Fedflationary fabrications

These press conferences with Federal Reserve Chairman Dr. Bernanke are becoming more amusing as of late:

“We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation [..]” – Ben. S Bernanke

Really?  On what basis of calculating inflation can one say with a straight face that over the last 30 years inflation has been tame or for that matter stable?  Let’s take a look at the 30 year chart of the CRB index, which represents a broad view of commodities as priced in US dollars.

30 year CRB index chart showing high inflation and unstable prices

30 year CRB index

Clearly inflation is not under control.  However, if the above chart is not enough to make one skeptical of the Fed’s latest remarks, then here’s a 30 year chart of the US dollar index, the currency in which prices are set for all the items we purchase in the United States (and other countries using or pegged to the US dollar).

30 year US dollar index chart

30 year US dollar index

What one can gather from these charts is that we’re experiencing 30 years of a weakening dollar and extremely volatile commodities prices.  Our central bank has the audacity to tell us that inflation is under control, and that in essence one should ignore gas prices, food prices and the prices of other goods which have surged over the last few decades (because all of the official inflation statistics ignore said prices).

I’ve always been a skeptic of the Fed’s press releases and these conferences, but this statement alone is enough to make one’s head spin when put in to context with the charts above.  I believe instead that the Fed is claiming inflation is under control as a guise to give them the flexibility to perform more easing should the European contagion come home, or if our own sovereign debt issues begin to become more apparent to bond investors.

Without quantitative easing, twisting (and lots of shouting) our markets would likely have higher Treasury yields, lower equity prices — but people would be enjoying lower prices on food and energy.  With the labor market stagnating and the overall economic picture still quite dismal, one has to wonder whether the Fed’s dual mandate of encouraging employment and maintaining stable prices has been abandoned in favor of recklessly supporting the financial system at large, and more specifically US Treasury bond and equity prices.  It certainly seems to be the case when objective data is reviewed from a macroeconomic perspective.

The great rotation from gold to silver

With gold pushing all time highs on a near daily basis, far exceeding its inflation adjusted highs from prior decades and pushing through several technical overbought indicators, many are concerned a correction is looming from this recent parabolic move, where gold went from the $1500s in July to $1890.00 today in late August.

Meanwhile, silver has underperformed after the correction from the peak at $50.00 — yet silver’s fundamentals look even more promising. While all the gold that’s ever been mined and produced is still above ground and available, silver is consumed as an industrial metal, and most of that usage is not recoverable or recyclable. Silver is also more difficult to extract. There are not many dedicated silver mines out there, instead silver tends to be a byproduct of other precious metals mining. In addition, silver is the best conductor of heat and electricity of any element, it is widely used for communications, medical devices, technology and military equipment.

The most interesting aspect of silver, however, is its historical ratio of 16:1. For this ratio to be achieved at today’s prices, silver would have to hit $115.00/oz, yet it currently trades around $43.50. This could be a ‘golden opportunity’ to rotate out of gold in to silver and see faster asset appreciation during a time when all signs point to the rally in gold moderating, but silver having tremendous upside potential. Many wise and experienced precious metals investors, including the legendary Eric Sprott, are moving cash out of gold and in to silver to position for this change in the precious metals dynamic.

Having just taken out major technical resistance at $41-42.00/oz, silver is poised to move towards the next major level at $50.00. Many predict silver could reach $75.00 by the end of this year on investment demand to hedge against inflation and monetary uncertainty in the US, Europe, Japan and beyond. I have long been an advocate of buying silver to protect one’s purchasing power and once again I am stating that for my investments I am continuing to buy silver funds as well as silver mining and channeling equities.

Remember that every investment strategy carries risk, and that one could potentially lose their principle if the investment strategy fails — but also remember that paper assets have a long history of catastrophic failure. Whatever path you choose, I wish you and yours the best of luck in the coming financial storm.

Precious metals outlook and thoughts

After the violent price swings we’ve seen in silver and the correction in gold, I remain cautiously optimistic that the precious metals sector is now in a bottoming phase and that the nominal paper values disconnect between physical values indicates that real world demand is still far beyond what virtual markets indicate. Spot prices of rounds, bars and bullion are about $4-6/oz for silver above the spot paper price. This disconnect is the result of price manipulation and will likely correct in the favor of physical prices being the real gauge of value. Silver prices of $50.00 an ounce and gold prices of $1800.00 an ounce by late summer are not out of the question.

Traditionally around central bank meetings metals prices and miners take a hit. This has been a trend for several years and can provide an excellent buying opportunity. In addition there are seasonal factors. Summers are often volatile and illiquid, leading to wider, but generally less significant movements in the gold and silver markets as well. Sometimes these swings bring about arbitraging or purchasing opportunities of precious metals stocks or physical metals funds.

Whispers of Q3, persistently high unemployment, asset disinflation, Bernanke’s legacy and Obama’s electoral hopes all speak to the notion of further easing coming later this year. It could indeed be a bumpy ride, but let’s not forget that metals are priced in dollars and the dollar has been and continues to be in a long term structural and fundamental decline due to loose monetary policy, debt-driven government spending and a tendency to inflate to cover tax shortfalls, rather than raise taxes or cut spending — and that trend does not appear to have an end in sight.

We may see volatility, we may see market dislocations, but at the end of the day I feel as though owning gold and silver positions one appropriately for the two possible scenarios we see moving forward. Either there will be a extremely sharp depression or a bout of severe stagflation. Either way a loss of confidence in the currency and financial system is inevitable and forthcoming. When that day comes the oldest form of money known to man should reign supreme once more as the remonetization of gold and silver continues, perhaps at an even faster pace.

We are essentially in a war right now. The war is between the 40 year failed experiment of fiat currency backed by nothing but faith and sound money that the world has run on for 5,000 years of human history. I feel as though investing in gold and silver puts one on the right side of that war. Indeed, many battles so far have been waged successfully and the Wall Street bankers, whose stocks have been underperforming the market and indicating a significant solvency problem, are on the run, retreating because they are aware that the ponzi scheme they rely on is in its initial stages of collapse.

Remember that no investment path is straightforward, many carry the risk of loss, some even greater than the principal investment involved. Please ensure whatever investment decisions you make suit your plan for retirement, savings and are appropriate for the level of risk you are comfortable undertaking — and always, always, always do your homework. Best of luck to everyone!

Disclosure: Long precious metals funds and miners.

Silver poised to make a move to $50 an ounce

Silver’s uptrend has been nothing short of astounding. The precious metal has more than doubled in the last year, and yet the rally seems to continue unabated, supported by fantastic fundamentals. The industrial and investment demand for silver products continues as the global above ground supply diminishes.

In the near term, based off of technical and fundamental (demand) analysis, it looks like the metal will regain the inflation adjusted Hunt Brothers’ high of about $50+ per ounce reached in the 1970s. Some go as far as to speculate that silver could return to a 17:1 traditional silver to gold ratio over time. With gold projected to hit about $2,000 an ounce, silver, assuming this ratio comes to fruition over the next several years, could hit about $120 per ounce.

Another factor that is contributing to demand of the white metal is inflation that seems to be percolating through global markets at an ever increasing pace. West Texas intermediate light sweet crude is now solidly above $100 per barrel, grain prices have made significant gains, other industrial metals such as copper, aluminum, nickel and zinc are staging impressive rallies and the value of the US dollar when compared against other currencies continues to diminish at a rapid rate.

Many savvy investors say the best way to own silver is through mining stocks or through buying physical bullion. There are a myriad of players in the silver mining industry, so if you are interested, do your homework on the fundamentals, their management and the chart of the company in question. If instead you’re interested in buying the metal itself, make sure you find a reputable dealer with prices that aren’t too much above the bid/ask spread.

If silver triples in price over the next several years, that could mean that today’s prices are a bargain the likes of which we rarely ever see in the investment world.

(Disclosure: The author’s family currently holds some positions in precious metals ETFs and silver mining companies. The author may buy positions in precious metals ETFs and silver mining companies.)

Hedging inflation in 2009 and beyond

What do silver, the Australian and Canadian dollars all have in common? They should all be considered good inflation hedges for US dollar-based portfolios.  The Australian and Canadian dollar are commodity-based currencies, because their underlying economies are very much driven by the production of commodities such as gold, silver, oil, industrial metals, etc.  Silver itself is very undervalued against ever increasing real world demand for coinage, jewelry, electrical and chemical applications.  The combination of all three assets, in two different asset classes (foreign currencies and commodities) provide strong upside as the dollar weakens and world growth comes more from emerging economies than industrial economies.

The Australian dollar ETF can be bought through symbol FXA, the Canadian dollar ETF through FXC and silver through SLV.  I currently have holdings in all three assets and advise those concerned about inflation to consider what their long term investment goals are and how these assets may or may not fit in to their strategy.

Gold to $1000?

The action in precious metals lately has been impressive.  Silver and gold caught a bid amidst the chaos in currency markets and bank balance sheets.  The nervousness has created an atmosphere of fleeing away from equity in to safer havens.  With gold seemingly gaining steam to make another move to the upside, is $1000 within sight?

Looking ahead

Markets tend to discount the here and now and focus on the future.  Has gold already priced in potential inflation or is that a variable being gauged on a daily basis?  Options traders in GLD would suggest that $95 to $100 (or around 950-1000/oz) are reasonable price targets given their usually large call positions.

Charting the course

Right now $1000 is resistance long term, without some extraordinary volatility to the upside.  Below is a three year, weekly chart of GLD.  The bollinger bands are a great indication of potential support and resistance in price moves.  We’re using a longer term chart to get a very broad view of GLD’s price action over the last 150 weeks.

GLD ETF

Past performance

While past performance is no indication of future gains, GLD has outperformed the SPY (S&P 500) consistently for quite some time.  Gold has always provided a safe haven for value.  For thousands of years, gold has had the same purchasing power.

It is wise for investors with long term objectives to have some precious metals exposure in any portfolio as a hedge against inflation, which is expected to increase significantly in time.  Traders may want to be more aggressive playing the rally depending on your strategy.