farmland prices in late 70's? The tulip bulb prices in the 1600's?

No asset is immune to either prolonged bear markets, or bubbles. What makes these are completely independent of the nature of the asset.

Chris

 

I agree with you in most cases, but let me get into the details of what I meant. The key part of my distinction was that of a physical market as opposed to a paper market.

As per Wikipedia: http://en.wikipedia.org/wiki/Silver_Thursday

So with 1980 PMs, that bubble was caused by leverage external to the physical market and was only popped by rule changes on the COMEX.

My point with precious metals is that the supply is finite. So the characteristics of a bubble cannot be met, since it would require either artificially decreasing the supply or artificially increasing demand. It's not artificial if someone isn't buying on margin. Demand is a global net result and thus not able to be impacted except in cases such as silver where the total market ($30 billion) can be bought in it's entirety by the large players, which means that the only reason it is capable of getting into a bubble is because it's currently in an anti-bubble. Gold's function is as a measurement of currency value so I would argue that it cannot get into a bubble, since it's just an inverse reflection of currency.

With tulip bulbs you can always plant more, or maybe there's a bad crop one year and supply goes down, but precious metals have a relatively fixed and immovable level of production. They're produced by stars and will eventually run out on a long enough timeline unlike plants, houses, and especially paper IOU's. Farmland is the one thing you mentioned that shares this characteristic, but since it's far more difficult to exchange (illiquid) than precious metals the supply/demand dynamic has a lag effect and much higher propensity for bottlenecks. So I don't think that's an ideal comparison since the dynamics are very different.

 

Just saying sir if everyone wakes up tomorrow and thinks, "hey, I am going to go buy an ounce of silver", prices will rise dramatically. If the next day they all decide to sell, then prices would drop. What happened for that one day was a bubble.

I know we agree 80%, I simply wished to point out any asset can be in a bubble, though some may lead to a bubble more easily than others. I understand what happened to the Hunt's, (having lived through that time), but it still went up to $35 and gold to $800 without their help, and then crashed down afterwards. Gold going from $100 to $800 and then back to $300 isn't a bubble?

I do not see PM in a "bubble", but do see non-traditional interest, which could have me concerned long term. Lots of non historical investors own physical silver today versus 10 years ago you must admit. What that means for the future remains to be seen, maybe more will buy driving prices higher, maybe some of these will sell driving them lower. I am simply sitting tight on my silver, (buying coins but not bullion), until I think I see something different.

Chris

 

Yeah you're right Chris. I guess the distinction I am making is between an artificial bubble and a bubble resulting from free market forces. If tomorrow everybody in the world decides they want PMs, is it really a bubble, or is it just the supply and demand dynamics? Food for thought. I don't have the answer.

 

It seems to me they call them bubbles because the demand for the item is being driven by the expectation of getting rich with little effort and little risk rather than free market demand and ability for the economy to support. It's an unreasonable "mindset" about an asset without regard for the facts.

I don't think this describes the current physical market in PMs. The small time physical PM buyers are buying because they see what is taking place with the traditional forms of 20th century investing that are unraveling in the 21st. I think some big investors and very quietly non-western governments are also stocking up on the metal because they know what is coming. However the vast majority of the population is still selling PMs which isn't the hallmark of a bubble. There are gold selling parties like there used to be Tupperware parties. Remember, as I said above, bubbles are created by a "mindset" and that mindset isn't there with the majority of people when it comes to PMs. There are still huge disincentives to owning PMs in the USA.

I don't think bubble describes what happened in the 1980s with gold. In the late 1970s most of the depression era controls over the finance industry were still in place. There had been excessive government spending related to 3 wars, Vietnam, Cambodia & Laos (sound familiar?), disastrous wage & price controls and of course all sorts of new regulations and vast expansion of the welfare state. Because of this spending Federal Reserve was forced to raise interest rates to historic highs, exceeding 16%. In response people simply sold off their gold. When you can make 10% - 14% just by having money sit in a safe insured bank account, there is no reason to hold bullion.

(The point here BTW, is you can't simply look at price charts and declare "it's a bubble".)
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My advice to anyone who thinks that PMs are in a bubble is this. Take whatever you are using as a bubble measuring stick and apply that measuring stick to the stock market.

 

I'm old enough to remember the time when it was standard portfolio construction to include a 5%-10% allocation to PMs [mostly gold]. So the last couple of decades might be considered the anomaly, and the increasing inclusion of PMs in the portfolios of investors is just a return to what might be considered "normal." If so, the demand for PMs might stay high for a very long time.

 

i say 42 is close due to holidays and what is going on overseas

 

Interesting thought. I remember that as well, and people kidded me for recommending such an "old fashioned" idea 15 years ago. I never linked those two ideas together actually.......

 

Good point. Bubbles are never "bubbles" under after the fact. Many times price appreciation is simply revaluing a market, and stays permanent. I would point to equities in the 80's as an example of that, where the PE simply permanently increased in investors expectations. People who declare a "bubble" before it has collapsed are simply speculating it will end up as a bubble, there is no analytical way to prove it until after.

Chris