Some Reasons Why Silver Is The Investment Of The Decade

By Michael Pennington © Copyright 2010 Pennco Coins

1. Demand is not only up, but still rising. The US Mint in the months of January and February sold as many dollars of silver as they sold dollars of gold. The Chinese used to export 100 million ounces of silver – they now import 112 million ounces – and that’s in a market that’s a total of 800 million ounces, or a 20% shift in just Chinese demand.

2. Supply and Delivery Challenges for Physical Bullion. In a market that trades roughly 400 million (paper) ounces a day, when Sprott Asset Management was preparing to open their physical silver trust they had extreme difficulty acquiring just 15 million ounces. Other evidence direct from the US Mint further solidifies this point. The Mint recently advised potential investors that it can longer coin the popular Silver American Eagle saying, “The United States Mint will resume production of American Eagle Silver Uncirculated Coins once sufficient inventories of silver bullion blanks can be acquired to meet market demand for all three American Eagle Silver Coin products.”

3. Technological demand for silver is increasing. In 2010 industrial production of silver was up 18% due to rising demand from the technology sector. Among other things, silver is increasingly being used in computers, cell phones, and solar panels. Health care, alternative and traditional, is another market segment that will see silver demand increase because of silver’s antibiotic properties. It’s already being used in bandages, clothing, and medical devices.

4. Silver is closing the margin on the gold-to-silver ratio. Historically, though not in recent decades, silver has traded at an average ratio of about 16-to-1. It is currently trading at about 40-to-1, and just recently was trading at nearly 70-to-1. If the historical ratio of gold to silver holds up, then if gold is priced at $1600 an ounce, silver would need to be trading at about $100. If gold were to trade at $3000 an ounce, a prediction made by several contrarian precious metals analysts, silver would trade at $300 if the gold-to-silver ratio returned to historical norms.

5. There is a silver shortage. We’ve already discussed the supply issues that many investors taking large deliveries may be experiencing. But, there is also a pricing disconnect occurring, that indicates supply problems, at least in the short-term, are prevalent. According to knowledeable analysts, forward looking silver prices indicate that a silver shortage exists. The phenomenon of price “backwardation” is one way of being able to identify this. Though there are millions of ounces in the ground, backwardation can mean there is simply not enough of an asset available right now. Sprott, for example, says that when they purchased the aforementioned 15 million ounces of silver, some of it wasn’t even minted until two weeks after they made the purchase, suggesting that existing inventory is simply not available.

6. More (Paper) Money. As the US Federal Reserve and central banks around the world continue to deal with fiscal issues through monetary means, more and more paper currency hits the global marketplace. As a result, more money is chasing fewer goods, with silver being one of those goods. For the reasons above, as well as the fact that there is more money available, the price of silver will continue to “inflate,” just like other hard assets. Over the last 100 years, since the Federal Reserve was established, the US dollar has lose some 95% of its value. This is a long-term 100 year trend, and given the current policies of the Fed, which are no different than the policies of the last century, the US dollar will continue to depreciate.

7. Gold for Main Street. While an ounce of gold may cost $1500, silver is significantly cheaper, giving working individuals and families the ability to invest without having to spend this month’s mortgage on a coin. Silver is available in various weights and mintages, from one ounce government issue coins like silver eagles to one-hundred ounce poured bars from Johnson Matthey. In addition, for newer investors, though fake silver exists, the risk to the investor is much lower because of the price, and investors can choose US “junk silver” coins like pre-1965 half dollars, quarters and dimes for easily identifiable and tradeable instruments. With silver, anyone who has a desire to do so can become their own central bank.

8. Crisis. Inflation is often identified as the single biggest reason for why precious metals like gold and silver rise. However, this is not always the case. During the 1990′s, a period where inflation was anywhere from 1% to 6% annually, the price of gold and silver barely moved. There was simply no investor demand. One of the reasons for this may have been because during the 90′s, the US was experiencing a period of boom. It was the advent of the internet and the general mood was positive. Stocks were rising and were the primary investment vehicle of choice during the technology boom. Gold and silver took a back seat. After the technology crash and September 11th, however, sentiment changed. As boom times gave way to recession, precious metals rose. They continued to rise as governments, namely in the US, passed more restrictive laws on everything from personal liberty to capital investment. When countries start restricting freedoms, people tend to shift capital. Throughout the first decade of the 21st century, this may have been the primary reason for gold and silver’s powerful rise. After the collapse of 2008, more and more investors began to realize that crisis is upon us. The government, failing to mitigate the problem, and likely making it even worse, forced those in traditional investments into the safe haven historical assets of choice – gold and silver. Thus, while inflation may play a part in the rise of precious metals, it is the perception that government is unable to deal with crisis that has been the real driving force. As the economic crisis continues to deepen, civil unrest breaks out around the world, and citizens lose faith in their government’s ability to manage crisis, the prices of precious metals, the last vestige of monetary security, will continue to rise.

According to the chart below, silver versus the Dow Jones has outperformed significantly, with the Dow experiencing a collapse versus silver of 86% over the last ten years:

The above chart indicates that we are already seeing a decoupling in terms of value.
In fact, the silver bull market remains as strong as ever. Factors ranging from low interest rates to endless money-printing all but guarantee inflation will burst onto the scene.

Indeed, when $13 trillion of freshly minted U.S. dollars floods the markets, the dollar is eventually going to run off the edge of a cliff. When that happens gold prices will soar once more.

That’s why I remain a steadfast gold-bug. Inflation is coming and all investors need to be prepared.

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China’s Demand For Gold Is Explosive

By Michael Pennington © Copyright 2010 Pennco Coins

I’ve been writing about this for months, but demand in China for physical gold and gold-related investments is growing at an “explosive” pace and its appetite for the yellow metal is poised to remain robust amid inflation concerns, an Industrial and Commercial Bank of China executive said.
ICBC, the world’s largest bank by market value, sold about 7 tonnes of physical gold in January this year, nearly half the 15 tonnes of bullion sold in the whole of 2010, said Zhou Ming, deputy head of the bank’s precious metals department on Wednesday.
“We are seeing explosive demand for gold. As Chinese get wealthy, they look to diversify their investments and gold stands out as a good hedge against inflation,” Zhou told Reuters.

The Chinese are always willing to take advantage of a situation. They know Silver is in backwardation and that the supply is very limited. Increasing Open Interest is giving the bankers sleepless nights. In the past they were always able to get investors to rollover contracts or accept a large cash premium. Now the Asians are holding for delivery of the physical metal. COMES is slowly running out of alternatives especially in Silver.

To make matters worse, the Chinese have also been investing millions into SLV. They have been requesting physical metal in exchange for their shares. Blackrock, the administrator, has a great reputation and will probably attempt to comply. Another complicating factor is that there are currently 16.12 million shares short on SLV. This is an increase of almost 2 million ounces over the prior reading. In other words BlackRock will also have to make sure that this silver which has been borrowed will be returned.

We have serious backwardation, a supply shortage, short interest growing on SLV and now we have the Chinese waking up to the fact that there is metal in SLV and saying, ‘let’s go get it.’ Let’s not forget the paltry inventories on the Comex. Any short would have to be frightened by that data.
There are two options left for the shorts, one is to naked short the heck out of this market in an attempt to drive the price down. But if they decide take this option it will worsen their position longer-term as the longs take advantage of the lower price and buy even more. The other option is to capitulate and let the price of silver rise in an attempt to let the silver market get into equilibrium. The second option could double Silver’s price in very short order

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Where Not To Store Your Precious Metals

By Michael Pennington © Copyright 2010 Pennco Coins

U.S DEPARTMENT OF HOMELAND SECURITY HAS TOLD BANKS – IN WRITING – IT MAY INSPECT SAFE DEPOSIT BOXES WITHOUT WARRANT AND SIEZE ANY GOLD, SILVER, GUNS OR OTHER VALUABLES IT FINDS INSIDE THOSE BOXES!

According to in-house memos now circulating, the DHS has issued orders to banks across America which announce to them that “under the Patriot Act” the DHS has the absolute right to seize, without any warrant whatsoever, any and all customer bank accounts, to make “periodic and unannounced” visits to any bank to open and inspect the contents of “selected safe deposit boxes.”

Further, the DHS “shall, at the discretion of the agent supervising the search, remove, photograph or seize as evidence” any of the following items “bar gold, gold coins, firearms of any kind unless manufactured prior to 1878, documents such as passports or foreign bank account records, pornography or any material that, in the opinion of the agent, shall be deemed of to be of a contraband nature.” Furthermore, safety deposit box holders and depositors are not given advanced notice when failed banks shut their doors.

If people have their emergency money in a safe deposit box or an account in a bank that closes, they will not be allowed into the bank to get it out. They can knock on the door and beg to get in but the sheriff’s department or whoever is handling the closure will simply say “no” because they are just following orders.

Deposit box and account holders are not warned of the hazards of banking when they sign up. It is not until they need to get their cash or valuables out in a hurry that they find themselves in trouble.

Rules governing access to safe deposit boxes and money held in accounts are written into the charter of each bank. The charter is the statement of policy under which the bank is allowed by the government to do business. These rules are subject to change at any time by faceless bureaucrats who are answerable to no one. They can be changed without notice, without the agreement of the people, and against their will. People can complain but no one will care because this is small potatoes compared to the complaints that will be voiced when the executive order that governs national emergencies is enforced.

That order allows the suspension of habeas corpus and all rights guaranteed under the Bill of Rights.

A look at the fine print of the contract signed when a safety deposit box is opened reveals that in essence the signer has given to the bank whatever property he has put into that deposit box. When times are good people will be allowed open access to their safe deposit box and the property that is in it. This also applies to their bank accounts.

But when times get really bad, many may find that the funds they have placed on deposit and the property they thought was secured in the safe deposit box now belong to the bank, not to them. Although this was probably not explained to them when they signed their signature card, this is what they were agreeing to.

During the Great Depression in the early 1930’s people thought that many banks were going to fail. They were afraid they would lose their money so they went in mass to take it out, in what is known as a run on the banks. The government closed the banks to protect them from angry depositors who wanted their money back. Throughout history, governments have acted to protect the interests of banks and the wealthy people who own them, not the interests of depositors or box holders.

In a time of emergency, people will have no recourse if access to their safe deposit box and bank accounts is denied. If they are keeping money in a bank that would be needed in an emergency or in a time when credit is no longer free flowing, they may not be able to get it out of the bank. The emergency may occur at night or on a weekend or holiday when the bank is closed.

The solution is to take emergency cash or valuables out of the safe deposit box or bank account and secure them somewhere else, like in a home safe. An even better idea may be to close the safe deposit box account completely, letting someone else entertain the illusion of safety.
THE SAME HOLDS TRUE FOR STORAGE FACILITIES

DON’T PUT ANYTHING VALUABLE AND/OR NON-REPLACEABLE IN ANY BANK OR STORAGE FACILITY

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A Great Way To Fight Inflation – SILVER

By Michael Pennington © Copyright 2010 Pennco Coins

I trust by now I don’t have to convince any of you that rapid inflation in the near future is a great risk to our economy and our own economic health and well-being. Food and oil prices are going through the roof and they’re not about to slide backwards anytime soon. Of course, these are not factored into the government’s calculation of inflation, which is bogus from word one – like its unemployment data and other statistics that the government generates for the sole purpose of trying to convince everyone they are doing a wonderful job.

The driving force behind the food price increase is the incredible spending spree of QE2. This drives the dollar lower, thereby increasing the price we pay for food. This shortage by the way is responsible for riots around the world as more and more people can no longer afford to feed their families. The problem will only get worse.

As you can see, food prices are up an average of 50% since 2009.

The oil price rise is geopolitical in nature. Oil is a political commodity. Our oil reserves have never been higher but the price keeps rising as global demand keeps rising and the oil companies have to raise prices to offset the declining value of the dollar since all world oil transactions are settled in dollars.
The amount of money being created from nothing and thrown at our problems right now is unprecedented in history, so inflation is a when question, not an if one. This process can and will result in a devalued currency unit, and a direct beneficiary of that is rising precious metal prices.
In real terms, real estate will go down, precious metals will go up.
It’s interesting to look at this trend with gold which is normally done, but it’s absolutely fascinating when you plug in the numbers for silver. Not only may silver outperform gold before this is all over, but silver is more “affordable” to the masses.
Let’s borrow a chart from “Casey’s Research” and take a look at how many ounces of silver have been needed to buy a median-priced home in the U.S.

In 1970, it took 14,067 ounces of silver to buy a median-priced U.S. home ($23,000). By January1980, it had dropped all the way to 1,603 ounces, based on silver’s average price that month of $38.80. The ratio bottomed at 1,258 at silver’s record high of $49.45 (London PM Fix) on January 21. (We can argue later how much of that spike was due to the Hunt Brothers hoarding of the metal, but I will point out that gold and silver peaked on the very same day, implying the same forces were influencing both).

The ratio peaked in 1990 at 22,616 due to silver’s average price that year of only $4.06, and was still at 18,365 in July 2006, the pinnacle of the real estate boom. However, look what happened to the ratio in the four years and three months since: it’s dropped 66.1%, to 6,213.
You may think the ratio won’t fall further since it’s already declined 69.2% in the last ten years. But I would point out that it collapsed 88.6% during the 1970s – and that was amid a 170% rise in home values! Only economists on government-laced Kool-Aid could fathom home prices rising that much over the next decade.
All this adds up to one thing: the number of ounces of silver to buy a median-priced home at some point in the near future will likely fall below 2,000 ounces. And given the unrelenting abuse to fiat currencies, it’s very possible it could hit a measly 1,000 ounces. ONLY TWO SILVER MONSTER BOXES FOR A NEW HOME! Now that’s affordable.
Think silver is too volatile to use as a savings vehicle? The price fluctuates, no doubt, but ask yourself this: if you were to put ten grand into a savings account and another ten into silver, which asset will have more purchasing power five years from now? Even with the savings account earning interest, you’d be able to purchase much more with the stash of silver when you go to spend the proceeds.
I for one am convinced that the silver price won’t be stopping when it hits $50 and that the price of homes will still decline as the dollar declines. If I’m right about these trends, that million-dollar vacation home you always yearned for five years ago could be had for less than 4,000 ounces of silver!
The same thing is true for Gold. As an example, after winning Super Bowl I, Green Bay players received a check for $15,000, before taxes. According to the Minneapolis Fed’s Inflation Calculator, that would be $99,180 in 2011 dollar’s. The winners today will receive a $83,000 check.

With gold at $35/ounce in ’67, the winner’s paycheck would be worth over 428 ounces. Today, that winner’s check would be worth just under 67 ounces of gold.

And this with a union contract.

And before taxes.

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Federal Reserve Out Earns Goldman Sachs

By Michael Pennington © Copyright 2010 Pennco Coins

For some, 2010 was a banner year… Financial firms are expected to pay out an all-time high compensation of $144 billion. The Federal Reserve earned record profits of around $81 billion. Government spending is at an all-time record of about $6.85 million per minute. And the number of Medicare recipients hit a new record (50 million-plus).

By other measures, for regular people who need to keep working to pay bills and eat, 2010 was a disastrous year… A record number of people became so discouraged they stopped looking for work. The federal debt hit $14 trillion. Banks foreclosed on more homes than ever before (2.87 million). More homes were repossessed than ever before (more than 1 million). The average time needed to find a job hit an all-time record. The number of Americans on food stamps hit a new all-time record (43 million-plus), and…

The value of the U.S. dollar hit an all-time low in 2010.
Those records are just another way of saying Goldman Sachs and its friends get paid, the government gets paid… and you and me? Well… we’re the ones doing all the paying!

And again, I must reiterate for those of you looking for the No. 1 money-making strategy… the best way to make a fortune is to print it up. That’s what the Fed did. It printed maybe $1.5 trillion or so and bought a bunch of securities with it. It earned record profits from the yield.

Goldman only earned less than $6 billion in the first three quarters of 2010. Say it makes $8 billion or so for the whole year. That’s less than one-tenth of what the Fed made. It’s hard to stay ahead of a counterfeiter…

Or is it? Another all-time record was set last year: The price of gold hit $1,400 an ounce.

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2011 Predictions

Before we explore 2011 predictions, it’s worthwhile to go back and review the highlights from last year’s predictions:

1. Silver was trading for $17.17 on January 1, 2010. I predicted Silver would end the year over $25. This was over a 45% increase I was predicting. Once Silver reached $25, I predicted in September that Silver would exceed $30 by year end. On December 31, Silver closed at $30.93.

2. Gold was trading at $1,121.50 on January 1, 2010. I predicted Gold would exceed $1,500 during the year. The yearly high for gold was $1,423. While I missed my prediction, I was spot on as far as Gold continued its price rise. I think we will see my 2010 prediction of $1,500 very soon in 2011.

3. I predicted a rise in interest rates which we are witnessing right now. It started later than I thought, but the FED has vowed to keep interest rates low. I believe my prediction on interest rates was accurate.

4. I predicted another 200 banks would be bankrupted and taken over by the US government. The final count ended at 211 banks. Not bad for an amateur!

5. I predicted the unemployment rate would go up in 2010 in spite of government publishing shadow statistics. In January 2010, they reported 9.5% while the year ended at 9.7%.

6. I predicted the collapse of Commercial Real Estate which would require STIMULUS II.

7. I predicted that foreign buyers of US Treasuries would evaporate and the Fed will have to monetize more Treasuries in 2010 via QE2. I reasoned other countries will not be able to afford to bail the US anymore because of the tremendous and irrational spending on the part of this administration.

Now it’s appropriate to stare into my 2011 crystal ball and see what appears:

1. I predict Gold will finish the year at $1,700 for another 21.4% increase and a 12th consecutive year of increases.

2. While Silver finished 2010 with over 75% increase, I predict another huge year with Silver climbing to over $40 per oz. This would lower the gold to silver ratio down to 42.5 to 1.

3. Interest rates will continue to climb, especially the longer term rates, such as the 10 year and 30 year.

4. The US dollar will start to collapse again. The dollar index will drop from 80.0 to under 70.0.

5. The true Inflation rate will start to rise as measured in food and energy prices which are the two components the government has removed from their calculation.

6. China will continue its robust growth at 8%-10%. This will result in continued pressure on all commodities, including energy, metals and agriculture.

7. There will be another collapse in the housing market as banks initiate sleeping foreclosures. Rising interest rates will hurt the sale of new homes, and higher ARM rates will force many additional foreclosures.

8. Another 150 Banks will go bankrupt.

9. Oh Yes, I almost forgot. CFB Champion – Auburn; Super Bowl Champion Atlanta; CBB Champion – Duke; NBA Champion Miami Heat; World Series Champion Phillies. (You’re smart if you fade me).

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Prices Fall As Physical Disappears

By Michael Pennington © Copyright 2010 Pennco Coins

Since reaching new highs at the end of 2010 gold and silver have been sold off, and the selling has been particularly intense in the last few days. This in spite of the fact the news on the economy is almost exclusively bullish for the precious metals. In addition, the dollar has dropped significantly during the same period suggesting higher precious metal prices. However, due to the price action one might be falsely led to believe that investment demand for the precious metals is waning. On the contrary, data reveals strong indications of growing shortages and furthermore that the gold and silver markets are approaching “tipping points” that will lead to an acceleration of price appreciation.

A close study of the open interest versus price data since silver went above $22/oz. indicates that as the price increases the open interest contracts! This means that in general existing shorts are covering their positions as the price rises. This is indicative of a looming chronic shortage. The owners of a commodity should be happy to sell at higher prices but that is not the case in silver. This shows that those who have committed to sell and don’t have the silver are buying back their commitments and those that have silver no longer want to sell it. There is no other way to interpret this change in relationship between open interest and price that has been developing over the last ten years. We have reached the tipping point where physical shortages are going to become more and more apparent.

Furthermore, John Embry in a recent interview with KWN explained how difficult it was to source physical silver for the Sprott Physical Silver Fund. I have written recently how Comex silver inventories are shrinking and are not far from ten year lows. The Financial Times just reported on acute shortages of gold bars for investment in Asia.

A spike in gold buying by Asian investors has created a scarcity of investment-grade gold bars in the region, supporting prices.
Traders said that gold sales to China had jumped 30 to 50 per cent since Christmas, driving the cost of kilo bars in Hong Kong more than $3 per ounce above the market price of gold, the highest level since 2008 and an indication of the tightness in the physical market.

“Physical demand has rocketed in China at the start of the year,” said Walter de Wet, head of commodities research at Standard Bank.
In the US, the Mint is selling silver at an unprecedented pace, It wass only a matter of time before the silver shortage would be spotted across the Atlantic, where distributors ran out of both gold and silver on a daily basis during the first time Europe became insolvent some time in early May 2010. Sure enough, BullionVault.com has announced that it has run out of silver in Germany “due to high demand.” In the meantime, the CFTC’s actions have succeeded in allowing the JPM’s suppression of precious metals markets to continue indefinitely, yet all its actions have really done is to provide a short-lived lower cost basis for the precious metals as there is no indication demand is subsiding. At some point the margin calls will come. Then not even Gary Gensler will be able to bail out JPM.

In other words, due to high demand, our own silver stocks are exhausted right now. As BullionVault is only dealing with physical bars which are already in our possession, we are currently unable to offer, silver on our own market. Most contracts are being rolled over or forced to settle in cash.

The result of forty years of gold price suppression is not only the disappearance from the markets of unquantifiable amounts of physical into the firmest of hands, but also an accumulation of claims for physical bullion through the growth of unallocated accounts at the bullion banks; and the secret we would all love to know is how large this commitment has become. In the absence of hard facts, we have to assume that all banks are leveraged at least 10 to 1 as fractional reserve held against their unallocated gold accounts. Overall, it is possible that that these banks are short 20,000 tons on their unallocated accounts.

How will the suppression end? It will end when… an overwhelming crowd of gold owners realize there is a shortage, and finally decide they want “The Metals In Hand”. That day too will once be upon us.

…………… The process has probably already started in some secretive dark murky back quarters of the world, where mega wealth thrives.

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