Can China and India Save the World?
A pillar in all bullish arguments for the global economy is that China and India will carry the weight of industrialized nations due to their insatiable demand for a better way of life. While they will certainly try, the risk of both nations hitting a wall is increasing as that insatiable demand consumes increasingly more resources.
Ignoring the rest of the world, The US, China and India are expected to increase their daily consumption of oil by almost 10 million barrels per day by 2025. Economic advancement over the last 150 years has been highly correlated with the consumption of oil and other fossil fuels. Without this increase in consumption of oil at low prices, the world will experience no growth. With such large populations, and leverage to energy consumption it is unclear if China and India can live up to their high hopes of leading the world out of the current global economic slump.
Global crude oil production peaked in 2005 and has plateaued at 74 million barrels per day. Global consumption took a small dip in the wake of the 2008 financial crises, however now that economies are recovering consumption levels are back on the rise. The result will be an inevitable rise in oil prices.
A $100 increase in the price of oil would cost an additional $3 trillion in direct consumption expenses globally - effectively reducing global GDP by 5.1 percent. While some of this wealth may be transferred to oil exporting nations, this is not a zero sum game. If oil shale or deep water drilling is used to replace current low cost supplies than oil producers will be spending nearly $100 in additional productions costs and realizing none of the financial gains to offset the losses from consuming nations.
Most developing nations that are driving global economic growth are highly dependent on energy consumption. Although The US, EU, and Japan consume large amounts of energy, these nations have less leverage to the price of oil in relation to their GDP. If the price of oil were to rise by $100, China would suffer from a direct 6 percent hit to their economy, and India would suffer from an 8 percent hit to their economy.
Another important consideration for countries is their foreign dependency on oil. While Russia has a high level of leverage in oil consumption, it is also a net exporter. As a result, Russian oil supplies are relatively secure. The two most vulnerable nations in the world to an oil shock are Japan and South Korea as they import more than 97 and 98 percent of their oil respectively. Both nations are also highly urbanized with very little arable land. These nations would not survive a halt in global oil trade. The EU, China and India are also highly dependent on oil imports.
Argentina and Brazil are in a unique position of being self sufficient in oil production and consumption. They also have vast amounts of arable land. As a result, they would be least affected by an oil shock.
Capacity of arable land is a strong indicator of potential for economic prosperity if energy prices spike because the arable land supports farming and food production.
Conclusion:
Japan is probably the most economically vulnerable nation in the world. Now that the US, and Europe, are also financially insolvent energy consumers, the world is turning to nations such as India and China to drive global growth. However, their large population and leverage to the price of energy create a situation of great risk. If peak oil is realized within the next five years, then growth prospects in India and China will be reduced drastically. The result will be negative global GDP growth and a reduced standard of living for virtually all nations.
South and Central American nations including Brazil and Argentina may have the best chances of coming out ahead as they are energy independent, have lower populations than Asia, and the most unused arable land.
Ignoring the rest of the world, The US, China and India are expected to increase their daily consumption of oil by almost 10 million barrels per day by 2025. Economic advancement over the last 150 years has been highly correlated with the consumption of oil and other fossil fuels. Without this increase in consumption of oil at low prices, the world will experience no growth. With such large populations, and leverage to energy consumption it is unclear if China and India can live up to their high hopes of leading the world out of the current global economic slump.
Global crude oil production peaked in 2005 and has plateaued at 74 million barrels per day. Global consumption took a small dip in the wake of the 2008 financial crises, however now that economies are recovering consumption levels are back on the rise. The result will be an inevitable rise in oil prices.
A $100 increase in the price of oil would cost an additional $3 trillion in direct consumption expenses globally - effectively reducing global GDP by 5.1 percent. While some of this wealth may be transferred to oil exporting nations, this is not a zero sum game. If oil shale or deep water drilling is used to replace current low cost supplies than oil producers will be spending nearly $100 in additional productions costs and realizing none of the financial gains to offset the losses from consuming nations.
Most developing nations that are driving global economic growth are highly dependent on energy consumption. Although The US, EU, and Japan consume large amounts of energy, these nations have less leverage to the price of oil in relation to their GDP. If the price of oil were to rise by $100, China would suffer from a direct 6 percent hit to their economy, and India would suffer from an 8 percent hit to their economy.
Another important consideration for countries is their foreign dependency on oil. While Russia has a high level of leverage in oil consumption, it is also a net exporter. As a result, Russian oil supplies are relatively secure. The two most vulnerable nations in the world to an oil shock are Japan and South Korea as they import more than 97 and 98 percent of their oil respectively. Both nations are also highly urbanized with very little arable land. These nations would not survive a halt in global oil trade. The EU, China and India are also highly dependent on oil imports.
Argentina and Brazil are in a unique position of being self sufficient in oil production and consumption. They also have vast amounts of arable land. As a result, they would be least affected by an oil shock.
Capacity of arable land is a strong indicator of potential for economic prosperity if energy prices spike because the arable land supports farming and food production.
Conclusion:
Japan is probably the most economically vulnerable nation in the world. Now that the US, and Europe, are also financially insolvent energy consumers, the world is turning to nations such as India and China to drive global growth. However, their large population and leverage to the price of energy create a situation of great risk. If peak oil is realized within the next five years, then growth prospects in India and China will be reduced drastically. The result will be negative global GDP growth and a reduced standard of living for virtually all nations.
South and Central American nations including Brazil and Argentina may have the best chances of coming out ahead as they are energy independent, have lower populations than Asia, and the most unused arable land.
Commercials Begin to Cover Silver Short Positions
Anyone following the futures market for silver know that the large commercial traders, banks such as JPM, always win. That is until now.
During the bull market in silver that began in 2001, a pattern of trading similar to the martingale betting strategy emerged in which 8 trading institutions sold short increasingly larger amounts of contracts into rallies until their sales volumes overwhelmed the market into a freefall. The same banking institutions would then purchase those short positions at a profit after the freefall and the rally process would begin again. This process of taking money from precious metals investors has been well documented by analysts such as Ted Butler, David Morgan, and others. The strategy has been so successful that some futures traders began to front run the banks on their own tactics using the COT report and other sentiment indicators.
It has been argued that these large short positions have suppressed the price of silver by a multiple of itself. This may be proven sooner than many expected.
Over the last 6 weeks all was going according to plan. Silver rallied and the commercial banks shorted an ever larger amount of contracts as the open interest swelled to the point at which most silver analysts were expecting a correction. In the last 2 weeks silver rose by nearly $2 dollars and most were expecting to see an even larger commercial short position reflected in the COT report. Instead, the commercials actually covered 2297 contracts, and bought an additional 989 long contracts during the week of September 28th to October 5th when the price of silver rose by $1. The covering was down at what appeared to be a short term top to many.
If it Bleeds...
Something has drastically changed in the silver market. The banks that once controlled the price of silver are now closing positions at a loss. Traders may begin to speculate on what has changed and why. Some traders have reported that a large buyer is entering the market. Regardless of the actual reason the commercial shorts have begun to bleed money. And when blood spills sharks will circle. Hedge funds and traders that never even thought of silver before will begin to squeeze the shorts. If the big banks don't quickly regain control of the silver market they may lose it forever.
While it can be speculated on how short covering could impact the market, a short squeeze could feed upon itself as it attracts capital. In five trading days of buying a net 3286 contracts the price of silver rose by $1. However the commercial banks are still a net 62,127 contracts short so at that linear rate it would take them 94 trading days to cover with a silver price of roughly $117. The resulting losses would be around $15 billion. Of course markets aren't linear and after the second or third week of covering traders would begin to purposefully front run and squeeze the commercial shorts so its unlikely that the positions could be covered that low or if at all. Unfortunately those who were hoping for a correction to accumulate more silver may not get it here as a price reset may be on the horizon.
During the bull market in silver that began in 2001, a pattern of trading similar to the martingale betting strategy emerged in which 8 trading institutions sold short increasingly larger amounts of contracts into rallies until their sales volumes overwhelmed the market into a freefall. The same banking institutions would then purchase those short positions at a profit after the freefall and the rally process would begin again. This process of taking money from precious metals investors has been well documented by analysts such as Ted Butler, David Morgan, and others. The strategy has been so successful that some futures traders began to front run the banks on their own tactics using the COT report and other sentiment indicators.
It has been argued that these large short positions have suppressed the price of silver by a multiple of itself. This may be proven sooner than many expected.
Over the last 6 weeks all was going according to plan. Silver rallied and the commercial banks shorted an ever larger amount of contracts as the open interest swelled to the point at which most silver analysts were expecting a correction. In the last 2 weeks silver rose by nearly $2 dollars and most were expecting to see an even larger commercial short position reflected in the COT report. Instead, the commercials actually covered 2297 contracts, and bought an additional 989 long contracts during the week of September 28th to October 5th when the price of silver rose by $1. The covering was down at what appeared to be a short term top to many.
If it Bleeds...
Something has drastically changed in the silver market. The banks that once controlled the price of silver are now closing positions at a loss. Traders may begin to speculate on what has changed and why. Some traders have reported that a large buyer is entering the market. Regardless of the actual reason the commercial shorts have begun to bleed money. And when blood spills sharks will circle. Hedge funds and traders that never even thought of silver before will begin to squeeze the shorts. If the big banks don't quickly regain control of the silver market they may lose it forever.
While it can be speculated on how short covering could impact the market, a short squeeze could feed upon itself as it attracts capital. In five trading days of buying a net 3286 contracts the price of silver rose by $1. However the commercial banks are still a net 62,127 contracts short so at that linear rate it would take them 94 trading days to cover with a silver price of roughly $117. The resulting losses would be around $15 billion. Of course markets aren't linear and after the second or third week of covering traders would begin to purposefully front run and squeeze the commercial shorts so its unlikely that the positions could be covered that low or if at all. Unfortunately those who were hoping for a correction to accumulate more silver may not get it here as a price reset may be on the horizon.
Opening a Can of Worms - Do You Have a Mortgage?
Millions of Americans have already or will likely soon receive a letter from a legal firm representing their mortgage bank asking for help. I received such a letter myself, so I know this is real. The letter will be an admission that the bank has either lost or never had the proper documentation with your signature proving that you actually owe a mortgage balance bound to the property. This document, known as a note, is the legal instrument that secures a real property to a debt owed to a bank. The letter is a clear sign of desperation.
When a home owner is forced into foreclosure, the case is presented to a judge for approval. Historically if uncontested, a foreclosure has quickly led to a judgment in favor of the bank - to evict the owner and confiscate the property. However, in the last few years a growing number of homeowners have been contesting the foreclosures and demanding proof of the note - or ownership of the mortgage. In many cases, the note can't be located and the foreclosure is not approved due to lack of documentation.
The issue is so serious that last week, Bank of America halted foreclosures in 23 states due to findings that it doesn't have the necessary documentation to foreclose on owners and has been foreclosing on homes without proof of the note. JPM Chase and GMAC have also already halted foreclosures in a similar move. In order to successfully foreclose, the banks will need to hire legal firms to litigate and re-establish their legal right to collect the value of the mortgage. However, this could be time consuming, costly, and the debt may be shifted from being secured by the property to unsecured by judgment.
Fraud based on Fraud based on Fraud.
Whether you have a mortgage that can be enforced is now in question, and by default so are the derivatives based upon the mortgage. The financial engineering and success of mortgage backed securities was based on the idea that mortgages could be pooled and sold to investors. It is now estimated that between 1/3rd and 2/3rds of all mortgage backed securities are not backed by a physical mortgage. Banks are simply unable to tie their products to the underlying mortgages. The result is that pensions, banks and other investors of even "high quality" mortgage backed securities may be holding near worthless paper. The derivatives based upon non-backed mortgage securities - based upon quasi-enforceable mortgages - based upon fraudulent, undocumented, or lax-documented standards are theoretical at best. Interestingly, this is represented by US dollar deposits.
Banks will sue homeowners for defaulting, homeowners will sue banks for deception, and investors in the mortgage backed securities will also sue for fraud. Pension holders will in turn sue the investment companies holding the worthless paper. The lawsuits have just begun. Ambac recently filed a $16.7 billion lawsuit against Bank of America, claiming that 97 percent of its securitized mortgages didn't conform to lending underwriting guidelines.
With roughly $14 trillion in mortgages outstanding in the US, and more than $8 trillion in mortgage securities, a large amount of capital is now at risk – especially if those mortgage backed securities are considered leverageable deposits. The consequence could be a halt in mortgage processing for several months, and shutting of title insurance companies which would effectively close the mortgage market. The most likely outcome will be the complete monetization of the industry.
Jim Sinclair was one of the first to bring this issue to light when he warned that many of these cases could not be dragged through the court system because they are completely based upon fraud. There may not be enough lawyers, judges, and courts in the world to ever untangle the chain of fraudulent derivatives based on other fraudulent derivatives. The lesson is clear; if you don’t own real assets then you don’t really own anything. The stampede into gold and silver will continue as investors seek protection from the largest distribution of wealth in history.
When a home owner is forced into foreclosure, the case is presented to a judge for approval. Historically if uncontested, a foreclosure has quickly led to a judgment in favor of the bank - to evict the owner and confiscate the property. However, in the last few years a growing number of homeowners have been contesting the foreclosures and demanding proof of the note - or ownership of the mortgage. In many cases, the note can't be located and the foreclosure is not approved due to lack of documentation.
The issue is so serious that last week, Bank of America halted foreclosures in 23 states due to findings that it doesn't have the necessary documentation to foreclose on owners and has been foreclosing on homes without proof of the note. JPM Chase and GMAC have also already halted foreclosures in a similar move. In order to successfully foreclose, the banks will need to hire legal firms to litigate and re-establish their legal right to collect the value of the mortgage. However, this could be time consuming, costly, and the debt may be shifted from being secured by the property to unsecured by judgment.
Fraud based on Fraud based on Fraud.
Whether you have a mortgage that can be enforced is now in question, and by default so are the derivatives based upon the mortgage. The financial engineering and success of mortgage backed securities was based on the idea that mortgages could be pooled and sold to investors. It is now estimated that between 1/3rd and 2/3rds of all mortgage backed securities are not backed by a physical mortgage. Banks are simply unable to tie their products to the underlying mortgages. The result is that pensions, banks and other investors of even "high quality" mortgage backed securities may be holding near worthless paper. The derivatives based upon non-backed mortgage securities - based upon quasi-enforceable mortgages - based upon fraudulent, undocumented, or lax-documented standards are theoretical at best. Interestingly, this is represented by US dollar deposits.
Banks will sue homeowners for defaulting, homeowners will sue banks for deception, and investors in the mortgage backed securities will also sue for fraud. Pension holders will in turn sue the investment companies holding the worthless paper. The lawsuits have just begun. Ambac recently filed a $16.7 billion lawsuit against Bank of America, claiming that 97 percent of its securitized mortgages didn't conform to lending underwriting guidelines.
With roughly $14 trillion in mortgages outstanding in the US, and more than $8 trillion in mortgage securities, a large amount of capital is now at risk – especially if those mortgage backed securities are considered leverageable deposits. The consequence could be a halt in mortgage processing for several months, and shutting of title insurance companies which would effectively close the mortgage market. The most likely outcome will be the complete monetization of the industry.
Jim Sinclair was one of the first to bring this issue to light when he warned that many of these cases could not be dragged through the court system because they are completely based upon fraud. There may not be enough lawyers, judges, and courts in the world to ever untangle the chain of fraudulent derivatives based on other fraudulent derivatives. The lesson is clear; if you don’t own real assets then you don’t really own anything. The stampede into gold and silver will continue as investors seek protection from the largest distribution of wealth in history.
Alternative Investments Should be Your Core
With interest rates flat lined near zero, investors of all types are competing with each other to chase yields ever lower in desperation of cash flow. Although bond buyers may think they are conservative they are really speculators as buying an asset far above its intrinsic value with the idea that someone else will pay even more is the basic definition of speculating. Even if yields don't fall from here, there isn't much to be made waiting 10 years for a 2 percent yield or less - ignoring that inflation is higher than that. This aberration has extended into the corporate bond market where large cap companies are now financing using debt that pays less than their dividends.
The end result is that millions of people who lost money over the past decade in stocks and housing are now buying bonds, annuities, and other fixed deposit credit based investments that are guaranteed to disappoint.
Traditional investment managers will continue to give you losing advice until your capital under management falls below the level at which they say it isn't worth their time to "service" you anymore. This is because their goal is to charge a commission for selling securities, rather than preserve and increase your wealth. While there isn't enough room for everyone to exit bond and equity markets, there remains opportunities in alternative investments that should be the core of a portfolio. If managed correctly, they will offer sustainable cash flow much higher than what banks or governments are willing to provide. This is especially important for people who are entering or already in retirement and need some stable income to live off of, as well as capital preservation.
Gold and Silver - Ironically the biggest argument wall street and the mainstream media will use against precious metals is that they don't pay a yield and can't provide cash flow like bonds can. Now that yields are zero for all practical purposes, that reasoning vanishes. There is no longer an opportunity cost of owning precious metals over bonds or cash. Most importantly, real interest rates are negative, and as long as they are gold and silver will have a powerful wind at their backs. Precious metals can be included in the cash and insurance portion of an allocation, and miners can be included in the equity portion. In addition to rising every single year, gold has appreciated at an annual rate of 18 percent over the last decade.
Farmland - Farmland particularly in the Midwestern US has increased over recent years, however there are still opportunities to purchase properties which provide stable income and protection from inflation. A successful investor can expect to lease the land to a farmer for a 4-6 percent annual yield, and historically land values have also appreciated by about 4-6 percent. Effectively the investor could earn an inflation adjusted 5-8 percent with little risk if it isn't leveraged by debt. Over the last decade, farmland prices appreciated at a rate of 7 percent while the S&P 500 had a negative return. Farmland performed even better when factoring rental or operating income.
Lumber/Timber - Money does grow on trees when evaluating timber. Investors in forestry have the potential to earn a steady return from the growth of lumber as trees are always growing. Timber is also historically known for being a great inflation hedge. The land itself also appreciates in addition to the lumber. From 1990 to 2007, the National Council of Real Estate Investment Fiduciaries (NCREIF) Timberland Index had an annual return of 12.88 percent - higher than the S&P 500's annual return of 10.54 percent and with less volatility. Investors could buy stock in timber companies such as Plum Creek (PLC) and Rayonier(RYN) that have dividend yields of more that 4 percent, or they could invest directly in land and lumber projects.
Arbitrage - Although much more lucrative in the 1970's and 1980's, there remain several arbitrage strategies that provide cash flow consistent better than a treasury with less inflation risk. Merger arbitrage funds ARBFX and MERFX have appreciated by an average rate of 4 percent over the last 5 years and investors aren't dependent on interest rates falling to make a profit.
Foreign real estate and businesses - While the US, Europe, Japan, and other developed countries are expected to see stagnating economies for the foreseeable future, there remains investment opportunities in developing economies. Real estate and other businesses in developing nations were much less affected by the credit crisis of 2008 because they didn't use the same degree of leverage as the US, Europe, and Japan. For this reason they will recover faster and offer higher returns.
By focusing on alternative investments, it is still possible for investors to achieve cash flow and annual returns between 4 to 10 percent. The key is to avoid overvalued stocks and bonds, and accumulate investments backed by tangible assets and special opportunities.
For more charts, news, and analysis visit Tradeplacer.com
Traditional investment managers will continue to give you losing advice until your capital under management falls below the level at which they say it isn't worth their time to "service" you anymore. This is because their goal is to charge a commission for selling securities, rather than preserve and increase your wealth. While there isn't enough room for everyone to exit bond and equity markets, there remains opportunities in alternative investments that should be the core of a portfolio. If managed correctly, they will offer sustainable cash flow much higher than what banks or governments are willing to provide. This is especially important for people who are entering or already in retirement and need some stable income to live off of, as well as capital preservation.
Gold and Silver - Ironically the biggest argument wall street and the mainstream media will use against precious metals is that they don't pay a yield and can't provide cash flow like bonds can. Now that yields are zero for all practical purposes, that reasoning vanishes. There is no longer an opportunity cost of owning precious metals over bonds or cash. Most importantly, real interest rates are negative, and as long as they are gold and silver will have a powerful wind at their backs. Precious metals can be included in the cash and insurance portion of an allocation, and miners can be included in the equity portion. In addition to rising every single year, gold has appreciated at an annual rate of 18 percent over the last decade.
Farmland - Farmland particularly in the Midwestern US has increased over recent years, however there are still opportunities to purchase properties which provide stable income and protection from inflation. A successful investor can expect to lease the land to a farmer for a 4-6 percent annual yield, and historically land values have also appreciated by about 4-6 percent. Effectively the investor could earn an inflation adjusted 5-8 percent with little risk if it isn't leveraged by debt. Over the last decade, farmland prices appreciated at a rate of 7 percent while the S&P 500 had a negative return. Farmland performed even better when factoring rental or operating income.
Lumber/Timber - Money does grow on trees when evaluating timber. Investors in forestry have the potential to earn a steady return from the growth of lumber as trees are always growing. Timber is also historically known for being a great inflation hedge. The land itself also appreciates in addition to the lumber. From 1990 to 2007, the National Council of Real Estate Investment Fiduciaries (NCREIF) Timberland Index had an annual return of 12.88 percent - higher than the S&P 500's annual return of 10.54 percent and with less volatility. Investors could buy stock in timber companies such as Plum Creek (PLC) and Rayonier(RYN) that have dividend yields of more that 4 percent, or they could invest directly in land and lumber projects.
Arbitrage - Although much more lucrative in the 1970's and 1980's, there remain several arbitrage strategies that provide cash flow consistent better than a treasury with less inflation risk. Merger arbitrage funds ARBFX and MERFX have appreciated by an average rate of 4 percent over the last 5 years and investors aren't dependent on interest rates falling to make a profit.
Foreign real estate and businesses - While the US, Europe, Japan, and other developed countries are expected to see stagnating economies for the foreseeable future, there remains investment opportunities in developing economies. Real estate and other businesses in developing nations were much less affected by the credit crisis of 2008 because they didn't use the same degree of leverage as the US, Europe, and Japan. For this reason they will recover faster and offer higher returns.
By focusing on alternative investments, it is still possible for investors to achieve cash flow and annual returns between 4 to 10 percent. The key is to avoid overvalued stocks and bonds, and accumulate investments backed by tangible assets and special opportunities.
For more charts, news, and analysis visit Tradeplacer.com
What Happens Now that Gold and Silver Have Broken Out? Is 5000 ounce gold realistic?
In recent weeks gold and silver have broken through their multi-month consolidation levels, and investors are wondering where the precious metals are headed. On a short term basis both gold and silver are overbought and due for a correction that may retest the breakout levels of 1250 on gold and 20 on silver.
On a longer term basis, gold is at an all time high and silver is at a 30 year high. These breakout levels were key because they removed any supply of sellers wanting to sell near their previous purchase prices. The result will be a vacuum in price discovery, because virtually any investor in gold and silver now have a profitable trade and the price will have to rise until enough of these investors decide to take gains. Projecting from the size of the consolidation in precious metals the next key level where sellers arise could be near $1500 gold and $30 silver by 2011.
Gold has risen every year for 10 years in a row now, demonstrating a powerful bull market that began in 2000. Since gold bull markets tend to last 15 to 18 years, investors are wondering how much potential the precious metals have in them. Gold and silver have to move substantially higher to revert to their inflation adjusted highs. However further dollar devaluation could multiply the potential gains.
Taking into account 11 key measurements based on historical movements and price ratios, gold is likely to exceed $5000 and silver is likely to exceed $200 within the next 5 years. If silver reverts to its historical ratio of 16 to 1 with gold, then it could rise even higher.
While most of these statistics use the 1980 highs in gold and silver as a proxy, there is much more potential for a greater move in precious metals now because currency and economic imbalances are not confined to the US but are global. If the US dollar is devalued, it is likely that the Euro, Yen and other currencies would also be devalued. While the 1970's bull market in gold and silver was largely driven by US buyers, a panic to buy precious metals within the next 5 years will driven globally.
On a longer term basis, gold is at an all time high and silver is at a 30 year high. These breakout levels were key because they removed any supply of sellers wanting to sell near their previous purchase prices. The result will be a vacuum in price discovery, because virtually any investor in gold and silver now have a profitable trade and the price will have to rise until enough of these investors decide to take gains. Projecting from the size of the consolidation in precious metals the next key level where sellers arise could be near $1500 gold and $30 silver by 2011.
Gold has risen every year for 10 years in a row now, demonstrating a powerful bull market that began in 2000. Since gold bull markets tend to last 15 to 18 years, investors are wondering how much potential the precious metals have in them. Gold and silver have to move substantially higher to revert to their inflation adjusted highs. However further dollar devaluation could multiply the potential gains.
| Gold | |
| Current SGS inflation adjusted high 2015 with 6% inflation | $ 10,226 |
| Nasdaq 1995-2000, 6.66 factor | $ 8,658 |
| Gold 1975-1980 | $ 7,949 |
| Current SGS inflation adjusted high | $ 7,689 |
| 1980 dow to gold ratio of 1.5 to 1 | $ 7,240 |
| 80% dollar devaluation | $ 6,500 |
| 1930's dow to gold ratio of 2 to 1 | $ 5,430 |
| Nikkei 5yr 1985-1990, 3.63 factor | $ 4,719 |
| Adjusted by growth in money supply/gold supply | $ 4,697 |
| Current CPI adjusted high 2015 with 6% inflation | $ 3,168 |
| Current CPI adjusted high | $ 2,382 |
| Average | $ 6,241.64 |
| Silver | |
| Current SGS inflation adjusted high 2015 with 6% inflation | $ 594 |
| Current SGS inflation adjusted high | $ 447 |
| 1980 dow to silver ratio of 25 to 1 | $ 434 |
| 80% dollar devaluation and return to 1/16 gold | $ 410 |
| Adjusted by growth in money supply/gold supply | $ 276 |
| Silver 1975-1980 | $ 200 |
| Current CPI adjusted high 2015 with 6% inflation | $ 184 |
| Current CPI adjusted high | $ 139 |
| Nasdaq 1995-2000, 6.66 factor | $ 136 |
| 80% dollar devaluation | $ 102 |
| Nikkei 5yr 1985-1990, 3.63 factor | $ 74 |
| Average | $ 272.36 |
Taking into account 11 key measurements based on historical movements and price ratios, gold is likely to exceed $5000 and silver is likely to exceed $200 within the next 5 years. If silver reverts to its historical ratio of 16 to 1 with gold, then it could rise even higher.
While most of these statistics use the 1980 highs in gold and silver as a proxy, there is much more potential for a greater move in precious metals now because currency and economic imbalances are not confined to the US but are global. If the US dollar is devalued, it is likely that the Euro, Yen and other currencies would also be devalued. While the 1970's bull market in gold and silver was largely driven by US buyers, a panic to buy precious metals within the next 5 years will driven globally.
Do Industrialized Economies Support Growth?
The book "For Good and Evil: The Impact of Taxes on the Course of Civilization" by Charles Adams is a must read for those interested in learning how taxation has both created and destroyed civilizations. Over the course of history, governments have tried every tax strategy and tax rate imaginable from flat income taxes to taxes based on how many windows a building has. Students of history will find a clear pattern. Low and fair tax rates have fueled the creation of massive expansive empires, and repressive unfair tax rates have destroyed countries to the point at which they are no longer recognizable.
During the Pyramid age, Egyptian peasants paid 20 percent of their crops to the Pharaoh. Historically, medieval serfs and farmers revolted when tax rates exceeded 30 percent. European empires such as France and the Netherlands collected tax rates between 15 and 20 percent during the 1600's and prospered. However when those rates increased, it led to French Revolution in the late 1700's. The Roman Empire began as a free trade state, in which revenue was collected from 1 to 3 percent in property or sales taxes. However, in the last years of its decline, tax rates and inflation were so repressive that many peasants welcomed barbarians.
Although capital is often taxed at capital gains rates, global economic activity is largely defined by income derived from labor. In this spirit, it can be argued that capital will tend to flow into countries with low income tax rates and enough perceived economic and political freedom to conduct business transactions in the pursuit of happiness.
One reason why economies are able to grow is because workers are able to specialize in a particular skill and trade that skill for other services or products. This concept, known as division of labor, enables increased productivity because producers can focus on what will create the most economic value. For example suppose apples and oranges cost the same amount, but farmers are specialized in growing one or the other and can produce twice as much product in their field. The apple farmer can produce two apples and trade one with the orange farmer who produced two oranges so both would end up with more value than they could individually produce. However, if tax rates exceed 30 percent then this division of labor breaks down because the apple farmer wouldn't produce enough apples to pay the tax and trade for an orange. If tax rates exceed 50 percent, then the farmers would have to be 300 percent more productive in their specialization to make it worthwhile.
It is not a coincidence that the three largest economies have effective tax rates higher than 50 percent (including social security and other income taxes), zero economic growth, near zero interest rates, and are past the point of no return in insolvency.
The three largest economies in the world are in structural decline and represent 61 percent of the global economy, measured by GDP estimated at $58 trillion. Their currencies also account for 71.5 percent of the global foreign exchange market. The Swiss Franc, and British pound account for an additional 9.65 percent of the market which leaves only 20% of the remaining foreign currency market from a long list of countries.
Currency "investors" and traders are really just gamblers unless they are only seeking to hedge another business transaction. There is no fundamental basis for 80 percent of the market, and no reason why Jim Sinclair or others will be right that the US Dollar index will fall to 50 or below because all major currencies are priced against each other. However, compared to any tangible asset a severe decline in currencies is inevitable. If hyperinflation does occur, it will likely be in all major fiat currencies and be witnessed in all countries except those with a completely closed economy.
With virtually every major industrialized nation insolvent, using repressive taxation and unsound fiat currencies the implication is clear. No matter how bullish the prospects are for emerging economies – they are not large enough to sustain positive global economic growth nor do they have an alternative currency that could be used to replace foreign exchange at current levels. The reality of peak oil and other resources will cap emerging economy growth as well.
Because these global imbalances are structural, capital will continue to flee industrialized economies in favor of higher returns and lower taxes. The result will be overnight boom towns, and planned cities, but it's arguable whether much of this money will be misallocated. Precious metals could also undergo a historic revaluing as holders of majors currencies seek alternatives. It is unlikely that capital, or people anywhere in the world will be left unaffected by the ongoing and inevitable devaluing of all major currencies.
During the Pyramid age, Egyptian peasants paid 20 percent of their crops to the Pharaoh. Historically, medieval serfs and farmers revolted when tax rates exceeded 30 percent. European empires such as France and the Netherlands collected tax rates between 15 and 20 percent during the 1600's and prospered. However when those rates increased, it led to French Revolution in the late 1700's. The Roman Empire began as a free trade state, in which revenue was collected from 1 to 3 percent in property or sales taxes. However, in the last years of its decline, tax rates and inflation were so repressive that many peasants welcomed barbarians.
Although capital is often taxed at capital gains rates, global economic activity is largely defined by income derived from labor. In this spirit, it can be argued that capital will tend to flow into countries with low income tax rates and enough perceived economic and political freedom to conduct business transactions in the pursuit of happiness.
One reason why economies are able to grow is because workers are able to specialize in a particular skill and trade that skill for other services or products. This concept, known as division of labor, enables increased productivity because producers can focus on what will create the most economic value. For example suppose apples and oranges cost the same amount, but farmers are specialized in growing one or the other and can produce twice as much product in their field. The apple farmer can produce two apples and trade one with the orange farmer who produced two oranges so both would end up with more value than they could individually produce. However, if tax rates exceed 30 percent then this division of labor breaks down because the apple farmer wouldn't produce enough apples to pay the tax and trade for an orange. If tax rates exceed 50 percent, then the farmers would have to be 300 percent more productive in their specialization to make it worthwhile.
It is not a coincidence that the three largest economies have effective tax rates higher than 50 percent (including social security and other income taxes), zero economic growth, near zero interest rates, and are past the point of no return in insolvency.
| Country | GDP | Currency | % of Currency Exchanged Market | Unfunded Liabilities as Percent of GDP |
| EU | $16.4 Trillion | Euro | 42.45% | 434% |
| US | $14.2 Trillion | Dollar | 19.55% | 854% |
| Japan | $5 Trillion | Yen | 9.5% | 227% |
| Total | $35.6 Trillion | 71.5% | 574% |
The three largest economies in the world are in structural decline and represent 61 percent of the global economy, measured by GDP estimated at $58 trillion. Their currencies also account for 71.5 percent of the global foreign exchange market. The Swiss Franc, and British pound account for an additional 9.65 percent of the market which leaves only 20% of the remaining foreign currency market from a long list of countries.
Currency "investors" and traders are really just gamblers unless they are only seeking to hedge another business transaction. There is no fundamental basis for 80 percent of the market, and no reason why Jim Sinclair or others will be right that the US Dollar index will fall to 50 or below because all major currencies are priced against each other. However, compared to any tangible asset a severe decline in currencies is inevitable. If hyperinflation does occur, it will likely be in all major fiat currencies and be witnessed in all countries except those with a completely closed economy.
With virtually every major industrialized nation insolvent, using repressive taxation and unsound fiat currencies the implication is clear. No matter how bullish the prospects are for emerging economies – they are not large enough to sustain positive global economic growth nor do they have an alternative currency that could be used to replace foreign exchange at current levels. The reality of peak oil and other resources will cap emerging economy growth as well.
Because these global imbalances are structural, capital will continue to flee industrialized economies in favor of higher returns and lower taxes. The result will be overnight boom towns, and planned cities, but it's arguable whether much of this money will be misallocated. Precious metals could also undergo a historic revaluing as holders of majors currencies seek alternatives. It is unlikely that capital, or people anywhere in the world will be left unaffected by the ongoing and inevitable devaluing of all major currencies.
Are Banks Closing their Shorts on Gold and Silver?
In the past few weeks gold and silver have both broken out of their year-long consolidating trading ranges. This breakout came shortly after the announcement that JP Morgan and other banks would close their proprietary commodity trading desks in order to comply with a new "Volker Rule" which states that banks can either trade their own capital or their client's capital, but not both. This news has led to speculation that JP Morgan and others would be forced to close their short positions in gold and silver which has been well documented.
This speculation is overly optimistic, and the evidence proves to the contrary. From August 24th to September 14th the net commercial short position has increased from 82,158 to 94,825. This short position has most likely increased even more since then although it hasn't been reported yet. Gold's net commercial short position also increased from 436,829 to 464,388.
As most gold and silver traders know, this pattern is a typical setup for a takedown that occurs a few times every year. The banks that consist of the commercial category in the chart will continue to sell into the rising strength of the metals until it causes a sharp drop allowing them to cover at a profit.
If the commercial banks actually begin to reduce their gold and silver short positions as the price rises then it will be an indicator that they are exiting the market as some believe. The result would be dramatic as hedge funds would likely try to front run the banks and sellers would vanish. The structure of paper precious metals markets have made this outcome increasingly likely, however it is not probable that the commercial shorts will simply walk away without a fight. The inevitability of the long run is the least likely outcome in the short run because neither the government, nor commercial banks, nor accumulating smart money want gold or silver to spike higher.
Silver analyst Ted Butler was one of the first to bring this structure to the daylight however he is far too optimistic that government regulation or limiting trading positions will lead to this event. It is more likely that the futures market is closed than banks voluntarily ending their game. They may close their proprietary desks and move the positions to another legal entity.
One reason to be cautious is that gold has not touched its 200 day moving average in over a year. This simply means that the gold price has been very strong, but indicates an extended move. However extended moves can be life changing events. Gold's formation above its moving averages is beginning to look like Potash circa early 2007 which was the beginning of a 10 fold move in its price.
Historical evidence indicates that the precious metals will most likely see a sharp correction in the coming weeks. However, if they don't then Jim Sinclair could be collecting money on his $1 million bet early.
For more news and articles about investing in gold and silver visit Tradeplacer.com
This speculation is overly optimistic, and the evidence proves to the contrary. From August 24th to September 14th the net commercial short position has increased from 82,158 to 94,825. This short position has most likely increased even more since then although it hasn't been reported yet. Gold's net commercial short position also increased from 436,829 to 464,388.
As most gold and silver traders know, this pattern is a typical setup for a takedown that occurs a few times every year. The banks that consist of the commercial category in the chart will continue to sell into the rising strength of the metals until it causes a sharp drop allowing them to cover at a profit.
If the commercial banks actually begin to reduce their gold and silver short positions as the price rises then it will be an indicator that they are exiting the market as some believe. The result would be dramatic as hedge funds would likely try to front run the banks and sellers would vanish. The structure of paper precious metals markets have made this outcome increasingly likely, however it is not probable that the commercial shorts will simply walk away without a fight. The inevitability of the long run is the least likely outcome in the short run because neither the government, nor commercial banks, nor accumulating smart money want gold or silver to spike higher.
Silver analyst Ted Butler was one of the first to bring this structure to the daylight however he is far too optimistic that government regulation or limiting trading positions will lead to this event. It is more likely that the futures market is closed than banks voluntarily ending their game. They may close their proprietary desks and move the positions to another legal entity.
One reason to be cautious is that gold has not touched its 200 day moving average in over a year. This simply means that the gold price has been very strong, but indicates an extended move. However extended moves can be life changing events. Gold's formation above its moving averages is beginning to look like Potash circa early 2007 which was the beginning of a 10 fold move in its price.
Historical evidence indicates that the precious metals will most likely see a sharp correction in the coming weeks. However, if they don't then Jim Sinclair could be collecting money on his $1 million bet early.
For more news and articles about investing in gold and silver visit Tradeplacer.com
A Japanese Styled Economy is the Chosen Path
Large global imbalances both between and within nations have been well documented over the last decade and have continued to become more misaligned. While most commentators have argued why a Japanese style stagflationary reversion to the mean is unlikely, it is both the most wanted and mostly likely outcome of current imbalances. It is most wanted by policy makers and most likely for the reason that it's being targeted.
The Japanese economic model over the last 20 years is the best alternative for the Federal Reserve and other government policy makers because the alternatives are too great and terrible to imagine. If the government discontinued its intervention, the credit expansion created during the last 30 years would be completely reversed resulting in massive defaults to the point at which banking as a whole would discontinue. This is the natural force of the market. On the other hand, if the economy stalls and the government intervenes with too much force too quickly, then confidence in currencies would collapse and global hyperinflation would ensue. Either of these scenarios would risk a breakdown in society and likely change in government regime.
The Goldie-locks path would be to intervene just enough such that the dollar slowly depreciates, and financial firms slowly rebuild their balance sheets over decades. In this scenario society as a whole may slowly change, but change would be less drastic. The wealthy and powerful would benefit the most from this outcome as they would maintain their control. Meanwhile, the middle class would slowly disintegrate as pressures from all sides erode any remaining wealth and income. Make no mistake, the only deflation the Japanese have suffered is in asset prices not monetary supply. Costs will inflate including commodities, energy, transportation, and of course taxes. At the same time, income will stagnate at best or more likely fall. Interest income will remain below inflation and traditional investment performance will remain subpar. Businesses will operate with lower margins and lower returns. There will be near 0 economic growth, with near 0 interest rates, and near 0 employment growth.
Just as in Japan, the population will age and require more care. At the same time the number of children born will continue to fall, and immigration will decline as foreigners look elsewhere for opportunities. The result will be a declining population, with lower quality of services provided to them at a higher cost.
Investment Strategies for the Japanese Style Reversion to the Mean
Just as there has been over the last decade and last few weeks (depending on your perspective), there will be plenty of bull and bear markets with rallies and slides. Some traders may be able to time these correctly, but most won’t. On a grander perspective, equities will oscillate with no trend and no significant returns for long term investors. Even if bond investors aren’t slaughtered by higher rates, the best they will achieve is 2 percent return from government bonds. While commodities will rise, producers will also experience similar increases in production costs led by energy and construction. The result will be much higher commodity prices with little or no benefit to the producers. Stocks will be pressured lower by a decrease in PE ratios, stagnate dividends, and an aversion to risk. All asset classes will experience selling pressure from a change in demographics as workers retire and begin selling whatever assets they have to live off of.
Investors may seek to capitalize on the dollar carry trade by borrowing dollars and investing in other assets with higher expected returns. However, overuse of leverage could become detrimental as it did in 2008 even with undervalued assets.
Emerging markets would likely become a core component for successful investors as both the equities and bonds will likely outperform US or European based investments. Commodities will most likely continue to perform well, although their producers may not. Resource companies will have to dig and drill farther and farther into the ground to obtain less and less. Physical commodities will retain their value, but many can't be purchased and stored in large amounts. While it is feasible to buy physical gold and silver, buying soft commodities such as wheat and sugar are not practical investments for most people so it will be difficult to capture their gains. Commodity ETF's and futures will contango and slippage so they won’t track spot prices accurately. This can already be seen by comparing DBA to its underlying commodities and UNG to natural gas. Farmland itself will likely appreciate, however so will fertilizer and gas, so owning and operating a farm would not likely be as lucrative as investors expect. Precious metals will continue to outperform in this environment, because there simply isn’t any competing asset class. With interest rates near 0, there is no opportunity cost to carry gold or silver. Risks of large takedowns and possible impunitive taxes or capital controls will remain, however.
Investors may have to plan for a Japanese style reversion of imbalances that stretch into the next decade, as it is the chosen path by policy makers. Overall, profits will be harder to make and harder to keep, but they will still be available.
The Japanese economic model over the last 20 years is the best alternative for the Federal Reserve and other government policy makers because the alternatives are too great and terrible to imagine. If the government discontinued its intervention, the credit expansion created during the last 30 years would be completely reversed resulting in massive defaults to the point at which banking as a whole would discontinue. This is the natural force of the market. On the other hand, if the economy stalls and the government intervenes with too much force too quickly, then confidence in currencies would collapse and global hyperinflation would ensue. Either of these scenarios would risk a breakdown in society and likely change in government regime.
The Goldie-locks path would be to intervene just enough such that the dollar slowly depreciates, and financial firms slowly rebuild their balance sheets over decades. In this scenario society as a whole may slowly change, but change would be less drastic. The wealthy and powerful would benefit the most from this outcome as they would maintain their control. Meanwhile, the middle class would slowly disintegrate as pressures from all sides erode any remaining wealth and income. Make no mistake, the only deflation the Japanese have suffered is in asset prices not monetary supply. Costs will inflate including commodities, energy, transportation, and of course taxes. At the same time, income will stagnate at best or more likely fall. Interest income will remain below inflation and traditional investment performance will remain subpar. Businesses will operate with lower margins and lower returns. There will be near 0 economic growth, with near 0 interest rates, and near 0 employment growth.
Just as in Japan, the population will age and require more care. At the same time the number of children born will continue to fall, and immigration will decline as foreigners look elsewhere for opportunities. The result will be a declining population, with lower quality of services provided to them at a higher cost.
Investment Strategies for the Japanese Style Reversion to the Mean
Just as there has been over the last decade and last few weeks (depending on your perspective), there will be plenty of bull and bear markets with rallies and slides. Some traders may be able to time these correctly, but most won’t. On a grander perspective, equities will oscillate with no trend and no significant returns for long term investors. Even if bond investors aren’t slaughtered by higher rates, the best they will achieve is 2 percent return from government bonds. While commodities will rise, producers will also experience similar increases in production costs led by energy and construction. The result will be much higher commodity prices with little or no benefit to the producers. Stocks will be pressured lower by a decrease in PE ratios, stagnate dividends, and an aversion to risk. All asset classes will experience selling pressure from a change in demographics as workers retire and begin selling whatever assets they have to live off of.
Investors may seek to capitalize on the dollar carry trade by borrowing dollars and investing in other assets with higher expected returns. However, overuse of leverage could become detrimental as it did in 2008 even with undervalued assets.
Emerging markets would likely become a core component for successful investors as both the equities and bonds will likely outperform US or European based investments. Commodities will most likely continue to perform well, although their producers may not. Resource companies will have to dig and drill farther and farther into the ground to obtain less and less. Physical commodities will retain their value, but many can't be purchased and stored in large amounts. While it is feasible to buy physical gold and silver, buying soft commodities such as wheat and sugar are not practical investments for most people so it will be difficult to capture their gains. Commodity ETF's and futures will contango and slippage so they won’t track spot prices accurately. This can already be seen by comparing DBA to its underlying commodities and UNG to natural gas. Farmland itself will likely appreciate, however so will fertilizer and gas, so owning and operating a farm would not likely be as lucrative as investors expect. Precious metals will continue to outperform in this environment, because there simply isn’t any competing asset class. With interest rates near 0, there is no opportunity cost to carry gold or silver. Risks of large takedowns and possible impunitive taxes or capital controls will remain, however.
Investors may have to plan for a Japanese style reversion of imbalances that stretch into the next decade, as it is the chosen path by policy makers. Overall, profits will be harder to make and harder to keep, but they will still be available.
Past the Point of No Return
People often say that the US dollar is no longer backed because it is no longer backed by gold or silver. The truth is that the US dollar is a promissory note backed by the ability and willingness of American taxpayers to pay the value of the dollar.
The currency value of the US dollar is the perceived value of the US government’s ability to collect taxes and repay its debts. This being the case, let’s review the fundamentals of the US economy and dollar.
Source: http://www.ncpa.org/pub/ba662
The above summary calculates the current unfunded federal, state and local government liabilities to be 123.3 Trillion. I have seen several other estimates running as high as 200 Trillion; however this article will continue to use that figure. If we take that $123 trillion in government liabilities and divide it by the 111 million households in the US we find that the average household liability to the government for its promises is $1,108,108. In other words the average household would need to pay $1 million each in additional taxes in order to pay for the unfunded liabilities. Government budgets are not currently balanced and are unlikely to become balanced as tax revenue declines during the recession. However, assuming government budgets were balanced let’s consider the following chart:
Sources: US Census Bureau, The Heritage Foundation, CNN Money
Total household income in the US is roughly 3.4% of total government liabilities already in place without future unbalanced budgets. In other words, if everyone living in the US spent their entire income after taxes - without food, clothing, or shelter - they could pay the interest only on that obligation as long as the interest rate was less than 3.4%. This is a good argument for keeping interest rates low indefinitely. Since people generally need food, shelter and clothing, let’s look at household budgets to see how much more they can afford to pay the government:
Given that the US savings rate of disposable income is hovering around 0%, it is clear that the average household already spends everything it earns buy its food, clothing, and shelter. One problem is that while the government has indebted itself beyond the brink of physics, another problem is the average American household has done the same. According to the Grandfather Economic Reports, the household sector has an additional $12.8 trillion in its own debt - and the interest rate on that debt is much higher than the government’s treasury interest rates.
It is often argued that the government can raise tax rates and increase its revenue. Sounds like a great idea, but it once again defies physics. Even assuming that households pay 100% of their income in taxes without any loss in GDP, the unfunded liabilities couldn’t be paid. In addition, the higher tax rates go, the lower tax revenues go and vice versa. If the government reality wanted to increase its revenue it would have to lower tax rates. As tax rates increase, taxpayers increasing turn to Fight, Flight or Fraud to avoid paying more taxes. This trend can be seen clearly below:
In the past, debts were manageable and households saved so the US dollar had perceived value. Some of this perceived value still exists. However, today it is clear that the US government will be unable to fulfill its obligations. While people may perceive or believe in the US dollar and government, the truth is that both are insolvent. It is only a matter of time before perception catches up to reality. If the government diluted $123 trillion in obligations against the current M3 monetary supply of roughly $14 trillion in an orderly fashion, the dollar would fall in value to about 11 cents in today’s dollars.
While the US is insolvent, it is not bankrupt. Bankruptcy is the realization of insolvency. As long as investors are willing and able to purchase and hold government bonds the liabilities can be refinanced. It is only when these promises can’t be delivered upon that participants will be forced to realize default and it may be possible to push this off for years.
The US is not the only country with unsustainable unfunded liabilities. Both the US and Greece have unfunded liabilities exceeding 800% of GDP, The European Union’s unfunded liabilities are 432% of GDP.
Source: Jagadeesh Gokhale, "Measuring the Unfunded Obligations of European Countries," National Center for Policy Analysis, Study No. 319, January 22, 2009 and Eurostat
The US along with most other industrialized nations are undeniably past the point of no return on the path towards a historical renaissance. There is no way out, but to go forward. While many free market proponents are pushing for smaller government, balanced budgets, increased savings, and criticize the Federal Reserve for its inflationary policies, it makes much more sense to support the nation’s current trajectory because it is much easier to go forward than back and it is too late to change inevitable outcomes. The more intervention and liabilities taken on by the government, the faster the realization will become. Despite fairy tale stories by the media and politicians, the laws of mathematics dictate that the dollar and the US economy will default either through the default of obligations or default of the currency itself through inflation.
For more investing information, up to date news, articles, analysis and charts visit Tradeplacer.com
The currency value of the US dollar is the perceived value of the US government’s ability to collect taxes and repay its debts. This being the case, let’s review the fundamentals of the US economy and dollar.
| GOVERNMENT DEBT: | |
| DEBT TYPE | DEBT AMOUNT |
| Federal Government Sector debt - a record high in 2010. | $13.4 Trillion |
| State & Local Government Sector debt - a record high. | $3.1 Trillion |
| Un-funded Social Security contingent liabilities estimated looking forward | $17.5 Trillion |
| Un-funded Medicare/Medicaid contingent liabilities | $89.3 Trillion |
| Total Government Liabilities | $123.3 Trillion |
Source: http://www.ncpa.org/pub/ba662
The above summary calculates the current unfunded federal, state and local government liabilities to be 123.3 Trillion. I have seen several other estimates running as high as 200 Trillion; however this article will continue to use that figure. If we take that $123 trillion in government liabilities and divide it by the 111 million households in the US we find that the average household liability to the government for its promises is $1,108,108. In other words the average household would need to pay $1 million each in additional taxes in order to pay for the unfunded liabilities. Government budgets are not currently balanced and are unlikely to become balanced as tax revenue declines during the recession. However, assuming government budgets were balanced let’s consider the following chart:
| Average Household Government Liabilities: | $1,108,108 |
| Average Household Income Before Taxes: | $67,163 |
| Average Household Federal Tax: | $22,929 |
| Average Household State and Local Tax: | $6,783 |
| Average Household Income After Taxes: | $37,451 |
| Income As a Percentage of Government Liabilities: | 3.4% |
Sources: US Census Bureau, The Heritage Foundation, CNN Money
Total household income in the US is roughly 3.4% of total government liabilities already in place without future unbalanced budgets. In other words, if everyone living in the US spent their entire income after taxes - without food, clothing, or shelter - they could pay the interest only on that obligation as long as the interest rate was less than 3.4%. This is a good argument for keeping interest rates low indefinitely. Since people generally need food, shelter and clothing, let’s look at household budgets to see how much more they can afford to pay the government:
Given that the US savings rate of disposable income is hovering around 0%, it is clear that the average household already spends everything it earns buy its food, clothing, and shelter. One problem is that while the government has indebted itself beyond the brink of physics, another problem is the average American household has done the same. According to the Grandfather Economic Reports, the household sector has an additional $12.8 trillion in its own debt - and the interest rate on that debt is much higher than the government’s treasury interest rates.
It is often argued that the government can raise tax rates and increase its revenue. Sounds like a great idea, but it once again defies physics. Even assuming that households pay 100% of their income in taxes without any loss in GDP, the unfunded liabilities couldn’t be paid. In addition, the higher tax rates go, the lower tax revenues go and vice versa. If the government reality wanted to increase its revenue it would have to lower tax rates. As tax rates increase, taxpayers increasing turn to Fight, Flight or Fraud to avoid paying more taxes. This trend can be seen clearly below:
In the past, debts were manageable and households saved so the US dollar had perceived value. Some of this perceived value still exists. However, today it is clear that the US government will be unable to fulfill its obligations. While people may perceive or believe in the US dollar and government, the truth is that both are insolvent. It is only a matter of time before perception catches up to reality. If the government diluted $123 trillion in obligations against the current M3 monetary supply of roughly $14 trillion in an orderly fashion, the dollar would fall in value to about 11 cents in today’s dollars.
While the US is insolvent, it is not bankrupt. Bankruptcy is the realization of insolvency. As long as investors are willing and able to purchase and hold government bonds the liabilities can be refinanced. It is only when these promises can’t be delivered upon that participants will be forced to realize default and it may be possible to push this off for years.
The US is not the only country with unsustainable unfunded liabilities. Both the US and Greece have unfunded liabilities exceeding 800% of GDP, The European Union’s unfunded liabilities are 432% of GDP.
Source: Jagadeesh Gokhale, "Measuring the Unfunded Obligations of European Countries," National Center for Policy Analysis, Study No. 319, January 22, 2009 and Eurostat
The US along with most other industrialized nations are undeniably past the point of no return on the path towards a historical renaissance. There is no way out, but to go forward. While many free market proponents are pushing for smaller government, balanced budgets, increased savings, and criticize the Federal Reserve for its inflationary policies, it makes much more sense to support the nation’s current trajectory because it is much easier to go forward than back and it is too late to change inevitable outcomes. The more intervention and liabilities taken on by the government, the faster the realization will become. Despite fairy tale stories by the media and politicians, the laws of mathematics dictate that the dollar and the US economy will default either through the default of obligations or default of the currency itself through inflation.
For more investing information, up to date news, articles, analysis and charts visit Tradeplacer.com
$1 Million From 5 Months in Gold
In April 2008, legendary gold investor Jim Sinclair made a $1 million bet that gold would exceed $1650 by January 14th 2011. At the time, Sinclair had stated that he believed his bet was conservative and that gold would probably be much higher. However, with gold hovering near $1200 the market is betting against him and there are only 5 months remaining. Intrade, a predictive betting market, currently has the odds of gold exceeding 1550 by the end of 2010 at 5 percent. This implies that anyone willing to take Sinclair's bet today from the long side is unlikely to win - but also that the payoff would be enormous if payouts were based on the perceived odds using call options.
A $450 increase in gold would be an increase of 37.5 percent, a rate of $90/month or roughly $4 per trading day for 5 months. On an annual basis, this would be near a 100 percent return. Perhaps there is something that Sinclair knows and others don't.
Projecting an exponential moving average, gold would be around $1300 by January. However, gold tends to have larger seasonal moves during the August to January timeframe. Comparing the change from August lows to January highs over the last 10 years, gold rose by an average of 20 percent. Using this average, gold would be roughly $1440 by January. This isn't enough to win the bet, but few investors would be disappointed with such a move. Once in the last 10 years, the 37.5 percent increase was exceeded. From August 2007 to January 2008, gold rose by 40 percent from $657 to $924. The second largest move was between August 2005 and January 2006 when gold rose by 32 percent from $431 to $569.
Given the above data, the odds of gold topping $1650 by January still seem low - perhaps near 20-25 percent. However, Sinclair may be factoring in the likely hood of an event that could launch gold higher. If any of the events below occur, gold could easily top $1650:
War/and or Oil Crisis - Increased tensions in various strategic locations throughout the world could cut off the supply of oil to the US. Potential locations include Iran, Iraq, Pakistan, Venezuela, and Russia.
Major Currency Devaluation - This could be either the US dollar, Euro, or Yen. It could happen over night or over a weekend. Gold would likely gap much higher on such news, just as when it was revalued in 1933 from $20 to $35 an ounce overnight.
Quantitative Easing 2.0 - The Federal Reserve could initiate another round of financial asset purchases. This would not have the same effect as the first round. Equity markets would likely see little gain; however precious metals would be given a stronger dose of buying.
While it is difficult to estimate the odds of these events, they are more likely than most perceive. Perhaps Sinclair will win his $1 million after all. However, if he proves to be wrong on his bet then investors should be grateful that they have more time to buy gold on dips.
A $450 increase in gold would be an increase of 37.5 percent, a rate of $90/month or roughly $4 per trading day for 5 months. On an annual basis, this would be near a 100 percent return. Perhaps there is something that Sinclair knows and others don't.
Projecting an exponential moving average, gold would be around $1300 by January. However, gold tends to have larger seasonal moves during the August to January timeframe. Comparing the change from August lows to January highs over the last 10 years, gold rose by an average of 20 percent. Using this average, gold would be roughly $1440 by January. This isn't enough to win the bet, but few investors would be disappointed with such a move. Once in the last 10 years, the 37.5 percent increase was exceeded. From August 2007 to January 2008, gold rose by 40 percent from $657 to $924. The second largest move was between August 2005 and January 2006 when gold rose by 32 percent from $431 to $569.
Given the above data, the odds of gold topping $1650 by January still seem low - perhaps near 20-25 percent. However, Sinclair may be factoring in the likely hood of an event that could launch gold higher. If any of the events below occur, gold could easily top $1650:
War/and or Oil Crisis - Increased tensions in various strategic locations throughout the world could cut off the supply of oil to the US. Potential locations include Iran, Iraq, Pakistan, Venezuela, and Russia.
Major Currency Devaluation - This could be either the US dollar, Euro, or Yen. It could happen over night or over a weekend. Gold would likely gap much higher on such news, just as when it was revalued in 1933 from $20 to $35 an ounce overnight.
Quantitative Easing 2.0 - The Federal Reserve could initiate another round of financial asset purchases. This would not have the same effect as the first round. Equity markets would likely see little gain; however precious metals would be given a stronger dose of buying.
While it is difficult to estimate the odds of these events, they are more likely than most perceive. Perhaps Sinclair will win his $1 million after all. However, if he proves to be wrong on his bet then investors should be grateful that they have more time to buy gold on dips.
Silver Spikes and Power Struggles
Silver has a history of undergoing massive spikes that look more like a heart rate chart than a stock or commodity chart. Due to silver's conductive and reflective properties, it has been considered a strategic metal for industrial uses since the introduction of electronics. It is the only commodity that has a users association lobbying for the organizations that consume it. Industrial use of silver has been relatively stable; however it is important to note that industrial use of silver has been greater than or near equal to production - which has thinned the market probably more than any other commodity. The reason for this is that both mining supply and industrial production have been near equal and stable. What is left at the margin are investors and speculators which are setting the price - not based upon 600-800 million ounce in global production or consumption but 50-100 million that is the remaining marginal amount that buyers and sellers can get their hands on. When investors aren't buying, the silver market is calm as a pool of stagnate water. However, when investors seek protection from inflation investors line up in a very thin market to produce shock waves.
1980
During the inflation panic of the 1970's the Hunt Brother accumulated a position of around 100 million ounces of silver. They started by taking physical delivery, however they continued buying futures contracts until the price of silver spiked to $50 in January of 1980. The COMEX, then changed the exchanges rules to only accept liquidation orders, and the price of silver subsequently collapsed to the $4 area. Gold trader Jim Sinclair was involved in the liquidation for the Hunt Brothers and still seems fearful of what he witnessed.
1983
Global central banks eased the money supply and credit in reaction to a recession in the US. This led to a return of inflation fears, and silver spiked from $5 to $14.72 in 1983. In the aftermath it fell back to the $4 area.
1987
A decrease in global silver supply, along with economic concerns led to another spike from $5 to $11. It once again fell to the $4 area.
1995
According to reports by Martin Armstrong, and an anonymous trader on ZeroHedge, PhiBro, a trading arm of Solomon Smith began to accumulate futures, and exercise out of the money call options to take delivery through Republic Bank. The CFTC approached PhiBro, and demanded to know the buyer. PhiBro never revealed the buyer, but was quickly forced to reverse the trade. The net effect was a small blip of the silver price in the $5 area. Although it wasn't revealed, there are reports that the buyer was Warren Buffett.
1997-1998
In a similar replay to 1995, Phibro began entering large call option orders through Republic Bank, except this time the buyer takes delivery in London, out of the jurisdiction of the COMEX. In both 1995 and 1998 out of the money calls were purchased and later exercised. The word was leaked that the buyer is Warren Buffett and other traders begin to accumulate positions. Armstrong claims that Republic Bank tried to make it look like he was the buyer; however US regulators tracked the positions to London and discovered it was indeed Warren Buffett who had taken delivery of 87 million ounces with intent to take nearly another 42 million ounces. Buffett publicly announced the investment stating “In recent years, widely-published reports have shown that bullion inventories have fallen very materially, because of an excess of user-demand over mine production and reclamation.” Silver spiked from $4 to 7 and fell back to $4 again.
Buffett never spoke of silver again until 2006 when he admitted he sold it shortly after buying it in when he was quoted as saying “I bought it very early, I sold it very early. Other than that it was perfect”. It is believed that regulators strong armed Buffett into selling the silver back with the threat of being targeted as a manipulator. It is not believed that Buffett had the intent to flip silver for a small profit, nor that he was attempting to manipulate the price.
2000-2008
Given the fundamentals of a long term supply deficit and depletion, in conjunction with negative interest rates, silver could no longer be held at $4 an ounce when it cost $6-$8 to produce it as pointed out in a previous article. An inflationary boom launched all commodities into a bull market. This time though, buyers were not a billionaire or large hedge funds. Instead small investors and smart money bought silver based solely on its fundamental value. Price spikes were mitigated such that both gold and silver rose in a measured slope.
In early 2008, the financial markets began to collapse with the dollar. Speculators were beginning to attack the world's reserve currency and silver hit a peak of 21. It remained at high level until the summer of 2008 when a large amount of silver was shorted. Numerous reports indicate that these trades were being made through JP Morgan, which is also the custodian of the SLV silver ETF. Gold was also shorted in conjunction with a swap of Euros for dollars. The effect was an immediate reversal of a large dollar short trade, collapse in precious metals and the subsequent crash of 2008. Silver fell to the $8 level.
-present
Inflationary policies quickly pushed gold to new all time highs, and silver back up to the $19 level. The structure of the precious metals markets have changed substantially from small value buyers and smart money to larger and more influential institutions and hedge fund managers such as John Paulson and George Soros. This is the classic description of the second phase of the bull market. However, the focus of these funds remains gold.
The word is out amongst large investors on the street to avoid buying silver or be made an example of. There is one thing common amongst billionaires - they all have a lot to lose and must maintain a co-existence with governments and bankers.
As Armstrong has pointed out, no one has survived a run on silver. The Hunts were bankrupted, and Buffett only escaped by immediately closing out his positions. Buffett won't speak of it again, and two of the best known gold traders – Jim Sinclair and Martin Armstrong not only avoid trading it, but even discussing it. It is unlikely that another billionaire will attempt to take delivery of 50 or 100 million ounces of silver again. However, the recent bull market has clearly been base building, similar to what was seen in the 1970's prior to the 1980 silver spike. The larger the base, the larger the spike - and the 1970's silver base pales in comparison to the 2000 base. When the next silver spike does occur there may only be one short seller, but there will be thousands of marginal physical buyers that have simply lost confidence. There will be no Hunt Brother or Warren Buffett to call up and threaten or strong arm, and there will be no one to reverse the trades on. It will be the public, or small retail investor acting in panic.
1980
During the inflation panic of the 1970's the Hunt Brother accumulated a position of around 100 million ounces of silver. They started by taking physical delivery, however they continued buying futures contracts until the price of silver spiked to $50 in January of 1980. The COMEX, then changed the exchanges rules to only accept liquidation orders, and the price of silver subsequently collapsed to the $4 area. Gold trader Jim Sinclair was involved in the liquidation for the Hunt Brothers and still seems fearful of what he witnessed.
1983
Global central banks eased the money supply and credit in reaction to a recession in the US. This led to a return of inflation fears, and silver spiked from $5 to $14.72 in 1983. In the aftermath it fell back to the $4 area.
1987
A decrease in global silver supply, along with economic concerns led to another spike from $5 to $11. It once again fell to the $4 area.
1995
According to reports by Martin Armstrong, and an anonymous trader on ZeroHedge, PhiBro, a trading arm of Solomon Smith began to accumulate futures, and exercise out of the money call options to take delivery through Republic Bank. The CFTC approached PhiBro, and demanded to know the buyer. PhiBro never revealed the buyer, but was quickly forced to reverse the trade. The net effect was a small blip of the silver price in the $5 area. Although it wasn't revealed, there are reports that the buyer was Warren Buffett.
1997-1998
In a similar replay to 1995, Phibro began entering large call option orders through Republic Bank, except this time the buyer takes delivery in London, out of the jurisdiction of the COMEX. In both 1995 and 1998 out of the money calls were purchased and later exercised. The word was leaked that the buyer is Warren Buffett and other traders begin to accumulate positions. Armstrong claims that Republic Bank tried to make it look like he was the buyer; however US regulators tracked the positions to London and discovered it was indeed Warren Buffett who had taken delivery of 87 million ounces with intent to take nearly another 42 million ounces. Buffett publicly announced the investment stating “In recent years, widely-published reports have shown that bullion inventories have fallen very materially, because of an excess of user-demand over mine production and reclamation.” Silver spiked from $4 to 7 and fell back to $4 again.
Buffett never spoke of silver again until 2006 when he admitted he sold it shortly after buying it in when he was quoted as saying “I bought it very early, I sold it very early. Other than that it was perfect”. It is believed that regulators strong armed Buffett into selling the silver back with the threat of being targeted as a manipulator. It is not believed that Buffett had the intent to flip silver for a small profit, nor that he was attempting to manipulate the price.
2000-2008
Given the fundamentals of a long term supply deficit and depletion, in conjunction with negative interest rates, silver could no longer be held at $4 an ounce when it cost $6-$8 to produce it as pointed out in a previous article. An inflationary boom launched all commodities into a bull market. This time though, buyers were not a billionaire or large hedge funds. Instead small investors and smart money bought silver based solely on its fundamental value. Price spikes were mitigated such that both gold and silver rose in a measured slope.
In early 2008, the financial markets began to collapse with the dollar. Speculators were beginning to attack the world's reserve currency and silver hit a peak of 21. It remained at high level until the summer of 2008 when a large amount of silver was shorted. Numerous reports indicate that these trades were being made through JP Morgan, which is also the custodian of the SLV silver ETF. Gold was also shorted in conjunction with a swap of Euros for dollars. The effect was an immediate reversal of a large dollar short trade, collapse in precious metals and the subsequent crash of 2008. Silver fell to the $8 level.
-present
Inflationary policies quickly pushed gold to new all time highs, and silver back up to the $19 level. The structure of the precious metals markets have changed substantially from small value buyers and smart money to larger and more influential institutions and hedge fund managers such as John Paulson and George Soros. This is the classic description of the second phase of the bull market. However, the focus of these funds remains gold.
The word is out amongst large investors on the street to avoid buying silver or be made an example of. There is one thing common amongst billionaires - they all have a lot to lose and must maintain a co-existence with governments and bankers.
As Armstrong has pointed out, no one has survived a run on silver. The Hunts were bankrupted, and Buffett only escaped by immediately closing out his positions. Buffett won't speak of it again, and two of the best known gold traders – Jim Sinclair and Martin Armstrong not only avoid trading it, but even discussing it. It is unlikely that another billionaire will attempt to take delivery of 50 or 100 million ounces of silver again. However, the recent bull market has clearly been base building, similar to what was seen in the 1970's prior to the 1980 silver spike. The larger the base, the larger the spike - and the 1970's silver base pales in comparison to the 2000 base. When the next silver spike does occur there may only be one short seller, but there will be thousands of marginal physical buyers that have simply lost confidence. There will be no Hunt Brother or Warren Buffett to call up and threaten or strong arm, and there will be no one to reverse the trades on. It will be the public, or small retail investor acting in panic.
Some Mining Investors are Already Witnessing Hyperinflation
Some Mining Investors are Already Witnessing Hyperinflation
Over the last decade, investors seeking protection from inflation have been accumulating gold and silver mining shares. Gold and silver have appreciated by more than 300 percent from their lows, so it would be logical to assume that mining shares have performed even better given their inherent leverage in earnings potential. Ironically, some of these investments have already suffered from their own hyperinflation in the form of share dilution. Just as governments have mismanaged their budgets and printed too much money; some mining companies have done the same to the detriment of their shareholders.
Coeur d' Alene (CDE), an American silver miner, is one such company. It has diluted its shares so much that on May 27, 2009 it had a reverse 10 for 1 stock split. This article will use post split adjusted figures. Governments often do the same thing with their failed fiat currencies. In the wake of Germany's Weimar Republic hyperinflation, a new Rentenmark was created that was equal to 1,000,000,000,000 of the old German Marks. While not as bad, CDE's shares outstanding have risen from 2.4 million in 1999 to over 80 million in 2009 - a factor of more than 33.
The majority of miners do issue shares in order to raise capital that is invested in projects with double digit returns; however this hasn't proven to be the case for CDE. $1000 invested in CDE in 1999 would now be worth only $440, while an investment in silver would have grown to $3300, and PAAS would have grown to $4220. Clearly not all precious metals investments are the same, and not all mining companies track the price of gold or silver over the long run.
Despite the all time highs seen in gold and a large increase in the price of silver, CDE was unprofitable in 2009 and the share price continued its long term trend downwards. Management's compensation was able to hit a new high though.
It is possible to be right about a major bull market, but still lose money if the wrong investments are chosen. Investors should be careful to only invest in mining companies that restrain themselves from over-dilution. Furthermore, if mining companies such as CDE lose half their value in a 10 year bull market due to share dilution, there is a significant risk that they won't survive a bear market in precious metals.
Coeur d' Alene (CDE), an American silver miner, is one such company. It has diluted its shares so much that on May 27, 2009 it had a reverse 10 for 1 stock split. This article will use post split adjusted figures. Governments often do the same thing with their failed fiat currencies. In the wake of Germany's Weimar Republic hyperinflation, a new Rentenmark was created that was equal to 1,000,000,000,000 of the old German Marks. While not as bad, CDE's shares outstanding have risen from 2.4 million in 1999 to over 80 million in 2009 - a factor of more than 33.
The majority of miners do issue shares in order to raise capital that is invested in projects with double digit returns; however this hasn't proven to be the case for CDE. $1000 invested in CDE in 1999 would now be worth only $440, while an investment in silver would have grown to $3300, and PAAS would have grown to $4220. Clearly not all precious metals investments are the same, and not all mining companies track the price of gold or silver over the long run.
Despite the all time highs seen in gold and a large increase in the price of silver, CDE was unprofitable in 2009 and the share price continued its long term trend downwards. Management's compensation was able to hit a new high though.
| 2005 | 2006 | 2007 | 2008 | 2009 | |
| Executive Compensation | 2,325,837 | 3,254,007 | 5,677,971 | 5,064,010 | 5,997,589 |
| Dennis Wheeler, CEO of CDE | 1,459,901 | 1,897,946 | 2,560,960 | 2,245,362 | 2,527,319 |
It is possible to be right about a major bull market, but still lose money if the wrong investments are chosen. Investors should be careful to only invest in mining companies that restrain themselves from over-dilution. Furthermore, if mining companies such as CDE lose half their value in a 10 year bull market due to share dilution, there is a significant risk that they won't survive a bear market in precious metals.
Where is The Silver?
With the price of gold hovering near 67 times the price of silver, a logical deduction must be that silver is much more abundant, and easy to acquire than gold. To the contrary, evidence proves otherwise. In fact there is very little silver to be found anywhere.
There is nearly twice as much gold as there is silver in the form of investment grade above ground bullion and coins, and that ignores that fact that 52 percent of the worlds gold is kept in jewelry. While there is an 953 million ounces of above ground silver, there is an estimated 1,803 million ounces of above ground gold in bullion form.
It is important to note a few structural differences in the holdings of gold and silver as well. Approximately half of the above ground gold bullion is held by governments. There are no known silver reserves held by governments. While governments have historically sold their gold to finance their budgets and keep the gold price contained there is no similar readily available entity that could sell silver bullion. Precious metals investors often hold onto their precious metals for time periods measured in years, decades, and lifetimes. Most private investors will not sell their bullion for a 10 percent or possibly even a 100 percent gain. Therefore, even if there are nearly 1 billion ounces of silver in existence, the question remains on how much of that is actually for sale at anywhere near today’s prices.
The implied dollar value of all the silver bullion is tiny compared to gold, or other assets. In fact, measured in dollar value, silver is 1/127th of gold. Many investment funds have more than $16.88 billion however gold is more readily available to purchase in larger dollar amounts. Silver may be one of the most neglected and unloved assets of this century. Perhaps, the reason why silver is so cheap, is ironically because it is too rare to be invested in by asset managers. Or is it?
Known Above Ground Silver Holdings |
|
| Form | Ounces |
| Silver ETF SLV | 295,313,780 |
| US Eagles Minted | 240,418,077 |
| COMEX Warehouses | 114,102,049 |
| Estimated Private Bullion (non eagles or maples) | 120,000,000 |
| Central Fund of Canada | 75,209,103 |
| LBMA Estimated stocks | 75,000,000 |
| Canadian Maples Minted | 21,303,000 |
| Silver ETF ZKB - SWISS | 7,397,885 |
| BMG Bullion Fund | 5,033,609 |
| Total | 953,777,503 |
There is nearly twice as much gold as there is silver in the form of investment grade above ground bullion and coins, and that ignores that fact that 52 percent of the worlds gold is kept in jewelry. While there is an 953 million ounces of above ground silver, there is an estimated 1,803 million ounces of above ground gold in bullion form.
It is important to note a few structural differences in the holdings of gold and silver as well. Approximately half of the above ground gold bullion is held by governments. There are no known silver reserves held by governments. While governments have historically sold their gold to finance their budgets and keep the gold price contained there is no similar readily available entity that could sell silver bullion. Precious metals investors often hold onto their precious metals for time periods measured in years, decades, and lifetimes. Most private investors will not sell their bullion for a 10 percent or possibly even a 100 percent gain. Therefore, even if there are nearly 1 billion ounces of silver in existence, the question remains on how much of that is actually for sale at anywhere near today’s prices.
The implied dollar value of all the silver bullion is tiny compared to gold, or other assets. In fact, measured in dollar value, silver is 1/127th of gold. Many investment funds have more than $16.88 billion however gold is more readily available to purchase in larger dollar amounts. Silver may be one of the most neglected and unloved assets of this century. Perhaps, the reason why silver is so cheap, is ironically because it is too rare to be invested in by asset managers. Or is it?
Silver May Go Lower, But it won't Stay There
One way to value something is by its replacement cost. Appraisers and insurers often use the cost to replace an investment as a baseline of value. In analyzing the silver market, one way to value silver is by measuring the real cost of producing an ounce of silver. This value does not include any premium from investment demand or industrial demand, but it provides a pricing floor because companies don't stay in business for long by losing money.
With the price of silver near its highs this decade and far from its bottom of $3, it would be easy to assume that miners are highly profitable. Considering first quarter earnings from the top four pure silver miners (PAAS,CDE,HL,SVM, Excluding SLW because it doesn't mine, and SSRI because its arguably an explorer), just how much are they earning from these high silver prices?
| Company | Earnings | Silver Produced | Breakeven Silver Price |
| PAAS | $19.1 million | 5.5 million ounces | $3.47 below spot |
| CDE | -$8 million | 1.3 million ounces | $6.15 above spot |
| HL | $18.4 million | 2.5 million ounces | $7.36 below spot |
| SVM | $9.8 million | 1.08 million ounces | $9.07 below spot |
| Total | $39.3 million | 10.38 million ounces | $4.33 below spot |
The average realized sales price of the silver sold was around $16.90. Averaging the earnings and production from all four companies, the breakeven spot price of silver was $12.57. However, it should also be noted that the majority of these earnings did not actually come from silver production, but the byproduct sales of base metals. Silvercorp (SVM) recorded a negative silver cash cost of $4.61 per ounce, and Helca (HL) recorded a negative silver cash cost of $3.03 per ounce. Without sales of other metals, many of the worlds silver mines would be still unprofitable at these prices.
Miners often provide financial figures that sound too good to be true. For example, Pan American Silver's cash cost per ounce of silver net of byproduct credits was only $4.35. While this sounds fantastic, it doesn't include many other fixed and variable business costs such as infrastructure, maintenance and exploration that is vital to replace consumed resources over time.
While these mining companies have excellent potential and leverage to the silver price, their financial statements also provide a window into just how profitable they will be at lower silver prices. A 30 percent decline would render the industry unprofitable, and if prices fell further mining production would be delayed or canceled. In addition, if energy and water prices spike, or if wages rise, a similar outcome could occur. Despite rising %500 percent in the last 10 years, the price of silver is scraping its own floor.
Dow is Flat Since 1999, but Down Against Gold and Real Assets
Dust off your pom poms, the Dow has just crossed the 10,000 level to the upside. Most people aren't partying like its march 1999 though – when the Dow first crossed that level. It has crossed the same level more than 30 times over the last 11 years, and the same exuberance has worn thin.
Perhaps investors are less exuberant because the Dow today buys so much less than it did in 1999. Today's Dow 10,000 is worth less than 7,500 when factoring in the governments CPI index. Compared to the price of oil in 1999, the Dow has fallen to around 2,650, and compared to gold its worth only 2300. The Dow to Gold ratio has fallen from 37 to 8.
Not only has the Dow remained flat since 1999, it has lost anywhere between 25 and 80 percent of its value, depending on the comparison involved. The concept of compounding has remained the same, but now in reverse. Losses in both nominal and real terms compound to create larger losses.
While equities have not provided returns or protection from inflation over the last 11 years, commodities and other real assets managed to gain in value and have acted as a pillar of financial stability. Gold and silver have performed exceptionally well, and proven that it is possible to generate positive inflation adjusted returns in precious metals. In other words, gold and silver not only acted as a store of value, but also provided returns beyond that which can be discounted by a rise is prices or monetary supply. Make no mistake, over the long run precious metals are not expected to rise at a faster rate than inflation. However, buying precious metals at the right time and price can yield outstanding returns just as the Dow did from 1980 to 1999.
Where are we in this investment cycle? Gold and silver were considered too risky at 270 and 3. When they are considered no risk buys, then you can look for similarities to 1999 - and we are far from such sentiment.
China Plays Currency Chess
Mainstream media has interpreted the recent announcement by China that it will allow their currency to float more against the dollar to be a positive signal for the global economy and beneficial for the US. This stream of political spin, that came from the White House and Congress, will prove to be as false as talk of a long term recovery last year.
Politicians are claiming that the move, which will lead to a higher Yuan, was made to appease American officials. They also claim that China wouldn't allow their currency to float higher if their leaders were concerned over a double dip recession. For this reason, the announcement was perceived to be a sign that China is bullish on the markets and economy.
Let there be no mistake; China will revalue their currency on their terms when the timing is most beneficial for China. A more likely scenario is that Chinese officials are anticipating the next phase of the recession and realize it is an opportune time to decouple their currency from the dollar. Despite common misinformation, a strong currency supports a strong economy. The dollars relative strength during the last century is a testament to this. The Chinese realize this and do not want to dragged down with the western economies as they drown in debt and currency debacles. China wasn't calling a bottom in the stock market, they were calling a top in the dollar.
Would it have made sense to revalue the Yuan against the dollar a couple of years ago when the dollar index was threatening to break below 70 and everyone was short the dollar? The near financial collapse launched the dollar higher to its current level near 90, and the Chinese Yuan went along the ride by default. Had the Chinese decoupled earlier their currency would have been trashed just as the Australian and Canadian dollars were.
The coming weakness in the global economy has already begun and will in the near term continue to increase demand for the dollar and treasuries. This will be an opportune, and possibly the last great time to exit the dollar. By decoupling when the dollar is near its peak, the Chinese currency will be launched at a moment of strength and might even give them the chance to sell some dollar based assets before the next round of quantitative easing begins.
Gold and Silver Meet Resistance
Conforming to the statistical odds, gold and silver have both met strong resistance levels. Gold has made several attempts at the 1260 level and been subsequently pushed back down to the 1230 area.
Silver has a much more developed band of resistance between 19 and 21 that stretches back to its 2008 highs. At this point the ceiling above silver seems impenetrable, however this 2 year band will fuel an explosive move when the level is finally pierced.
Both metals are facing strong head winds, that make their performance much more impressive when taken into consideration. Global liquidity is drying up rapidly, and equities are dragging everything lower as money managers sell assets across the board. Historically, the next 3 months are the weakest for precious metals, especially silver. The fact that both metals are threatening their long term resistance levels at such a weak period is a precursor to the next up leg that will likely begin in the fall. In the interim, the precious metals will likely correct low enough to frustrate the bulls wanting a higher price, and shallow enough to frustrate those hoping to get in at lower prices.
However, such frustrations with gold and silver are surely better than what general equities investors will endure.
TradePlacer.com Launches Real-Time Exchange for Collectibles
In an effort to increase liquidity for collectible assets, TradePlacer.com is pleased to announce the launching of its real-time auction marketplace for gold, silver, platinum, wine and other items. After over a year of development, the marketplace was built to leverage state of the art technology capable of handling large trading volumes, and is offering incentives for beta users.
Unlike traditional auctions, TradePlacer.com buyers and sellers are able to set their own prices and quantities. Users are able to resell items that they won previously back into the same auction before it expires. A trading order book lists all bid and ask prices and quantities for full transparency, and trades are matched in real-time by TradePlacer.com's proprietary trade matching engine. This enables users to trade real assets such as gold and silver bullion, and wine in real-time, much like they are trading a stock. While some users may choose to only buy items for delivery, other users may sell, or trade items for profits before an auction closes.
Initial items listed include gold and silver coins, junk silver, and other bullion. Users are also encouraged to suggest new items to be listed. It's completely free to sign up and place orders. If a user's price is matched, they become an auction winner. Users are allowed to cancel and change their orders at any time until they are matched. A small commission is only charged for successfully fulfilled trades.
For more information on how to trade gold, silver, platinum, wine and other collectibles please visit TradePlacer.com
If you are a business interested in listing your gold, silver, wine or other items on TradePlacer.com for free, please contact us at
info@tradeplacer.com
What's the Fed's next move
With the stock market up over 50% last year, talk of a V shaped recovery, green shoots, and other aberrations, most analysts expected the economy to resume growing as if 2008 was some sort of unpredictable outlier. With interest rates at 0, and massive government spending programs, the biggest concern for mainstream media was that the economy might grow too fast.
However, it seems evident that even the Federal Reserve doesn't believe in the green shoots theory anymore. Despite government intervention, economic indicators are rolling over, money supply measured by M3 is declining, and financial stress is increasing. Europe is now in an economic crises that could easily spread, and oil is filling the Gulf of Mexico. Risks of a shock to the financial system are everywhere.
Some analysts have been arguing that interest rates must rise to compensate bond holders, however the European crisis has been a gift to the dollar and treasuries so interest rates have remained low. A spike in interest rates appears unlikely in the near term.
If the current trajectory continues, there could be another sharp correction in equity markets globally but US assets may perform the best in comparison, especially treasuries. This could trigger another bout of financial asset deflation and panic. But what can the Fed do now that interest rates are at 0? Will Robert Prechter finally be right after so many years?
Unlikely.
The Fed will never be out of bullets as long as there is a fiat currency - for better or worse. The Fed would probably resume quantitative easing programs on an astronomic scale. And it might even work for a while.
Asset Allocation of Gold and Silver - What is the Right Allocation?
There are a lot of options for you when it comes to investing, like stocks and bonds. So why would you even consider investing in gold and silver? Are they not too risky, especially for beginners in the market, and even for those who are already been trading for quite some time? You can bring down the risk level as long as you have some ideas about proper asset allocation of gold and silver.
Studies have shown that an allocation of an investment portfolio in gold and silver can protect against inflation, hedge against a market downturn, and increase overall performance over the long run. But what is the right mix of gold and silver in your portfolio?
Portfolio experts advise having an asset allocation of anywhere between 5% and 25% in precious metals. Your asset allocation in gold and silver depends greatly on your individual needs, risk profile, and also to a large degree upon the other investments in your portfolio. For example if most of your assets are already real estate, oil trusts, or other commodities, your are also hedged against inflation and may not need a large portion of your money allocated towards gold or silver. On the other hand, if you have no commodities exposure, and hold long term bonds, it may be best to allocate a significant portion towards precious metals.
An allocation of precious metals may be broken down further into equities, such as gold and silver miners, and bullion. From there, advisors also suggest breaking down the allocation between gold and silver. Larger investors may also acquire platinum, but the core holdings should be gold and silver.
Now, is it better to invest in gold, or in silver? While both are good choices, a half and half plan is not necessarily the ideal way to build your portfolio. Gold is much less volatile than silver, investors looking for liquidity in something that they can sell quickly may want to start with gold. However, silver has more upside potential over the long run and will likely benefit more from an economic recovery due to its industrial uses. For this reason, investors looking for a return on capital may want to allocate a larger proportion towards silver.
During a bull market in precious metals, it is better to invest more on silver; perhaps ten percent of your portfolio is silver and five percent in gold. This is because silver rises faster as compared to gold.
One place to build a precious metals portfolio is Tradeplacer.com