The Price of Money

My old economics professor used to say, “Interest is the price of money.” By that he meant of course that when you take on a debt, the cost of that debt—the price of money—is the interest. Simple stuff.

This is why the US Dollar Index tends to crash when the FED lowers key interest rates. As the rate goes lower, the US Dollar is cheaper relative to other currencies. The dollar becomes “cheaper” as in “worth less” than it was worth before the cut.

This is also why the price of hard assets tends to increase after a rate cut. When money becomes cheaper, more of it tends to be all over the place looking for a place to park. This increase in money supply causes inflation: more dollars chasing after the same amount of “stuff” causes the price of “stuff” to increase (in that currency).

I’ve long felt that the stock-market rallies that often occur after a rate cut are nothing more than the market’s re-pricing of stocks to reflect the new lower value of the dollar. In other words, the stock market is the quickest to react to inflation. When viewed from this perspective, these rallies aren’t nearly so spectacular. Your stocks aren’t worth more—your money is worth less.

A look at the one-year DOW chart suggests that the market is building a channel between 11,600 and 12,800. There’s two ways you can look at this—either the market has bottomed and is now consolidating in preparation for a glorious rally, or a short-term floor has developed, and it’s just a matter of one or two more dropping shoes before we resume our trip into the abyss. I suppose the market could also channel for an extended period of time, but that’s unlikely… people are too nervous with their money to let it sit in a market that’s not moving. I would love to think that the market is going to rebound and all is going to be well and good, but I personally know too many people that are losing their jobs, houses, and marriages to think that we are anywhere near done with this mess.

P.S. After reading this article, (and this one also) I’ve also noticed that at the same time the bull market in gold and silver is “ending”, many bullion houses are out of Silver Eagles and Maple Leafs. This one ain’t over by a long shot folks, buy silver!

The Good, the Bad, the Ugly

I received the two silver 2008 Bald Eagle Commemorative coins that I ordered from the mint a couple of days ago, and I must say they are good-looking coins. At $369, I couldn’t quite swing the gold coin, but I did get both the proof and uncirculated versions of the silver. It’s hard, as a coin-collector (*AHEM* numismatist), to explain the allure of a nice coin to someone who doesn’t collect, but I suppose it’s like that with any hobby. I’ve been collecting so long that it’s hard for me to imagine a person growing-up without a coin collection.

I’m thinking about sending these two coins to NGC for grading, along with five or six really nice Peace Dollars that I’ve cherry-picked out of some junk silver. They’ll probably sit there for six months before I finally get around to it.

The price of spot gold has finally closed above $1000 an ounce. Wow. I knew this was coming (and a lot more is coming also, mark my words), but now that it has actually happened it seems incredible. It infuriates me the way the mainstream media downplays the trouble with our economy, as well as the significance of the major bull-market developing in precious metals. I’m not trying to be an alarmist, but there are some major hard-times coming and people need time to prepare themselves. The media will tell everyone that everything is fine right up until the time that bread runs out on the grocery-store shelves. To anyone reading this—get yourself some hard assets, and quick. Don’t take my word for it, do your due-diligence, find out for yourself.

The stock market is a slow-motion train wreck. The only reason it was doing as well as it was is because of inflation and the crashing dollar. It’s amazing how strong a “rally” can look when the market is priced in a toasted currency. The DOW priced in Euros or gold doesn’t look nearly as attractive; in fact, it looks downright scary (and has for some time). Now the market is falling fast, even when priced in a currency that’s falling fast. Stop and think about that for a second… if that doesn’t scare you, I don’t know what will.

Next up for me: I think I’m going to buy a hefty basket of gold, silver, and mineral OTC:BB mining and exploration stocks. It’s only a matter of time before the stocks start doing what bullion has been doing, and for a cash-strapped Joe such as myself, it seems like the way to go! More to follow on that…

Cheers!

-Tom

The Stock Enigma

I’ve always found the stock market to be a bit strange, particularly when it comes to the esoteric art of “valuation.” While I’m sure that there are quite a few people out there who really understand the “real value” of a stock, it seems that the vast majority of the people who trade stocks—you know, the ones who lose all of their money—look at the charts and figure, “Hey, it’s moving up, it must be a good trade, right???”

A couple of years ago I purchased a small chunk of a company that manufactures cell phone cases called Forward Industries. I bought this stock for about $4 a share, purely because the technicals looked good (I think there was a double-dipping screaming dojo reversal pattern or something). Shortly after I bought it, it started to scream indeed; I was hoping for a two to three dollar rally, and ended up selling it a couple of weeks later for $14 a share. It topped out around $28, and, as of this writing, is now $2.39. Man, I would hate to have been the “greatest fool” in that one.

Forward Industries had released some positive news, the stock started to go up, Kramer got a hold of it, and then all hell broke loose. The result was a classic pump-and-dump, one that I was on the right side of for a change.

Stock “values” are based upon perception, not reality. If a stock doesn’t pay a dividend, the only reason to buy it is to hopefully unload it on someone later for more than you paid for it. That person, in turn, hopes the same thing. So what is the stock really worth? Well, I’ve always felt that the proof is in the pudding: If you get more money for the stock than you paid for it, you valued the stock correctly! Non-dividend paying stocks, as they exist today, have no intrinsic value. Can anyone explain why a person would choose to purchase a piece of a company and not get a corresponding piece of that company’s profits?

Imagine buying a 10% stake in a local bakery, for example. At the end of the fiscal year, your partner—who owns the other 90%–comes to you with good news: the bakery made $100,000 profit, and they brought you your share in the form of a fat check and a dozen black-and-white cookies. You are, of course, elated when you hear this news, but you refuse the check. As you’re eating the cookies you explain to your partner that you have no interest in taking the profit proceeds, you only want to sell your 10% ownership at a profit to some guy you’ve been talking to! And guess what? He wants to do the same thing! That’s a pretty good deal for your partner, eh?

I guess this is why I’ve always liked things like commodities and the FOREX. Try as you might, you can’t present a mess of corn as anything but a mess of corn. And hey, I’m always down to trade a bunch of my worthless fiat currency for your worthless fiat currency. After all, when the DOW is sitting at 7000 next year all of that colorful foreign currency will make nice wallpaper in my little girl’s room.

My Two Cents

In case you guys haven’t noticed by the things hanging in my sidebar, I’m a big, big fan of silver and gold. There are a million good articles out there right now about why silver and gold are good investments, so I’m not going to rehash what you’ll see twenty times anyway if you just click a few links. I will say this though: It seems like every PM (precious metal) fan writing articles out there really talks up their chosen vehicle, be it stocks, ETF’s, or physical ownership.

So I’m going to talk up mine.

When all is said and done, a bird in the hand beats two in the bush. Buy your PM’s, own your PM’s, hold your PM’s. No matter how low the price of bullion goes, if having a safe full of gold and silver (or platinum or palladium) is the worst problem you have, then you’re living a pretty charmed life! Buy some junk silver, some one-ounce Eagle bullion coins, some private mint bullion, and some big blocks of the stuff if you can swing it. A word to wise though: if you hold a large amount of the stuff in your home, you had also better be prepared to invest in some lead, if you get my drift…

I will mention also that one of the rarest opportunities for the small investor exists right now: the opportunity to buy small amounts of silver over time, and eventually accumulate enough to make a lot of money. And if it takes awhile, so what; it doesn’t go bad. If you have only a limited amount to invest, then buy a Silver Eagle every payday—at the end of the year you’ll be amazed at what’s staring you in the face. The best part is that it’s real money. And it’s yours.