Commodities Have Become A Fear Trade

Buffett: If the world falls apart, am I going to take a few gold pieces to the guys with food and resources and trade them for it.  I almost forgot, in a post apocalyptic world, nothing is more important than shiny metals with no practical use!

 

Fear mongering is reaching epic proportions. It makes me sick.  I guess it’s just too easy to prey on the fear of the unknown for some people to resist. They’ll go on and on about the downfalls, shortcomings, and the eventual demise of civilization as we know it.  They can cite scary statistics with the best of them.

They’ll point to the Fed’s 0% interest rates and quantitative easing or the lousy housing market.  They’ll even cite the bailouts and stimulus as evidence the government is out to replace private business. But they don’t stop there… They can scare you with the high unemployment rate and rising commodity prices.  And don’t forget the biggie… the destruction of the US Dollar!

They twist and turn the information until it fits their view.  Then they show you just how the end will come.  And I’ve got to give it to them… they have a convincing argument.

Here’s the kicker… What am I supposed to do?  Should I buy stocks, bonds, ETFs? Oh, that’s right, invest in gold and silver bars and coins. Huh?!?

So, if the world falls apart, I’m going to take a few gold pieces to the guys with food and resources and trade them for it.  I almost forgot, in a post apocalyptic world, nothing is more important than shiny metals with no practical use!

Give me a break. Listen, if it all goes down… then you want to own a farm.  You need to go off the grid.  You need to be self sufficient.  You need to own guns and ammo.  And maybe a tin-foil hat to make sure “they” can’t read your thoughts.

Then again, there’s a word for people like that... What’s it again?  Oh yeah, Crazy! After all of the fear mongering, it’s time for a voice of reason… someone to bring a little humor and perspective to the situation.

Thank goodness Warren Buffett’s letter to Berkshire Hathaway shareholders hit my inbox this weekend.  It was just what I needed.

I was only a few pages into the letter before Mr. Buffett shook some sense into me.  He woke me from my fear fueled fog so I could see the fear mongering jesters’ true colors.If you’re gripped by fear and convinced the problems facing the world today are too great to overcome… read this quote from the Oracle of Omaha’s shareholder letter.

“Money will always flow toward opportunity, and there is an abundance of that in America.  Commentators today often talk of “great uncertainty.”  But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001.  No matter how serene today may be, tomorrow is always uncertain.

Don’t let that reality spook you.  Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America.  Yet our citizens now live an astonishing six times better than when I was born.

The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.

We are not natively smarter than we were when our country was founded nor do we work harder.  But look around you and see a world beyond the dreams of any colonial citizen.  Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.” I couldn't have said it better myself.  It’s time to be bullish on America.

“Show Me The Money….”

Mohit Gupta | MarketDhara@Gmail.Com

I read a quote by a famous US based Futures trader named Ed Seykota, around twelve years ago. He said “Everybody gets what they want, from the markets”. It is only recently, that the true import of this statement dawned upon me.

When you ask market participants what they want from the market, they will all say that they want to make money. However, things are not always what they seem. There may be different reasons for being in the market and making money through price differentials may not be prime amongst them. Here are a few examples :

The day trader: He is in it for the action. If you ask him a hypothetical question whether he would like to earn Rs. 10 per day through day trading or Rs. 100 per week by trading once a week, most probably he will choose the former. For such people, it is the thrill of being involved with the rough and tumble of markets that is exciting. Many even use the colloquial term “Time-Pass” when asked as to why they are glued to the screen 5×5 (Five hours a day for five days in a week). Money is the ostensible motivator but the real reason is “the kick” which they get from being a part of the action.


The stockmarket analyst: The markets have given birth to this animal called an analyst. However many a time, making money from his/her recommendations is the last thing on the analyst’s mind. They are in the market only because it offers them a well-paying job. Analysts who work in large brokerage houses usually do not buy the stocks they recommend. They justify this strange behaviour by citing “compliance-related” reasons. It is rather surprising that the compliance department does not permit an analyst to put her money where her mouth is. Not that many analysts mind it. They relish the accoutrements that accompany their job. Analyst meets in five-star hotels, plant visits in scenic locations, the networking with other analysts (which may help in securing a lucrative new assignment), etc. Why bother to stake your capital in the market when your job gives you everything without any risk…


Some company promoters: For many promoters, stockmarkets are a necessary evil. They are required for periodic fund raising and nothing more. For them, despite being market participants, money is made through their business and not from price gyrations. Of course, for investors it may make sense to tag along with managements who are involved with developing their business as compared to those who have an eye on the quotation screen.

Brokerage houses: They aim to make money by making others transact as much as possible. They are not so much concerned with price movements, as to find reasons for stimulating action among traders. In a sense, the day trader and brokerage houses share a symbiotic relationship. If the day trader is seeking action, the broker does his utmost to provide it.


The financial media: Though not strictly “market” participants, they certainly mould the opinions of several people in the market. By virtue of their daily appearances many media personnel are elevated to the status of “stars” and exult in the adulation and feeling of power that accompanies it. They love the market as that is their vehicle to stardom.


The investor: He is the most invisible market participant (save and except for a few whom the media anoints as a “Wizard” or “Oracle”). He is the one who is really in it for the money and he tries to attain his objective in as unobtrusive a way as possible. Large investors come into the limelight when they make an open offer etc. but there are many other individuals or outfits who disregard the glitz and glamour of the stockmarket as it is irrelevant to their main objective, which is wealth creation.

Seykota himself was a semi-recluse who operated far away from Wall Street as he wanted to remain unaffected. He was clear about what he wanted from the market.

Are you frustrated about not making money in the market? It may be worthwhile pondering as to whether that is what you really want or are the markets already giving you what you want and you are not aware of it…..

How are Gold and Silver As Investments - A Comparison

An argument for holding both gold and silver including 22 things to ponder in comparing and contrasting the two precious metals. (An modified version suited to Indian Metal Investors & Traders Community).

Special Thanks to Author: Jerry Western 

NEW DELHI/TORONTO (FINANCIAL_ARTICLE_SUMMARY) -

Silver has had quite a run the last couple months so it's no surprise that it has gained much attention and interest from investors - even more so than gold.  It is extremely volatile, however, and tends to rise or fall in spurts so I'd like to focus on its attributes as compared to gold, make a case for holding some, and discuss some ultimate price possibilities.

Gold is known as the ultimate form of money; the king of money.  Silver is generally thought of as gold's little brother or ‘Poor Man's Gold'.  It is said that:

Gold is the money of Monarchs,

Silver is the money of Gentlemen,

Barter is the money of Peasants, and

Debt is the money of Slaves.

Both gold and silver have been used as money forever.  Historically, the price of gold has almost always been greater than that of silver.  This is because silver is ten to twenty times more plentiful in nature.

SHOULD WE ONLY HOLD GOLD? 

I say no for the following reasons:

1. You get more (metal) for your money holding silver. 

2. The price of silver has more room to appreciate, both because of its relative low price and because of the current relatively high gold:silver price ratio. 

SHOULD WE ONLY HOLD SILVER? 

 I say no again - for the following reasons: 

1. Gold is highly recognizable and highly coveted in all societies.  Most world governments and central banks hold gold but virtually no silver, save a few notable exceptions (Russia, China, and India).  They know that gold is the ultimate money. 

2. Just as you would diversify your portfolio among asset classes and large/small cap stocks, etc., so too should you diversity between gold and silver.  No one knows which will appreciate faster or further and be the superior investment going forward.  Therefore, I hold both.

WHAT ARE SILVER'S MAJOR ATTRIBUTES THAT SHOULD BE LOOKED INTO?

Silver has three massive attributes that make it special, valuable, and unique:

1. Versatility: silver has many and varied important uses where it is the best solution.  It is either the best material to use for a given application or it is the least expensive of all the alternatives.

2. Inelasticity: more silver is not produced as price increases because most silver comes from other-than-silver mines, and less is not consumed as the price increases because there are no less-expensive alternatives.

3. Duality: silver has the potential to do well price-wise in both an up and a down economy.  Being both an industrial metal as well as money in and of itself, silver tends to have a market no matter the condition of the economy.

HOW DO GOLD AND SILVER COMPARE?

Below are 22 things to ponder when comparing and contrasting gold and silver, in no particular order:

1. Gold is hoarded and the above-ground stockpile is continuously expanding.  Silver is consumed and is uneconomical to recycle in most uses.

2. There is greater than 300 times the dollar value of gold in above ground form as there is silver.  Silver is the smaller market by far.

3. According to the U.S. Geological Survey, there are fewer years of production of silver left in the ground than any other metal or mineral, including gold.

4. Silver is used in more applications than any other commodity (aside from petroleum).

5. About 30% of silver comes from primary silver mines.  Approximately 70% is byproduct of other primary metal mines.  Most gold is produced from primary gold mines.

6. There is less gold mined than silver, but there is more gold than silver bullion in existence.

7. Both gold and silver have been selling near or even below the cost of production for the last 15 years.

8. Both gold and silver are up over five fold since the beginning of this current bull market.

9. Silver is used in industry and for investment.  Gold is used almost entirely for investment.

10 Silver is more expensive or difficult to store (or hide) than gold because you get more for your money.

11. It would be easier for silver to rise higher on a percentage basis than gold due to the ‘law of large numbers'.

12. Only about 2% of the 160,000 tonnes of gold unearthed over the last 5,000 years has been lost and is unrecoverable according to Goldfields Mineral Service (GFMS) and the World Gold Council (WGC) while most of the silver ever mined is unrecoverable and gone for good.

13. Silver supply and demand are both ‘inelastic'.  This means that supply cannot be ramped up quickly when its price rises.

14. The National Inflation Association (NIA) picked silver as its investment of the decade in December 2009 .

15. The Silver:Gold Price Ratio favors silver appreciation to return to historic norms.

16. Both gold and silver tend to rise and fall in price together but not necessarily in percentage terms.  Their price movements are still highly correlated though.

17. In precious metal bull markets, silver always outperforms gold before it is over. Silver has a tendency to underperform gold as a rally in the metals gets going, however, it tends to greatly outperform gold near the market tops.  At its peak, for example, gold was up nearly 250% in early 2008 but silver was up well over 300% at the same time from the beginning of 2002.  As the metals both declined throughout the remainder of 2008, silver fell farther than gold from peak to trough.  Silver fell nearly 60% while gold fell about half as much or 30%.  Now on the way back up silver is again leading.

18. Gold and silver related stocks tend to greatly outperform on the way up but terribly underperform on the way down.  On the way up, many stocks leveraged the metals 3, or 4, or 5:1 but on the way down some gold and silver stocks lost 90% or more of their pre-crash market value.

19. When the economy is good, silver will tend to outperform and when the economy is bad, gold will tend to outperform.  This occurs because silver is also an industrial metal besides being a monetary metal and, [as such,] is in great demand when the economy is rolling along but less in demand when the economy is in recession.  Conversely, gold tends to be forgotten when times are good and remembered when times are bad.  Even though gold fell substantially during the financial meltdown of 2008, it fell less than did the stock indexes, silver, or oil.

20. I believe silver may outperform gold dramatically before the bull has run its course.  Silver rose more than 38 fold in the 70's bull market; from a fixed price of $1.29 to $50 ($52.50 CBOT).  Silver bottomed just above $4 in 2001.  38 x 4 = $152.  Not a bad initial target.

21. Interestingly, the Silver/Gold ratio bottomed at ~ 16:1 in 1980.  In other words, you could exchange one ounce of gold for 16 ounces of silver near the end of that bull market.  Today, the ratio is about three and a half times higher (~56:1).  Should gold get to $6375 and the ratio return to 16:1 at the top, silver will reach almost $400 an ounce.  That's a 100 fold increase from its pre-bull low.  Remember, we're only playing with numbers here, the markets will surprise and do their own thing in due course.

22. The following two extremely important and potentially explosive events for silver have happened just recently:

a) CFTC commissioner Bart Chilton, in regards to the trading of silver on the Commodities Exchanges, said; "There have been fraudulent efforts to persuade and deviously control that price", and "I believe there have been repeated attempts to influence prices in the silver markets", and  "the public deserves some answers to their concerns that silver markets are being, and have been, manipulated." 

b) Two separate lawsuits against JPMorganChase and HSBC for manipulating and suppressing the price of silver futures on the Comex in violation of the Commodity Exchange Act and the Sherman Anti-Trust were filed as class action suits. Any hint that these suits have merit and may be settled in favor of the complainants or a finding of price suppression by the CFTC in its current silver market investigation, could send the silver price sharply higher.

WHICH IS BETTER TO OWN - GOLD OR SILVER? 

I own some of both but I believe that silver will outperform gold in the end.

Mohit Gupta is the Co-Founder, MarketDhara.Com and have extensive experience sharing strategies on how to protect one's wealth in the 21^st century The Gold-Silver rush. He is a contributor to many leading trade e-zines, financial journals and online forums.  Mohit can be reached at MarketDhara@Yahoo.Com.