Monday, March 31, 2008

OK now SELL with both hands

Man, this market stuff is hard.

Just as I was settling in for a happy week of bad news about inflation and silver prices going straight to the moon, Clive Maund comes along and says that these precious metals are waaaay overbought and due for a correction along with every other commodity. And then the price of gold drops, and so does silver.

What's a fella supposed to believe? Maybe I am like a cab driver after all.

Half the market thinks the price of gold is controlled by a conspiracy of central banks. The other half, maybe, takes money from the first half. Or maybe they just trade money back and forth, like a pair of closely matched hockey teams.

Tuesday, March 25, 2008

Halfwise the proverbial cab driver?

You know the story: when the cab driver starts talking about how to make a killing in the stock market, it is time to sell all your stocks.

Well, I don't know whether I am the equivalent of a cab driver in the precious metals markets, but here are two things to occupy your investment mind today:
First, the picture you see here is the chart of the price of silver over the past three years. Look at the top RSI (Relative Strength Index) line and look how low it has dropped. This is an incomparably strong buy signal.

Then, for speculation about the price of silver compared to the price of gold, check out this link to
Ted Butler and Israel Friedman's articles.

Sunday, March 23, 2008

Buy with both hands

...says an analyst, not a cheerleader.

Read this link and tell me where Moriarty's thinking might be flawed. I can't contradict him. Derivatives represent more in wealth than the markets themselves, and no one knows enough about them or what happens when they start to unwind because of a credit contraction.

Strange times coming. Real property is wealth.

Tuesday, March 18, 2008

Ominous words from a wise man

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come the result of a voluntary abandonment of further credit expansion; or a final and total catastrophe of the currency system involved.
- Ludwig von Mises

Sunday, March 16, 2008

Anybody else here starting to get angry?

Here is what is bugging me:

Credit was extended from central banks through financial institutions and mortgage houses through to mortgage brokers, borrowing companies and individuals. On the lending side, people put up their money and got returns that were well above T Bill rates. On the borrowing side, people who maybe did not really deserve credit got money and used it to buy assets (houses) or to consume more than they otherwise could or should have. All the while, bond rating agencies and insurers marked up the loans, guaranteed them, and pocketed their fees.

So careless greed on one side, and living beyond one's means on the other side, all facilitated by bond raters and insurers, led to a couple of years of fantasy-land bubbles in housing and consumption fueled by unsustainable leverage. The profits on all these transactions have been pocketed by the management teams that made the lousy decisions in the first place, and by the shareholders who supported the regime. Consumers enjoyed living beyond their means.

Now the rest of us are going to be asked to pay for the party, either as taxpayers funding bailouts in the US, or as holders of depreciating currencies.

In other words the profits are private property but the inevitable costs of cleanup are going to be shared as a social burden. Environmentalists go crazy when this principle is applied to private industries who pollute.

The approach is just wrong. Why not let the shareholders and the management teams fail? Yes, that means bank failures. But depositors have FDIC. Why not pay out the Deposit Insurance amounts out of the funds set aside for them, and apply whatever taxpayer dollars might be necessary ONLY to supplement the FDIC, then let the lending institutions write off the losses and move on? And let the lenders evict defaulting homeowners if they choose to, or work something out with each borrower if that is the better path?

Seems to me that the general public is going to pay and get nothing, and some foolish, greedy and/or unethical people are going to pay nothing and yet benefit.

Comments anyone?

Tuesday, March 11, 2008

The more I read

...the less I know.

At least, in the world of investing, this is what I am finding. If I stick with human nature, I read things which reinforce my preconceptions. Fine for things like global warming and politics, but in the market there needs to be a buyer and a seller (otherwise there is no market!), so I sense that I need to know what the person on the other side of the deal might be thinking.

So far I have found a range of opinions, all based on facts and history. I would have hoped these would have dampened some of my emotional reaction to the market, and made me more analytical. The opposite happened yesterday and I sold out of a position that I should have just hung on to. The stock bounced back today but I did not own any of it.

Grrr. Tuition is expensive in this course.

Monday, March 10, 2008

Global Warming, Economic Crisis, Zigging vs Zagging

Here is an interesting editorial on a coming collision between economic meltdown, peak oil, the price of gold, solar activity levels, and just about any other hot-button issue of today other than radical Islam.

The author, Brian Bloom, is an Aussie with an analytical mind, who starts by calling for an end to equivocation (although he uses the word "prevarication" which I equate with "lying", not with "being vague about one's meaning" which is what I think he really means). He posts some point-and-figure charts, which show trends up in the value of commodities over industrial stocks, and in gold bullion over oil, but not gold equities over gold bullion. He then analyzes interest rates and has some insights into what has been happening over the past 30 years.

He draws some conclusions, points to some unanswered basic questions, and then gifts us with some sunspot data that suggest there will be one more burst of sunspot activity, leading to the last great panic of global warming hysteria, followed by cooling.

But here's a telling quote:
In an environment where the world is running out of oil, there is no way the world economy can keep growing unless/until new energy paradigms have been embraced that can have an economically stimulative impact.
If we all get suckered into solar power and general greenliness (it's next to godliness, you know) and then the sun goes away behind clouds, where will we all end up? Zigging when we should have been zagging, in Bloom's opinion.
From the year 2012 onwards, after the coming sunspot cycle has peaked and cloud cover begins to increase once again, the world's industrial infrastructure might find itself chronically short of electrical power (because fossil fuels will be less readily available and incoming solar energy will not be as powerful as previously thought), and the world economy might become terminally damaged as a result.
Check out Bloom's outline of his upcoming, related novel at his other website.

Sunday, March 09, 2008

Perfect Economic Storm?

Ink is being spilled everywhere on the state of the world's economy, and if one believes the extreme positions we are either
  1. Facing the end of the modern economy, or
  2. Just going through a normal recession and our biggest fear is fear itself.
Permit me to muse that it is likely neither of the above.

First, the bad news. Credit has been extended to people and institutions who are not credit-worthy. In the old days, this would have led to debtor's prison for the borrowers and financial ruin for the lender. Everyone would have observed the misery of those who ignored Shakespeare's maxim "neither a borrower nor a lender be" and prudence would presumably have guided their steps. A harsh system with built-in consequences has its benefits.

When credit that flowed out past where it should have flowed is cut off, and the parties are called to account, pain happens. People lose "their" houses, and investors lose money. Leveraged investors lose someone else's money, which creates its own amplified problems. There is nothing like a newspaper story of someone being evicted, or a financially powerful political lobby group, to influence politicians to intervene so that they can be seen to be doing something.

The intervention will inevitably take the form of insulating both borrower and lender from the natural consequences of their action. Who should pay instead? Why, the government will help people and institutions out, of course. If the politicians and special interest groups were honest enough to say "individual taxpayers" instead of "the government", perhaps the debate would take a different turn. Would that it were so.

Taxpayers will suffer in two ways: tax money will flow to undeserving recipients, and the currency of the debtor nation will be debased as governments try desperately to stave off the deflation that follows the collapse of an asset bubble. This will be good for no one other than investors in inflation-proof assets that generate inflation-adjusted returns.

Now the good news.

First, the economy is a big, inevitable, non-concentrated amorphous thing that is hard to knock off its feet. A financial crisis does not stop food from being grown and sold, kids from going to school, refineries from running, cars getting into accidents and so forth. At least in economies where freedom reigns, the system self-adjusts and carries on. I can not conceive of a credit crisis ruining the corn crop and causing mass starvation, for example. So the system will grind along, and we will muddle through, murmuring over the headlines but surviving nevertheless.

Second, just as the fear of the Lord is the beginning of wisdom (Proverbs 1:7) then surely a secular equivalent could take root, ie the fear of financial ruin is the beginning of prudence. Once beleaguered taxpayers see that THEY are being asked to insulate others from the consequences of decisions that the taxpayer had no part in, and they realize that their depreciating dollar already buys only 20% of what it bought a generation ago, is it too much of a stretch to expect the world to want to return to something real behind its monetary system?

Fiat currency systems fail because humans run them. Some fail faster than others, but the outcome is always the same, devaluation. The political benefits of devaluation of currency, and the individual benefits of repaying debt using diminished dollars, are irresistible in the short term. But it is like wetting the bed to warm yourself. Sooner or later cold reality asserts itself.

The world will be a better place when we live within our means, when we lend and borrow only to acquire productive assets instead of consumer goods, and when our monetary system is based on substance rather than empty promises. We may have to go through some wrenching re-adjustments to get there. I can only hope that a politician has the testicular fortitude to stand up soon, state what is going on in layman's terms, and get us started in a healthier direction.

Saturday, March 08, 2008

More background info on Silver

Silver is a ubiquitous and essential industrial metal with literally thousands of uses, many of which are irreplaceable. Jim Cook,President of Investment Rarities (800-328-1860), has recently listed just a few of silver’s thousands of modern uses, many of which are infinitesimal in amounts per unit, but multiplied by many millions of units, it’s thousands of tons of silver. (I can’t vouch for each one of these statements, but at least most of them are true).

Both rechargeable and disposable batteries are manufactured with silver alloys. Billions of silver oxide-zinc batteries are supplied to the world’s market yearly, including batteries for watches,cameras and small electronic devices,tools and TV cameras.

Steel bearings are often electroplated with high-purity silver. Silver solder facilitates the joining of materials. Silver-brazing alloys are used in air conditioning, refrigeration, power distribution, automobiles and airplanes.

Silver is of first importance to plumbers, appliance manufacturers, and electronics.

Chemical reactions use silver as a catalyst; approximately 700 tons of silver are in continuous use in the production of plastics.

Silver is essential for producing a class of plastics which includes adhesives, laminated resins for construction, plywood, particle board finishes, paper and electronic equipment, textiles, surface coating, dinner ware, buttons, casings for appliances, handles and knobs, packaging materials, automotive parts, and electrical insulation materials.

Silver is necessary for producing soft plastics used in polyester textiles. It is used for molded items, for insulating-handles for stoves, and for computers, electrical control knobs and Mylar tape(which makes up 100% of audio, VCR and other types of recording tapes). It is also used to produce antifreeze.

Silver is used in commemorative and proof coins around the world. There is wide silver use in silverware, jewelry and the decorative arts.

Silver is the best electrical conductor of all metals and is used in contacts and fuses and ordinary household wall switches. The use of silver for motor controls is universal in the home, and is even a better conductor of electricity than copper. All of the electrical appliances, timers, thermostats, and some pumps, use silver contacts. A typical washing machine requires 16 silver contacts. A fully-equipped automobile may have more than 40 silver-tipped switches.

Silver relays are used in washing machines, dryers, automobile accessories, vacuum cleaners, electric drills, elevators, escalators, machine tools, locomotives, marine diesel engines and oil-drilling motors. It is also used for circuit breakers. It is widely used in electronics, membrane switches, electrically heated automobile windows and conductive adhesives.

Every time you turn on a microwave oven, a dishwasher, clothes washer or TV set, you have activated a switch with silver contacts. The majority of computers use silver-membrane switches. They are used for cable television, telephones, microwave ovens, learning toys and keyboards of typewriters and computers and in prepaid-toll gizmos. These silver-containing , radio- frequency- identification devices will soon make an appearance, imbedded in credit cards and passports.

Silver is used in circuit boards and is essential to electronics to control the operation of aircraft, car engines, electrical appliances,security systems, telecommunication networks, mobile telephones and TV receivers.

Silver is used in windshields in General Motors all-purpose vehicles because it reflects some 70% of the solar energy. Every automobile produced in America has a silver ceramic line in the rear window to clear the frost and ice.

Silver plating is used in Christmas tree ornaments, cutlery and hollow ware. Because it is virtually 100%-reflective after polishing, it is used in mirrors and coating for glass, cellophane and metals.

A transparent coating of silver is used on double-paned thermal windows.

Silver has a variety of uses in pharmaceuticals. Silver sulfadiazine is the most powerful compound for burn treatment worldwide. Catheters impregnated with silver diazine eliminate bacteria. It’s increasingly being tapped for its bactericidal properties from severe burns to Legionnaire’s Disease to dressings for wounds.

One out of every seven pairs of prescription sunglasses incorporates silver. Silver-based photography has superior definition and low cost; it is still the biggest user of silver.

Digital photography is considered by many to be a threat to old-fashioned film photography, which at one time was the biggest user of silver, as digital cameras are becoming the camera of choice for millions of people. Ergo, physical silver use will decline in the film business, and that is considered by many to be a bearish factor. Kodak was at one time the world’s largest user of silver in manufacturing film. Because they used silver in every roll of film in the ‘70s, silver photographic use was touted as one reason for the silver bull market of the ‘70s.

There is a counter argument, and a counter, counter argument.

It is not generally known, but much of the silver used in film is recycled to be used again by the film companies. That is also true of silver in medical x-rays.

But more than offsetting this is the fact that silver is also used in glossy photographic print paper at Wal-Mart, Kmart and Costco and other supermarkets, for people to print out their digital photos, and that paper is never recycled. One of my daughters informed me that now that she has a digital camera, she takes 12-times as many pictures of the boys as she did with her old-fashioned film camera, and she usually prints them out.

But also, the film companies will still sell one-billion rolls of film this year.

Silver is widely employed as a bactericide and algaecide. A doctor friend of mine told me that when there is an open wound or big burns, a silver compound is used on the dressing. Silver ions have been used to purify drinking water and swimming pools for generations.

Silver ions in house frames help resist mold and mildew. Silver compounds are providing doctors with powerful clinical treatments against antibiotic-resistant bacteria.

I could go on and on, and I guess I already did, but that’s one reason why our silver inventory is under assault, and if Butler is even partly right, that could be one reason why silver is turning into the supply/demand investment of the century.

Will the growing assault on silver inventories trigger a switch to some as-yet-unknown substitutes?In some cases, probably yes. Copper can do some of the things silver can do, but copper is rocketing up in price in a solid bull market, and is becoming a more and more expensive substitute. Usually the thousands of silver uses are so small in each individual unit manufactured, that they are only a small part of the cost of manufacturing the units that incorporate it, so there is not enough incentive to change at these prices, but collectively, they add up to thousands of tons of silver.

Silver as Money

Silver has an important monetary role, according to economic history. One disagreement I have with Butler is that he has discounted the monetary role of silver.

Silver has been consistently used as money throughout history, even more than gold, but as I have said several times before, whenever paper money fails (every 50 to 75 years), the world is subsequently littered with useless paper currencies. That’s when silver is resurrected and comes back into its own.

For example, when the Chinese government fell at the end of World War II, paper currency became distrusted, but almost like magic, U.S. silver and gold coins became the currency of choice all across that huge, primitive country. Everyone knew what an American silver dime was worth. This held true until the Communists imposed a new “fiat currency” (one that is money just because the government says it is) and enforced it with the heavy hand of government.

Could that happen here in America? No one knows for sure, but that remote possibility is becoming less remote every day. That’s why you need some silver for insurance purposes, because the dollar’s fate seems to be sealed and delivered by our present rate of internal monetary inflation. Whether it will take one year, ten years or 30 years, I don’t know, but eventually the world will be littered with worthless paper dollars, and governments will be forced to go back to a gold standard to back a new currency. At some future time, silver coins will be minted again in massive quantities, and silver and gold will both reign triumphant over the world’s monetary system until we have a monetary system we can trust. I don’t know exactly how it will work, and probably nobody else does either, but for that reason, I repeat, you should buy at least ½ bag of junk silver (pre-1965 American dimes, quarters and halves) for your family, just for the silver content. This is not for investment (even though it will go up), but as an insurance policy against a possible inflationary calamity.

Silver always rises during gold bull markets, usually twice as far and fast as gold, but the supply/demand situation (ETFs and jewelry and industrial usage) dwarfs all other reasons why silver will soar in price, perhaps much more than twice as much as gold.

One other supply/demand factor that really matters is that COMEX, (The New York Commodity Exchange), which is by far the biggest commodity exchange in the world, has a monster silver futures exposure. Many of the “longs” have bought a silver contract from the shorts contracting for the silver, in the hopes that silver will be rising, and so will their contract. It can be settled either with a cash payment or by delivery of the physical metal. But a lot of the longs are silver users and need the metal and have only bought the contracts for delivery. They won’t settle for cash, but only for delivery, because they need the metal.

The “shorts” have sold silver they don’t have, assuming they will be able to buy it back at a lower cost in the future and thereby profit handsomely. They are pure speculators, betting that the price will go down so they can buy it cheap. Steadily rising prices are their worst nightmare.

The longs are even more dangerous than the shorts. Remember, for every long contract, there is a corresponding short. As silver has soared, shorting paper losses have mounted to billions of dollars.

I guess the short speculators never learn. That’s exactly what they did back in the 70’s, and when the Hunt brothers tried to corner the silver market and drove the price to $50, most of the governors of the COMEX were short, in effect betting against the Hunts. Their losses mounted day by day, and as they became more and more insolvent, their need to cover their shorts, either with cash or by buying silver to deliver, was way beyond their financial ability to handle. Technically the COMEX should have been shut down, as many of the shorts were governors of the COMEX, but this was unthinkable, as we couldn’t allow the world’s most important commodity exchange to close down.

Eventually they won the battle with the Hunts by, among other things, changing the rules to “liquidation only.” That’s when I decided to tell my subscribers to sell their gold and silver at $35 an ounce, before the $50 top, as when the elephants are fighting, we mice should scurry into the underbrush. Yes, it went to $50, but $2 to $35 is good enough.

This is similar to where COMEX finds itself today. But this time they are short so much silver, that if they had to buy enough silver to cover all their shorts, especially if the longs are silver users who need the physical silver for their industries (many are) and won’t accept just a cash settlement, that this could soak up as much as 100% of all silver production. Also, the short’s cash position is so dire, as their paper losses have mounted as silver has risen, that they won’t have enough money for a cash settlement. Sooner or later they will have to buy silver, and the stability price of silver could soon be above $100 an ounce (my best guess) in order to induce holders (you) to give up yours.

Silver is the investment of the century. It will move with gold, but further, as has already been demonstrated. Gold is up about 200%, and silver is up more than 300% over the last couple of years. We will eventually find that silver at today’s $15 to $20 is the bargain of the century. Silver and silver-mining stocks will be a license to print money.

For silver bullion coins or semi-numismatic coins, contact Investment Rarities by calling (800-328-1860); International Collector’s Association (800-525-9556); Kitco (877-775-4826); or Camino Coins (800-982-7070). Always compare prices. They are all dependable and long-standing friends of mine. Prices may differ one way or the other on any given day. You don’t necessarily need the very cheapest; close is good enough. I beg you on bended knee to buy silver! This is the safest investment call I have ever made.

By Howard Ruff
The Ruff Times

Howard J. Ruff, the legendary author and financial advisor, has re-edited and will re-issue his 1978 mega best seller, How to Prosper During the Coming Bad Years, still the biggest-selling financial book in history, with 2.6 million copies in print. He is founder and editor of The Ruff Times Financial Newsletter. This article appeared in the March 7, 2008 issue of The Ruff Times. The newsletter is much more comprehensive and deals with a broad spectrum of middle-class financial issues and includes an Investment Menu from which you can build your portfolio.

Friday, March 07, 2008

Home owners under water

NEW YORK - Americans' percentage of equity in their homes fell below 50 percent for the first time on record since 1945, the Federal Reserve said Thursday.

Homeowners' portion of equity slipped to downwardly revised 49.6 percent in the second quarter of 2007, the central bank reported in its quarterly U.S. Flow of Funds Accounts, and declined further to 47.9 percent in the fourth quarter — the third straight quarter it was under 50 percent.

That marks the first time homeowners' debt on their houses exceeds their equity since the Fed started tracking the data in 1945.

Read the full sorry tale here. House prices won't be recovering any time soon, methinks.

Wednesday, March 05, 2008

Molybdenum Demand Marches Forward

(This article from is from Purchasing magazine, an industry journal aimed at buyers of materials, not at buyers and sellers on the stock exchange).

By Tom Stundza -- Purchasing, 3/5/2008 9:47:00 AM

World demand for steel-strengthening alloy molybdenum is expected to grow 5.8% this year, forecasts Catherine Virga of the CPM Group in New York. And with supply lagging demand, “present molybdenum prices (above $30/lb for the past 10 months) are sustainable,” she tells the annual meeting in Toronto of the Prospectors and Developers Association of Canada.

Moly demand is growing for the alloying metal because it enhances steel’s anti-corrosive properties and allows that metal to withstand higher temperatures. She points out that in pipeline-grade steel, “increasing molybdenum content to 0.5% (from 0.2%) can reduce the total tonnage of steel used in construction of the pipeline, allowing producers to cut costs, reduce the amount of welding and lower weight and transportation costs.”

So, Virga says the most recent climb in molybdenum prices can be attributed to increasing demand from the energy sector, which accounts for 78% of demand for the metal due to expanded sales of oil country tubular goods. Today, less molybdenum is being produced as a byproduct of copper mining in the U.S., Canada, Peru and Chile and more is coming from primary alloy producers in China, the U.S., and Canada.

Yet assured supply of the needed 400-450 million lb/year is being tightened by tough new government regulations on exports from key producers in China. And this will continue to be a supply base issue, she says, because the expected growth in demand will force world production to the 550-million-lb level by 2011.

Monday, March 03, 2008

The Classic Example Of Barstool Economics

The Tampa Tribune
Published: February 18, 2008

Suppose that every day, 10 men go out for beer and the bill for all 10 comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do.

The 10 men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.
"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20."
Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his "fair share?"

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:
The fifth man, like the first four, now paid nothing (100 percent savings).
The sixth now paid $2 instead of $3 (33 percent savings).
The seventh now pay $5 instead of $7 (28 percent savings).
The eighth now paid $9 instead of $12 (25 percent savings).
The ninth now paid $14 instead of $18 (22 percent savings).
The tenth now paid $49 instead of $59 (16 percent savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man, "but he got $10!"
"'Yeah, that's right," exclaimed the fifth man. "I only saved a dollar too. It's unfair that he got 10 times more than I!"
"That's true!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"
The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, ladies and gentlemen, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.

Saturday, March 01, 2008

Price of Silver

I have posted before on the attractiveness of silver bullion as an investment.

How do you know that people want something? Its price goes up quickly, and some people start to pay more than market value because they fear there is a shortage coming.

A week ago, you could have bought a 10 oz bar of silver on eBay for a pretty predictable price: $195 to $205. A week before that the range was a bit lower. This week both the price and the range have jumped up, and it's now about $235 to $285.

I conclude from this that people are starting to flow into silver bullion purchases. Since investors move in herds, expect higher prices and eventually a full fledged frenzy. When prices go parabolically upward, fortunes are made by those who sell wisely to latecomers. When the last on the scene borrow to buy at the top, fortunes are lost.

Be early.