Silver as an investment

The prior post has been made much nicer as a publish quality article:

http://www.coolpage.com/commentary/economic/shelby/Rope%20to%20the%20Hyper-Inflationalists.html

Hi Shelby,

I realise that it is profane in some circles to quote Jon Nadler but even a broken clock tells the time correctly twice a day. In the article linked below JN makes reference to the increasing gold supply emerging from the pipeline of projects in China and Russia. Old news for most of your readers I imagine.

http://www.kitco.com/ind/nadler/aug262009.html

"Surprisingly" JN implies to the reader that this is BAD NEWS for gold, ie increased supply. As we know these are controlled markets and export bans can be enforced and both countries' central banks are buying gold. So from a supply perspective this "information" is fundamentally price neutral if you believe that gold is money rather than "just another commodity".

I am mindful of Professor Fekete's insights into the importance of stock-to-flow ratios to the "moneyness" of PMs and the technological rationale for silver's demonetisation in the late 1800s and early 1900s (advances in gold metallurgy/minting etc).

(BTW I recall seeing comments from you musing about the billions of ounces of silver in flatware, jewellery and tableware. If you like I can provide a post summarising a convincing set of arguments as to why this potential source of silver may be a non-factor in the silver price any time soon.)

In light of Fekete's reasoning, to the increasing gold supply I would add the following:
-Recent lifting of the ban (dating to 1911, I think) on bullion bar purchasing by South African citizens,
-Ongoing remonetisation of gold in several SE Asian countries (Thailand, Vietnam etc),
-Reports of 25,000 tonnes in the hands of Indian citizens,
-Hommel's insights into the diffusion of gold among the citizens of developing nations generally.

I think these trends bolster the case for gold having a big role in the PTB's end game. However, I would also argue that increased gold supply is another bearish indicator for silver as money, at least, in the near term if not the long term.

Lest you think me bearish on silver over the long term please note that I am extremely bullish. The fact that it is not currently recycled outside of the photographic industry, to any large extent, and supply is finite tells me that the way silver is used today is unsustainable and contributes to its' ongoing undervaluation. (So is Helium BTW to a stunningly greater extent if you research its history and potential uses.)

However, my concern is that remonetisation may not be the driver for repricing silver that a lot of people assume it to be.

Perhaps silver's future re-pricing (upward) may be more like the circumstances surrounding rhodium (An "oh shit" moment when people realised it is more scarce and essential than its price history suggested) or the prospect of restricted supply prompting more people to understand that silver is also highly strategic in terms of military and industrial applications and to the future economic development of Nations.

If the latter scenario is correct then the behaviour of the price of rare earth metals could give us a preview of silver's future repricing potential, if not the timing. Please see link below.

World faces hi-tech crunch as China eyes ban on rare metal exports

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6082464/World-faces-hi-tech-crunch-as-China-eyes-ban-on-rare-metal-exports.html

Cheers!

Measuring from this comparison:



Based on the logic at the end of this:

http://www.coolpage.com/commentary/economic/shelby/Rope%20to%20the%20Hyper-Inflationalists.html

9 weeks duration of the down-dip from 4th week of Dec 2002 to 1st week of Mar 2003, 1 week of Dec 3 months from bottom of recession.
Thus, 12 weeks duration for this up-move from 2nd week of July, which started 4 months from bottom of recession.



===========
Marketoracle butched my article, perhaps go the original:

http://www.coolpage.com/commentary/economic/shelby/Rope%20to%20the%20Hyper-Inflationalists.html

http://financialsense.com/fsu/editorials/2009/0826c.html

The "inevitable collapse" (hyper-deflation) comes first (we are in it now). The hyper-inflation is the end game at the end. I expect gold (especially silver) price to crash down when stocks crash later this year, but then a whiplash hyperinflation comes at any time after that. I also expect we may (or may not) get a temporary rise in the gold & silver prices now before the crash.

===my comment posted to bottom of my article on marketoracle======
I am the author of this article. Using the correlations to 2002, I was able to project a market crash at the 2nd week of Oct:

http://goldwetrust.up-with.com/precious-metals-f6/silver-as-an-investment-t33-165.htm#1867

Note my article is saying that we are in a controlled crash (hyper-deflation), but there will be volatility (recoveries and crashes) in markets along this hyper-deflation path, and the end game is final implosion (of what every remains from the hyper-deflation) in hyper-inflation. It is key to click the links in the article to read my "Bell Curve Economics" research paper, which explains how the hyper-deflation can not lead to general inflation, irregardless of how much monetary base, supply, or stimulost is applied.

Also the original version of my article is also available here:

http://www.coolpage.com/commentary/economic/shelby/Rope%20to%20the%20Hyper-Inflationalists.html

Thanks to Nadeem Walayat for publishing my article.

First of all, I want to thank you for your article on “Rope to the Hyper-Inflationalists”.

This is truly one your best works to date that is so focused on “raw economic” within a short time frame of a long history concerning the fiat beast. You have managed to brake through the “history will repeat” were “others “look to the great depression in order of comparison… You have uncovered that the fiat beast has evolved.

Bravo!!!

Note when I wrote "Rope to Hyper-Inflationalists", I realized the metals might go up first, which is why I exited my short position 2 days ago. And this morning I see I am correct, with silver doing a vertical rocket shot to $14.80.


http://goldwetrust.up-with.com/economics-f4/inflation-or-deflation-t9-240.htm#1873

Shelby wrote:...replied to an email regarding my "Rope to the Hyper-Inflationalists":

> I enjoyed your article, and have been noticing how all of the markets seem
> to be tied at the hip, take today for example. To summarize your theory,
> would it be fair to say you expect some short term strength(in gold and
> stocks) followed by a large plunge, followed by a large hyperinflationary
> rally?

Correct I see that as most likely (and breakout might be significant), next most likely is stock market rolls over now and metals down with, and least likely scenario is we go into hyper-inflation (bank holidays, etc) now.

>
> I have been long resources for several years, and an ideal scenario would
> be to exit near what would be percieved as a high, and buy back twice as
> much on the plunge, but I have not been too sure if the dollar would rally
> or plunge on the stock market crash. Fundamentally it seems as it should
> weaken, sending gold higher, but that has not been the case lately.


The thesis of my article is that has not been the case since 2003, except for a few counter-trend thursts which revert to the trend.

>
> My thought is that initially the dollar would rally on a stock crash and
> thus gold would break down, but gold would be the first thing to bottom
> and quickly make new highs, making it dangerous to try to exit and buy
> back on the plunge.


Yes I see that risk also. As well bullion premiums may skyrocket again.

I am rather looking at a strategy from Dr. Fekete to make money on my metal without ever having to relinquish it. I summarized it today in a new post, where I will also place a copy of this reply I made to you (anonymously of course):

http://goldwetrust.up-with.com/economics-f4/inflation-or-deflation-t9-240.htm#1873

>
> Thanks for your time


Thank you also for sharing your thoughts.

As I wrote in prior post above (where I had liquidated my short position), and also in a recent post in gold thread, that we could get a significant burst up in PMs prices, before the next big deflationary decline.

At this point, if the rocket up continues at same speed, then upside for silver is in $18 - $20 range, and would within a week or two, be very good candidate for a fairly aggressive shorting. If it slows down with some pullbacks and more sideways range bound volatility, especially with a further fall in dollar, then even a higher upside potential could be justified ($1300 and $27?). However, in the short-term the downside risk is also very great with the price so high above moving averages. If you want to jump now, use suitable stops and be prepared that they might just get taken out (if they are too much smaller than say -10% or so) by some choppiness. Bottom line for me is that one can lose -10% in this market easily as he can gain it. So the 25% upside potential is not that attractive to me relative to the volatility. I prefer to look for a more lopsided point to enter the market aggressively. I am hoping for the fast run up to $18, so that I can aggressively short. I must admit that when I failed to buy when silver hit the moving averages at $12.54 at start of this run (primarily because I was in midst of traveling and also in midst of converting physical silver to liquid paper so I could be more flexible as I execute a strategy to have physical outside the USA), then psychologically I was unwilling to go long at successively higher prices. This is because also I had been under the illusion that it may be possible to earn risk-free income from trading, so I was looking for these risk-free trades, versus focusing on averaging back in to paper silver for the near-term as I transistion to physical overseas. I have in recent private emails become thoroughly convinced that one can not earn any income in gold trading and that speculation is precisely that (in the long-run you lose overall to the casino house). I will average in long and eat my mistake, but I will keep an eye out for any "no brainer" speculation shorting opportunity, where I am clearly betting against an irrational herd.

I am basing my stance on the belief that no matter what the metals do now, especially silver, they are due for big fall with the coming collapse of larger credit bubbles by next year at latest. I rationalize that these next wave of debt implosions will suck back into Tbonds all the $trillions floating into general markets now. However, would the next general markets crash cause a major shift in attitude by the public towards gold and silver? Is this what silver and gold are projecting now with this current rocket shot? This risk is why I may scale in long on each and any significant pullback(s) during this current vertical move up. Of course any pullback could be the start of major downleg, so scaling in versus all at once, seems prudent.

Thus, I could have made a critical mistake (selling out of my metals for most part recently between $14 and $16) and that PMs could set new higher price levels now, with perhaps $1000 and $16 becoming support, instead of resistance. But in that case of support levels, thus buying at current levels would not net you out a gain over the next say 6 - 18 months. Could new support levels be set higher than current prices?

I say the risk analysis favors my stance over the long term, barring some radical shift in status quo of the dollar as the reserve currency. However, short-term speculators may want to play this a different way than I am. My main objective is preservation of net worth, not income or gain. I saw some deflationary risk of prices significantly lower than the price I sold. I may end up being correct about eventual downside corrections, except at much higher prices due to the injection of liquidity by govts recently. Thus I may have made a critical error about the inflation vs. deflation argument. It may be that precious metals will react to the injection of negative marginal utility credit differently than other capital assets. Well I always thought they would eventually, but I thought it would come more as one final move. We see now that these hyperinflation impulses can come in waves at any time. Of course I am still wary the deflationary impulses can come at any time also.

I think someone who dollar cost averages in from here over the next year, will do fine. And in the meantime, we may get some no brainer chance to short and then to go long again at extremes. Then again we may not get that opportunity, so scaling in over time is prudent.

Shelby, just maybe during the month of Sept and Oct we will see the dollar in retreat and PM's on the rise? There is a question about the T-bonds - is the US going to falsify the purchase of the bonds to fool the mass?
I don't see a move up in pm's until Feb or March.

What I'm trying to say is the PM's will move up and down in the short term Sept to Jan, but long term, Feb - March 2010, will be the big move in PM's when we get the real data after the holiday's!

Without any academic arguments; The trend is still your friend.
Today Gold is breaking old resistance of 1000
USD Index is breaking its former low - now 77
EURUSD is breaking 1,45 (no tresistance from here..)
...and basically we have a USD under BIIIIG pressure now.
It remains to be seen wheter this is a false break or not. Statistically this is a good stance for a bet.

Looks to me like it's getting overextended:
http://stockcharts.com/charts/gallery.html?$SILVER

The weekly chart is not yet overextended, but Maund has a good point about COT:

http://www.gold-eagle.com/editorials_08/maund091309.html

If silver pushes quickly towards $18, I will probably risk gambling going short. Whereas if it moves higher with delay and consolidation, then I would not risk the time decay of Puts. We could be looking at a several week topping process.

I do not believe Gold is going to blast off to $1300, so maybe that is exactly what will happen. But seems to me that too many people are positioned for that, so it won't happen.

It looks like silver may want to do a rocket shot, which would extend the RSI on the weekly chart (see stockcharts.com) above 70, which last happened when silver was at $21. That would be a no brainer shorting opportunity, assuming the Comex doesn't default or some other wheels fall off of the current system...

In short, I am keeping my eye on the Weekly chart. Otherwise, I will continue my stance of dollar cost averaging back in on any significant dips. Again, I recognize that the price might run away from me. I do have the COT structure on my side, being the highest ever. And I see SRSrocco is back to misrepresenting my stance again. He wrote something about me in the Hommel forum making a wrong call about shorting in the $14s (which I promptly reversed and got out of at no loss), but he failed to include the part where I said my situation was unique, because I had a need to convert to cash in order to move my bullion out of the USA. I was selling all the way up. I also had a need to convert to cash, because some of it will be going into my new venture mentioned in my other post, which if it returns 300% as I calculate, then should far outperform bullion. Will gold be at $4000 next year (300% gain), i doubt it!

I am licking my chops seeing how bullish the gold bugs are getting now. I am just hoping Hommel will write something about "buy silver now" with everyone chiming in, then I will know we are ready for a huge drop in price again. Could this time be different? Yes it could, but pigs could fly if they had wings.

Weekly chart is moving into oversold on RSI, as it hasn't done since silver was over $19, but notice that last oversold period lasted 3 weeks, so one needs to be aware of this when shorting with time depleting Puts or reverse ETF. Also notice that silver last time fell only to $16-17 for months, before finally crashing down to $9.

I find it very dangerous going against such a trend (and especially if you are fundamental bullish on the trend). You could be right but it's very hard to make successful "guesses" to bottoms and tops. And as you know in strong trends RSI are close to useless. It could be overbought until 30 USD for that matter until it retraces. Another matter these days is Obamas decision about creating custom restriction on wheels from China. Does he really think China is smiling and nodding polite without any response. He's playing with fire.

Kleerance wrote:I find it very dangerous going against such a trend (and especially if you are fundamental bullish on the trend). You could be right but it's very hard to make successful "guesses" to bottoms and tops. And as you know in strong trends RSI are close to useless. It could be overbought until 30 USD for that matter until it retraces...

The least dangerous time is when everyone is betting the opposite way, then it can't go on any longer. They hard part is knowing when everyone is 100% in (at top, or out a bottom) that is going to buy in (or sell out).

We've got weeks to go before we hit the top, as the Weekly chart in my prior post shows and this metric below shows:

http://www.kitco.com/ind/Watson/aug172009.html



According to chart above (black line), silver should top between $18.50 and $21.50.

Shelby wrote:...I am licking my chops seeing how bullish the gold bugs are getting now. I am just hoping Hommel will write something about "buy silver now" with everyone chiming in, then I will know we are ready for a huge drop in price again...

Here comes Hommel as expected:

http://silverstockreport.com/2009/stealth-silver.html

When Hommel screams "BUY" instead "stealth" in a couple of weeks, then we will know we are a top:

Hommel wrote:...Americans buy less gold than other nations (1/100th of the world market?), and much more silver (40% of the world market?), but could still buy much, much, much, much, much, much, much, much, much, much more of both. This bull market in precious metals is barely getting started...

This jives with my prior post in this thread:

http://www.financialsense.com/fsu/editorials/cherniawski/2009/0918.html