Gold within a hair of new record high in $s (Metal of Kings)

Being wary is intelligent if you ask me =)

 

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I think the point being made has to do with the holding period. One of the favorite examples cited on this forum is Gandma's tea service. That is a holding period touching 3 generations and I just don't think bullion coins and bullion bars have this same potential and will roll back into the market place at a faster rate.

 

I agree that "rising interest rates" is a low probability given the current administration and where we are in the election cycle. However, if both the Dems and Repubs don't completely marginalize the Tea Party movement, there's a chance the economy may finally get back on track. After all, you can only marginalize "Common Sense" for so long.

As for bonds, I don't see a lotta people clamoring to buy 1% CDs at my bank. Now if you offer them 3%-4%, things may be a bit different. As long as the FED continues a policy of Quantitative Easing (aka...taxation without representation), interest rates will remain low and the debasement of the dollar will continue to push PM prices higher.

It's more the fear of rising interest rates rather than the actual fact that keeps some bond investors on the sidelines (who wants to be first in line to catch the inevitable "falling knife"). However, once the knife hits the floor, investors will fall over themselves to pick it up...that's a fact. Then we'll have investors funding the bond market and not the US taxpayer.

Additionally, rising interest rates don't deter most bond investors. Most bond investors are in the market for the long haul and employ strategies that are effective in any interest rate environment. Some bond instrument are little affected by interest rate moves such as zero coupon bonds. After all, your principle is always returned if you hold a bond to maturity.

 

This is where I would disagree -- I believe the bullion coins and bars are already in the market place. It goes back to the idea that investment demand is somehow inferior or not real and that the only proper use for silver coins is to melt them. If this is true, then everyone here should be selling all silver coins and bars NOw while there is enough demand to absorb them. But if silver is a legitimate asset just coming back into favor after a lengthy absence, coins and bars are already "off the market" from a commercial standpoint.

 

There is probably very little overlap between institutions that buy bonds and those that buy silver. And the next time interest rates move higher, it will probably be in connection with a resumption of a decline in the dollar. A lot of people won't want 8% taxable bonds in a currency losing value faster than that. In those circumstances, I don't think the expected move out of silver will take place. We'll have to wait and see. The only historical precident for this is the 1970s when silver prices rose sharply in an economy with rising and high interest rates. So expecting the opposite to happen might seem logical, but may not occur.

What will eventually end the bull market in silver is either (1) an end to budget deficits or (2) a bubble in silver with a blow off top at prices undreamed of. The least likely outcome is for the price rise to fizzle out because individual investors world wide come to prefer 3% CD rates to $40 silver. Of course a third possibility is for there to be a massive deflationary depression with bond defaults, another and total collapse of real estate, and 30% unemployment. I guess that would hurt silver too if it happened.

 

On the comment above, only Gold tracks the debasement of the dollar. Silver does not. If this isn't evident then go back and re-read my posts in this topic.

An asset that has a swing of 240% then part way back again in less that 12 months isn't tracking anything but irrational and emotional thinking.

 

Silver may not track things nearly as consistently as gold, but the overall trendline is pretty similar over the last 10 years. Significantly greater volatility is there, but the analogy I've heard before is that's like waves on the beach compared to the tide.

I think there's a chance that we see them both at the same time, deflation in real estate, due to lack of demand / market saturation, while simultaneously seeing inflation in items of necessity like food and energy, more so due to monetary debasement and people only being able to afford what's important, but in the case of food also due to shortages caused by weather. Energy is sort of a wild card that world events could change the game of without warning. I think metals will still gain in this scenario.

 

It doesn't track it at all. The financial system started melting down in 2008 and later that year we heard the remarkable announcement from Bush that the economy was going to collapse unless close to a $T is printed and handed over to the banks. In the next 1.5 years, Obama took the public debt from $6.2T to $$8.7T. Yet in a period where officially $3.5T dollars was printed, (unofficially it's a lot more) silver didn't move at all. In fact it dropped in price. And this is but one example.

I'd be willing to hear a counter argument with figures, but this is something that is also remarkable. That is people who claim to be silver investors, who never look at these rather simple correlations.

 

What I meant to say is that silver tracks gold. Gold tracks the dollar. So it's an indirect correlation. It's not a perfect ratio, nor would I expect it to be, but this is the basic trendline I'm referring to. I don't believe we've seen the full effect of money printing thus far because a large portion of it is sitting in financial institutions and has not hit the larger marketplace.

 

It's clear enough even on those charts. Silver is not tracking the debasement of the dollar.

Silver is not a hedge against monetary policy as your charts absolutely prove it.

 

Debasement of the dollar is more than just quantitative easing. Interest rates used to be a lot higher years before they hit zero percent in 2008 which you've cited as the point of focus. Lowering of interest rates accomplishes the same thing as creating new money. When interest rates could go no lower is when the easing started. Also I would not look for precious metals to instantly move in response to dollar policy. IMO it has a delayed effect as the new money enters the market which is a huge variable. These reasons are why I prefer to look at trends in terms of decades instead of shorter time periods. I should clarify I'm not trying to say the metal charts are an exact inverse of the USD, just that the directions themselves are inverse and the trendlines are what I am looking at here. If we can't agree at this point we probably never will, but the one thing I would point to that I believe is not disputable are the similarities between gold and silver. If you believe that gold tracks the dollar's debasement, then so does silver.

 

Indeed. I didn't even mention QE in my post above. My comments specifically mentioned an increase in the debt and direct payments to the banks (TARP & Tarp like) These are worse than QE because they directly cause an increase in base dollars and thus make a direct hit on inflation. The effects of QE, are not as well known because much of that activity is hidden by the Fed. However this would make it even worse and highlights even more the failure of silver to track it.

It should also be noted the Democrats failed to even produce a budget in early 2010 as required by law, and silver didn't catch that either.

 

Again I would just point to the fact that you are citing specific examples over a short timeframe instead of looking at the longterm bigger picture. Circumstances change, but the trends have been consistent. Just because the market doesn't have a kneejerk reaction doesn't mean there isn't an impact. I'll go ahead and let this sleeping dog lie now. ;]

 

I am responding to your posts. If you want to go back in time, I will be glad to do so. Please pose your questions.

(though I think a 2.5 year period isn't that short either)

 

In fairness to the TARP program, money did leave the Treasury for it, but a good proportion has been returned to the treasury in cash. That which has not is still viable as stock or portions of a business. It appears that the automotive industry along with the Fannies are laggards. Now once the treasury had the money back, what it did with it is less documented. I get amused and abused reading stories that indicate it is "lost money", gone forever. IMO. URL support
Jim

http://projects.propublica.org/bailout/main/summary

 

The banks simply borrowed the money from the Fed to pay back the Treasury. The aggregate of the TBTF banks haven't made any money to pay anyone back. In fact, Ally Bank (really GMAC Finance) got more money last year.

The banksters took this approach because it allowed them to use a backdoor to get out of restrictions on CEO bonuses.

 

I can't think of any questions really. I understand where you're coming from, but for better or worse it's just not my perspective. I think the timeframe piece is where our divergence comes from. I look at things like the DOW/Gold ratio over the last 100 years, so a couple years to me isn't a very long time to establish something. It would be a bit more difficult to do accurate metal trending as compared to currency over 100 years instead of 10 since there were so many changes to how gold was valued and how it was used, but I feel like 10 years of the same policy is a good way to evaluate the current trend. Can you argue that the trend is not entirely due to what the dollar is doing, most certainly. I would say currency in general is more of an indicator than just the dollar, and the supply/demand impacts are growing as of late, but from a bird's eye view is where I am coming from in my previous posts. When looking at longer term trends I actually prefer not to take into consideration every individual situation (although I find them interesting to follow, and base my 'gut feeling' on the sum of my research), because there are always more factors than one can know, and they aren't always rational.

 

The current currency system in the United States has only existed since 1971. Anything prior to that date would be a meaningless comparison. The value of gold was fixed at $35/oz-Au from 1933 to 1971. 100 years ago the $ was defined in terms of silver which itself was defined in terms of gold. i.e. the number of $s was limited to the physical amount of gold. 100 years ago, gold was in everyone's pocket and nobody owned stock. Today it's exactly the opposite.

As noted, since 1971 there is no relationship between gold and the USD (and hence the DOW) except as a hedge against the Federal Reserve Note which itself, the concept even, didn't exist then. I don't see how valuing the Dow in those terms would provide any use to an investor today. Not as important, but a consideration is the Dow itself hasn't been fixed over this period. It's nothing but a weighted valuation of just 30 stocks.

 

I will defer to the source of this information and let it speak for itself since I would just be paraphrasing and probably missing some of the relevant points. I would say that comparisons prior to 1971 do have merit because they show where things naturally gravitate to in a free market.

http://www.youtube.com/watch?v=UE7QcVN5tC8

 

Gold just hit $1600/oz for the first time in history.