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Silver and Gold 2012Posted Thursday, January 5, 2012, at 7:07 AM
I have been looking at the precious metals tea leaves in the bottom of my cup.
All I can see is a mess of chopped up leaves. That said, there are some points for considerations for the year ahead.
Precious metals are not an investment the way that stocks are. We hope that stocks give us a return on our capital investment. Precious metals should preserve our capital.
As I pointed out earlier this year, the fundamentals show that the intrinsic value of gold is primarily determined on the number of dollars in circulation as the supply of gold is very stable.
In 2008, the value of gold was bouncing around $800. Since then, we have doubled the number of dollars and gold has been bouncing around $1,600 after a bit of a bubble earlier this year.
It is worth noting that the Dow Jones was bouncing around $1,200 in 2008 and is bouncing around the same level today with double the number of dollars in circulation.
This year is an election year. Hold onto your hats, it is going to be a wild one.
Will our president be re-elected? Who knows? Anyone who gives you better odds than 50-50 is an advocate, a liar, a fool, or has way better inside knowledge than any of us are likely to have.
A mathematical sequence of numbers: One hundred, a thousand, a million, billion, trillion, depression.
Only two forces move all financial markets: Fear and Greed. The U.S. is going into debt to the tune of a couple trillion dollars per year at the moment. Will the Fed print more money? If they do, gold and silver will go up relative to a devaluing dollar. What will stocks and bonds do?
Is the world getting safer or more dangerous? With the likely matchup of Obama and Romney, how will this effect international security? If things are getting more dangerous, it is likely that gold and silver will go up and stocks will either stagnate or decline.
What is going to happen in Europe? At the moment, things look bad with little prospect for improvement. At the moment, people are leaving the Euro and moving into dollars. As the dollar goes up and the Euro goes down, gold gets less expensive in dollars and more expensive in Euros.
Will the break up of the European Union be orderly, or will it spin out of control? If it spins out of control, the dollar is likely to rise for a while, and then get sucked down with the Euro. If that happens, precious metals go up.
As risk in the general economy goes up, interest rates are supposed to rise. As risk in the general economy goes up, gold and silver prices are supposed to go up. The nice government men have been pushing interest rates lower and lower to where some rates are less than 1 percent. Can this continue or will the market re-assert itself? If rates go up, people will leave precious metals and lend their money to banks and governments at interest. For at least the next few years, I don't see market forces coming back to interest rates and I believe that they will be artificially suppressed.
If the economy turns around, if the price to earnings ratio on stocks come down, stocks will be the place to be. If the government keeps printing money to pay its bills, if the economy continues to struggle, if the nice government men keep interest rates down and stock P/E ratios high, investing is out and preserving capital is the move to make.
At the moment, it takes 57 ounces of silver to equal one ounce of gold as the price of both metals is declining. Historically, silver is 15-20 times more common than gold. Mining data from the last several years shows there is only 7.3 times more silver being mined than gold. In the last 20 years, the two metals seem to move to quite different aspects of similar forces. If I were going to bet the odds, it looks like silver is the best buy to make for the start of this new year.
These are just my thoughts on these subjects and you follow them at your own risk. It is always a bad idea to invest in what you do not understand. People should do their own research before making investment decisions.