I'm concerned about holding gold and silver after watching this video...

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I'm concerned about holding gold and silver after watching this video...

 Hi all,

I saw this video from Harry Dent and was concerned about what he said regarding Gold and Silver...

http://hsdent.com/blog-report/interview/

Any thoughts?

Take care

A

 

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I would love for Chris to respond to these ideas

Maybe there are some previous posts from Chris where he argues that inflation is more likely than deflation. Does anyone know of any posts that I should be reading to get an idea on how Chris would respond to what these guys are saying?

 

Thanks,

 

Will

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Hold it

Hold it so you are diversified.  Eventually, it will move back closer to what it actually costs to get it out of the ground (anyone know how much it costs to get it out?)  It's really just a Tulip.  

MrEnergyCzar 

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CM on inflation and deflation
whoknew79 wrote:

Maybe there are some previous posts from Chris where he argues that inflation is more likely than deflation. Does anyone know of any posts that I should be reading to get an idea on how Chris would respond to what these guys are saying?

 

Thanks,

 

Will

Chris has written a lot about inflation and deflation. Here are just a couple pieces.  He's also written counter arguments, I just don't have them all in front of me.

I did a quick Google search "chris martenson inflation deflation" and picked a couple.  You can also use the search feature on the top right of this web page, which also uses Google search.

http://www.peakprosperity.com/blog/dont-be-fooled-inflation-upper-hand/4...

http://www.peakprosperity.com/blog/commodities-look-set-to-rocket-higher...

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agree, hold it

I think they do make some good points, but they have not addressed certain points:

1.  what will peak oil have on the value of gold/silver

2.  What impact will world wide purchasing of gold and silver have on ultimate prices.  Multiple countries such as China and India have begun purchasing gold.  

3.  What impact will the world wide sovereign debt crises have on the demand for gold/silver

4.  Is there a value difference between paper gold/silver and physical precious metals.  

5.  if/when the Eurozone breaks up, will the flight to safety be in dollars or precious metals

6.  Are they suggesting putting money under mattress.  If we are to have a deflationary collapse as they are suggesting, many banks will go under.  So "cash" in the bank will be a risky venture.

 

Brian

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I started watching the video....

Watched to 18:15 and I have seen enough... I am always open to debate in questioning my holding of Gold and Silver.  That's what being a critical thinker and truth seeker is all about.. not dogmatism.

That being said.. this guy is smoking crack.  They talk like they know about the debt bubble we are in.. but then to go and compare the collapse of Gold and Silver in 1980, and say that same will happen this time.. is absolutely idiotic.  Gold and Silver crashed in 1980 because Volcker decided to raise interest rates for dollar savers above the inflation rate... do you recall how high the rate on a CD was in the early 1980's?  Volcker induced a recession to save the dollar.. he protected the scarcity integrity (of the currency) and caused people to save once again.   

Bernanke has no such maneuvering room today... were interest rates simply to mean revert... the US debt servicing costs would eat up a large percentage of our tax revenue.  Simply said, the most beneficial environment for Gold is one where interest paid to savers is less than the rate of inflation.. the bigger this disparity, the stronger the case for Gold.  This argument is completely spurious.  There is no bubble now, and the demographic arguments have no bearing on Gold and Silver... the parabolic phase will come when the 1%, along with institutional investors, decide that they need lots more exposure to PM's as an asset class.  That is what I am frontrunning now.

If you have the guts and the investment capital, and believe as I do that Gold and Silver will continue to go up over time.. then there are some really absurd sales on right now in the mining space.  One example;

Vista Gold, VGZ   Market cap = $234M,  share price = $3.28. EPS = 0.93.... so... drum roll... P/E = 3.52.  

What does that tell you about the current status of the "Gold Bubble" ?????? 

And to EnergyCzar... that was a confusing post.  You appear to have no appreciation for Gold's history as money.. benefiting always from nature's own regulation of it's scarcity.  The cost of getting it out of the ground, for what it's worth.. will be going up along with energy costs over time, and along with decreasing ore grades over time.  Tulips are renewable...  more can be printed... but Gold is fossil (unless you are an Alchemist).   

 

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Hhhhmmmm.....

 I just watched their presentation.  For what its worth, I see CM's presentation of information as much more thought out, serious, and based in long term thinking.  First, this information does not talk about the arrival of a peak oil world (gas priceses have gone up nearly 20 cents in Vermont in 3 days) and it seems grounded that the economic system we are all concerned about will survive.  They talk about ups and downs and seasons, but I believe CM's presentation challenges us all to think about a world where money continues to be printed at obscene levels.  Their will be periods of inflation and periods of deflation....no one knows for sure....

My money is on more and more money printing in the future.

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another sigh

Geeze people, wake up.  Look at Harry Dent's track record.

As for making killings on low P/E gold stocks, substitute inside connected sharks for S&W.

I see more blood shed coming.  Insider information and connections as well as psychology and emotions trump numbers and so-called facts every single time.

 

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So AO...

There are some very respectible Gold/Silver analysts that have sworn off all paper (most famously "ranting" Andy Hoffman, now of Miles Franklin)... they have had it with mining stocks, and argue passionately that they (miners) will never win, will be nationalized as Gold goes up, economies get worse, etc.  There is certainly good reason to be disgusted with the recent and longer term past performance of miners.  I would never argue for someone to make miners a large part of their investment portfolio... but I do think that right now, if you want to put some money in the casino.. there are some flaming deals on miners (for all the reasons above).  There is a parabolic phase coming for PM's, and I do think there will be at least a period within that where the miners participate, and where some folks will make fortunes (if they know when to get out).  Then again, maybe I am as a moth to the flame.   

The stock I mentioned is heavily owned by Sprott and others... as with all stocks, one should do their own due diligence before investing.  

That being said... if the stock market decides to take a huge dump as a whole... given current psychology (PM's as risk assets), PM's and miners will probably dump right along with it.... and the blood will be shed as you say.          

   

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if only it were that simple
Jim H wrote:

There are some very respectible Gold/Silver analysts that have sworn off all paper (most famously "ranting" Andy Hoffman, now of Miles Franklin)... they have had it with mining stocks, and argue passionately that they (miners) will never win, will be nationalized as Gold goes up, economies get worse, etc.  There is certainly good reason to be disgusted with the recent and longer term past performance of miners.  I would never argue for someone to make miners a large part of their investment portfolio... but I do think that right now, if you want to put some money in the casino.. there are some flaming deals on miners (for all the reasons above).  There is a parabolic phase coming for PM's, and I do think there will be at least a period within that where the miners participate, and where some folks will make fortunes (if they know when to get out).  Then again, maybe I am as a moth to the flame.   

The stock I mentioned is heavily owned by Sprott and others... as with all stocks, one should do their own due diligence before investing.  

That being said... if the stock market decides to take a huge dump as a whole... given current psychology (PM's as risk assets), PM's and miners will probably dump right along with it.... and the blood will be shed as you say.          

Jim,

Never forget the government.  And never forget that the government is corrupt.  Let me give you a parallel hypothetical example.  Drug company finalizes production of highly promising drug.  Drug company makes press release to media (with promises on the side of advertising in said media when the drug comes to market).  Media hypes said drug (in anticipation of lucrative advertising deals).  Drug company stock price soars.  Drug company has to submit said drug to FDA for final approval.  FDA hacks review drug.  FDA hacks short drug company.  FDA refuses to approve drug.  Stock price of drug company plummets.  FDA hacks cash in their chips.  FDA hacks buy drug company long.  FDA approves drug.  Stock price rises.  FDA hacks cash in their chips.  Through connections, select politicos and others have access to this inside information as well, in return for special favors.  Investigation and prosecution is avoided through these connections.  Any resemblance between this story and real world events is purely coincidental.  

This hypothetical scenario has repeated itself in many permutations and combinations.  Do you think gold and silver are not being influenced by a similar hypothetical scenario?

P.S.  Why would anyone want to bet in a casino if they could own a casino?  

 

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I agree.. anything paper is ultimately in the casino...

And they run the casino.  Just remember.. they can (as you show) make money on the upside as well as the downside.  If you follow the Comex watchers as I do, you will know that of late the bankers have been covering their shorts in Gold and particularly Silver;

Note:  CoT = commitment of traders (report)

"This would be a good spot to discuss some silver fundos. As I mentioned in yesterday's video, the latest silver CoT numbers are very intriguing. At the height of the silver rally back in May, the spec long position in silver exceeded 45,000 contracts. Today, that number has been nearly cut in half to about 24,000. In contrast, the bank long position in May was around 36,000 contracts. Today that number stands near 41,000! Clearly, these are extremely bullish statistics and exactly what I would be looking for, from a CoT perspective, at an important bottom. These numbers don't mean we are at the bottom but they do indicate that we are very close."

http://www.tfmetalsreport.com/blog/3218/how-bout-some-charts

The (bullion) bankers know full well that if they take their foot off of Silver, especially in an environment of new QE.. that it will fly.  At that point, there won't be enough naked shorts in the world to stop some of the smaller Gold/Silver miners, that usually trade several 100K shares per day, from lifting off as well.  That is my thesis for easing into more (already beaten down) miners at this time.  I agree that it is against the grain... as we discussed in another thread, many Gold/Silver true believers are completely sworn off paper.  Why should the bankers make all the money when the miners finally take off?               

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Just a little more talk about stocks....

Many of the PM stocks are beaten down badly... right now.  If you believe that Gold and Silver are headed up.. it's hard to argue that some of the miners are not reasonable investments at this point, on fundamentals alone.  Buying miners now is buying when there is blood on the streets, as far as that goes.... 

You could buy SPG (Simon).. which Mr. Market has been in love with since post crash.  Why Mr. Market would love the stock of a company that owns shopping malls, when most of us here see a post-consumer world emerging.. I don't know... um.. but wait.. I do know!  The bankers couldn't let it die.. because then SPG would not be able to service the debts on all the CRE that the banks hold... so a circle jerk of sorts emerges, SPG sells more shares to get money to pay the bankers, and then the momo's/algo's catch on and drive it higher, etc, etc. 

Anyway, you could buy SPG;  with a P/E of  43, and an unsustainable Div. of 2.8%, which amounts to $3.60 per share vs a stated EPS of $2.99 (I guess they have some special accounting tricks over there in REITland).  

Or, you could buy Silver miner SVM, with a current P/E of 14, and a Div of 1.6% (yes, some miners have dividends now) that is a sustainable 10 cents per share, vs earnings of 50 cents/share.  SVM is trading near two year lows.... remember the old adage buy low?  

If one was of a mind to be buying stocks right now.. I think selected miners are a good choice.      

 

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 Harry Dent is extreme in

 Harry Dent is extreme in his thinking.  Doesn't mean he's wrong about the outcomes he's predicting, but he is extreme.  What's nice about CM is that he is realistic...he acknowledges that this is a game of probabilities, not predictions.  He has said that his portfolio is weigthed 30% for a deflationary outcome and 70% for an inflationary outcome, and that these weightings are based on his own personal views of the liklihood of each occurring.  Even though assigning probabilities to the unknown is more art than science, it is imperative not to place all eggs in the same basket if the outcomes of the alternate scenario are too devastating to ignore.  And these (inflation and deflation) are very much binary outcomes with consequences on opposite ends of the spectrum.  In other words, CM is almost certainly going to have substantial paper -- and probably permanent -- loss of some capital (either 30% or 70% depending on which way things go), but given how severe the consequences of each scenario will be, he will likely make far more in terms of purchasing power on his profitable bets than he will lose on his losses.  

Harry Dent sounds like he's 100% prepped for deflation, which is fine.  But if he's wrong he's going to be very very sorry that he didn't look at this probabilistically instead of putting so much emphasis on predicting the future with such precision and trying to look like a genius.  Right now the central banks are trying to navigate a very fine line between deflation and inflation.  Each is a slippery slope and, once it has begun to manifest itself, each is almost impossible to stop.  History is littered with examples of high/hyperinflation that quickly and permanently escaped the control of the government until such point that the currency was destroyed.  And deflation, which is less talked about but in my opinion even nastier than inflation, is almost impossible to overcome if the government doesn't "manage expectations" and print enough to prevent credit contraction.  The M3 money supply -- conveniently no longer reported by the government but still tracked at shadowstats.com -- is in fact seriously contracting and the Fed is rapidly printing money in an effort to compensate for the deflationary contraction.  Some day they will miss a beat on one side or the other...and when they do it will not be pretty.  

By the way I agree with Harry that precious metals and everything except the US dollar and certain other currencies will get creamed by unmitigated deflation.  Ultimately, however, the finite supply of critical commodities will win out and prices will soar.  For example, with a 10-15 year time horizon something like silver appears to be close to a no-brainer to me.  Deflation or not, above ground supplies are nearing zero, diminishing at a rapid rate, production is shy of consumption by a wide margin annually, ore grades are falling, and mining is heavily influenced by base metal prices (primarily lead and zinc) for which silver is mined simultaneously in such small quantities that it is viewed almost as a byproduct.  Silver is a monetary metal like gold, but it also has over 10,000 applications -- second only to oil -- and is in alarmingly short supply.  If we have deflation and silver prices crash, I will be buying what little I can afford to.

Also, I think that the public will get so desperate in a deflationary environment that they will beg the Fed to print their way out of it by nationalizing the few remaining banks, improving the velocity of money, etc.  It would be just the cover the Fed needs to inflate the currency to the point that the dollar turns into confetti.

Society loses either way.

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 Jim H, Have you looked at

 Jim H,

Have you looked at Goldgroup, Impact Silver, Yukon Nevada Gold, or Aurcana?  These junior miners are unbelievably cheap save for a deflationary outcome.  Some of these junior miners have near term production fully funded, no debt on their balance sheets, very much cash flow positive, and trading at multiples of 3, 2, and even 1x 2013 or 2014 expected free case flows.  Crazy cheap and an interesting way to lever precious metals prices.  Just have to be careful to watch for the all-too-common stupid management decision out of left field that destroys shareholder value...one of the advantages of investing in physical metals.

Also, if you're concerned about a collapse of the financial/banking system, you'll be better off in physical than in the stock market during a bank holiday.

Having said that, I am long junior miners for part of my portfolio.

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AWR...

I have for the most part been playing with miners just a step up from the .PK (pink sheet) level.. although I do have shares of USSIF.PK.  I have EXK, HL, UXG, RVM, and the aforementioned Vista Gold.  I think the Yukon Nevada you mention looks every bit as tempting as some of mine.  Crazy cheap is right.    

As for physical Gold and Silver, I hold almost all of my non-IRA/401K "cash" outside of the banking system, in safely stored Gold (mostly US buffalos) and Silver (mostly ASE's).... though I might have forgotten where I buried it, hence it might be lost  : )    Also have the requisite CM-recommended cash holdings in order to weather those pesky bank holidays.  My interest in PM stocks should not be construed as an either/or.... the physical is the core of any savings plan in my book.         

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Wall Street Has Your Back...
Ameet wrote:

I saw this video from Harry Dent and was concerned about what he said regarding Gold and Silver...

http://hsdent.com/blog-report/interview/

Any thoughts?

Don't worry about your gold and silver holdings Ameet, Wall Street has your back....

It really doesn't matter if you fear inflation or deflation, because as soon as you fear something, Wall Street owns you. 

Best...Jeff

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Good stuff Jim and AWR.

Good stuff Jim and AWR.  Personally, I picked up GDX, GDXJ and SIL because of complications in knowing not only financial statement data, but also management to have confidence they won't give themselves options and dilute future profits.  I HOPE those funds will do well as mining shares in general do.  As for bullion, I have mostly silver, but plan to even out with gold and also I really like palladium as someone on my thread directed my attention to it.  It is 30 times more rare than gold and sells at just over 1/3 gold's price.  BTW, I LOVE those gold buffalo coins and expect to get some soon.  The question is now, or wait and see if the dollar strenghens and gold dips further.  I also have cash and and future inheritance and retirement in paper (limited TSP options).

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Some great questions

1.  what will peak oil have on the value of gold/silver

I beleive Peak Oil will be nuetral to PM's, meaning that Peaking and slowly diminishing production will not add a premium to Gold.  It may have an indirect effect though.  I belive Gold will continue to move inversely to the dollar, and peak oil could certainly affect the dollar.  Which direction depends on how far the FED is willing to go to impose inflation.

2.  What impact will world wide purchasing of gold and silver have on ultimate prices.  Multiple countries such as China and India have begun purchasing gold.  

Obviously if there is a worldwide move to purchase PM's, the price will know no limits.  However, this would require a coordinated change in monetary policy (which IS possible). Sure, central banks are buying but retail investment remains really low.....but rising.  Even aside from that though I think PM's will continue to act as a safehaven amid this economic turmoil.

3.  What impact will the world wide sovereign debt crises have on the demand for gold/silver

Tough to say.  If the debt crisis continues to degrade the forces of deflation may prove irresistable.  Let's face it, something that is unsustainable will not be sustained.  Our current (unsustainable) economic policy of debasing the currency and artificially surpressing interest rates may have to give way to higher interest rates and defaltion. Take a look at the bond rates of EU members now under stress - a glimps into the future IMHO.  A period of deflation could eventually ensure here in the US.

4.  Is there a value difference between paper gold/silver and physical precious metals.  

There is.  The premium of PHYS shares (physical gold shares) to Gold ETF's like GLD bears this out. It commands a 30% premium!

5.  if/when the Eurozone breaks up, will the flight to safety be in dollars or precious metals

Most likely dollars will benefit intially, perhaps even dampening gold prices.  We saw multiple periods of EU distress in the past year.  Gold's reaction was nuetral-negative.  The Dollar strengthed. But once the smoke cleared Gold emerged better than ever.

6.  Are they suggesting putting money under mattress.  If we are to have a deflationary collapse as they are suggesting, many banks will go under.  So "cash" in the bank will be a risky venture.

We did have a brief deflationary collapse post 2008.  Most banks did not go under.  The money masters figured out how to beat that one with Fannies and TARP's.  In the purely fiat world (since 1971) this sort of  "magic" is possible. 

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neutrino, Always good to

neutrino,

Always good to read what you have to say.  I think you are the one who put palladium on my radar screen.  I do notice that it seems to have had a lower correlation to movements in the other PMs, and therefore could offer could diversification in the PM arena, particularly given its low price relative to its scarcity and the price of gold.

Higher interest rates and deflation here?  Amazing, but clearly possible, if not possible given we live in bizarro world where interest rates do NOT largely reflect inflation expectations.  But if we have European level of interest rates, wouldn't that bury us in debt service as maturing issuances are rolled over into higher and higher rates?  Back of the envelop calculation to me indicates a 5% increase, from roughly 2% to 7% equates to $700 BILLION per year, bringing total debt service to over $1 trillion!  Bottom line, won't the fed buy bonds to keep rates low if only to keep debt service from consuming tax revenues?  We surely don't have the Volcker bullet in the gun this time, even if rates rise in a deflationary envirnonment and not an inflationary environment like the 70s/80s.

On value difference between physical and paper, my question is whether spot price is determined by physical or paper?  I can get a 1 oz. coin at $50 or so over spot, which is far lower than a 30% premium.  So not so much a premium of physical versus spot price, but absolutely a big premium between physical and paper funds that are suspected NOT to be fully backed by the metal.

 

 

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dmger14

 Would be interested in neutrino's thoughts on this as well.

Higher interest rates and deflation here?  Amazing, but clearly possible, if not possible given we live in bizarro world where interest rates do NOT largely reflect inflation expectations.  But if we have European level of interest rates, wouldn't that bury us in debt service as maturing issuances are rolled over into higher and higher rates?  Back of the envelop calculation to me indicates a 5% increase, from roughly 2% to 7% equates to $700 BILLION per year, bringing total debt service to over $1 trillion!  Bottom line, won't the fed buy bonds to keep rates low if only to keep debt service from consuming tax revenues?  We surely don't have the Volcker bullet in the gun this time, even if rates rise in a deflationary envirnonment and not an inflationary environment like the 70s/80s.

I believe you're on the right track here.  The Fed will -- out of necessity -- buy bonds (read: print money) to keep debt service from consuming tax revenues.  It will be QE2 but on steroids.  But the question remains: will it be inflationary or deflationary....or some of both.  I think Jim Rickards has it right when he says the Fed will remove dollar limits and time limits on printing and will call it something like "nominal GDP targeting" where they basically say they'll print until GDP growth hits X%.  This removes the obtacle of having to constantly justify new rounds of money printing.

On value difference between physical and paper, my question is whether spot price is determined by physical or paper?  I can get a 1 oz. coin at $50 or so over spot, which is far lower than a 30% premium.  So not so much a premium of physical versus spot price, but absolutely a big premium between physical and paper funds that are suspected NOT to be fully backed by the metal.

Spot price is currently determined in the paper markets.  I believe that will change someday when a big contract holder decides to "take delivery" and there isn't enough physical PM to fulfill the contract (similar to what Warren Buffett did in silver back int he late '90s).  Once the intergrity of the paper markets is undermined by a perception change that recalibrates investors toward the real physical market instead of the fantasy paper market set up by the banks.  On some days more ounces are traded in one day in the paper market than are physically produced in an entire year!  If all those dollars we directed out of the ETFs and futures markets and were instead chasing the actual physical precious metals, the price would explode IMO.  And this is not even taking into account the historically low level of retail ownership and global fiat currency system in a debt crisis!  The 30% premium on the Sprott funds are in my opionion due to the masses who want some PM exposure but don't understand the benefits of holding physical.  Also, the Sprott funds offer a little more liquidity than holding physical.  I view them as a "bridge" vehicle for investors who know enough that they want their PM investments to be backed by physical but who are not yet concerned enough with the banking system to liquidate their brokerage accounts and buy physical.  Truth be told, I own some of the Sprott Silver and Gold funds in addition to mining stocks and actual physical, but I'm contemplating going all physical.

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Correction
neutrino wrote:

4.  Is there a value difference between paper gold/silver and physical precious metals.  

There is.  The premium of PHYS shares (physical gold shares) to Gold ETF's like GLD bears this out. It commands a 30% premium!

Neutrino

You have some good thoughts, but I want to correct one point for other readers. The 32.25% premium is only on the Sprott silver fund PSLV. The Sprott gold fund is just 6.4%. (These premiums are as of today.) http://www.sprottphysicalsilvertrust.com/NetAssetValue.aspx   http://www.sprottphysicalgoldtrust.com/NetAssetValue.aspx There is another silver ETF with full physical backing that has a premium of 9%, SBT.U, and trades over the counter in the US as SVRZF. Still high but there are very few fully backed silver funds and they are in high demand. 

As Dmger14 said, the markup on coins is pretty modest.

Travlin 

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AWR wrote:  I believe
AWR wrote:

 I believe you're on the right track here.  The Fed will -- out of necessity -- buy bonds (read: print money) to keep debt service from consuming tax revenues.  It will be QE2 but on steroids.  But the question remains: will it be inflationary or deflationary....or some of both.  I think Jim Rickards has it right when he says the Fed will remove dollar limits and time limits on printing and will call it something like "nominal GDP targeting" where they basically say they'll print until GDP growth hits X%.  This removes the obtacle of having to constantly justify new rounds of money printing.

Spot price is currently determined in the paper markets.  I believe that will change someday when a big contract holder decides to "take delivery" and there isn't enough physical PM to fulfill the contract (similar to what Warren Buffett did in silver back int he late '90s).  Once the intergrity of the paper markets is undermined by a perception change that recalibrates investors toward the real physical market instead of the fantasy paper market set up by the banks.  On some days more ounces are traded in one day in the paper market than are physically produced in an entire year!  If all those dollars we directed out of the ETFs and futures markets and were instead chasing the actual physical precious metals, the price would explode IMO.  And this is not even taking into account the historically low level of retail ownership and global fiat currency system in a debt crisis!  The 30% premium on the Sprott funds are in my opionion due to the masses who want some PM exposure but don't understand the benefits of holding physical.  Also, the Sprott funds offer a little more liquidity than holding physical.  I view them as a "bridge" vehicle for investors who know enough that they want their PM investments to be backed by physical but who are not yet concerned enough with the banking system to liquidate their brokerage accounts and buy physical.  Truth be told, I own some of the Sprott Silver and Gold funds in addition to mining stocks and actual physical, but I'm contemplating going all physical.

Excellent points.  One thing that is a big plus for paper is being able to sell and buy in volatile markets with far less transaction fees and hassle, giving a more feasible option to time  market moves.  For silver in particular, with its higher volatility, someone could make a killing if they can be in the ballpark of decent timing.  I don't pretend to know enough to market time, so accumulation is my game.  But for those who want to try, paper is (FOR NOW, UNTIL THE SHTF WHICH COULD BE ANY TIME) a viable option. 

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dmger14...

I agree that, to the extent that the PM's have been of late, and may continue to act, in sync with the risk assets... then there is opportunity to play the volatility for those adept enough.  I mention this because there is a piece by Bob Janjuah on ZH right now that lays out what I see as a credible scenario for how risk on/risk off might cycle for the rest of this year;

http://www.zerohedge.com/news/bob-janjuah-ushers-new-year-here-we-go-again

"The tactical outlook is always more difficult to nail, but as of now:

  • I think we are very close (days) from a top of some sorts in equities and the risk-on trade. Depending on price action, I reckon the time to get short risk is around/by January 13th - as a proxy guide the S&P should be within 3% to 5% of current levels (1277 S&P).
  • I think Q1 is going to be extremely bearish for risk, for equities, for the periphery, for the euro, for credit spreads, etc. The real pain may only be seen in March, when I expect the hard Greece default to happen. In Q1 I expect the S&P will trade down to/below 1000, and core US, UK and German government Bond yields will be closer to 1.5% than 2%.
  • For the balance of H1, based on my US, UK and eurozone Q2 QE call, I would expect to see risk assets recovery hard (especially commodities);
  • At some point in early Q3 a huge opportunity will present itself to those who want to get short risk, as by the Summer I fully expect the (coordinated) Western QE to result in global real economy failure. However, for now, I think H1 will contain significant volatility, so I will worry about H2 nearer the time. Suffice it to say that my S&P 800 target for 2012 still holds.
  • In terms of where my outlook herein for markets may prove to be wrong, I think most likely that it will be by being too bearish (risk) too soon, by around a quarter or so, driven by a failure on my part to recognise not just the willingness but also ability of policymakers to "kick the can" down the road for a little bit longer. Let's see!"

 

 

 

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dmger14
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Jim, pardon me but what is

Jim, pardon me but what is "H1 and H2?"  First and second Half of the year?  This dovetails pretty well with the new Gary Shilling predictions/forecasts, which leads me to a new post I hope you will chime in on...

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Yes.....

that's how I read the Janjuah piece.. 1st Half and 2nd Half 2012. 

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Thanks for the correction on

Thanks for the correction on the ETF's Travlin - that is  exactly right, my mistake.

 

Higher interest rates and deflation here?

It could happen but probably not here and now.  Ideally the Fed wants to keep things nuetral - offsetting the natural tendancy toward deflation by reflating........the banks.  Make no mistake, what the Fed is doing now is repairing balance sheets of the TBTF banks.  Backstopping assets, suspending mark to market accounting, handouts via the discount window are all attempts to keep the banking game alive.  It can be argued that a nations banking system is the heart and lifeblood of its economy.  While true, its  piss poor justification for keeping the casino banks alive.  Regardless of the currency system (fiat or asset backed) reckless banks must fail so that shareholders are wiped out, lessons learned and conservative banks reap the rewards.  Instead the Fed has created a monster (or more lappropriately the monster created the Fed).

As mentioned the Fed is primarily concerned with the balance sheet repair of banks. Asset deflation in the housing sector has caused most banks to be technically insolvant based of their capital ratio's (a ratio of asset value to cash).  The Fed is backfilling the hole with cash not tied to assets (through various mechanisms).  Once banks are repaired AND the deflation in housing ceases then bank  balance sheets will be considered safe and lendable.  In that environment the banks will be anxious to start lending again - afterall that is their core business. In the fractional reserve money system lending is the priciple way money supply is expanded. Inflation will ensue as a result of lending and high inflation is princibly curbed by increasing interest rates.

One of the keys to the Feds current success in maintaining a relative balance in inflation/deflation is they are not dealing with a banking system that wants to lend.  This will change some day.  Once balance sheets are repaired I beleive we will be turning a (potentially ugly) corner when it comes to monetary policy. The Fed will shift from saving banks to curbing them.  The primary means of curbing bank lending (and the resulting inflation) is through interest rate hikes.  The Fed will not have to worry about asset deflation affecting balance sheets anymore so it will most likely use interest rates as one of it's key monetary tools like it has traditionally before the Financial crisis began. Interest rates are one of the levers in its machine and investors should not assume the Fed will not face circumstances warranting its adjustment higher. 

Keep in mind that direct monetization of debt is the last ditch desparate act of a dying fool.  The spiral it creates is well known and predictable.  And while our Debt to GDP ratio is high it can go higher.  Just look at Japan whose D/GDP is double the US.  The point is that there is potentially some spare capacity for more debt.   So it will do all it can the next few years to keep the balance until it can't. 

The "when" and "how much" is anyones guess but I certainly do not rule out interest rate increases. Should that occur I expect Gold will take a hit. Its still an investment to hold to be sure.  Long term it will come out the winner.  But just don't get too complacent or too leveraged.

 -Neutrino

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Excellent stuff, neutrino. 

Excellent stuff, neutrino.  I agree the banks are on a mend by deposits at the fed for free money.  I do have a few questions though.  If the fed increases interest rates, won't that lead to increased rates on treasuries, and drive up national debt service as rollover and new debt has to be issued at higher rates?  Also, many are predicting that by the end of this year we will be slipping into a recession.  How will the banks lend out so much money in that scenario, given the default risk will be higher?  Will they ease restrictions on lending and go with an easy money/risky lending scenario?  What if they want to lend but people and businesses are still deleveraging and don't want to borrow in a recessionary period?  I realize that increased rates will be bad for gold, but seems to me those rates will have to be above the inflation rate to have a meaningful impact, and at that level, debt service payments will skyrocket and the fed will have to issue MORE debt than otherwise to cover them.  Also, IMO, Japan was able to increase debt to GDP to such a high level because all manner of people and institutions there buy Japanese bonds and not their central bank, so they've had deflation.  In contrast, the fed is buying much of our debt here, which should prove inflationary and lead to much higher interest rates relative to Japan, which is a cycle of destruction on our finances as debt service payments skyrocket, forcing the treasury to issue more bonds as the fed ny that time may be the only buyer of treasuries left.

As always, thanks for the input.

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The context to keep in mind

The context to keep in mind for my comments about increased interest rates are that they are a possibility not necessarily probable though.  While not probable, particularly in the near term, they are far from impossible.  Most of our assumptions are of a steady state going forward.  Prolonged economic contractions are likely to produce stresses in way we may not completely anticipate.  For example , while the need for organic buyers of US treasuries may presently appear optional making the artificial supression of interest rates a viable alternative, what happens in the case of, say, war?

 If the fed increases interest rates, won't that lead to increased rates on treasuries, and drive up national debt service as rollover and new debt has to be issued at higher rates? 

Yes, it would increase the amount to service national debt.  But leaving rates artificially low in the face of a discouraged Bond market would require the Fed to buy Treasuries (or cancel the auction and raise the question of default) thereby increasing the National Debt and the cost to service.  Of the two the later is slower, albeit a Faustian Bargain.  But both the spector of default AND awareness of monetization BOTH put upward pressure of rates.  Not an enviable position.

Remember the Fed Funds directly affects T-Bills.  Longer maturity instruments (such as notes or bonds) are somewhat more influenced by traditional supply and demand. That is why the 30yr is yeilding 3% and the 1 yr, 0.12%.  Don't get too hung up on terminolgy, T-Bills = short term maturity (months), T-Notes = medium (years), T-Bonds=long term maturities(30 years).  For a primer: http://www.thestreet.com/story/1156889/1/how-does-the-fed-funds-rate-affect-treasury-bills.html 

Regardless your instincts are right on. The Fed Funds rate will affect "Treasuries".  Accordingly I do not expect this sort of policy measure to come to fruition, at least not for any sustained duration.  However I only consider it only less likely, certainly not impossible. Keep this context in mind when reading my previous posts.  I am not suggesting this is the most likely course of action, but it remains a distinct possibility. Especially for temporary durations when confidence in the USD is obviously slipping beyond what is manageable.

Question though, If the Fed maintains its interest rates low, which eventually fails to attract organic bidders (direct and indirect) for various Treasuries, what will happen to interest rates on T-Bills, Notes and Bonds barring intervention? (Fed buying)

What is the known effect of that type of intervention?

How will the banks lend out so much money in that scenario, given the default risk will be higher? 

Again you are correct.  My time horizon for this is a little further down the road (~3 years+). Our economy still has some deleveraging left before we reach something close to a sustainable base.

Will they ease restrictions on lending and go with an easy money/risky lending scenario?

No. Lending, in earnest, will only return when they have a viable balance sheet and economic downside risks have abated.  Risk will have abated when the economy has fully contracted and little or manageable downside is perceived. We are not there, not even close.  So the "natural" tendancy is toward deflation which the Fed hopes to offset, at least at the balance sheet level, by reflating.

I realize that increased rates will be bad for gold, but seems to me those rates will have to be above the inflation rate to have a meaningful impact, and at that level, debt service payments will skyrocket and the fed will have to issue MORE debt than otherwise to cover them. 

Interest rates will have to be above inflation to encourage a shift away from other assets.  In fact you've touched on one of my fundemental assumptions on the behavior of Gold.  Gold had embarked on an unmistakeable upward trajectory ever since net interest on savings has been negative i.e. since 2001 when the Fed dropped and kept rates artificially low.  Money that would have appreciated with a net interest using various vehicles needed to find other avenues.  It did in housing, commodities and Gold.  Lending expanded the flow and leverage amped it higher. I believe Gold has other drivers besides merely net interest but this nonetheless is one of them.  Should that incentive be removed - i.e a return of real net interest on savings via interest rates higher than inflation - then you will see one of the legs kicked out of Gold.  This is precisely the cause of the Gold bubble unwinding in 1980. So keep that in the back of your mind however unlikely it may seem.  If you do see it in the future you have a clear understanding of cause and effect and can position accordingly.

If and until then I'll be long Gold.

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dmger14
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I was sloppy on my

I was sloppy on my terminology but do know the difference between bills, notes and bonds.

Question though, If the Fed maintains its interest rates low, which eventually fails to attract organic bidders (direct and indirect) for various Treasuries, what will happen to interest rates on T-Bills, Notes and Bonds barring intervention? (Fed buying)

If the fed doesn't buy them, I presume they would go up.  

What is the known effect of that type of intervention? 

If you are referring to fed intervention to buy treasuries so rates stay lower, keeping housing prices and consumer borrowing from tumbling, I don't know, maybe the fed can buy treasuries and keep rates low.  However, seems to me at some point the interest rates charged to citizens and companies can diverge from the manipulated treasury rates.

 

Will they ease restrictions on lending and go with an easy money/risky lending scenario?

No. Lending, in earnest, will only return when they have a viable balance sheet and economic downside risks have abated.  Risk will have abated when the economy has fully contracted and little or manageable downside is perceived. We are not there, not even close.  So the "natural" tendancy is toward deflation which the Fed hopes to offset, at least at the balance sheet level, by reflating.

OK, makes sense.

 

I realize that increased rates will be bad for gold, but seems to me those rates will have to be above the inflation rate to have a meaningful impact, and at that level, debt service payments will skyrocket and the fed will have to issue MORE debt than otherwise to cover them. 

Interest rates will have to be above inflation to encourage a shift away from other assets.  In fact you've touched on one of my fundemental assumptions on the behavior of Gold.  Gold had embarked on an unmistakeable upward trajectory ever since net interest on savings has been negative i.e. since 2001 when the Fed dropped and kept rates artificially low.  Money that would have appreciated with a net interest using various vehicles needed to find other avenues.  It did in housing, commodities and Gold.  Lending expanded the flow and leverage amped higher. I believe Gold has other drivers besides merely net interest but this nonetheless is one of them.  Should that incentive be removed - i.e a return of real net interest on savings via interest rates higher than inflation - then you will see one of the legs kicked out of Gold.  This is precisely the cause of the Gold bubble unwinding in 1980. So keep that in the back of your mind however unlikely it may seem.  If you do see it in the future you have a clear understanding of cause and effect and can position accordingly.

Makes good sense to me.  I didn't know offhand that rates were dropped below inflation in 2001 but it surely makes a compelling case for negative real interest rates being a huge factor in gold.  In fact, wouldn't interest rates have to be higher than the REAL rate of inflation (or at least ballpark close), not the bogus underestimate contrived by the gubment?  While I certainly have this issue in mind as it relates to gold price rising or falling, wouldn't an increase in rates to above the real rate of inflation lead to potentially hundreds of billions of dollars in additional debt service payments?  I realize the only debt service affected would be new issuances and rolled over debt at the new, higher rates. 

 

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 What is the known effect

 What is the known effect of that type of intervention? 

If you are referring to fed intervention to buy treasuries so rates stay lower, keeping housing prices and consumer borrowing from tumbling, I don't know, maybe the fed can buy treasuries and keep rates low.  However, seems to me at some point the interest rates charged to citizens and companies can diverge from the manipulated treasury rates.

 

I was referring to the known effect of direct monetizing of debt as a key feature in the demise of Germany, Zimbabwie, Argentina, Bolivia, Indoneasia, etc, etc.  As I said earlier it's a last ditch desperate measure that buys you time but ensures currency destruction. 

On the other hand a default on debt rsults in sky high interest rates.  Consider Greece whose Bond market today assumes a defualt in unavoidable (an it is unavoidable).  The interest on their 2 year Bonds is 180%.  Since they cannot monetize as an EU member, they will default, exit the Euro and suffer a massive devaluation while overnight being forced to leave within their meager means.

 

Each a death by different means.  One of these two scenario's awaits the US if present trends persist.  Unless of course the money masters pull out the rug from everyone and changes the rules of the game as they have many time before. I happen to think they eventually will. For a preview of what that may look like see Jim Rickards presentation to Pentegon planners.

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dmger14
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Is Jim Rickards the same guy

Is Jim Rickards the same guy James Rickards who wrote Currency Wars?  I am reading that book now at the request of visionvictory on youtube (Daniel) and it is a good read!

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