TradePlacer.com Blog - dollar tag

Silver Miners Are Much Cheaper Than Internet Stocks

Mon, 07 Mar 2011 17:05:00 GMT

With gold and silver prices surging higher, some investors are questioning whether mining companies are entering their own valuation bubble. Despite the fact that some silver miners are up three or even ten-fold from their 2008 lows they are much cheaper on a relative basis to popular darling Internet stocks.

Amazon.com currently sports a PE ratio of 69, with a 2012 expected PE ratio of 38 – which is quite high considering it has had negative earnings growth over last year. Another Internet favorite, Apple, has a PE of 17 and 2012 expected PE of 14 with earnings growth of 58 percent.

Silver mining companies on the other hand are seeing year-over-year revenue and earnings growth rates well north of 100 percent. With such rapid growth rates, one might expect their PE's to also be enormous, yet they are fairly low. Pan American Silver has a current PE of 18, and Silver Wheaton has a PE of 26. Projected estimates of silver miners are using lower prices, so if the price of silver rises further these companies will dramatically exceed estimates for next year and beyond.

Despite a large run-up, investors are discounting the earnings power of silver miners especially when compared to other sectors. There are still opportunities to accumulate positions on pullbacks of quality companies that are expanding their ounce production while precious metals prices appreciate further.

Is This Time Different for the Dollar?

Mon, 24 Jan 2011 18:39:00 GMT

The recent correction in precious metals and miners has led some investors to question whether they missed the ultimate top in the bull market for gold and silver. Conversely, this would lead to the question of whether the dollar and other fiat currencies have bottomed.

According to a study of 775 fiat currencies by DollarDaze.org, there is no historical precedence for a fiat currency that has succeeded in holding its value. 20 percent failed through hyperinflation, 21 percent were destroyed by war, 12 percent destroyed by independence, 24 percent were monetarily reformed, and 23 percent are still in circulation approaching one of the other outcomes.

The average life expectancy for a fiat currency is 27 years, with the shortest life span being one month. Founded in 1694, the British Pound Sterling is the oldest fiat currency in existence. At a ripe old age of 317 years it must be considered a highly successful fiat currency. However, success is relative. The British pound was defined as 12 ounces of silver, so it's worth less than 1/200 or 0.5 percent of its original value. In other words, the most successful long standing currency in existence has lost 99.5 percent of its value.

Given the undeniable track record of currencies, it is clear that on a long enough timeline the survival rate of all fiat currencies drops to zero. Fiat currency bulls will probably not argue with this fact, but the remaining argument to hold fiat cash is that the decline of fiat currencies is manageable to such an extent that the loss in purchasing power will have a minimal or unnoticeable impact. The purchasing power of the British Pound has eroded by a seemingly manageable 3 percent average annual rate.

The US Dollar was taken off of the gold standard in 1971 when it was 1/35th an ounce of gold. At 40 years old, it has already lost 97 percent of its value. Yet it has lasted longer than the average fiat currency so perhaps its performance should be labeled "better than expected". The US Dollar has fallen by an average 9 percent annually over this 40 year period when measured against gold. As such, investment advisers may want to readjust their inflation expectations when projecting dollar based investments. The S&P 500 appreciated at 7 percent over the same 40 year period - not even keeping pace with the decline in purchasing power of the dollar.

Gold and silver have outperformed the S&P 500 and held their purchasing power since the inception of the US dollar fiat currency. Despite this excellent track record, the question remains as to whether this trend will continue. While investors can be confident that over a lifetime, precious metals will hold their value most are wary of volatility in the markets that may take gold and silver years to recover from. The obvious example of this is the commodity bear market that began in 1980 with gold peaking at $800 and falling to $250. This leads to the only remaining argument against precious metals investing based on the premise that currency flaws can be prolonged into the future:

Yes, the dollar will continue to lose substantial purchasing power and is terribly flawed. However it will bounce for several years through austerity measures and in the process push precious metals prices lower for an interim period. After all, currencies have bounced as they stair step lower over the years.

In order for such an event to occur Federal budgets would have to be reduced by $1 trillion annually and Paul Volcker, or a new version of him, would have to raise nominal interest rates above inflation rates such that real interest rates are positive by multiple percentage points. In 1981, federal funds rates exceeded 19 percent. Since the US dollar and economy is much further along its terminal decline it would take even more extreme action to create a recovery for the dollar. Considering that Volcker has resigned from being an economic adviser to the White House, and that the federal funds rates ate flat lined at zero, the odds of any such action are astronomical. The financial industry and economy clearly could not sustain such an interest rate shock today. Any rise in interest rates would exponentially increase US debt carrying obligations pushing it even further into insolvency and have the reverse effect on the currency by devaluing it at an even faster pace. Europe is a living example of this.

The implication from the above is that the worst case scenario for gold and silver would be a 2-5 year correction followed by even higher prices. The fiat currency decline will become increasing pronounced until a resolution event occurs such as a replacement of the dollar or reinstatement of an asset backed currency.

Is this time different? We don't think so.

9 Market Predictions for 2011

Mon, 10 Jan 2011 19:26:00 GMT

The bear market in bonds will be confirmed globally. While interest rates likely bottomed in 2010, a significant rise in rates during 2011 will confirm a bear market trend for smart money investors. This bear market will continue until the global currency market is restructured.

Precious metals will surprise on the downside in the first half and surprise on the upside in the second half. Gold will top $1650 and silver will top $50. This will confirm the third phase of the bull market in precious metals.

A return to the energy sector in a big way. Energy companies have disappointed since 2009 due to a softening in US demand and the BP disaster. Oil will exceed $100 and capital will start flowing into energy investments as it did in 2007 and 2008. Natural gas and alternative energy will also rebound.

Global stock markets will correct in the first half but end higher for the year. June and July will be a pivot point for stock markets. Capital flows from bonds to equities will accelerate and investors will begin to view the stock market as an inflation hedge rather than value proposition. The S&P 500 will top 1400.

Increase in political rhetoric and class warfare leading up to 2012 elections in the US. Capitalists will continue to increase their wealth while laborers in developed nations will suffer from stagnate wages and rising expenses.

QE3 will be announced at the rate of at least $100 billion per month. This will continue indefinitely in order to finance trillion dollar deficits.

The dollar and US investments will outperform other currencies for the first half of the year lead by a fall in the Euro. However, by the fourth quarter, the dollar will begin a slide to new lows as it becomes evident that the Federal government must bail out state and local governments.

A retirement trend will begin to become mainstream in baby boomers looking to reduce costs. Instead of taking on a second job to live in retirement, some will look to retire in cheaper counties. Mexico, Costa Rica, and Panama will be the primary beneficiaries.

Proposed tax overhaul including legislation for a VAT tax along with an extension in the reduction of social security taxes. There will also be additional capital controls and asset reporting legislation.