At the time of writing, spot silver is trading at about 14.25 paper US Dollars. Although I agree with many observers that the chart of silver is looking parabolic, I believe that any pullback should not last for more than a year. My comment on 18 Feb 2004 about a Credit Bubble still stands true today. One of the main reasons for opening this journal was to illustrate that it is possible to achieve above average returns (i.e., above 10% per year) without trading more than once a month. As you can see from the posts earlier in the thread, I purchased silver in August 2003 at 5 paper US dollars. I have added to the position since then. Gold and silver are examples of responsible money. Paper US Dollars are dropping from the sky. Yes, this post does suggest a short-term top is near, but as mentioned earlier, any pullback should not last for more than one year.
Update: Still long silver. The reasons for this position are substantially similar to those that I had back in August 2003, when I started this journal. It's gone up a lot in recent weeks, but I still think the climb will continue in the coming months and years.
I'd prefer to keep that information to myself. I'm more interested in the successful trade (long at 5 "US Dollars", current price about 19.80 "US Dollars") which has generated an internal rate of return of about 35% since August 2003.
Since March, the gold/silver ratio has soared from the low 50s to as high as 75 earlier in September. This large move reflects silver's use as an industrial commodity, whereas gold is considered to be money. The following contains some thoughts about gold as money that I posted in another thread: Thanks for posting this surf - it's a good read. I agree that US Dollars and gold are both only worth what someone is willing to pay for them. So in that respect, canned food and ammo are probably better stores of value. However I do not the following: * Investing in gold is not necessarily a black or white proposition. i.e., it's not either "doomsday scenario" or "everything is OK". There can be an in between. For example, gold proved to be an excellent store of value in the US 1970s. It proved to be an excellent store of value to countries outside of the US that experienced currency crises. If the world does move toward a doomsday scenario, then it is likely that there will be time for holders of gold to sell the metal, and buy canned food. * While I agree that canned food has utility (edible) that gold does not have, gold and silver have a long successful history as money. Judas did not betray Jesus for 30 cans of tuna. He betrayed Jesus for 30 silver coins. * Gold has a much smaller bid-ask spread than a can of tuna. There are financial markets and coin shops that deal in gold. Supermarkets sell tuna but they are reluctant to buy it from the general public who don't have a receipt, and/or want to exchange a large amount. * There are difficulties associated with storing large quantities of canned food and ammo. At a value above 300 "US Dollars" per ounce, gold has a much larger value to size ratio than a can of tuna. ************************ Quote from marketsurfer: ************************ From my friend Vitaliy Katsenelson, CFA--- pretty much sums up the truth about gold.
http://www.safehaven.com/article-11453.htm Who's Bailing out Whom? by Ed Bugos This just in. I hope you are sitting down. The news that should be driving gold prices to the moon is out! The Federal Reserve released its latest weekly monetary data after the market closed Thursday. The Federal Reserve has just expanded its balance sheet more in one month than it has in almost all of its first 86 years of existence. I am not kidding. Its assets, which represent the cumulative reserves the Fed has "created," totaled less than $700 billion at the turn of the millennium and continued to expand by about $50 billion per year after that, up until this month. In September alone, reserve bank credit inflated by almost $600 billion. It is a record, and has already affected the monetary base. The relevant factors of increase in the month include: * $30 billion through the primary credit facility * $12 billion in securities purchases (T-bills) * $147 billion in credit extended to primary dealers, including MER, MS and GS * $152 billion through its new asset-backed commercial paper "Money Market Mutual Fund Liquidity Facility" * $220 billion in purchases of "other assets," probably related to the currency swaps * $60 billion to "other credit extensions," which include the AIG stuff * $140 billion in "securities lent to dealers" (which is an off-balance sheet item). That adds up to roughly $621 billion (excluding the off-balance sheet item). Up until September, the Fed had been careful to sterilize its liquidity provisions by selling Treasuries, reverse repos or simply by lending its securities off balance sheet. So while it has extended credit since August 2007, it has not monetized much of the liquidity. Besides, usually, other factors offset the Fed's injection of "liquidity," such as cash withdrawals from the banking system (represented by an increase in "currency in circulation") and other activities that may increase money flows back into the Fed... like the money raised by the Treasury for the Fed under its recently created "Supplementary Financing Program." Since announcing this new program two weeks ago, the Fed has received about $350 billion from the Treasury. Additional factors of decrease include about $80 billion in deposits that came into the Fed during September via reverse repos and "other" deposits, a $26 billion decline in outstanding repos and about $4 billion in currency (cash) leaving the banking system. The NET factor of increase to reserve bank credit for the month of September was about $170 billion. That is money created out of thin air... unsterilized. This number is unprecedented -- seriously -- in these here United States. You can see this statistic in second chart at the top. Note the statistic "monthly changes in reserve balances with FR banks." This statistic measures the effects of Fed actions on reserves provided to the banking system. It is the net difference between factors supplying Fed funds and factors absorbing them. You can look at it like a measure of net money flows in and out of the Fed. It tells you whether the Fed is injecting unsterilized net liquidity, and how much. Balance Sheet Shock Note in the chart here how the composition of Federal Reserve assets has changed in just the last 12 months. Historically, 75-80% of those assets consisted in Treasury securities. That is because, traditionally, the Federal Reserve inflates by buying these securities in the open market, thereby increasing reserves in the banking system so that banks can create deposit money on top of that (and then Wall Street pyramids up too). Now, you can see, the Fed has many windows open to it by which to inflate today. Indeed, in only eight months, the Fed's holdings of Treasuries have dropped to an unprecedented 31% of the Fed's assets. It gets worse. As you can see in the graph below, the Federal Reserve has sold about $300 billion in Treasuries in order to fund its lending programs, leaving it with just under $500 billion worth. However, since March, it has also swapped out about $270 billion of these securities through its off-balance sheet Term Securities Lending Facility (TSLF), leaving it only about $230 billion in wiggle room before it is forced to either collect (deflationary) or monetize the loans outstanding (inflationary). That is, Treasury assets comprise just 16% of the Fed's balance sheet today, net of the TSLF. That's astonishing. Indeed, it is probably why the Treasury is raising money, why it stopped selling its security holdings to sterilize its liquidity back in June and why the printing presses are on. This news is very bullish for gold. It is one of the data points we were looking for to confirm our outlook. It is bullish for other commodities too. It may be bearish for the dollar, but only if other central banks hold back. Not likely. There's already talk of coordinated monetary policy actions and so on. In the short term, the gold market is likely to key off the "bailout" and its impact on the stock market, which will hint to investors whether all is getting better. It likely will not, but it certainly is possible for Wall Street to bid up stock prices in response to this liquidity push too. Consequently, it is difficult to predict gold's short-term response to this shock, but the market cannot ignore the fundamental effect of this crackup for long. This "liquidity" injection will ripple through the economy and dollar in the next few months and years in ways that not a single person can know. The monthly money supply numbers probably do not come out for another week or so, but the early indications surely confirm what gold bugs could only surmise when they drove gold prices up to $910. With interventions like this, we should get a few more $100-up days soon enough. ************************ http://www.kitco.com/ind/Szabo/oct082008.html longer article about the same topic
I'm not sure the fed balance sheet expansion is inflationary. since its the treasury who is providing the Tbonds(instead of the Fed purchasing with newly created electronic money) the money supply didnt increase. what is inflationary is the bond issuance, hard to explain but basically the more government bonds are issued the more private capital is crowded out or taxed which dimishes the supply of goods and services down the road. for the next year or two we wont see that because of the recession but after it inflation could begin to pick up
Daal, I do not completely understand the content of the above two articles. However I can confidently state that: Gold does well in times of high inflation / hyperinflation, because it is a store of value. We are not there yet, however the recent actions of Bernanke and Paulson could be sending us down that path. Gold does well in deflationary times, because it does not carry default risk, whereas bank deposits do. As Mish Shedlock says - gold is money because it acts like money. On that topic: http://www.google.com/search?hl=en&q="sales+of+safes"+gold&btnG=Search&meta= http://www.independent.ie/business/...es-as-consumers-withdraw-savings-1493108.html By Charlie Weston Thursday October 09 2008 SALES of safes have shot up as panicky consumers take money out of banks and seek to stash it in their homes. Gold and other commodities are also soaring in value as the flight to safety and away from banks gains momentum. Irish investors are estimated to have put as much as â¬100m into gold this year. Locksmiths yesterday reported strong demand for safes as many consumers now see banks as vulnerable and want to keep their valuables close at hand. With banks around the world imploding and stock markets falling, some consumers want to stash their cash at home, while others plan to move valuables from bank-held safe deposit boxes to their own safes. Ann Brown of Brown Brothers in Dun Laoghaire, said: "We are noticing an increase in safe sales on last year." A number of consumers were opting for safes that can be bolted to a wall or fixed to a floor, at a cost of between â¬300 and â¬500. It is also understood that German discount store Aldi, which sells low-priced safes, is seeing strong demand for the security storage devices. Chubb's sales manager for safes, Tom Kiely, said the domestic home safe market was booming. His company, which supplies the top end of the market with safes from around â¬3,000 upwards, said sales were up between 20pc and 25pc this year. Gold, which is considered to be a safe haven in uncertain economic times, is proving hugely popular among worried Irish investors. It is estimated that around â¬100m has been invested in the yellow precious metal by Irish investors this year, through Irish and UK-based gold brokers. Dublin-based Gold Investments said yesterday its business was up 440pc in the third quarter this year compared with the same quarter last year. Mark O'Byrne of the company said: "We can't keep up with the demand. The phones are ringing off the hook and the emails are coming in non-stop." Mr O'Byrne reported some investments as high as â¬10m as high net worth individuals seek a safe haven for the money. Gold Investments has a $10,000 minimum before it will accept an order, prompting some buyers to buy gold through British precious metal brokers. Gold is expected to add to its gains after central banks across the world cut interest rates to increase liquidity confidence. Gold was up â¬25 an ounce yesterday to â¬905 at the mid point of trading, but it had gone as high as â¬920. - Charlie Weston
I just finished reading two very interesting articles about the flaws of fractional reserve banking: * * * * * * * * * * * * * * http://financialsense.com/fsu/editorials/2005/1212b.html A snippet: How does it end? A debt-based monetary system has a lifespan-limiting Achilles heel: as debt is created through loan origination, an obligation above and beyond this sum is also created in the form of interest. As a result, there can never be enough money to repay principal and pay interest unless debt is continually expanded. Debt-based monetary systems do not work in reverse, nor can they stand still without a liquidity buffer in the form of savings or a current account surplus. When debt grows faster than the economy, the burden of interest is bearable only so long as the rate of interest is falling. When the rate of interest reverses course, interest charges start rising faster than debt growth. This point was reached on 16 June 2003, the day the yield on the benchmark 10-year Treasury bottomed at 3.09%. Since then, debt grew from $32 trillion to $40 trillion, an increase of 25%. During the same period, annual interest charges rose by over 50%, from $1.28 trillion ($32 trillion at the prevailing average interest rate for debtors of 4%) to $2.0 trillion ($40 trillion at 5%). When interest charges exceed debt growth, debtors at the margin are unable to service their debt. They must begin liquidating. Dipping into savings or running a current account surplus can offset liquidation for a time. The greater the pool of savings and the current account surplus, the longer an economy can endure liquidation at the margin without experiencing cascading cross-defaults. The US in the early 1930s and Japan in the early 1990s had such a liquidity buffer. In both cases, mobilizing domestic savings to increase government debt reversed the decline in total debt outstanding in two to three years and interest rates stayed low because savings financed the new debt. As a result, interest charges no longer exceeded debt growth and the need for marginal debtors to liquidate disappeared. The US is now in a fundamentally different position than it was in 1930 or Japan was in 1990. Aside from a dearth of domestic savings, its vulnerability is compounded by a current account deficit. There is no buffer and no margin for error. Thus, when interest charges, now $2 trillion per year and accelerating, overtake annual debt growth, now $3 trillion and decelerating, liquidation will immediately trigger cascading cross-defaults. Without domestic savings to mobilize, the Fed cannot facilitate the expansion of government debt to fill the breach and simultaneously hold down interest rates. It cannot win the battle to keep debt growth greater than interest charges, the precondition for the viability of a debt-based monetary system. Once started, cascading cross-defaults consume all debt within an economy. The Fed has only two options: institute a new monetary system with a new currency or return monetary authority to the market and shut down. * * * * * * * * * * * * * * http://www.financialsense.com/fsu/editorials/martenson/2007/0108.html Here is a snippet: But if all money is loaned into existence, with interest, how does the interest get paid? Where does the money for that come from? If you guessed âfrom additional loansâ you are a winner! Said another way, for interest to be paid, the money supply must expand. Which means that next year thereâs going to be more money in circulation requiring a larger set of loans to pay off a larger set of interest charges and so on, etc., etc., etc. With every passing year the money supply must expand by an amount at least equal to the interest charges due on all the past money that was borrowed (into existence) or else severe stress will show up within our banking system. In other words, our monetary system is a textbook example of a compounding (or exponential) function. * * * * * * * * * * * * * *