Paper Gold & Silver

Gold and silver Electronically Traded Funds, or ETFs, are strange animals. It’s easy enough to understand the appeal of them; after all- buying, storing, and especially selling physical metal can be an enormous pain in the rear. I guess whether or not they’re a valid vehicle all boils down to personal reasons, and personal motivations.

For the pure speculator, the ETF is a godsend. Tons of liquidity means they can get in quick… and get out quicker. They’re not too concerned with whether or not the asset supposedly backing the fund actually exists or not, because they’re not going to be around too long, and have no intention of ever placing their hands on the product.

In all honesty, these funds have done the precious metal markets a huge favor, by packaging gold and silver ownership into a form suitable for the masses. Dealing with the actual metal is not many people’s cup of tea, and I also think many people hold the view that holding 1000 shares of gold is “investing,” but holding 100 ounces of gold is “hoarding.” Funny how that works, eh?

Much of the current “flight to quality,” as it’s called, is really the desire of investors to avoid getting burned by the exotic (and very opaque) paper investments that have been all the rage these last few years. The recent mortgage-CDO meltdown highlighted to many people the risk of losing everything to an investment that they didn’t really understand in the first place. It’s not so with precious metals; you own them, there they are, and they’re worth whatever they’re worth. It’s hard to obfuscate a chunk of metal.

To me, these ETFs do just that—obfuscate—by adding a layer of abstraction on top of something whose main draw is simplicity and transparency. If I have to wonder if the asset backing the share actually exists, that’s not simple, and it’s certainly not transparent. Not to mention that for those of us who are in it for the long haul, it makes it a little too easy to press the panic button and liquidate on a whim (because it sure would be nice to get that hot tub…).

At the end of the day, I think of a vote for gold or silver as a vote of no confidence in the paper-based insanity that’s been growing in our equity markets. The FED obviously knows that also, judging by the way central banks coordinate massive gold sales in an attempt to hammer the market. They know they can explain away anything *except* rising gold prices.

I suppose this is why the idea of trading gold and silver paper “shares” seems so strange to me. While holding physical metal may be something of a pain, if “the stuff” hits the fan, you can actually use it for what it’s good for—survival.

Fixing the Mortgage Mess

I’ve come up with my own simple suggestion for saving homeowners facing foreclosure. In my opinion, the government should provide some sort of fat incentive for banks to refinance failing loans-to the current delinquent homeowners-for 40, 50, or even 80 or 100 years if necessary. At first this may sound goofy, but let’s think about what this would accomplish:

• The banks keep the bad loans and foreclosed properties on their books as assets instead of liabilities, which is what they become when the foreclosure happens. They also increase their own revenue stream by increasing the amount of interest income the mortgage produces. With a 60 year note, the first 20 years or so of payments is almost all interest. I would imagine that smaller payments composed solely of interest would help the bank’s gridlocked liquidity situation a lot more than no payments at all and a crumbling house occupied by homesteading squatters. I could be wrong about that one though.
• Of course the homeowners have no intention of living in the home for that long, but they would have lower payments (as a result of the longer loan terms), and a real chance to wait the market out to sell or refinance… because that could take 10 years or more. Time is the important thing here, not money. Not to mention that as inflation continues to erode our dollar, they’ll probably be able to refinance sooner anyway.
• The government would get off easy by only providing tax breaks or a small subsidy. And they would look like they actually solved a problem for a change, instead of continuing to pave the road to hell with their good intentions.
• Most important to me: the people who did the right thing and didn’t get themselves in over their heads won’t be stuck paying for all of the people that took these foolish jumbo ARM loans in the first place.
• The speculators that bought five houses and only put $1.86 down between them are just going to have to get a paper-route or something; I really, really don’t feel bad for these folks.

See, easy! To me, this is a solution that everyone can live with. At least I can.

Any thoughts? Anyone? Bueller? Bueller?

History Rhymes

We are blessed with a wonderful establishment here in Baltimore called The Book Thing. I really hope this thing exists in other cities, because it is truly a book-nerd’s paradise. The way The Book Thing works is simple: Bring all of the books, magazines, manuals, etc… you’re tired of tripping over in your basement to an old stinky warehouse, and donate them. In exchange for your donation, you get a tax write-off in the same fashion as Goodwill or the Salvation Army.

Now I’ll admit that this sounds pretty standard-fare at this point, but here is where it gets good. Volunteers at The Book Thing take all of your readable donations, stamp the inside cover with the words, “Not For Resale – THIS IS A FREE BOOK”, sort them by content, and then stock them on what must be a hundred shelves made from donated 2 x 4’s. At this point anyone—it doesn’t matter if you made a donation or not—can walk through the place and take whatever they want, free of charge! And when I say anything, I mean anything. You can take two books or two-hundred; it’s all the same to them.

The place is awesome. The thing I like most is that I often find very old, out of print books written by long forgotten authors. I am reading one such book now, called Only Yesterday. It was written, in 1931, by a man named Frederick Lewis Allen, and is basically a political and social history of the roaring twenties, written at a time when the country was just beginning to understand that the Great Depression was going to be great indeed.

This book is chock-full of choice observations of the things that led the country into depression, but one paragraph in particular is so choice it deserves a special mention, because with the exception of the laughably small dollar amounts mentioned in the writing, it very well could have been penned yesterday:

“Prosperity was assisted, too, by two new stimulants to purchasing, each of which mortgaged the future but kept the factories roaring while it was being injected. The first was the increase in installment buying. People were getting to consider it old-fashioned to limit their purchases to the amount of their cash balance; the thing to do was to “exercise their credit.” By the latter part of the decade economists figured that 15 per cent of all retail sales were on an installment basis, and that there were some six-billions of “easy payment” paper outstanding. The other stimulant was stock-market speculation. When stocks were skyrocketing in 1928 and 1929 it is probable that hundreds of thousands of people were buying goods with money which represented, essentially, a gamble on the business profits of the nineteen-thirties. It was fun while it lasted.”

- Frederick Lewis Allen, Only Yesterday, c.1931

So you see folks, we’ve been here before. And here we are again… a country full of people spending tons of money we don’t have on tons of things we don’t need. You would think we would have learned something from all of this, eh?

Do yourself a favor and buy some physical gold and silver (that is if you can find some silver, there’s a 4-6 week wait for Eagles and Maple Leafs at most of the big bullion houses), and stick it in a safe place until a rainy day. If history is any indicator, this could very well be a rough ride. You have a choice… you can profit from it, or suffer because of it.

P.S. After posting this article, I did a little more research on Frederick Lewis Allen, and found Only Yesterday, it it’s entirety, online! I’ve always found reading entire books from a monitor screen to be a bit tiresome but if it’s your bag, then have at it, it’s a wonderful read. -Tom

Happy Friday!

Have a good weekend all! I found this article this morning. Read it.

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