Saturday, October 11, 2008

Physical gold and silver versus paper

I know this guy who buys physical gold and silver as a form of portfolio insurance and to profit from the bull market in precious metals (which is not over yet). This friend has noticed recently the disconnect between the quoted "price" of gold or silver and the price at which it is easy to actually buy physical metal. No bullshiite, many coin dealers are sold out of silver and/or gold bars and common coins and have been for weeks (and months in some cases). Why would an extremely steep drop off in price cause people to wet themselves and bum rush the nearest coin shop to buy precious metals? What wackos want to hoard a barbarous relic?

Did you know the U.S. Mint ceased minting gold coins (American Eagles first, then American Buffalos, some of the most popular ways to invest in physical gold for U.S. citizens) because of high demand? I've read Orwell. I know, right makes left and up makes down. Let me get this straight. Our government is broke. We borrow money from Asia, the Middle East, and anyone else with a pulse and a checkbook; but God forbid, we keep up with demand for our minted coins and make some of our own money to help pay some of the bills.

No, if demand increases for our coins, we'll simply announce that we will no longer produce the items that people want, no matter what. We won't just get behind and delay shipments of our coin due to increased demand, and we won't just fulfill the order as soon as we can so please be patient while we catch up, we'll just COMPLETELY STOP MAKING THESE COINS BECAUSE PEOPLE WANT THEM. We don't want people to want these coins, for God's sake! No, we make them so people won't like them or buy them and we don't want them to be a success. In fact, we have stopped making these coins indefinitely with no explanation other than “heavy demand.”

People, please think with me for a minute and just stop drinking the Kool-Aid for 2.53 seconds. Do you think our government stopped making gold American Eagle coins because they have your best interests at heart? I mean God forbid the government actually try to please its customers, whether it be via minting gold coins or voting AGAINST a banksta bailout. The physical market has disconnected from the paper market because trust is breaking down. This is part of the nasty bear/social mood cycle down we are in and is part of the reason to be bullish on precious metals, at least as portfolio insurance if nothing else.

Bad money (fiat U.S. dollars) is chasing good money (gold and silver) out of the system. That can only mean one of two things: there are too many paper dollars chasing things of real value and/or the things we used to think were valuable are no longer valued.

Because decreasing land, commodity and stock prices are deflationary and deflation can never be tolerated, inflationary medicine is being poured over our economy liberally. This inflationary government medicine is also know by its street name: "printing money out of thin air." What a treat! Can you imagine being given the privilege to order that money be printed out of thin air? That sounds like a habit I could get used to. The economy is slow? Sprinkle some fairy dust on it and it'll perk up - duh!

The market is in deflation but the government is trying to change it. Markets will win (as always) but governments will push their inflationary medicine so hard that once the markets are done dealing with their deflationary issues (1-3 years?), the United States (and others that seem all too willing to follow our lead lately) could lurch into a highly inflationary drunken fit. Buying gold now gets you in at a reasonable price and ensures protection from the monetary storms that lie dead ahead.

I have seen premiums AT MULTIPLE DEALERS for physical metal products I like ranging from 10-100% over the paper market spot price lately. This compares with 5% or less for the previous five years. Things changed last spring, possibly for awhile. I understood when dealers had sketchy inventory after we cracked $1000/oz gold and $20/oz silver last spring. I mean yo, the fever was on and the bull was raging. Intoxicating gains make a speculative beast tough to tame. But when gold dropped from just over $1000/oz to $750/oz, the shortage remained. Now, the U.S. Mint is too busy to supply customers willing to pay 25% over spot price for their coins. Forget the fact that it is one of the U.S. Mint's mandates to do so.

I bought lots of physical silver at $15-18/oz, not exactly near the bottom. I believe we're going into a brief deflationary period and I know silver doesn't do well in a deflation. The "paper" price of silver is now at $10/oz (i.e. futures price or price seen on a price chart). Not a great investment so far, eh? Yet, on Ebay and at multiple dealers in cyberspace and/or a town near you, physical silver in the "real" market sells for $15-22/oz.

You see, actions can have unintended consequences. When bad money is used to chase out and beat down good money, the good money goes into hiding. And it becomes demanded by more and more people who lose faith and trust in the paper promises. It has happened with every fiat currency in history. A worldwide experiment of giving one country the ability to print the reserve currency for the whole planet at its whim is headed toward the same fate. The current fiat currency regime (nightmare?) may be the grandest in terms of scale, but this scheme like all others before it is destined to fail and flame out at horrible economic and societal cost. This is not a conspiracy, this is the expression of human character flaws. Few mortals can resist the temptation to print more money in a time of need once they have had their first taste.

Gold is an alternate currency. It competes with the paper promises of panicked politicians, which throughout history have yielded less than a junk bond and harbored three times the risk. Which investment do you think will hold up better going forward?

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