Gold, Silver, Treasurys – A Snapshot

Gold & Silver

In December 2008 I called for a bottom in Silver. From then through June it has risen from $10 to almost $16 Dollar per ounce, a 60% gain. Then, on June 7th I advised caution on Silver and recommended to cash in and buy at new lows. Since then it has dropped from near $16 to around $12.50.

Below you can see a summary of my predictions in the chart:

Silver Chart
Click on image to enlarge.

I also said in that post from June 7th that gold should do fine. Gold has remained comparatively stable since then. While silver dropped by about 15%, and the S&P500 by about 6% gold fell by only 4%:

gold-vs-silver-07-10-2009
Click on image to enlarge.

Monetary commodities, such as gold and silver should act well during a deflation. Why? Because during deflation cash is king. And gold is the king of all cash.

The problem with silver is that it acts like a hybrid between a monetary and an industrial commodity. It is hard to discern how many people are invested in it for the wrong reason, namely inflation. (Yes, I am talking to you Peter Schiff :) ) But in cases when it is so obvious, when false inflation fears scream at you, it is pretty easy to figure it out.

Once those are washed out and people are back in reality mode, silver should continue to act well along with gold. Silver may be an attractive addition to portfolios again at this level. But I would advise caution. For the time being gold remains preferable. In fact, gold has outperformed both the market and silver since October 2007.

As far as gold/silver mining stocks are concerend, the ^HUI index continues to hold the line and another upward wave may be due now:

hui-as-of-july-10-20091

Treasurys

Treasury Notes and Bonds are the ultimate deflation investment. Why? Because during deflation cash is king. And Treasury securities are the safest possible claim to cash at interest. Why? Because the government can always (and will) tax and loot the people to the hill to pay off its debts if it needs to.

(Remark: Contrary to what some people tell us, the US government can NOT print money to pay off its debts. True, the Fed can print money to buy NEWLY ISSUED government debt that may or may be used to pay off older debts. But that doesn’t make the debt go away. It merely refinances old debt. It is the exact opposite of printing money to pay off debts which is, for example, what happened in Weimar Germany and in Zimbabwe and precipitated hyperinflation. It is crucial to understand this causality. Again, to those who don’t fully understand this yet, I can only recommend reading my post Inflation & Deflation Revisited.)

Back in November 08 I called for significantly lower Treasury Yields between 2% amd 2.5%. They then fell from 3.09% to just below 2.5% in January 09. I then expected for technical reasons that they will move higher to the upper end of the range which would be around 3.3%. They actually overshot and went as high as 3.99%. I then said that Treasurys are a good call again. Yields have since then fallen to around 3.30%:

10-year-treasury-2009-july-10

Click on image to enlarge.

I think Treasurys will continue to act well. There maybe some upward pushes here and there so long as inflation expectations pop up once in a while, but the mid-term trend remains unchanged: It is likely that yields are headed for new lows.

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Inflation Fears vs. Reality

Markets everywhere are unanimously heralding a return to dollar inflation

Perceptions:

Inflation expectation is up:
inflation-expectation-june-2009
Click on image to enlarge.

Stock markets are up (S&P 500 below):
sp500-june-2009
Click on image to enlarge.

Treasury yields are up (10 year Treasury Note yield below):
10-year-treasury-notes-june-2009
Click on image to enlarge.

Spreads between Treasury Inflation Indexed Securities and regular Treasuries have widened significantly:
10-year-treasury-notes-vs-tips-june-20091
Click on image to enlarge.

The dollar is dropping against major currencies:
dollar-euro-june-20091
Click on image to enlarge.

Recent news are screaming Inflation:

Gas prices above $2.60:

Gas prices have been steadily rising since early December, when the national average was around $1.60 a gallon. But despite the recent rise, gas prices are still well below year-ago levels of $3.986 a gallon and last year’s all-time high of $4.114 a gallon.

But some are concerned that prices will continue to rise. Part of that has to do with the usual increase in demand for gas during the summer months.

In addition, rising hopes of a U.S. economic rebound have helped push oil prices higher as the dollar has weakened against other currencies. A weaker greenback tends to push up the price of oil since oil is traded in dollars around the world.

Dollar’s wounds reopen:

Emerging market indexes and commodities are surging as investor wealth pours in once again. Profligate US spending and skyrocketing deficits, hyper-loose monetary policies in this crisis, and collapsing confidence that the Fed will actually be able to withdraw such policies and excess liquidity when required, are all causing dollar inflation expectations to become deeply rooted in investor psychology.

The overpowering perception on the part of global investors that the Fed, Treasury and Administration are losing control of the US fiscal position, and that inflation (more likely hyper-inflation) is virtually becoming inevitable is threatening to wreak irreversible harm upon US finances and upon the dollar itself.

Reality:

Actual market data, however, tells us the following:

Credit is imploding across the board…

Consumer Credit:
consumer-credit-june-20091
Click on image to enlarge.

Commercial Bank Credit:
commercial-bank-credit-credit-june-2009

Industrial and Commercial Loans:
industrial-and-commercial-loans-june-2009

Loans and Leases at Commercial Banks:
loans-and-leases-at-commercial-banks

Real prices are dropping at unprecedented rates:

Case-Shiller-CPI (CS-CPI) vs. CPI-U

click on chart for sharper image.

See CS-CPI Negative 5.0% Third Straight Month for more details.

Greenspan ignored the effects of asset bubble like housing, by failing to take into consideration housing in the CPI. Real interest rates were -5% in mid-2004 and stayed that low for quite some time, spawning the biggest credit boom the world has seen. Now in spite of a Fed Fund’s rate that is zero, real interest rates are +5%.

Home prices continue to decline:

home-price-index-march-2009
Click on image to enlarge.

According to the new Case Shiller report nationwide home prices dropped by 18.7%.

Top 3 annual declines:

1. Phoenix, AZ: 36.02%
2. Las Vegas, NV: 31.23%
3. San Francisco, CA: 30.06%

Top 3 monthly declines:

1. Minneapolis, MN: 6.25%
2. Detroit, MI: 4.85%
3. Phoenix, AZ: 4.52%

…this is not the stuff from which inflations are made.

I expect a reversal of market data to adjust to real conditions sooner or later. I think Treasury Notes will be a good call. The dollar should start to rise again against other currencies. I think gold is likely to do fine. It is merely back to where it was before the inflation fears began. Silver‘s excessive gains, however, may have partly been fueled by these inflation expectations. I would advise caution here. It may be time to ring the register on some silver gains and buy at another low.

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The Federal Reserve, IRS & Legal Tender Laws – A Criminal Racket

Robert Kahre, standing up for sound money, freedom of choice, and the rule of law, paid his contractors in gold:

Robert Kahre, who owns numerous construction businesses in Las Vegas, is standing trial on 57 counts of income tax evasion, tax fraud and criminal conspiracy. If convicted on most counts, he could live out his life in prison.

But attorney William Cohan paints Kahre as an American “hero” who believes his payroll system helped keep the U.S. monetary system sound, and was also a form of legal tax avoidance.

A self-made entrepreneur, Kahre, 48, paid his workers in gold and silver coin, and said they could go by the coins’ face value — rather than the much higher market value of their precious metal content — for federal tax purposes. He did not withhold taxes from their wages, and he provided the same payroll system to 35 outside clients, which were other local businesses.

Judge David Ezra is presiding over the criminal trial, which began May 19 in U.S. District Court. Joining Kahre as defendants are his longtime girlfriend, a sister who works in his businesses, and a former business assistant.

Three of the four present defendants were among the nine people tried on similar charges two years ago, but no convictions resulted. In the 2007 trial, four others of the nine defendants, including Kahre’s mother, were entirely acquitted. Two individuals were only partially acquitted, but dropped from the indictment that forms the basis for the trial before Ezra.

This time around, the only new defendant is Danille Cline, Kahre’s girlfriend of 19 years, and the stay-at-home mother of his four children. The government claims she obstructed the Internal Revenue Service by allowing Kahre to place several homes in her name, thus attempting to conceal his assets.

Cline’s former brother-in-law, Thomas Browne, also was indicted this time, for his role as broker in some of the real estate transactions, but has since reached a plea bargain. He is expected to testify against the defendants.

“This is a case about money, greed and fraud.” The line appeared on screen in court during the government’s opening statement by Christopher Maietta, a trial lawyer from the Washington, D.C., office of the Department of Justice.

My comment: From the point of view of a dull and uneducated person there exists of course no other way to “describe” this case. I would more appropriately title it a case about freedom, sound money, and legal tender injustice.

It is obvious that the IRS is terrified about this completely legal way to avoid income taxation. Their indoctrination of the public about the immorality of supposed tax evasion has indeed permeated the minds of the clueless masses.

But before they have the right to attempt even the slightest attack on people like Kahre, they themselves should first of all do their best to justify the current US fiat money system.

Now, anybody who is confronted with any of the age old lies regarding the legality of the US fiat money system can politely point the ignorant blabbermouth to some very simple paragraphs in the US constitution.

It is commonly held that Congress rightfully delegated the powers to print fiat money to the Federal Reserve Bank, based upon the following paragraph in Article I, Section 8:

The Congress shall have power…
To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;

The problem here is obviously that this section clearly talks about coining money. There is nothing else that could be read into this. Based on this Congress has no right to create fiat money, be it directly or indirectly.

Now, one could argue that the states independently could be allowed to enforce legal tenders other than gold and silver. But there is one problem: The Constitution states explicitly in Article I, Section 10:

No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.

The 10th Amendment clarifies what powers the Federal government does NOT have:

The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.

Nowhere does the Constitution delegate to the Federal government the power to print paper money and make it legal tender. Not only that. On top of that it even strictly prohibits this practice to the states. How much more obvious did the founders of the United States have to make their unconditional opposition to the use of fiat money?

And they didn’t do it just for the heck of it. They were well aware of the problems caused by fiat money. They had lived through the disasters caused by the Continental Dollar:

With no solid backing and being easily counterfeited, the continentals quickly lost their value, giving voice to the phrase “not worth a continental”.

The painful experience of the runaway inflation and collapse of the Continental dollar prompted the delegates to the Constitutional Convention to include the gold and silver clause into the United States Constitution so that the individual states could not issue bills of credit.

… so long as people are ignorant and forget, history will repeat itself.

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Gold & Silver Hold the Line

Gold has made it back into the safe 900s and Silver is attempting another run toward $15.

The HUI index which monitors gold mining companies has now hit a 7 month high:

hui-as-of-may-12-20091
Click on image to enlarge.

To look at an example of how well silver mining stocks have done since silver bottomed out, please see below the chart of Silver Wheaton Corp (SLW), a Canadian silver miner:

slw-as-of-may-12-2009
Click on image to enlarge

The stock has tripled over the past 5 months.

The relatively low trading volume coupled with good performance is a likely indicator for smart money buying in.

I still like silver here and I still like gold here…

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Silver More Desirable than Gold

The Fool writes:

From the beginning of my contributions here at The Fool, I have expressed my conviction that silver offers far more upside potential than even gold for Fools seeking precious metals exposure. By no means do I advocate targeting exclusively silver in place of gold, but I maintain that silver makes the perfect complement to gold exposure, and ought not be overlooked.

See this 2-year chart comparing the relative performance of gold vs. silver, expressed via the proxy ETFs for convenience:

Now, at the worst levels of this precious metals correction (which is now over in every major world currency except the USD), the gold:silver ratio surpassed the 80 mark, which signalled to me that the time was right to be heavily weighted in silver. I created the ‘silverminer‘ CAPS profile on 11/19/08, and the result has been fairly positive so far, but I mention this only to highlight the trend in play. You see, even at today’s ratio of 70 following silver’s recovery from $9 to over $13, I believe silver still has plenty of room to run to normalize this at least towards the 50 level for starters. Later in this precious metals bull market, I expect the ratio to approach 20:1. That would mean silver at $45 today at present gold prices, but I believe that ratio will be reached when gld is sugnificantly higher than where we are today.

If silver reaches the 20:1 ratio near my extremely conservative gold price target of $1,650, that would give us $82 silver. With long-term expectations like these, now you see why I remain so heavily allocated in precious metals.

Coming back to the near-term, though, I avoid speaking to the very near-term because absolutely anything is possible within a short timeframe when entire markets are manipulated to the degree that these markets are. That being said, the manipulation efforts must ultimately fail, and I expect gold to move very bullishly past last year’s high and up toward $1,250 in a way that will surprise even many gold bulls. We could see some weakness before that occurs as last-ditch efforts to contain the price are executed, but I believe such an effect can not last long. At $1,250 gold, a 37% rise from today’s price, I expect silver to trade well into the mid $20s, for a gain of more than 90%. This would of course correspond to a simultaneous drop in the gold:silver ratio to around 50:1.

See this long-term chart of historical gold:silver ratios charted alongside the silver price chartfor a reference. A target ratio of near 20:1 is my rationale for having heavy exposure to silver for the long haul, but I believe even Fools with a shorter time horizon can consider riding the mid-term trend from the current 70:1 ratio to about 50:1. I see a big year ahead for silver once gold breaks out in USD terms the way it has already in the other currencies.

I have said elsewhere that most ratios mean little in this chaotic environment, but the gold:silver ration will always be an important one for precious metal investors to follow, because ultimately these metals are called precious for a reason. Within the Earth’s composition, it is estimated that gold and silver exist in a ratio of 16:1. Food for thought, if indeed markets always seek out true value over time.

Fool on!

I fully concur. I said back in December that Silver had bottomed for pretty much the same reasons:

This year the price of a silver ounce has fallen to less than 1/82 of a gold ounce. While gold pulled back by about 30% from $1,011 to around $704, siver has plummeted by 58% from $20.92 to $8.79.

With the money supply on the rise again, and the Federal Reserve policy obviously out of control, coupled with a very cheap ratio in terms of gold, it is certainly reasonable to start being bullish on silver again. Silver is, after gold, the best monetary metal. True, it derives a lot of its demand from industrial uses, but it has already taken its beating for it.

As far as my limited chart reading skills go, the SLV chart seems to reaffirm this belief:

Click on image to enlarge.

Has a floor formed? I do think so. Has the trendline been broken? Not quite yet, but it looks like we’re close to a trend reversal.

Silver investments have paid off handsomely since then. The ETF SLV went up by over 40% to now $14.30 and the silver stock Silver Wheaton (SLW) has more than doubled. During the same time the Dow Jones has dropped by about 22%.

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