Precious Metals Bargain Hunting

We’ve had a rocky few weeks but I’m convinced that bottom has been hit for this year and we are on the way back up. My belief is that Silver and Gold will begin to reflect their inherent strength despite the over all market condition. Our recent drops have been caused by funds liquidating to cover other paper losses, these were weak hands and flushing them out of the market will in the long run makes the metals market more stable for the next run up. In my little circle of metal owners, nobody has panicked or seems on the verge of dumping their physical positions. Staying the course is the rational thing to do as there is no data showing the U.S. dollar is in better shape; there is however data (U.S. gov) that says Consumer inflation is rising at about 2.2% and more accurate data (Shadowstats) showing U.S. consumer inflation hovering about 10%.

Inflation is good for metals as they are a physical asset that will appreciate with inflation while dollars loose their value during inflation. The shaky stock market and housing market cannot withstand the higher interest rates required to check inflation leaving the Fed in a serious predicament. To raise rates will kill the domestic economy; to lower rates will fan inflation, weaken the carry trade and the U.S. ability to borrow, feed its gluttony all while weakening the dollar making creditors less than happy.

The supply/demand situation for silver is still the same and no big move away from deficit usage is expected as far out as the end of the decade. Gold supply from South Africa is way down; Zimbabwe’s entire mining industry has almost shut down; Central Banks sales are expected to decline in Europe while other countries are increasing gold reserves. Support from the IMF for GATA’s position on gold price manipulation and the IMF call for more honest and transparent accounting of Gold loans, leases etc will be nothing but bullish for the price of Gold.

All these factors make me more than content sitting on my physical position knowing that the reasons I bought in the first place have not changed.

In Silver: I still expect strong long term price growth with a likely shortage and mega price spike.

In Gold: I expect an honest accounting of Central Bank gold will shrink the world’s real supply and raise prices regardless of the U.S. financial situation.

In Silver and Gold There is a reasonable potential for the monetization of metals stemming from some form of U.S. fiscal crisis which would result in massive spikes for both Silver and Gold.

PM Stocks

I’ve said before that physical silver is safer than paper products, this is still true. However, once you have attained your goal for a base physical position there is great potential for generating wealth from the leverage inherent in precious metals stocks, despite the risk. My methodology was to acquire a bare minimum physical position in my case weighted 10% gold, 10% junk silver, 10% 1oz silver rounds and maples, 70% large silver bars. Once I had acquired my target number of ounces I began splitting any new investment money 50/50 between mining stocks and a larger physical position. This allows me to grow my physical position to maintain a fixed percentage vs. my net worth for safety sake making me feel better about taking on the added stock risk as my portfolio grows.

The main point for my writing today is the apparent disconnect between bullion prices and the price of Silver and Gold mining shares. Before the big melt down two weeks ago I found the stocks of some producing mines and certainly most juniors were either not keeping up with bullion prices or sliding in the opposite direction without any news justifying the drop in share prices. Some stocks would even announce results I thought were favourable yet the stocks still headed south, I don’t get it. When the big blow off came, many of the stocks I own or at least follow took a complete nose dive way out of proportion to the price drop in bullion.

While I feel this recent run down in prices has once again made physical bullion a good buy, the unbalanced drop in many precious metals stocks has created some great buys. I picked a couple of my favourite stocks and increased my meagre little positions as much as I could. People will eventually catch on that Gold and Silver mines don’t just produce a commodity they produce real, honest money distinct from the constantly devaluing paper currencies of the world. The world wide money supply is growing at more than 10% per year debasing paper money and making metals with their 1.5 % supply increase year over year, even more valuable.

I’m not going to flog or pump any particular stock, I’m not qualified and there are already too many unqualified voices doing so. My rational in picking stocks has yet to be proven particularly good or bad but is as follows.

I don’t usually (with 2 exceptions) buy stocks in South America, Asia, or Africa. It’s not that they don’t have good resources and cheap labour but they do carry various political risks ranging from, Government seizure and Nationalization to civil war. There are enough good viable juniors in Canada, U.S, Australia, and even Mexico that I can’t follow let alone purchase all the ones that sound like possible producers and 10 bangers. Keeping up on the domestic news of dozens of countries is impossible for a part time investor, so I suggest pick your markets, learn about them then look for good choices in that region. The reverse is finding a couple of miners you like in one region and then research the political situation before buying.

Personally I try to avoid as much political risk as possible but it is impossible to avoid it entirely; you may be more willing to accept high risk than I.

I like Mexico for reasonable labour cost, good resource base, qualified experts, and a pro mining stance by government, there is some political risk however.

I like Canada for stability, huge untapped resources, a reasonable tolerance for the mining industry, and especially in Quebec with a great tax structure for exploration and the mothballing mines during periods of low prices.

The U.S. has many great untapped resources but many states are a bitch to get permits in. You have to go state by state. Mine shut downs usually invite a visit from the EPA and huge clean up costs.

Australia has great resources, lower P/Es than many stocks trading in North America but generally trade on their own exchange making it harder for part time investors to follow and trade.

Juniors have a greater potential and a greater risk than senior mining companies; while this should not dissuade you from dabbling, don’t put all your eggs or even more than 5% of your eggs in one basket. Another consideration is the kind of mines you invest in, if you are trying to play a precious metals position do not buy base metal miners with gold and silver as a by product, stick to specialists.

Bargain hunt while you can.

Are metals still the right choice?

As I understand it the recent downward pressure on gold and silver is due to the liquidation of assets by fund managers needing to cover margins after the recent stock market fall. Will this continue? I don’t know. Yes there are going to be more sell offs of stocks as the U.S. economy slumps what we don’t know is where this money will go if stocks are seen as unsafe.

Will they plough it into bonds that have a lower return than the real inflation rate?

Will they sit in cash until the dust clears hoping devaluation does not strip them of even more buying power while they wait?

Will millions of people start behaving like Chinese investors after getting burned on stocks and go back to their olds ways of storing wealth in gold and silver?

Will more countries like South Africa start adding to their gold reserves?

Will the deflationists be correct and the U.S. dollar will gain in value lowering all commodity values including metals?

Will more funds like the recently announced Artemis Hedge fund sink 300 million into silver investing?

I’ve read inflationists who believe in metals and some who do not, I’ve also read deflationists who believe in metals and those who do not, it really is a leap in faith which ever way you go. My brain hurts sometime just trying to analyse all these views and rationalize my beliefs. It comes down to several basics.

There is no free lunch; U.S. government debt is out of control and unsustainable.

The markets do not have infinite patience; at some point the markets will stop funding U.S. debt addiction.

The ability of banks and governments to create money from the thin air is irrational and destructive to the value of previously existing money; this is evil and irresponsible and may well lead to a monetary crisis.

Metals have always had some value through out mankind’s history of commerce. The key is timing when to get in and out of this market with your investment money, and knowing never to leave the market with your emergency money.

Over time all fiat money loses value and eventually fail. The recorded loss of buying power of the U.S. dollar since the creation of the Federal Reserve and the quicker loss since the decoupling from gold shows us that fiat money is weak and unsustainable.

Even in the last few decades numerous fiat currencies have failed. Those who had a small portion of their net worth in metals ahead of time faired well, some simply offset their paper losses and maintained their way of life, others made out like thieves greatly increasing their wealth.

Diversification is a concept most financial advisors will talk about but they tell you stocks, bonds, t-bills, etc are diversification because they sell them. I say they are not; they are paper promises subject to default, debasement, and mismanagement. I don’t say you should not have any of these but to be fully diversified means also having real physical assets that cannot be destroyed or counterfeited such as land and metals.

If any of these points make sense to you, then you know your decision to buy metals was a reasonable move to protect yourself.

So will metals fall more? Maybe, but in the long run they represent an opportunity to safeguard you should something catastrophic happen to the dollar. Silver supply is still in a deficit situation and will be so for up to 10 years, these corrections are opportunities to buy more and take major profits when silver supply reaches a critical shortage even without a monetary crisis.

Do I get nervous on the drops? Hell yes! Do I sell? No, I go out buy another 100oz leap of faith and increase my holdings. I don’t spend money I can’t afford to, I don’t borrow, and I don’t worry. I could always take up making jewellery or anti werewolf bullets.

Small Changes Equal Huge Opportunities

I’ve had a number of responses, personal and on the blog about the affordability of silver or gold as an investment and wanted to show people the comparable value of these metals vs. the day to day purchases we make. My argument is we all live above our needs in some way and a small deviation from the norm can free up at least a little for investment.

Coffee: It’s not an original idea but if you save up your coffee money over a year it really can up to substantial savings. One coffee on the way to work or at break can run from 1.20 to 3 dollars if you like those crazy Starbucks coffees. 49 weeks of work on average X5 days would work out to anywhere between 300 to 735 dollars. Or in bug speak 18-45 oz of silver or nearly 1 oz of gold. I gave up most morning coffees and two coffee breaks during the day making my personal savings $700 even with discount coffee, all for breaking a 3 dollar ritual.

Brown bagging lunch or just grabbing a plain bagel and using the Peanut butter in my desk drawer, easily saves me $20 bucks a week even when I cheat, annual savings equals $980

Movies: 1 night out for 2 people at a theatre, $22 for tickets and at least $40 after snacks, up to $60+ with baby sitting, if you waited 4 months and rented the movie the net savings even after supplying snacks would be $50+,
I’m not a big movie guy but would likely go to see about 5 a year so a $250 or 15 oz savings.

Beer: I like my beer, I really do, but I decided some time ago that a lovely Creemore was not value for my money and switched to Lakeport Honey Brown.
At $7.50 savings per 12 pack I can sock away enough to buy one sheet of silver maple leafs, another 10 oz for the hoard for just under $200

A nice sit down meal in a mid range restaurant, drinks, appetizers, coffee, dessert, for 2, $80 dollars, with baby sitting, gas, parking etc. would total $110. Compared to putting the kids to bed early and having a quiet dinner alone after they’ve crashed; net savings at least $80, or 5 ounces per meal. Even 6 nights out a year changed to nights in would net me $480 or 30 ounces.

I had a second car, 10 years old and functional, but it received little use other than taking me to the commuter train. My decision to walk to the train station and give up the car saved me on insurance, license tag, emissions testing charge, routine maintenance, giving me a net savings of around $1200 a year. Not only that I was making an ethical decision to reduce green house gas emission and get exercise.

So just on a few things I learned I could do without I’ve managed to reduce my expenditure by $2800 or 160+ ounces of silver or 3 ounces of gold and some silver for change, without any loans and before liquidating other investments to buy silver.

I could have stopped drinking beer altogether and made other more stringent savings and would have easily made 200 ounces of silver in one year. You don’t have to sit down and pull a big cheque out of your butt, just make small changes in your lifestyle and put it aside until you can buy the product you want.

I believe in $100+ silver as inflation and shortages eventually improve the attraction of silver. That is a multiple of 7.5 over today’s price, each grand I put away in silver should in time (under 10 years) be worth $7500. I personally think it’s worth the scrimping and the sacrifice of a few luxuries now.

RBC Fiat Slap Down

I know this is a little late but since no actually reads these posts I won't apologize. There has been a lot of non silver things worth reading and blogging over so I've been lax in reporting on a few interesting articles I've seen in the last week or two.

On Jan 18 Anthony S. Fell, Chairman of RBC Capital Markets was a speaker at an RBC client appreciation dinner, this segment is from that speech.

Now I've stated before that metals are a store of wealth, metals are a hedge against undue monetary inflation but many scoff because after all, who am I? So I was very glad to see the Chairman from one of Canada's largest international corporate investment banks come out and tell the truth about gold and fiat currency.

.... "I would not want to close off the evening without tabling one opportunity for all of us to make money, safeguard our wealth, and protect ourselves from the ravages of inflation over the next many years -- and that is gold bullion."

"Is gold a currency, a commodity, or a store of value?

The answer is all three, but gold bullion is primarily a currency and a store of value and is a hedge against fiat paper money and inflation. "

What have I said all along? Now it is true he is talking gold and not silver but the theory is the same, a rare non forgeable commodity which has been historically accepted as money and will act as a hedge against the mismanagement and inflation of fiat currency.

Fell, obviously a very bright man further supports my rantings that gold is real money.

"Gold bullion is the only currency worldwide which is freely tradable and which is unencumbered by vast quantities of sovereign debt and prior obligations.

Gold bullion is the one investment and long-term store of value which cannot be adversely impacted by corrupt corporate management or incompetent politicians -- each of which are in ample supply on a
global basis."

He supports my view that inflation is the death of fiat money and the destroyer of real wealth

"Since the U.S. moved to fiat paper money in 1971, the dollar has lost 80 percent of its purchasing power."

"Since the Federal Reserve was established 93 years ago, the dollar has lost 98 percent of its purchasing power."

And that gold is a good investment

"To some extent, I regret to say, all paper currencies are becoming somewhat suspect, and accordingly it is my view that gold bullion, rather than being the barbarous relic described by John Maynard Keynes, may well become the asset of choice for many investors over the coming decade."

"I have always been told to buy quality assets that are vastly undervalued and that have been ignored by the marketplace for a prolonged period.

Notwithstanding the modest rise in gold prices over the past few years, that is where gold bullion is today, and it represents a great opportunity. "


Am I gloating that someone rich believes me? No, for one he's never heard of me, second it's common sense. Gold's supply is fixed and only grows by about 1.5% each year, monetary inflation is 10%+. Supply and demand supports that more dollars chasing less gold = higher prices and less value to each dollar unit. Fell supports that high inflation is real and can be seen in the appreciation of real estate and other assets. Inflation mixed with government debt and trade deficits can and likely will eventually lead to a monetary crisis. I wish he had shown the balls to admit that the Government have been lying about the true inflation rate for a long time, too much to hope for I guess.

Silver is gold light, it's still a store of value, still a currency, still a hedge but with several advantages.

1 It's cheaper so us peasant folk can afford some.

2. It's market cap is smaller allowing smaller investments to more quickly raise the price.

3. Industrial demand keeps destroying it at or over the rate of production, making it rarer each day.

4. In a metals bull market like 1980, the hyperinflation of 1920s Germany, and the last 5 years, silver always out performs gold, giving that little extra for your buck.

I'll say it again, gold good, buy some, Silver better, buy lots. Paper money, and paper assets bad, convert at least 5 if not 10% of your portfolio to real, physical metals. Personaly I'm aiming for 10% net worth rather than 10% portfolio. Take the time to read the full text of Fell's Fiat Slap Down and tell me what you think.

The Nationalization threat

This week have seen new declarations from both Hugo Chavez of Venezuela and Bolivian President Evo Morales about their intentions to nationalize various industries. Earlier in the week the Fiji army took possession of a mine belongings to Emperor gold mines. While the mine was recently mothballed due to heavy losses if was still a illegal seizure of private property and a sign of the danger of both high commodity prices and the anti western feelings growing in many parts of the world

While it's still unclear how Bolivia and Venezuela will handle these moves to nationalize major industries, it is very clear that this is a great potential danger to investors. The options open to these states can be varied from simply seizing the properties up to paying fair value for and taking on the debts for these ventures. This means you could take a 100% loss or break even but don't expect a profit.


I continue to believe that it's essential that people hold a substantial amount of their metals investment as physical gold and silver and this is the perfect example why. Putting some portion into the market is a great way to leverage your investment and make some serious money when gold and silver go up, but you must factor in the risk involved in stocks. Companies have different levels of exposure to unstable regions and it is important that investors research and measure risk before taking the plunge. Bolivia for example will impact some of the larges silver miners in the world, Pan American Silver and Coeur d’Alene Mines plus some smaller ones who probably have less diversification of production. Know what your are buying, what assets they have and where, investigate the political situation if you have to but don't buy blind.

The nationalization threat has hit oil, mining and energy for two reasons, 1. a shift in more countries to an anti western (aka American) sentiment 2. Greed, these countries were more than happy to suck up billions in economic development from exploration with zero risk. Now that commodities are growing more lucrative they wish to seize the profits without ever having taken the risks. As oil and gas become more depleted in the years ahead expect to see more nationalization risk in more countries. Weakness in the U.S. dollar will pump up silver and gold prices which will add more temptation by leaders to ignore the rule of law and contracts for profit.

Be careful, research, know your risks and your acceptable level of risk, but most importantly own phyiscal silver and gold as a secure investment before you start wagering on mere paper.

Gold and silver had big moves today, I hope you got in early.