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9 comments

Time for Precious Metals?

Posted January 14, 2009 7:56 AM

A number of stories in the press talk about recent developments in precious metals. Has the slack world economy placed more emphasis on these traditional havens of safety for investors? Is that trend warranted? Or are these stories indicative of a temporary spike rather than an industry trend? From the manufacturing side, are tough economic times boosting investment in precious metals development? Will precious alloys take on a larger role?

The preceding article is a "sneak peek" from Metals & Alloys, a newsletter from GlobalSpec. To stay up-to-date and informed on industry trends, products, and technologies, subscribe to Metals & Alloys today.

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#1

Re: Time for Precious Metals?

01/15/2009 1:10 AM

Today, 1/14/09 April gold contracts closed at $810.20..... a far cry from the lofty values quoted on the radio ads extoling the virtues of owning physical gold.

What a farce.

They claim that in times of crissis gold will become the currency. I beg to differ. We have to look no farther back than Hurricane Katrina. Certainly a time of crissis and catastrophy. I heard no reports of people slicing off slivers of gold from their wedding rings or gold coins to effect transactions.

Conversly, during this event if you had 5 gallons of gas and a loaf of bread you had some real purchasing power.

The reason why gold and oil spiked in July of 2008 is because it was becoming clear that the wheels were falling off of the US economy. Oil and gold are priced in US dollars. As the US economy began to unwravel the strength of the dollar decreased and pushed oil and gold up.

At the same time investors and futures traders (the evil "speculators" demonized by ignorant media types and ignorant politician types) began to look to oil and gold as a haven for their money (in effect the ecolomies shifted to one based in dollar currency to one based on oil and gold - but still, you didn't see people using physical gold (or barrels of oil) to pay for their groceries).

Remember, for every trader who speculates the price of oil, gold, or any other commodity will go up, there is a trader speculating the price will go down. For every buyer there is a seller and vice-versa.

July 11 the price of oil peaked (and gold follows closely). Post July 11 it became clear that many other world economies were circling the drain right behind ours. With this realization (as well as lower demand caused by $4 per gallon gas) oil prices began to retreat parelleled closely by gold.

Today, oil at $44.19 / bbl and gold at 810.20 / oz, I would say the bubble in oil and gold has burst. Investing in and holding physical gold as a path to future riches is probably not a good plan. Now - buying and selling (or selling and buying) futures contracts with proper information and analytical techniques has the potential to net you a very tidy sum (which you could use to buy physical gold if you so choose).

The economic circumstances are nowhere near as bad as they have been during other downturns. Anyone remember the double digit interest rates of the late 70's? The Jimmy Carter Misery Index? The underlying reasons for this downturn do not compare with those of the '70's... However, if The Lord Barac Oboma, the Most Merciful, Praise be to ACORN and the ACLU has his way taxes - income, corporate and every other tax will go up and we will find ourselves back in the same circumstances as we were in during the Carter administration.

Even during the dismal economy of the Carter era, as bad as it was, people did not use physical gold for their transactions. This fact should take the wind out of the sails of those who are calling gold a "safe haven".

Travis

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#2
In reply to #1

Re: Time for Precious Metals?

01/15/2009 6:00 AM

Well Put. Every time I see or hear those commercials about gold I think " What good is gold compared to FOOD or Fuel' If the Great Crash comes as some are predicting it will probably turn into a Bartering system and money or gold will have no real value.

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#3
In reply to #1

Re: Time for Precious Metals?

01/15/2009 6:02 AM

In other words, most of the people who fall for the precious metals hype at times of volatility...get burned.

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#7
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Re: Time for Precious Metals?

01/15/2009 1:54 PM

I would warn everybody to really think long and hard about the conclusion put forward above by Mr. Roark.

That writer is the one who draws the parallel that times are similar to the Carter administration, but let's look at what really happened:

After Nixon repudiated the Bretton Woods agreement (valuing the US dollar fixed against gold) in 1971: gold went from $35/oz (1971) to a peak of $850/oz (1982). (growth of 2329%, or 33.6% compounded annually. Thats a good investment!!!)

Inflation and interest rates went up to 18%. Real wages went down. During the same period, the Dow Jones went from 930 to 840. ( a loss of 11% over the decade, or -1% compounded annually. But given the debasement (loss of purchasing power) an 840 DJIA in 1982 represents over a 40% loss compared to 1971 dollars. Pretty bad performance)

Why would anyone agree with the conclusion presented in this post? It is based purely on ignorance.

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#4

Re: Time for Precious Metals?

01/15/2009 8:25 AM

I'm not smart enough to predict when the price of gold will spike, but I am smart enough to know that it will happen. Using "every doggy has its day" princples of investing is fun and means you will always have something you can turn into cash if the need arises. I personally believe that collectable firearms continue to have a long and impressive run. Look at recent auction results. You will find many antique firearms that sold for a few dollars when they were made, now selling for 6 and 7 figures. Firearms, unlike gold coins, have no intrinsic value.

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#5

Re: Time for Precious Metals?

01/15/2009 12:14 PM

You have to separate different types of crisis:

1- "End of the world" type of crash. You will need food and fuel. Money and gold are useless if there is nothing to buy. These normally only last for a few days or weeks. Examples are tornadoes, earth quakes, and hurricanes. Gold and silver are not usually very useful in this case.

2- Financial collapses. These do not happen very often but they wipe out the middle class because the currencies are usually worthless. There is usually food to buy if you have the right currency. These events last for many years. You will need to buy food and fuel eventually unless you go back to subsistantial farming. Examples are Wiemar republic, Argentina, Mexico, Vietnan, Zimbabwe... People owning land, property and having Gold, silver, other currencies did very well as they could pay the taxes on their property and keep it. They could buy food, and also fly out of the country. Gold and silver were useful as a currency immune to the hyper inflation caused by their government.

Even in the last financial crisis, gold and silver did very well in most countries other than the United States. Even in the United States, gold has been one of the best investment in 2008.

Don't go to extremes but stay in the middle path as it is usually the best. Nature has proven that diversity is the best strategy to prepare for crisis. Then, once the crisis is identified, specialization allows you to get through it.

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#6

Re: Time for Precious Metals?

01/15/2009 1:27 PM

The US is heading for a period of extremely high inflation due to debasement of its currency. Most of the people commenting above are heading for financial disaster with their heads buried in the sand.

To explain this, look to what is already happening in the world today. Iceland is a modern, educated, stable democracy. In 2008 it's government had to inject the equivalent of US$8 billion and nationalize its banks due to bad investments. Iceland has 320,000 inhabitants and a GDP per capita of 39,000 (CIA world fact book). So this "bailout" represented $18,700 per capita, or 48% of GDP.

Where does the money come from? It prints it out of thin air. Of course, it is not called that, it is called euphemistically as "selling government treasury bills". The result of this bailout has been the Icelandic Krona has devalued 49% against both the US dollar and Euro in less than one year.

The upcoming devaluation of the US dollar over the next 4-8 years will be far worse.

The U.S. financial bailout is currently estimated at 8.5 TRILLION US dollars. Read that again! 8.5 Trillion with a 'T' !!!

Expenditures and commitments made by the US government thus far:

$29 billion for Bear Stearns, $143.8 billion for AIG (and it keeps growing), $100 billion for Fannie Mae, $100 billion for Freddie Mac, $750 billion for Wall Street investment banks, $25 billion for the auto industry, $200 billion to buy securities tied to student loans, car-loans, credit card debt; $8 billion for IndyMac, $700 billion to $1 trillion stimulus package (from January); $50 billion for money market funds; $138 billion for Lehman Bros. (post bankruptcy) through JP Morgan; $620 billion for general currency swaps from the Fed.. (Agora Financial)

This is a shade under 3 trillion so far. Yet, most people think the bailout has cost 750 billion. This simply is not so. Adding up the commitments made to January 2009 is 4 times this amount. It has yet to end.

People do not understand the magnitude of what their business and governmental leaders have done to their economy with their recklessness. This crises still has years to play out. To believe the cheerleaders on Wall Street would be foolish at this time. What the government is not saying is that it now has unfunded pension and medical liabilities that were exacerbated by the Wall Street meltdown. Add this to the needed credit bailouts and the US will be fortunate if in the next four years it comes out of this less than 10 trillion (!!!) in the red.

I will use 8.5 trillion to be the expenditures the Bush and Obama administrations have and will pump into business as "stimulus packages. We see the population of the US is 305.5 million with a per capita GDP of $47,200. (CIA World fact book) This means the US financial bailout is $27,800 per capita, or 59% of GDP.

Using the Icelandic Krona as a reference experience to extrapolate, the US will most likely experience a debasement in the value of the dollar of 65% over the next few years. Once people lose faith in the dollar as a reserve currency, the effect of "dumping" will make this far worse.

How to protect yourself...commodities - particularly precious metals and oil.

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#9
In reply to #6

Re: Time for Precious Metals?

02/17/2009 8:45 PM

Thanks. No need to go to per capit gdp to understand this.

$8.5 trillion is roughly half the us GDP of $18 trillion.

We now owe ourselves 50% of our total annual production.

That won't affect prices in commodities vis a vis our currency's ability to purchase them?

Hmmmmmmmmmmmmmm

milo

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#8

Re: Time for Precious Metals?

01/16/2009 12:04 AM

The $3T already spent is only delaying the issue. When the inflation from this becomes apparent any commodity that is inflation resistant and liquidatable will have momentary power.

It is not that inflation will not happen. It already has, we have just not seen the effects yet. Right now it looks like as stocks devalueate, some are buying bargains that can afford to weather the coming storm. This is actually keeping the stock market up.

Currency is just that, what ever it is currently worth. This is not something that just happened. The mechanics of inflation and devaluation are a mature science.

Brad

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