Physical Silver

[FCharlie]

As a means to hedge against potential inflation that results from excessive QE and an exponentially growing U.S. national debt, are there any of us here building physical silver positions?

 

My logic here would be that the monies paid for Social Security, Medicaid, Medicare, and any other entitlements currently exceed all tax receipts, the U.S. national debt is currently $16+ Trillion, and if budget projections end up as expected (They usually end up worse than expected), the United States is facing a decade of $1 Trillion deficits. Not sure of the exact statistic, but I think 10,000 baby boomers each day sign up for Social Security. Wow!

 

At some point, the owners of U.S. Treasury securities will not want negative return investments. At some point, we will probably face a currency crisis. When? No idea. This could go on for many more years or we could face a crisis in 2013.

 

Other reasons to own silver:

 

Commodities tend to run in 20 year super cycles. We are only a decade into this one.

 

Industrial demand for silver for solar, cell phones, computers, etc should continue to consume supply. A large amount of silver is consumed and disposed of as opposed to gold, which is mostly used for jewelery and coins and gold is rarely tossed into landfills.

 

Precious metals, even with their decade long bull run, are still mostly unloved. Most people don't own gold or silver, and if masses decided to go in, there's simply not enough size or liquidity for people to own silver. If 200 million people woke up tomorrow decided to buy eight ounces of silver bullion each as a small $250 investment, those 200 million people would overwhelm global production two times over. That's 1.6 billion ounces of demand against 800 million of annual production, but actually against it's more like 8 times the actual amount of silver available for investment since again, most silver is consumed by industry.

 

 

Seems like there are a lot of reasons silver can keep rising and not so many reasons that it could fall. The reasons that exist that would hurt silver prices would really boil down to the U.S. government getting it's finances in order, drastically cutting the deficit which would support a strong dollar. Likely?  I think no.

 

Thoughts?

 

 

 

 

[Palantir]

I think hedging inflation is a poor idea, because we need inflation to happen first. Secondly, even if inflation does happen, many things can be inflation hedges, why silver?

 

According to Ray Dalio, gold performs well in deleveragings, is there evidence that silver behaves the same way?

 

You're summarizing a lot of what  mainstream investors say about silver, however it's not in the form of a coherent argument, I think you should sharpen your opinion a little bit and present a case. (No offense btw).

[beerbaron]

You might what to reflect a little bit on the difference for an economy between Quantitative Easing and credit creation. It might change your views on inflation.

 

BeerBaron

[FCharlie]

I recognize there is minimal inflation today.

 

How does the Federal Reserve drain Trillions of liquidity when things turn around? Is it possible to do this without creating a crisis?

 

Who's the bidder for mortgage backed securities with 3% mortgages behind them if the Fed becomes a seller?

 

How many years can the United States run a $1 Trillion deficit without anyone questioning the $US Dollar as a reserve currency?

 

I'm looking for information as opposed to presenting a case for buying silver so feel free to expand on any reasons why it wouldn't work out over a period of say, eight, nine or ten years.

 

 

 

 

 

 

[Palantir]

I recognize there is minimal inflation today.

 

How does the Federal Reserve drain Trillions of liquidity when things turn around? Is it possible to do this without creating a crisis?

 

Who's the bidder for mortgage backed securities with 3% mortgages behind them if the Fed becomes a seller?

 

They can drain liquidity by raising rates, which will in theory not be for a few years.

 

Regarding MBS's, I don't see there being a problem for selling these securities. Many of them are liquid, and you have to keep in mind, they are constantly maturing and being replaced by newly bought securities, and that position can be slowly wound down in a combination of maturation and sales.

[ItsAValueTrap]

1- Warren Buffett used to horde physical silver.  I don't think he made much money off it.  Apparently he also did swing trading on copper futures... I'm not sure about that one.

 

2- Personally I find that predicting commodity prices is too hard.  There are a lot of variables at work that makes prediction hard.

 

Even Soros, who is famous for his macro trades, has a hard time predicting commodity prices. 

Or look at Jim Rogers (who advocates futures as there is some yield on them).  His book predicted that the supply of lead would be constrained due to environmental and NIMBY issues (which is true in many but not all parts of Australia)... but it turns out that lead production went up a lot because of China.

 

I think that some diversification may be sensible.

 

3- Check out companies like Altius Minerals and Contango Oil & Gas.  Well-managed companies with productive assets would be another way to play commodities. 

 

4-

How many years can the United States run a $1 Trillion deficit without anyone questioning the $US Dollar as a reserve currency?

Oddly enough, people in Argentina and Zimbabwe are hoarding physical US dollars.  They are not hoarding gold or silver.

 

 

[JRH]

How many years can the United States run a $1 Trillion deficit without anyone questioning the $US Dollar as a reserve currency?

 

The idea of a "reserve currency" is more complex than the mental model most people have, which is that it is essentially "voted" on by people/institutions/nations, in one form or another.  Not accusing you of this, just saying in general, it's what a lot of people use as a "proxy" concept.

 

One example of the reality is the fact that China's holding of U.S. financial assets (reserves, T-bills, T-bonds), is a necessity in order to maintain their currency peg.  Eliminating those asset holdings would damage their export sector, as Hugh Hendry has pointed out.  They are not "doing us a favor" by buying those assets.  They are in the equilibrium they have chosen to be in for their own interests.

 

So, two distinctions I would make.  First, I would suggest that a better question is, "At what rate does the rest of the world wish to accumulate U.S. financial assets, and for what reasons?"

 

Second, I would focus on broader measures of the money supply.  If we were running $1T/year deficits while expanding private sector credit, I would be pretty concerned, too, but that is because I expect the combination would cause demand-pull inflation.

 

Just to clarify, do you believe that being dropped as reserve currency would cause inflation, or vice versa?

 

Just some thoughts.

[FCharlie]

I honestly have no idea what the inflation impact would be from being dropped as the reserve currency of the world.

 

The main concern I have is that we cannot, under any circumstances I can see, balance our budget. I don't even think we could get close. I can't see how the Fed drains liquidity fast enough to stop inflation once the economy gets heated up. Yes the easy answer is to say they raise rates through open market operations, but 3 or 4% higher interest rates would be a disaster to the budget when your debt is $20 Trillion. Once that disaster becomes reality, I go back to my original question, which is how does the Fed drain Trillions in liquidity without a crisis.

 

Combine that boondoggle with the scarcity of silver, the underinvestment in precious metals, the reality that in a crisis people tend to throw money directly at precious metals, and I *think* a strong case can be made to own silver.

 

I do appreciate all the responses so far.

 

[ItsAValueTrap]

the reality that in a crisis people tend to throw money directly at precious metals

To me, this is not 100% set in stone. 

 

One of my largest positions is in Queenston Mining, a gold explorer, so I am long gold.  But I am not sure that the long gold trade is an easy lay-up.

 

Historically, all sorts of fiat currencies has had problems and have ended badly.  Yet the adoption of fiat currencies has steadily been increasing.  There aren't a lot of people using seashell, cattle, gold coins, silver coins, etc. for trade.

 

2- Historically, gold and silver have had 50%+ corrections.

 

3- I'm not sure if silver is scarce.  Production has increased more than gold even though the price of gold has gone up more than silver.  It's not as hard to find as gold. 

 

4- Some macro trades are incredibly hard to make.  Suppose you foresaw the collapse of investment banks, homebuilders, etc.  Timing is so crucial!!!  These stocks took a very long time to collapse.

 

George Soros would crying wolf over the overleveraged financial system for decades.  There is a lot of uncertainty in macro trading.  This is why guys like Jim Rogers and George Soros are somewhat diversified.

[FCharlie]

 

 

Historically, all sorts of fiat currencies has had problems and have ended badly.  Yet the adoption of fiat currencies has steadily been increasing.  There aren't a lot of people using seashell, cattle, gold coins, silver coins, etc. for trade.

 

2- Historically, gold and silver have had 50%+ corrections.

 

3- I'm not sure if silver is scarce.  Production has increased more than gold even though the price of gold has gone up more than silver.  It's not as hard to find as gold. 

 

4- Some macro trades are incredibly hard to make.  Suppose you foresaw the collapse of investment banks, homebuilders, etc.  Timing is so crucial!!!  These stocks took a very long time to collapse.

 

 

 

 

There aren't a lot of people using gold or silver coins for trade, but gold and silver coins will always be accepted and valued in the world. They could be sold for a currency that hasn't been devalued.

 

Bank of America has served me with a couple of 50% corrections since it became my largest position! That didn't deter me.

 

Gold is recycled. Silver is often trashed. You can find miniscule amounts of silver in soap, bandages, on catheters, in medicine, in cell phones, in computers, in mirrors. These things end up in the garbage. Gold ends up at the refinery.

 

It could be many years, next year, or never when the U.S. has a crisis. If it's many years or next year, the opportunity to buy silver or gold at today's prices would evaporate so quickly that people wouldn't be able to buy enough to make a difference. If it never happens, GREAT! All my other investments, stocks and real estate will be just fine.

 

 

[Ross812]

Precious metals is a game of the greater fool. You buy a pretty piece of metal and hope someone else will give you more fiat currency for it later... Rather than buying a pretty piece of metal and hoping to convince someone later that it is even prettier and worth far more than you paid, you could own assets that are essential for day to day life. Railroads, real estate, high tech commodities, water, and land are going to be much more valuable than silver if the fiat currency unravels. If it makes you sleep better at night to have a truckload of silver bars in the basement, have at it.

 

If the fiat currency goes up in smoke, what is silver worth? If I am the bank that owns your house I think your mortgage is now... 16 ounces of silver a month... The whole premise of precious metals is flawed. Any future money supply will have to have an electronic form. Banks are not going to send trucks of silver back and forth to pay debts. The prospect of a commodity currency is further from reality now than anytime in human history.

 

If controlled inflation comes about in the next 10 years, silver will be worth whatever someone who thinks the inflation will continue for another 10 years is willing to pay for it. If precious metals revert to the mean, like they always have, you lose your entire investment. If the fiat currency implodes you have no idea what your silver is worth. I would expect gasoline, natural gas, and water will be far more valuable than a bar of shiny metal…

[Palantir]

 

The main concern I have is that we cannot, under any circumstances I can see, balance our budget. I don't even think we could get close. I can't see how the Fed drains liquidity fast enough to stop inflation once the economy gets heated up. Yes the easy answer is to say they raise rates through open market operations, but 3 or 4% higher interest rates would be a disaster to the budget when your debt is $20 Trillion. Once that disaster becomes reality, I go back to my original question, which is how does the Fed drain Trillions in liquidity without a crisis.

I think you're focusing too much on the "balanced budget" part. But you do have a point that persistently running a deficit and financing it via increasing the money supply is going to be inflationary. Let's say the economy gets heated up, why don't you feel the Fed can drain liquidity? The fed has such a huge balance sheet right now that releasing these (liquid) assets would do a lot in addition to adjusting rates. (Fed can also sell its gold holdings if inflation rises too much).

 

Basically my opinion is that the Fed has a much easier time of fighting inflation than fighting deflation.

[FCharlie]

 

I think you're focusing too much on the "balanced budget" part. But you do have a point that persistently running a deficit and financing it via increasing the money supply is going to be inflationary. Let's say the economy gets heated up, why don't you feel the Fed can drain liquidity? The fed has such a huge balance sheet right now that releasing these (liquid) assets would do a lot in addition to adjusting rates. (Fed can also sell its gold holdings if inflation rises too much).

 

Basically my opinion is that the Fed has a much easier time of fighting inflation than fighting deflation.

 

Perhaps you are correct and they can drain Trillions without an issue. I hope that's what happens. I do not wish for economic chaos or a currency collapse. I just don't see how we get out of the situation we are in without a crisis. The Fed can move rates up, but what would that do to the Treasury when they can't borrow at 1% anymore? I'm young and don't remember the early 1980's so I don't know how it played out when Fed Funds were in the mid teens. The national debt back then was much much smaller. Look how quickly the banks failed when small percentages of Trillion dollar balance sheets moved against them.

 

And in the event that we simply end up with moderate inflation, then commodities should simply rise with that.

 

All of this gets back to my point that I don't see many reasons for silver to fall significantly. The investment legends are quick to point out that if you cover the downside, the upside takes care of itself. That's all I'm thinking here.

[ItsAValueTrap]

There aren't a lot of people using gold or silver coins for trade, but gold and silver coins will always be accepted and valued in the world.

I'm not really sure that this is going on.  From reading Jim Roger's books, it seems that many countries around the world use US dollars when the local currency collapses.  This practice seems to continue today.  They just don't use gold or silver coins.  That's the reality I see so far, though I have never visited Argentina or Zimbabwe.

 

2- At the end of the day, macro speculation/investing is not my strong point at all.  I'd rather stick to things I am less ignorant about (and am interested in and think I understand).  Good luck to you.

 

All of this gets back to my point that I don't see many reasons for silver to fall significantly.

Sometimes crazy things happen with individual commodities.

 

Beaver pelts, spices... nobody cares about these commodities anymore.  Maybe not that crazy.

The Hunt brothers cornering the silver market... crazy.

The gold market have a massive correction before a massive bull market... crazy.

North America about to become an exporter of natural gas... crazy.  Several years ago Cheniere was trying to import LNG.  Ken Peak of Contango Oil & Gas, a really smart guy, made money with Cheniere (LNG) and got really lucky even though he was wrong about natural gas.

A smart guy like Jim Rogers thought that the production of lead wouldn't increase due to environmental concerns and NIMBY effects... he was wrong.

 

I think that there is a lot more uncertainty in commodities than I prefer.  Though my portfolio is really long commodities (via commodity stocks... even though I'd rather index futures over commodity stocks).