Silver Investing; Is it too Late at $41.00?

In September 2010 I published an article in another venue entitled “Silver Investing—Is It Too Late at $20.”  The conclusion was, no.  A mere month later, I published another article with a similar title when the price of silver closed just shy of $25 an ounce.  The article closed with the same conclusion; it’s not too late. In late January of 2011, when the price of silver had pulled back about 11%, I wrote in that venue that it was a great buying opportunity.  I took advantage of the opportunity.  I hope you did too.

I stopped writing Silver Investing articles for the other venue that include price and specifics about the lawsuits claiming manipulation of the silver market because I had trouble getting them published.  The site management of that venue does not like specific price and defendant information, but instead prefer general information that is still “ . . . just as relevant ten years from now.”

So in this venue, my own blog, I ask if it’s too late to get into silver investing with the price of silver at $41 per troy ounce.  The answer is a resounding NO.

You can see from the chart below that $20 and $25 were great times to get in.  The pullback in January 2011 where price dropped back below $27 was a great time to get in.  $35 was a great time to get in.  Looking back two years from now, it will obvious that $41 is a great time to get in.

Silver Investing Chart

Will the price of silver pull back from its current level?  I do not know.  However, those that awaited a pullback when silver broke through the $25 mark haven’t gotten that opportunity yet.  The price has risen 60% in the six months since it surpassed $25.

Why is it not too late at $41?  Several reasons, but in general, the really bad economic times haven’t yet started.  The U.S. government claims inflation in the U.S. is about 2%.  A lot of people still believe that.  It’s really about 6% according to the NIA (National Inflation Association).  The $14 trillion debt that the U.S. has amassed, and the fact that the Federal Reserve has had to purchase about 70% of the Treasuries sold at recent auctions to keep the yields from shooting up, will make the coming economic depression worse than it would have otherwise been.

Yes, I said depression.  What will be called a double dip recession when things turn down again, will really be just the second leg down in the early stages of a multi-year economic depression.

When the official U.S. inflation level gets into the high single digits, say around 8%, the U.S. equity markets will have a tough time.  Many will know by then that U.S. treasuries are no longer safe.  Those who do will turn to precious metals; gold and silver.  And it will not take much of the trillions of dollars currently invested in the stock and bond markets to move the relatively tiny gold and silver markets a long way.

From the chart above you can see that silver closed at $40.93 on 4/8/11.  Gold closed at $1,475. The gold to silver price ratio stands at 36:1.  That ratio was 68 to one a year and a half ago.  I believe silver is a much better investment than gold for two primary reasons;

  1. Over half of the silver mined each year is consumed in industrial applications—there are real, practical uses for silver.  When investors start hoarding silver, supply for industrial uses will be tight—and price will soar.
  2. The gold to silver price ratio fluctuated between 15:1 and 20:1 for about 200 years when both were used as money.  The average ratio was about 17:1, the same ratio that geologists say silver and gold exist in the earth’s crust.  That is, there is 17 times more silver than gold.

For a ratio of 17:1, silver would need to be $86.75 per ounce today.  When the price of gold hits $1,700 an ounce, a 17:1 ration would put the price of silver at $100 an ounce. And when it hits $2,500, $147 an ounce.

Personally, I think the ratio will go lower than 17:1.  So when is it too late to invest in silver? I say, when the gold to silver ratio gets to 12:1.

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Long Term Silver Investing in Your Self Directed IRA

I do some short term silver investing, but I am phasing it out.  I have made as much or more on my long term silver investments over the last few months as I have on my short term investments. My short term investing is in the form of options—I like the leverage.  But because the price of silver has been so volatile, the premiums on options are very, very high.  When I happen to buy call options a short time before the price of silver pulls back, I stand to lose a considerable portion of my investment.  That is because, even though I am confident that the price of silver will come roaring back, during the time it takes to do so, the premium I paid deteriorates.  Even if the price of the leveraged silver ETF or silver mining stock comes back to the price it was when I bought the options, the value of my options is less that I paid due to the time deterioration of the premium I paid.

All of my silver investing has not been short term.  In late 2010 I owned some 2012 LEAPS, and in early 2011, I rolled to 2013 LEAPS. Of course, as expected, since the premiums on options with six-month expiration are very, very high, the premium on LEAPS is very, very, very high.  I noticed that the profit on my LEAPS was as good as my shorter term options, and I have no qualms about holding them through a correction in the price of silver.  In previous posts I have written about the reasons the price of silver will experience a multi-year bull market, and why I believe silver will vastly outperform gold.   Nothing has changed.

silver investing chart

I think the easiest way to invest in silver is by buying an ETF (Electronic Traded Fund).  I like SLV.  It has been around awhile and has plenty of liquidity.  The target share price of SLV is the spot price of silver minus operating costs. I do not own shares of SLV, because as previously mentioned, I like the leverage of options. An advantage to trading options on SLV is that LEAPS are available. And while the premiums are high, the deep-in-the-money strike price LEAPS have considerably less premium.  For example, at time of writing, the share price of SLV is $39.86.  The ASK on a 2013 call with a strike of $25 is $16.50 per share = $1,650 option cost because an option represents 100 shares.  The difference between the $25 strike and the share price is $14.86 ($39.86 – $25). So the premium is $1.64 per share.  But to control 100 shares until the third Friday in January 2013, the cost per share is $16.50 instead of $39.86.  The leverage through the LEAP is 2.4 to 1, or, stated another way, 240%. Since the $25 strike price is so deep-in-the-money, and the resulting premium is so small, the value of the LEAP option will move pretty much the same as the share value of SLV.  That is, if the price of SLV moves up $1over a week, expect the value of the 2013 25C to move up about $0.95.

If you like leverage but do not have option approval in your account, there are two other options.  One is silver mining stocks. Producing mines have a relative stable cost of extraction.  So when the price of silver goes up, profit margins also go up.  If you decide to buy stocks, I recommend you stick to those with proven reserves of silver, and not gamble on the exploration stocks.  The price of silver over the next decade is going to explode upward.  Why gamble on exploration companies?

Another means of gaining leverage on the price of silver without buying options or mining stocks is the leveraged silver ETF.  The leveraged silver ETF that has been around the longest is AGQ, Proshares Ultrasilver.  It is designed to move, on a daily basis, at 200% of the price of silver. If the price of silver gains 1% today, AGQ will gain very close to 2%.  Of course, if the price of silver drops 4% tomorrow, the value of AGQ plummets about 8%.  It’s a wild ride.  But since AGQ is an ETF, there is no expiration as there is with options.

The risk with leveraged ETFs is in sideways markets.  They tend to have some slippage.  AGQ does not own silver bullion as SLV does.  It uses options and other instruments to attempt to return 200% of the price move in silver on a daily basis.  If silver isn’t moving much, slippage can occur.  While I have some concern about slippage on a leveraged gold ETF, I’m not worried about slippage on leveraged silver ETF.  Look at the 5-year chart again.  We’re just getting started on this long term silver investing trend.

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Silver Investing—How to Buy Silver Bullion—Part 4

This is a continuation of Part 3, Where to Buy Silver Bullion.  I am going to discuss fulfilling some, or part of your silver investing needs via eBay. Although no longer my personal favorite, there was a period of time during which I made multiple small purchases per month.  And I still peruse the offerings on my favorite form of silver bullion, 90% U.S. silver bullion coins, about once week.  If you only have a few dollars to invest, and would rather invest it as you get it instead of saving up for weeks or months, and possibly getting several ounces less due to price increases, eBay may be the buying venue for you.

The adage “Buyer Beware” has a lot of relevance when buying silver bullion on eBay.   But don’t let that scare you.  There only a few things you need to keep in mind to avoid a bad buy.

I’ve never gotten what I would call a “steal” buying silver bullion off of eBay.  But I have made some very good buys, and many good buys. The main advantage for me was the opportunity to buy very small quantities at a low premium.  First, the general warnings that I apply to any purchase:

  1. Bid only on items offered by sellers with a very high feedback score; I suggest 99.5% or better as a guideline.
  2. Check the shipping charge before you bid.  I have stopped bidding on items with a high shipping charge because I never win.  There seems to always be at least one other buyer who doesn’t figure the high shipping cost into his/her bid.
  3. U.S. buyers, buy only from U.S. sellers.
  4. If buying from an in-state seller, determine if you will be charged sales tax, and bid accordingly.

I have only purchased silver bars, silver rounds, and 90% silver coins off of eBay.  When bidding on bars and rounds, be certain that the item/s are:

  1. .999 pure silver
  2. Solid silver, not plated
  3. Troy ounces, not ounces

If the listing is not perfectly clear, if you have any doubt, do not bid.  There are hundreds of other items for you to consider.

When bidding on 90% silver coins, be certain that:

  1. The coins are 90%, not 40% silver.
  2. The coins are all 90%, not a mix of 90% and 40%.
  3. If the listing mentions the weight of the silver, be it is Troy ounces, not ounces.
  4. If the listing mentions face value, be sure nickels are not included in the mix.

$1.40 face value of pre-1965 dimes, and/or quarters, and/or halves contain one troy ounce of silver.

Many listings claim something like “1 ounce of 90% silver coins,” or “just over an ounce of pre-1965 silver coins.” An imperial ounce of 90% silver coins is only $1.10 to $1.15 face value, which contains only about 0.825 troy ounces of silver.  One day I bid on about 15 one ounce listings and didn’t win even one.  Why?  Because at least one other bidder thought he/she was bidding on a troy ounce of silver.  If silver is $35 an ounce, the difference in value between 1.0 troy ounce and 0.825 troy ounces is $6.10.  I no longer waste my time bidding on 90% silver coin listings that do not state the troy ounce and/or face value.

Silver dollars; they contain more silver than a dollar face value of dimes, quarters, or halves.  Silver dollars were minted with .7735 troy ounces of silver instead of 0.725 troy ounces.  At $35 per ounce, a silver dollar contains about an additional $1.75 of silver more than $1 face of dimes, quarters, and halves.

How to determine what to bid?  I check the selling price of $100 face from a dealer and use that as my guide.  For example; if I can get $2.45 face for a little more than the cost per face dollar of $100 face from a dealer, I figure I have done well.  Since I know Northwest Territory Mint is competitive, I check the website before I bid.  The price stated is the “delivered to your door price.”

As an example, if the delivered price for $100 face of 90% silver coins at NWT Mint is $2,520 (which is $25.2 per $1 face value), and I am bidding on $3.20 face value with a $2.25 shipping charge, I would get my bid price by:

Multiplying $3.20 by $25.2 and subtracting $2.25.  The result is $78.39.  I would bid $79, or maybe

$80.  If the $3.20 face value contained a silver dollar, I would bump my bid by $2.

The nice thing about silver investing in this manner is, you can’t get hurt too badly, and, the way the price of silver has been moving, even if you pay too much, it is likely to look like a very good buy a year from now anyway.

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Silver Investing—How to Buy Silver Bullion; Part 3

In Part 1 defined what items I consider to be silver bullion (in the United States). Part 2 discussed the pros and cons of each type. Part 3 explains where to buy. I will make some general comments before getting to specifics and my current silver investing favorite.

First, there are coin shops and gold and silver dealers all over the country. I think the number is growing monthly, and will probably continue to do so for a few years. When I started buying, I visited a couple in my area; just to acclimate myself, compare premiums to on-line sources, and establish a local contact for future buying and selling needs. The coin shop from which I bought some silver had been in business for only 5 months. When I went in to pick up the 90% silver coins from this small shop, the owner/operator checked the price of 90% silver coins at the largest coin dealer in California and gave me the same price. The price was also the same as I would have paid had I ordered from an out of state mint from which I had previously purchased a few silver bullion bars.

Something to consider when buying from local dealers—SALES TAX. In California, if the transaction is under $1,500, sales tax is charged. The rate in my area is 9.75%. That’s double the premium on the bullion or 90% silver coins! California sales tax can put quite a dent in one’s silver investing. Ask about sales tax before you buy. You also need to pay attention to terms. To get the lowest margin or premium, you will have to pay cash, or for very large purchases, probably pay via wire transfer. With my budget, I don’t have this problem, but I noticed the terms on the website before visiting the shop.

There are a number of private mints in the United States that produce .999 pure silver bullion bars with various designs. I have bought a few bars from Northwest Territory Mint (nwtmint.com) in southern Washington. NWT Mint was recommended to me by a good friend who lives in El Paso, TX. To get the best margin at NWT Mint, one must place a minimum order of 50 troy ounces of bars or rounds, or $100 face of 90% silver coins. Since there is 71.5 troy ounces of silver in the $100 face value of 90% silver coins, the total dollar value of the bars is less. Orders are taken by phone. Then mail your check. When payment is received, the order is scheduled for production.

The only silver bullion I have purchased from NWT Mint is bars. I waited 6 – 8 weeks for my order to be shipped (and shipping & handling is included in the price for a 50 ounce minimum order). This seemed reasonable, since they had to buy silver and produce the particular style I bought. However, I found out that if I bought coins that were minted by some government decades ago, I also had to wait weeks. I didn’t like the idea of the mint working off of my money.

There are plenty of reputable commercial mints besides NWT Mint in the United States to fulfill your silver investing needs. I investigated, via the internet, several. I would not hesitate to do business with any that have been in business for more than a couple of years. Silver bullion is silver bullion. If you choose to fulfill your silver bullion investing needs in this manner, go for lowest total delivered cost.

I have purchased both silver bullion and 90% silver coins off of eBay in small quantities at low premiums. But there are pitfalls to avoid. Purchasing silver bullion off of eBay will be the subject of Part 4.

My current favorite source of silver bullion is bulliondirect.com. Essentially, it is a clearing house that brings buyers and sellers together. For any particular item, you see the bid and ask prices of the various members interested in buying or selling that item. I have been able to buy for less than the value of the silver content a couple of times. As a buyer, I pay a 1% fee on top of the purchase price. Buyers do not need to take delivery immediately upon purchase. I accumulated small quantity purchased for about three months before taking delivery. There was no storage charge, and the shipping and handling charges were very, very, reasonable; well under 1% of the value.

One can buy from the store. I did not compare prices. For my silver investing money, bidding through the exchange function is the way to go.

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Silver Investing—How to Buy Silver Bullion—Part Two

In Part One I discussed what I consider silver bullion to be in the United States. Part Two takes a look at the advantages and disadvantages of each type of silver bullion coin and silver bullion bars; that is, what to buy and why. For consideration in your silver investing, here they are– in reverse order of my preference and recommendation.

Non-U.S. coins:  I do not recommend that U.S. citizens living in the U.S. buy non-U.S. coins. Unless you have studied coins of the world, you will not know what you are buying. And when you want to sell them, buyers may be very limited, because they will not know what you are selling. And you will want to sell your silver at some point. We’re talking silver investing, not coin collecting.

U.S. coins, 40% silver: If an outstanding deal on some 40% silver U.S. coins fell into my hands, I guess I would take it. But I have not even considered buying 40% silver coins for three reasons:

  1. Too much storage space

  2. Too confusing to calculate the value

  3. Not nearly as common as other forms of silver bullion available in the United States

Silver Eagles

Silver Eagles are minted by the United States government.  They are .999 pure, and they have been very popular the last few months. I don’t buy them because the premium is higher than other forms of silver bullion.  By premium, I mean the cost of the coin above the value of the silver content. Remember, supply/demand drives price. The high demand for silver eagles has pushed the premium up. When the price of silver is higher than you can at this time even imagine, I think the premium will disappear. If you buy silver bullion at a higher premium, you get less silver.

Rounds

Silver rounds are coin-shaped silver bars. Silver Eagles could be called rounds, because they are not currency. The most common size is 1 ounce—that’s one troy ounce—of .999 pure silver. I have also seen 5-ounce and ten=ounce rounds. They are more like medallions than coins. Rounds are struck with some type of design. Often, one side will have the striking mint’s logo.

After buying a few 1-ounce bars (mentioned below), I bought a few rounds. Both came encased in plastic; 10 to a sheet. I leave them encased in the plastic for protection. My only real reason for preferring bars over rounds is that the bars take less space. Both are a troy ounce each of .999 pure silver. The premium is the same, but less than that of Silver Eagles.

SilverBullion Bars

Silver bullion bars are struck by a number of commercial mints around the world. I have seen bars weighing from a tenth of an ounce all the way up to 10,000 ounces. Silver bullion bars, like rounds, have one of the lowest premiums of any type of silver bullion. When I first started buying silver bullion, I bought bars because they had the least premium at the low quantity that I could afford to buy.

Pre-1965 U.S. silver coins

These are dimes, quarters, half dollars, and dollar coins minted by the United States treasury in the years 1964 and earlier. These coins are 90% silver and 10% copper. The dimes, quarters, and half dollars were minted with .725 troy ounces of silver per $1 face value. That is; four quarters contained 0.725 troy ounces of silver. Ten dimes or two half dollars also contained 0.725 ounces of silver when minted. Circulated coins are considered to have only 0.715 ounces of silver per $1 face because of wear. I have seen dealers use as little as 0.712 ounces and as high as 0.72 ounces. I have noticed that the later the mint date of the coin, the less wear. This is not surprising since the United States experienced double-digit inflation in the 1970s. 90% silver coins were pulled out of circulation by those “in the know.” Sadly, I wasn’t one of those people.

The silver dollars were minted with 0.7735 troy ounces of silver. With silver at $30 per troy ounce, the silver in a silver dollar is worth about $1.75 more than the silver in $1 face value of 90% silver dimes, quarters, and halves.  $1.40 face value of dimes, quarters, and halves contains one troy ounce of silver.

90% silver coins have become my favorite method of silver investing and form of silver bullion. They are readily available for purchase in small quantity. The U.S. government guarantees the silver content of each and every coin. They are legal tender, and therefore, are much less likely to be confiscated should the economic chaos some predict will come to pass in a few years or less.

Part three next; Where to Buy.

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Silver Investing—How to Buy Silver Bullion—Part One

There are many ways to invest in silver. The most conservative is to buy silver bullion; that is, to possess or to have under your control, some form of physical silver. Part one of How to Buy Silver Bullion defines what I consider to be silver bullion. I am writing from the perspective of a citizen of the United States who has never lived outside of the country, and does not anticipate doing so.

Silver bullion is measured, and bought and sold, in troy ounces. A troy ounce equals 31.1 grams. An imperial, or standard ounce, equals 28.35 grams. Therefore, there are only 14.585 troy ounces to a pound, not 16, as is the case with imperial or standard ounces. Gold is also measured in troy ounces.

Here is a list of silver bullion items readily available to the silver investing community in the United States.

Bars; most commonly in denominations of:

1 ounce

5 ounces

10 ounces

100 ounces

1,000 ounces

Rounds; most commonly in denominations of:

1 ounce

5 ounces

Rounds are a lot like silver coins, except they are not currency. They are not currency any more than bars are. They are minted by various commercial mints. There are numerous designs.

Silver Eagles; Silver Eagles are minted by the United States Mint.

Pre-1965 U.S. coins; dimes, quarters, half dollars, and dollar coins.

These coins are 90% silver. The dimes, quarters, and half dollars were minted with .725 troy ounces of silver per $1 face value. That is; four quarters contained 0.725 troy ounces of silver. Ten dimes or two half dollars also contained 0.725 ounces of silver when minted. Circulated coins are considered to have only 0.715 ounces of silver per $1 face because of wear. I have seen dealers use as little as 0.712 ounces and as high as 0.72 ounces. I have noticed that the later the mint date of the coin, the less wear. This is not surprising since the United States experienced double-digit inflation in the 1970s. 90% silver coins were pulled out of circulation by those “in the know.” Sadly, I wasn’t one of those people.

The silver dollars were minted with 0.7735 troy ounces of silver. If silver is $30/ounce, the silver in a silver dollar is worth about $1.75 more than the silver in $1 face value of 90% silver dimes, quarters, and halves.

U.S. coins; 40% silver

Non-U.S. coins

What type of silver do I not consider to be silver bullion?

Silverware, silver candlesticks or other wares. I do not consider these items bullion because they have value beyond the silver content. I do not deal in such items because I do not have the ability to assay purity and determine weight if the silver content. Also, there is a cost to melt the item to recover the silver.

Numismatic silver coins. These are coins that have value over and above the value of their silver content. This value is usually because of scarcity. This type of coin is often called a collector coin. When high inflation hits the U.S., the value of these coins may drop due to decreased demand. At best, the numismatic premium will remain about the same. Since the value of the silver content of a numismatic coin is a smaller percent of total value than that of a bullion coin, the value of the numismatic coin rises much less than a bullion coin when the price of silver rises.

Proof and newly minted so-called collector coins. Silver content is usually slight, and not nearly enough to justify the cost.

I own three of the six forms of silver bullion I list above. Next time I’ll discuss the pros and cons of each of the six, the one that has become my favorite way to buy silver bullion, and why.

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The Gold to Silver Price Ratio and JP Morgan

Silver investing has been very difficult, and costly, the last two decades. For about 200 years, the ratio of the price of gold to the price of silver fluctuated in a narrow range between 15:1 and 20:1. This made sense, since geologists claim that there is about 17 times as much silver as gold in the earth’s crust.

Over the last two decades, if anything, the ratio should have decreased because of the increasing demand for silver in industrial applications. Industry consumes over 50% of the 700 million ounces of silver mined each year. A tiny percent of the gold mined each year is consumed by industrial applications. Yet, the ratio has ranged from as high as 100:1 to as low as 48:1 the last couple of decades.

In the last half of 2010, thanks to the tireless efforts of Ted Butler and others, it became apparent to the silver investing community that the price of silver has been manipulated lower for over two decades. In the last four months of 2010 there have been three developments with the biggest alleged manipulator, JP Morgan.

  1. In the first week of September JP Morgan announced that it would be closing its twenty commodity trading desks.
  2. In November, two lawsuits were brought against JP Morgan and HSBC in Manhattan Federal Court charging price manipulation.
  3. In mid-December, according to the Financial Times in London, “JPMorgan has quietly reduced a large position in the US silver futures market which had been at the centre of a controversy about its impact on global prices for the precious metal.” JP Morgan said in a statement, “It is absolutely incorrect to say or imply that the Nymex, CFTC or any other exchange or regulator has instructed or asked us to reduce our position.”

From early September through the end of 2010 the price of silver increased 56%, and there have been no signs of manipulation.  The chart below, of year-end price ratios, indicates that the current price ratio is the lowest since the early 1980s.

Ratio Chart The Gold to Silver Price Ratio and JP Morgan

The price of silver reached a new 30-year high the last day of 2010, and the year-end ratio is the lowest ever. In a non-manipulative market, I expect the ratio to continue decrease until it reaches at least the long-time norm of about 17:1. There are fundamental factors that warrant an even lower ratio.

Throughout world history there have been 46 billion ounces of silver produced, and only 5 billion ounces of gold. Worldwide inventories of silver have declined 90% since 1940; from 10 billion ounces to approximately 1 billion ounces today.

As good as I think the case for gold is this decade; I believe the case for silver is three times as good.

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Silver Investing Storm Element #4; U.S. Government Debt

The last element of the silver investing storm to kick in will be the U.S. government debt crisis.  It will add its considerable power to the tempest a few months after inflation in the U.S., silver storm element #2, takes off.  In sluggish economies such as the U.S. economy at this time, monetary inflation kicks in 24 to 32 months after a significant increase in the money supply.  That first big increase occurred in mid-2009.  So mid-2012 is a forecast of when storm element #4 might kick in.  It all depends on how good of a tightrope walker Fed chairman Bernanke is.

In analyzing precious metals, I am always mindful of the fact that the U.S. is a relatively small portion of the market in precious metals, even though the U.S. economy is four times that of the world’s second largest economy of China.  But the U.S. dollar is the world’s reserve currency, and when inflation in the U.S. results in a U.S. debt crisis, the safest place to have your money will be in precious metals.

Inflation in the U.S. is a foregone conclusion, and the central banks of the world know it.  Wall Street knows it—everybody who is paying attention knows it. Inflation will destroy the U.S. treasuries market.   Here’s what will happen.

First, institutions and individuals buy U.S. treasuries because, for decades, they have provided a fair and SAFE return on the capital invested.  For the past two years, yields on U.S. treasury bonds have been at historic lows, diminishing the return.  For example, 10-year bonds have been selling at a discount to the face value of the bonds to yield about a 2.50 per year.  That means if average inflation is 2% per year, the buyer of 10-year bonds makes only 1/2 of 1% per year on the investment.

When investors see the average annual inflation in the U.S. edging jumping up to 4% or 5%, they will demand at least double the rate of return.  Monetary inflation in the U.S. cannot be avoided.  As inflation rises, risk rises.  The government will have to let the yield increase to attract buyers to take the higher risk.

When the U.S. government has to pay double the rate to get bids at auction, that means the discount from face value is deeper.  That is, it receives a lower percentage of the face value from those who buy the bonds.  That means it gets less money today as a percent of the future obligations it is making.  That means it must increase future obligations so that it sells enough bonds today to pay off the bonds that are due to be paid off tomorrow.  The further in debt the government goes, the higher the risk.  The higher the risk, the bigger the discount, the bigger the discount, the more bonds the government sells, the more bonds sold the higher the debt, the higher the debt the greater the risk . . .

Speaking of risk, about three months ago the debt rating of the country of Greece was lowered to junk status.  Greece had to pay credit card interest rates to entice buyers to buy its bonds.  Some of the key debt ratios of Greece are not that different from those of the United States.

These are those key ratios according to Daryl Jones of Hedgeye.com.

Deficit as % of GDP

  • US: 10.4%
  • Greece: 13.6%

Debt as % of GDP

  • US: 86.5% (including GSE* debt: 121.6%)
  • Greece: 115.1%

* Government Sponsored Entities

Debt as % of revenue

  • US: 358.1%
  • Greece: 312.2%

Greece had the European Common Market to come to bail it out.  The U.S. has no one to come to its rescue.  Those who could possibly help, China and Russia, won’t.

By the time this storm element kicks in, I believe ‘gold mania’ will have already set in.  I also believe silver investing storm elements #s 1 and 2 will have propelled silver prices upward faster than that of gold.

The price of gold spiked up about $60 in two days last week in response to Fed Chairman Bernanke’s announcement of QE2 (printing an additional $60 billion).  On a percentage basis, silver moved even higher, to a new 30-year high of over $26 an ounce.  More importantly, the gold to silver price ratio (my silver investing storm element #1) dropped from 56:1 down to 54:1 in those two days.

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Silver Investing Opportunity

Last week the price of precious metals pulled back. Some say this is the beginning of a significant correction. Others say it is just a minor blip. The trigger event was the central bank of China’s quarter point increase in interest rates. That caused the Chinese Yuan to dip in value, the U.S. dollar’s value to spike up, and the price of precious metals to dip. The next two days the dollar was down a bit and precious metals prices up a bit.

gold investing chart silver investing chart

Silver’s recent rally took off later than gold’s.  But notice the steeper incline in price. In the last two months gold gained about 15% while silver gained about 30%.

Some have been predicting a severe correction in the price of precious metals; even stating that gold is in a bubble. I don’t believe the “bubble” idea for a minute. Both gold and silver price were in bubble territory in 1980, with gold topping out at $873 and silver a few cents short of $50.  When you take inflation into account, the price of gold has a long ways to go to reach that same bubble level.  And silver has three times as far to go.

Having said that, do I believe precious metals are in for a big correction?  I have no idea.  But I do believe that price levels of gold and silver will form much bigger bubbles than they did in 1980.

The price bubbles were formed in the late 1970s, primarily, because of double-digit inflation in the United States. The United States will again experience double-digit inflation.  I believe this factor alone will result in larger price bubbles because there is considerably more wealth in the world in 2010 than there was in 1980.  Gold inventory has not increased as much as wealth.  And with the advent of gold ETF’s, it is much easier to buy gold than it was in 1980.  The same hold true for silver, except in the case of supply.  The supply of silver has actually decreased since 1980—and decreased significantly.

There is more; much more.  This time around we are not talking about just another decade of inflation.  Not long after double-digit inflation hits the United States, the world will lose confidence in the dollar due to the huge debt that simply cannot be repaid.  The dollar will no longer be safe. There will be a stampede into gold, and then silver.  When gold goes to thousands of dollars per ounce, people will turn to silver.

Everybody will know then what you know now; that the historic price ratio of gold to silver is about 17:1.  That will be the number one reason to buy silver instead of gold. Right now that ratio is about 59:1.

And in the case of silver investing, China is going to help—it already is.  China has been one of the largest exporters of silver.  But they have recently clamped down.  Silver exports the first eight months of 2010 are down by 60% from 2009.  The Chinese government is also urging its citizens to buy gold and silver bullion—to hoard it.  Silver is a small but crucial component of hundreds of industrial applications.  The Chinese know this, as do all governments.  But the Chinese have taken action.

Even though I am a short-term trader by nature, my silver investing has a long term outlook.  I am not smart enough to call the short term price swings.  I don’t think anyone can—at least not consistently.

I bought silver on the way up, and I’ll buy it on the way down.  If one invests in silver consistently throughout the year, average cost will be close to the average price of silver for the year.  I am not absolutely sure that the average price of silver will rise every year.  But I am confident that it will be much higher in five years, and probably at bubble price levels in 10 years.

I believe the laws of supply and demand, supercharged by fear and greed, will result in price bubbles for all precious metals.  I like silver investing because, at the gold to silver price ratio of 59:1, it has three times the growth potential as gold along the way.

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The Perfect Silver Investing Storm-Element Three (part 2)

The technical analysts (chart readers) are calling for a pullback in the price of gold. But it hasn’t happened yet. I believe demand for gold and silver investing by the “Big Money,” also called ”Smart Money” has kept price moving upwards at an increasing rate despite talk of deflation and analyst predictions. As one example, those who follow such things claim that billionaire George Soros has pulled $60 billion out of equities, leaving a mere $5 billion, and has quietly been buying gold.

I believe Wall Street is also beginning to position for inflation. In the U.S. stock markets, volume is off 30% from last year. Volume on the NYSE was 33% lower in September than in August. But remember, the gold market is tiny compared to the stock market, and the silver market is tiny compared to the gold market. Wall Street must move slowly and quietly to avoid causing price spikes. At current prices, the gold above ground is estimated to be worth somewhere between $3.5 trillion and $4 trillion. The value of the silver aboveground is only about $20 billion, which is a mere $0.02 trillion, or if you prefer fractions, 1/185 of the value of the above-ground gold. The retirement accounts of Americans alone are worth about $14 trillion. The super rich and Wall Street are going to have to move very quietly and slowly to reposition their wealth to survive inflation.

What does that mean for me, “Small Money,” and presumably you? There’s no reason Small Money cannot also be Smart Money.

I believe the compounding affects of; 1) the end of silver price manipulation (storm element 1 and 2) the extreme supply/demand situation (storm element 2), will power the gold-to-silver price ratio back to a historical ratio during the coming years of monetary inflation (storm element 3). The gold to silver price ratio may eventually find a new low well below 17:1 due to the severe shortage of silver relative to industrial demand.  Now could be the silver investing opportunity of a lifetime.

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