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.

As mentioned in this post, I’ve decided to purchase a rack of cheap resource stocks. So in the interest of blogger disclosure-as well as coming up with some topics for this blog-I am long the following:

• Gold – Bullion and Numismatics
• Silver – Bullion and Numismatics
• Almaden Minerals Ltd (AAU)
• Apollo Gold Corp (AGT)
• Caledonia Mining Corp (CALVF)
• Coeur D’Alene Corp (CDE)
• Capital Gold Corp (CGLD)
• Evolving Gold Corp (EVOGF)
• Endeavour Silver Corp (EXK)
• Gold Resource Corp (GORO)
• Kimber Resources Inc (KBX)
• Miranda Gold Corp (MRDDF)
• Nevada Geothermal Power (NGLPF)
• Pacific Rim Mining (PMU)
• Silver Dragon Resources (SDRG)
• Santa Fe Gold Corp (SFEG)
• Silverado Gold Mines (SLGLF)
• US Gold Corp (UXG)
• Wits Basin Precious Minerals Inc (WITM)

It took me awhile to cut down my original list to just these guys, I hope a few of them perform well. PLEASE don’t invest in any of them just because you saw them here; do your due diligence. I will say that a couple of these are classic dartboard picks!

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

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!

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

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.