more on silver + gold

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    April 7, 2003:  Peer Through the Billowing Smoke of the Investing Battlefield.


    This truism is appropriate to today's fighting men and women AND today's investor.  The investment landscape is permeated with emotions today, as the gains and losses of war ebb and flow like a tide that pulls and tugs on the prices of both financial and tangible vessels.  This is the classic, emotionally charged environment where many investors make the biggest mistakes.  Getting caught up in the moment, so to speak, and following the crowd in making not-well-thought-out assumptions about the implications for the cessation of conflict in Iraq on the global economy and financial system can cost an investor precious dollars that are hard to come by.

    As the soon-to-be-dethroned Saddam would likely say, "This is the Mother of Knee-Jerk Rallies" with reference to the U.S. stock market.  The economy is weakening by the periodic report, credit quality is falling off a cliff, debt assumption is setting new records, earnings season (a.k.a. confession season) is upon us, geopolitical tension is still very high and possibly increasing, and a potential for trade wars exists on a par not seen since the 1930's.  This is not the waning days of an economic slowdown as in January, 1991.  This is not an undervalued stock market at 31.6 times earnings on the S&P 500.  This is not a rally coming from stockholder capitulation when sentiment was at 25% bulls / 75% bears and when mutual fund cash was at 10% plus.  There are no signs of economic recovery and the profits recovery that accompanies a surge in demand at the consumer and capital investment levels at the end of an economic slump.

    Quite the opposite.  The fundamentals are weakening day to day, with no turn in sight.  The U.S. stock market is forecasting a recovery that is not 6 months out, as has historically been its vision, but in reality at least 6 quarters out.  Don't get crushed financially in the surge forward by the investing crowd and think there is safety in numbers like suicide bombers in pickup trucks speeding at M1A tanks.

    The gold and silver markets have been pummeled like an Iraqi Division, with the erroneous assumption being made by most investors that the War Premium is the only reason for holding gold and silver bullion in today's world.  While the prior resistance level of $325 per ounce for gold was taken out this morning in War Euphoric Trading, technical analysis is seriously flawed in a commodity that can be and is manipulated by moneyed insiders, private and governmental.  This is not delusional thinking as the evidence supporting such claims of concerted efforts to cap and depress the price of gold have been well documented and continue to occur.  At a minimum, gold mining companies who have publicly stated that they intend to continue to reduce their million dollar gold hedge books are taking the opportunity in a bullion market currently lacking conviction to depress the price temporarily to exit these punitive and not-insignificant short positions.  These actions alone are a vote of confidence in the long-term trend of gold prices, that is, UP.  One can rest assured that the financial intermediaries such as J.P. Morgan-Chase and Goldman Sachs are assisting in the market controlling moves, getting out of their own previously losing positions in concert with the producers.

    If this were a free market in gold and silver bullion I would place some credence on technical / chart support and resistance levels, but the Big Boys can Wag the Dog to panic the weak hands out at depressed bullion price levels.  STAND YOUR GROUND.  Better still, step up to the plate and get on base.

    The increase in daily volatility in both gold and silver should be viewed as a sign of a healthy market that is in a constant battle between buyers and sellers; minimal daily price movement in any market is a sign of a lethargic market lacking interest and trading volumes .  A quick and cheapening price correction in a commodity that can retrace 65% plus of any intermediate up move in a heartbeat will present an entry point for new bullion investors and an accumulation point for existing bullion investors sooner rather than later.  Granted, many precious metals investors and want-to-be's are not convinced that either gold or silver are in a solid bull market.  They are waiting for some magic price level, say $350 on gold and $5.15 on silver before making a commitment.  Timing bullion, like timing the stock market, is an exercise in futility, especially when the holding periods are set at a 3- to 5-year investment horizon.  Like holding valuable property, it can take the last 30% span of time in the total period to actually make money.  Get out of the Internet Era Mindset of Instant Gratification because that bubble has burst, has cost investors trillions of dollars (not to mention lost opportunities), and can't be put back together again without a definitive recovery in corporate profits.  As a bargain hunter myself, $325 gold is a lot more appealing than $390 gold, and I see excellent client interest in silver (two to one over gold, in fact) at the sub-$4.50 level.

    Let's take a moment to look at some of the asset areas that our emotionally driven, almost panicked and yield-starved investor is plunking his or her hard-earned money into:


    Momma Mia, I can't believe what I am seeing, but these funds are increasingly popular with investors trying to beat Lilliputian Money Market Yields brushing 1% per annum.  Why anyone would buy a Bottom-of-the-Heap investment credit in the Most Overleveraged Corporate Environment (MOCE) ever with historically high default rates and steadily weakening credit quality across the entire spectrum of quality-graded American companies is beyond me.  What you likely gain in yield you are likely to lose in any sudden reversal of interest rates due to maturity risk (short to intermediate maturities included) and increasing rates of default within the Junk Bond portfolios due to withering business results.  Is it written in stone that interest rates will stay at 40-year lows indefinitely, cause even Sir Alan, manipulator par none, cannot control the 10-year plus maturity spectrum where the cheap money of today's mortgage addicts is pegged?!!!  Foreigners, not too happy with our conquering ways and maybe capable of more objective investment analysis, will have a very big voice in U.S. interest rates going forward based on their waning proclivity to purchase additional U.S. debt or to hold what they currently possess.  This potential disgorgement of U.S. debt is due to the very real prospects for further weakening of the U.S. Dollar in lock-step with overall U.S. creditworthiness, and an American economy still flat on its over-spending, instant-gratification back.


    Whoaaaa, Nellie, if you think Arthur Andersen accounting was bad, just try to decipher yet-to-be-developed countries' accounting standards, income statements, and balance sheets.  While you can make money on these puppies due to the translation benefit of a declining Dollar, many countries peg their currency to the Dollar to avoid massive capital flight at the first sign of trouble.  You want volatile?  Your 15% coupon rate can turn into a loss of principal as inflation soars past 30%, as oil workers go on strike, banks fail from hidden losses (Japan anyone?), the local despot changes the rules, or capital / investment controls are gradually introduced.  Just because a sector has been in the toilet for the last several years, and is performing better than a quicksand stock market does not mean that the fundamentals for investing in that sector are worthy of tossing money into it.  Desperate men do desperate things.  If developed countries are the major export markets for these less-developed or developing countries' goods, what are their economic prospects based on Europe, Asia, and America all experiencing recessionary GDP rates of growth.  Their major markets are falling away.  Another bad choice unless you have some of the 82nd's jump gear on every minute.  Once again, timing will get you financially blasted.

    o  BANK CD'S

    Jumping Jeepers, you mean that those nice people at Farmer's Mercantile Bank aren't sitting on AAA+ credits?!!!  The simplistic analysis here is that you are covered by the under-funded FDIC's deposit insurance up to $100,000 (Uncle Sam can just print more money if the FDIC goes bankrupt), but those juicy 3% yields are only available in the 5-year maturity offerings.  Now if inflation is truly running at 3.5% as many of us doubting analysts would state, you have a negative real rate of return today that is going to be locked in for the next 5 years.  Which means, when you feel more comfortable in moving money to a better performing asset with steadily improving fundamentals such as gold and silver, your money may not be available without a substantial early withdrawal penalty.  Treasury bills of one-year or less maturity would be a better bet, because as interest rates increase due to a correction in the debt market if nothing else, you have the ability to lock in higher rates at will within the 5-year period.  And it would be patriotic to purchase Treasuries to fund our bulging deficits cause some of the Unfriendly Countries out there may be selling their Treasury securities to make a statement.  Make sure any product that you buy at a bank is Federally Insured and don't keep more than $100,000 at any lending organization.  Most banks without exception have been out to lunch over the last 3 years in their lending standards and the proverbial doo-doo eventually hits the fan.


    Holy Toledo, you actually believe what those used-car-salespersons, a.k.a., realtors, are telling you about the price of homes and land just going higher and higher as far as the eye can see???!!!  If it weren't for super easy credit in both rates and lending standards, housing would have been in the dumpster about 2 years ago or even sooner.  The housing market generally leads the economy into recession along with the auto industry.  But since groundhogs and chipmunks are getting mortgage loans today, the Ponzi Scheme goes on.  I think a couple of major lenders violating Federal or State reserve requirements due to collapsing loan portfolios from a surge in mortgage defaults will halt the lending insanity before Sir Alan ever pulls back on the liquidity lever.  In most markets around the country, we have already seen the crest, not in prices, but in the time on market that it takes to unload this most illiquid of investments.  Eventually as supplies of unsold new and existing homes reach the 6-month level and beyond, prices begin to get softer and softer.  Sellers know that sitting in the market with an unsold house for months on end does nothing but compromise their ability to get top dollar.  Real estate sales results take months to show up in public data, but the evidence is building with each monthly report that the top is in.  Want to buy another overpriced asset that could take a year to sell?  Then follow the emotional herd and plunk money into real estate in 2003.  People lose money in real estate all the time, and the odds are against you in today's climate.


    So where are you going to invest today?  This presentation of the facts is not intended to suggest that you buy gold and silver merely because virtually every other traditional investment avenue has as many landmines as an Iraqi suburb.  It just points out the misinformation that investors are using to pile money into investments that will turn out to be much, much riskier than bullion itself.  I would assume, having been burned over the last three years like an Iraqi jet sitting on the runway that investors are more risk adverse today than in 2000.  But their current behavior tells me that once again they have fallen prey to the smoke of the battlefield of investing, where adrenaline and emotion run rampant.  Charts are great to ponder, but sometimes carefully formulated intuition, fortified with hard facts about this historic deterioration in the State of Affairs, is much better at having predictive power.  The world is hardly a kinder, gentler place for most of mankind.  The War on Terrorism has just begun, and we cannot keep the zealot out of our homeland any better than the Israeli's have for the last 30 years.

    IN CLOSING, GOD PROTECT THOSE WHO ARE IN HARM'S WAY, WHETHER THEY BE IN COMBAT FOR THE GOOD OF OTHERS OR UNDER THE RULE OF DESPOTS.  And I know damn well that us Americans want the French, Germans, and Russians to benefit from spilled Coalition and Iraqi blood in the rebuilding of that less-developed country.  Like hell.

    P.S.  My prediction of $75 per barrel oil prices has not panned out to date, but did I mention that that forecast was before December 31, 2003.  Hey, with these tap shoes on, I could run for Congress!!!  Furthermore, I herein nominate Senator Kerry to the office of President of Iraq, the only presidency that he may be tangentially qualified for.  Don't count out sabotage in post-conflict Iraq, and I think this form of terrorism could occur at any oil distribution or processing center in the world.

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    If you are considering investing in silver, you need to realize that the physical supply is much, much tighter than world prices, manipulated as they are, would suggest.  I converse with refiners and minters on a regular basis, and many products are getting currently delayed for shipment by one to two weeks due partially to the difficulty that producers are having in obtaining the raw material for their silver bullion products.  We told you on these pages that this day would come and it is here.  If you don't like 10% premiums over melt, wait until this summer when they are likely to go to 15% for rounds, 10 ounce bars, and 100 ounce bars, on an undelivered basis!  Delivery charges add about 2% additional premium to silver bullion products but if oil goes to $75 plus per barrel as I predict, even if temporarily cause shipping rates are upwardly sticky, you can end up paying an additional 7% to 10% premium for silver products by July of this year.  Not a slam-dunk prediction, but the odds favor significantly higher premiums over melt for silver bullion going forward.  Unless the unthinkable happens, of course, and the price manipulation ceases on the trading exchanges and more supply comes onto the market (if that supply exists!).  Maybe.  As soon as pigs fly.  Isn't it reassuring that our bloated government is doing such a fine job of looking out for the small investor?!!  BE PREPARED.
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