PM Investing Requirement - Inflation, Deflation, and Parenthood

A recent response to a post from someone on CGN indicating the inflationary case for gold and silver.

During the Christmas break, I tried convincing my Dad (again) to invest in precious metals.  I went so far as to give him a 1/20th ounce gold maple leaf.  His response was to scoff at the coin I gave him and say that if we experience a deflationary recession, gold and silver will go down in price.

Personally, I think it doesn't matter if it's inflation or deflation - gold and silver are a safe investment either way.  Here's why:

Quote: "I think all the predictions like that are based on extremely high US inflation accompanied by massive printing by the federal reserve.  It isn't so much that the metals are going up as the value of the dollar is falling.


When you look at debt Canada isn't much better, I'd bet lot of money that the combined federal provincial debt is over a trillion dollars.  Throw in municiple debt, corporate debt, personal debt, unfunded programs like the old age pension and... I just don't know, pick a number...


If the Bank of Canada starts printing money to cover those bills..."

It isn't so much the debt that's bad - it's where the money created through that debt is invested that is the big worry and what are the implications of that debt as fundamental and unavoidable changes to the economy occur?

As long as I've been alive, it's almost been taken as gospel that "home prices ALWAYS go up," but that's because of the huge working class of baby-boomers who upbid the price of housing because of the apperance of increased wages, combined with loose monetary policy by the central banks (encouraging unsustainable debt). 

What happens when most/all of these boomers transition from working age to retirement age - and the inflows of capital into the real estate market start subsiding as fewer and fewer (relative historically) people start buying homes because the combination of artificially stimulated demand that has upbid thein price for the last 30-40 years has made it too expensive to buy?  Housing prices already are unreasonably high, IMO.

I think the prices HAVE to come down, and come down sharply - meaning anyone banking on high valued real estate and more specifically, home equity, will be screwed, whereas anyone with saved up capital will be able to swoop in like vultures to pick up some killer deals.

Also as long as I've lived, the other asset that has been touted as one that "always goes up" are mutual funds, specifically equities and bonds.  This again, is because of targeted government intervention designed to incentivize people to invest in these assets.  While investors like me didn't leverage up to buy these assets, I suspect the fund managers, corporate insiders, or other speculative investors buying on margin did - and just like in real estate, when a huge swath of the population transitions from being BUYERS of these assets and either stop buying them or worse, become SELLERS of them, it's simple supply and demand fundamentals that will drive the prices of them through the floor.

I think the insidious design of the government manipulation of the economy through rigged pension and savings plans are the worst part (RRSP, TFSA, RESP, etc.).  It absolutely reeks of criminal corruption.  The government sets tax rates to confiscatory levels, then the same government creates savings plans with "tax incentives" to coerce people into investing into the stock and bond markets.  Bond sales, in turn fund government spending and force the government to set taxes at confiscatory levels in order to pay off the interest on the bonds.  If that's not a fraudulent, criminal ponzi scheme - I don't know what is.

For now - no one buys physical precious metals which is EXACTLY why I want to load the truck up and buy them.  My Dad didn't take kindly to the 1/20th gold maple I gave him for his birthday.  He simply said "I'm just going to lose that."  I felt like saying to him "You'd lose a $100 bill?  Someday that thing will probably be worth at least $500." 

Instead he wants to buy shares of Telus, which look like they pay a decent divident but I think looks like it's in a dead cat bounce (but what do I know?) [url]http://www.google.com/finance?q=TSE:T.A[/url].  My Dad doesn't care about dividends though - he only buys stocks on the assumption they go up in price.

Peter Schiff has often said "When the tide goes out, you see who's swimming naked."  For basically 40 years, the tide of easy money due to demographics and monetary stimulus has been coming in, but now, I think over the next 10-20 years, the tide is going to be going out and going out fierce.  I think a LOT of people are going to be swimming naked or stealing swim shorts from the people who had no idea what's going on.

It isn't just the inflationary prospect that makes precious metals an attractive investment, it's the established history of it being a shelter of portable wealth.  When the vast majority of people start seeing thier wealth destroyed through a deflationary shock, if the governments and banks don't step in to lend a helping hand (by dumping oceans of currency on the economy), I believe these panicked sheep will come running into the tiny PM market and send the price to the moon. 

Either way, inflation or deflation - the sky's the limit for the price of the metals.  All we as PM investors have to do is sit back and enjoy the ride and be thankful everytime the price falls through the floor, because it presents an excellent opportunity to get some metals at a discount. 

I knew my Dad's reaction when I gave him that 1/20th.  100% of his wealth is tied up in real estate, equities, and bonds and he's retiring this year.  Some day soon, I envision his portfolio being quartered, halved, maybe even completely wiped out.  At the same time, I believe gold and silver will be at unimaginably high prices.  When that happens, I'm simply going to tell him "You know, Dad, that gold coin I bought you for your birthday the year you retired?  I bought it for $100.  Now, it's close to <X>."  (My guess is at least $300, as high as $500).  I hope giving him that coin, he at least drives him to give it a bit of thought to buying even a little gold and silver. 

To him right now, $10,000 is very little money (odds are you've seen my Dad if you watch TV or Youtube).  My Dad has the outward apperance of being very wealthy and succesful.  He worked very hard and made a lot of personal sacrifices in his life to make it to the top of the corporate ladder.  Even though he was "there" my entire childhood, I recently told my wife that the first 18 years of my life, my Dad probably spent 13 of those years in his office or taking work home with him.  How ridiculous is that, for fathers to spend 72% of thier children's childhood away from them? 

In my Dad's case, he may have achieved material and career success, but if what I envision comes to pass, most to all of that success will disappear and the sacrifices he made to his health, his family, his soul, will all be for nothing.

This is why I am so passionate about gold and silver.  Gold and silver ARE a representation of human sacrifice.  I hate having to sacrifice my time, mind, and body away from my wife and daughter to earn fiat currency that I believe will be worthless by the time my daughter is a grown woman.  I don't want the time I spent away from her wasted.

Pay Day Price Analysis - 29 Dec 2011

It's been an interesting two weeks.  I did a brief investigation into the platinum market and took the plunge.

Platinum historically is priced 1.6-2.2 times higher than gold, and a few news letters and blogs (sovereignman.com and survivalblog.com being two big ones) I subscribe to highly recommended them, with the price being approximately 0.9 the price of gold.  All the local dealers in my town were sold out, so I ended up ordering 2x 1oz Platinum Maples from APMEX.

I had a bit of a realization looking at some of the price charts.  I am very bullish on silver, however, I am going to start diversifying into other metals as well (gold and platinum for now, maybe palladium a bit down the road).

Starting with gold:

Having broke through th trendline I drew last pay day AND the 200 day moving average, I bought.  $1540 and $1485 I think would be the next entry points.

Silver:

Again, the lower trendline from last pay cheque was broken.  The next resistence of $26.83 was hit as of this writing, meaning $24 and $25 look like good targets.  

Not pictured here is a down trend from the top of Sept 1, 2011 to a top around Dec 6, 2011.  Where that intersects the long term trendline, is about Feb 2012.  If silver tops that trendline, it has a long way to go to take out the downtrend set after the crash of May 2011 that won't be resolved by Sept 2012 at the latest.  

In a separate post, I'll write about this phenomenon, but by the chart, it looks like a similiar pattern developed in response to the 2008 financial crisis.  There was an established uptrend dating back to around the start of the bull silver market (in 2003) then the big smack down in 2008.  I'm going to be watching for that pattern to repeat itself - and if it does, I think there will be a VERY brief period of time where the price will hit $25 (or lower - $22 or lower would be an OMGWTFBBQGETYOURHANDSONSOMESILVER price).

What this means is STACK STACK STACK.  2012, I think is going to be the year to buy, buy, buy silver (with paper dollars).  There might be a period of time to trade gold for silver, but I think that will correspond very closely with silver hitting it's bottom (which I don't think it has yet).

Don't despair either way.  So long as you don't sell, you cannot lose.  In my 10 year silver price analysis series, I made the case for the next top in silver occuring sometime between February 2013 and June 2014.  That being the case, I think the low prices we are going to see in 2012 ARE A BLESSING and the extra time you have now is A GIFT.

BrotherJohnF did a video a few days back where he made a Fibonacci series calculation on what kind of move we could see when silver tops.  On the high end, if I recall correctly, it was about $350.  I'm still sticking to my projection though, of $53 at the low end (but I highly doubt it will be that low), $150 at the high end.  Either way - $27 silver IS A MONSTER BUYING OPPORTUNITY.

Gold to silver:

I went the WRONG WAY and bought some gold right on the break out above the upper trendline.  I don't regret it, even if it was a bit of an impulse buy.  Me personally, I won't swap any gold for silver unless the ratio is between 70 and 83 (which I do think is coming).

Platinum:

I don't have much to say about platinum.  It's a bit more of a speculative buy than anything, but again, I want to diversify into other assets.  For me, my sell point will be around the time the platinum:gold ratio is within it's historical range of 1.6-2.2.

It looks like platinum could be due for a big correction too, so I plan (if possible) to buy some on the way down.

Conclusion:

Fiat to PM:

BUY BUY BUY.

Gold to silver:

Maybe - again, still holding out to see if silver bottoms out.  70-80 would be a big indicator to do so.

Silver to gold:

No

Platinum to gold:

No

Platinum to silver:

No

Until next pay cheque, keep stacking and Happy New Years everyone!

Capitalism is Magic: Hearth’s Warming Eve

In my opinion, the only legitimate function of government is to protect individual property rights and self ownership.  For a very good summary of what I mean, I recommend this video:

Governments do not exist to solve problems and the record of history is unequivocally clear that every time governments try to solve problems, they end up creating far more problems than they end up solving.

The My Little Pony Friendship is Magic Season 2 mid-season finale/Holiday special demonstrates this point very well.  In a pageant portraying the founding of Equestria, it is revealed that prior to Equestria’s founding, ponies existed in 3 segregated, centrally managed tribes (essentially the equivalent to modern day nation states).

Although not directly shown, it is inferred that a tenuous trade agreement between the Earth, Pegasus, and Unicorn pony tribes is maintained, or at the very least heavily influenced by the three representative governments of each tribe: the Pegasus military dictatorship of Commander Hurricane, the clueless, democratically elected Earth Pony Councillor Puddinghead, the self-indulged, elitist monarch unicorn, Princess Platinum.

As is the universal standard every time governments try to manage anything, the tenuous equilibrium of trade and sustainable coexistence between the three tribes starts to break down.  As a consequence of this disharmony between the pony tribes, evil Wendigo’s afflict the land the three tribes occupy with a horrible blizzard that leads to starvation, suffering and eventually hostile conflict. 

While Wendigo’s are strictly a My Little Pony phenomenon, the starvation, suffering, and conflict governments create whenever they get involved in trying to fix societies problems are very real.  The brilliance of this episode is that it really does not matter what system of government exists, excessive government intervention into the lives of those they govern ALWAYS ends tragically for those being governed.

Perhaps the most memorable scene from this episode, the one that I think perfectly portrays the government to citizen relationship is one of Princess Platinum, muzzling and riding Clover the Clever’s back to cross a small, trivial stream.  Again, it does not matter what system exists (democracy, dictatorship, or monarchy), governments that extend themselves beyond the function of protecting the individual right to self ownership end up being a useless dead weight.

Perhaps the most heartening and encouraging message of this episode, was the climactic conclusion.  After being trapped in an inescapable cave, facing certain doom as a result of their government’s ineptitude and overbearing rule, the individual ponies of the three tribes united in the spirit of friendship to save themselves.  I'll note Fluttershy's dialogue has to be the cutest expression of a Libertarian's attitude towards bloated, overextended, unnecessary government:  

It’s ironic, but very telling and realistic that the only way that the individual ponies were able to solve the problems they as a society were facing, was by their governments rule being paralyzed by the Wendigo’s that thrived off the inept disharmony sowed between one another.  Just as in real life, governments create such strife and disharmony to the point that they cease to function only after they have placed the societies they govern in grave peril.

This is a very powerful lesson that speaks to the creative power of a society that is left alone and freed from the burden of government that extends itself beyond its only legitimate purpose.  Governments that ride on the backs of its citizens and squable with other governments out of naked self interest create poverty, shortage, and misery.  Governments that allow the magic of capitalism to work end up creating magical kingdoms of prosperity, abundance, friendship and happiness.

PM Investing Requirement - Understand What Money Is

Most people understand what is used for money (fiat currency).  When asked to define money I do not believe most people can come up with a concise, accurate description.

If you care about your financial well being, you should know the characteristics of money (durability, fungability, unit of account, etc.).  That said, the characteristics of money in my opinion are inadequate to describe what money fundamentally is.

Money is a representation of the expenditure of human time, talent, and effort.

If you work for a paycheck, the "money" you are paid, is meant to be a representation of the hours you spend away from your family, away from the pursuits that interest you, where you forfeit the ability to exercise absolute sovereignty over your existence.

Unless you live in a despotic, totalitarian (typically communist or socialist) society, you more or less voluntarily trade your time, talent, and effort in exchange for "money" as compensation.  "Money" can take many forms, be it blueberries, oil, gold, or fiat currency - but the critical component to make something money is it MUST be a reasonable representation of an expenditure of human time, talent and effort in the past, present, or future.  This is fundamentally what determines the value of any thing as money.

Many big names in the precious metals community use the term "sound money."  For money to be sound, it should be an accurate representation of an amount of human effort, efficiently expended in a venture that produces something desirable enough to another human being to trade an equivalent expenditure of their time, talent and effort for.
 
Precious Metals and fiat currency represent two extremes, with one being sound, one being completely unsound.

Fiat money, due to the insidious phenomenon of inflation is unsound money, as manipulations of the supply guarantee from one day to the next, it's value represents a different amount of human effort.  Today, $10 may be enough to hire someone to perform menial labour.  Tomorrow, the same labour may require $15.  Granted in my life time, the decline of the value of fiat currency has been gradual to the point it's difficult to notice.  History has shown in instances where fiat currencies have met their demise, the change in valuation happens much, much faster than that.

Precious metals, on the other hand have a natural restriction that prevent them in their physical forms from the manipulations every fiat currency in history suffer from.  Consider this recent post from BrotherJohnF's blog along with the video documenting how silver is mined: What it takes to mine silver.

Also consider this video about gold prospecting from the movie "The Treasure of Sierra Madre"

When you hold 1 oz of silver or gold in your hand, what you are holding is an enormous expenditure of human effort, talent and time.  In order to have an absolute equivalent substitute for that 1 oz, nearly the same amount human effort, talent and time has to be expended.  This is one of the biggest reasons precious metals are sound money.

Fiat currencies in their current form represent debt obligations.  The same is true of all paper assets redeemable in only fiat currency.  They are the promise of future expenditures of human effort, talent and time that have no mechanism to ensure the bearer of them every actually receive the benefits of such expenditure.

This understanding of the fundamental essence of money is critical to invest in precious metals.

Sadly enough in our modern age of secular, enviro-religious tyranny and crony-capitalist greed-mongering, the concept of the true worth of human life is marginalized.  As a consequence, the value the human experience as an expenditure of effort, talent and time is skewed.

With this false understanding of the human condition, how can anyone actually understand what money is?

Pay Day Price Analysis - 12 Dec 2011

Remember - we're talking physical here, folks.

Gold:

I think gold has a date with the 200 Day moving average (around $1617) and maybe a trend line going back to 2009 ($1526).

Silver:

Anytime silver is under it's 200 day moving average, I think it's on sale (200 day moving average, currently $36.83) .  However, I think it's worth holding out to see if it tests the trend line from late 2010 ($29.82), as well as the 2008 trend line ($24.16).

Gold to Silver Ratio:

It will be interesting to see how this pennant gets resolved.  It's really anyone's guess, but below 50.8 might start looking to favour a silver rally (priced in gold), but over 57.5 and the opposite is true.

Other thoughts:

A European economic catastrophe might bring with it a doomsday crash like that in 2008 (hence the 2009 trendline), but I believe it will be all driven by the paper market.  This may well lead to a short term crash in the price of both metals, but as VisionVictory posted on his youtube channel, if silver hit the sub $24 mark, "all hell would break loose in the physical silver market."

The subsequent rally as millions of Europeans looking for a safe haven to store their wealth as their financial institutions collapse, I think could be quite epic.

Conclusion:

Fiat:
I'm going to take a nibble on silver, still waiting to a big correction to $24 before making a big purchase.  Hold out on gold to see if it hits the 200 day moving average - but I probably will take a bite on this dip.

Gold to silver:
Watch for a GSR of 57.5 for a decent opportunity.  I'd swap 1 oz, but keep some in case of a serious spike, up to something ridiculous, like up to 83.57.

Silver to gold:
Not even on the radar.  I'd say not worth looking at until at least a GSR in the 40-45 range.

Until next pay check!  Good luck everyone!