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Sunday, April 24, 2011

Resist The Fear

The president is all over the media preaching how our country will go down the tubes if we default on our interest payments on our national debt.  He's actually right.

What he is being disingenuous about - at the very least - is that raising the debt ceiling (the Continuing Resolution, or CR) is necessary to prevent a potential debt default.  This is nothing more than fear mongering.

Obama, as president, has choices to make.  Do we continue to fund federal agencies and programs that are not authorized by the Constitution - such as the NEA, the DEA, HUD, Labor Department, Education Department, et al - or do we pay our bills?

More importantly, and tied to the hip of the previous question, do sane people borrow money to pay other debts?

I'd answer that by saying, in an emergency situation, such as a real war, you may do it.  You'd consolidate your debt, borrow a bit more to keep your creditors at bay, then you'd tighten your belt, do away with frivolous spending, and pay it off as soon as possible.

From Washington, the answer always seems to be the same - Austerity is never the answer:  Borrowing is.

How's that philosophy working out?

In the last week, I must have had this same conversation at least 4 or 5 times a day:  "So, how high are gold and silver going to go?  Is this bubble going to burst?"

I tell them not to get sucked in by the doom-and-gloomers on either side of the equation.  Don't think precious metals will rise in price forever, and don't think that we're in the middle of some economic bubble that's artificially inflating PM prices.

I ask them a couple of questions:  What do you think is causing PMs to rise in price, and do you think those causes will change direction any time soon?

If they're in our shop, they've already asked and answered those questions, and are just looking for reinforcement.  They know that the federal government is unlikely to stop spending more than it brings in.  It will fund those excess either by more borrowing, higher taxes or both.

No good answers.

Many just finished doing their taxes, and saw the paltry numbers they had to provide for "Interest Income" from their savings accounts.  Banks aren't paying squat.

The stock market makes no sense.  It's got the feel of a classic "bubble" of epic proportions.  When profits are largely a product of expense reductions - cutting people, locations or capacity - this is a temporary patch done to "weather the storm".  It's become the norm.  Hell, many banks make more money now from stock trading and asset sales than they do from interest income.

Last man out gets left holding the empty bag.

I then tell them that at sometime in the future, it will make sense to sell PMs and convert the proceeds into something else.  What that is, who know?  It's whatever makes sense at that time.

Personally, I think real estate will soon be fully "corrected" and prices will be more realistic.  I think residential, commercial and raw land still have a ways to go before they're priced right.  But it's getting close.

Accept The Challenge

Don't act out of fear.  Act with knowledge.  Never, EVER only listen to one point of view.

Personally, I search high and low for opinions and facts to tell me why PMs won't continue rising for at least the immediate future.  Give me data I can research.  Give me a hypothesis I can test.  Give me far-fetched conspiracy theories.  Give me SOMETHING!  Help me question what I see and believe.

Crickets chirping is all I get.

Here are some things that could cause the price (not necessarily the value) of PMs to drop:

-  The Federal Reserve raises interest rates on the money it lends to banks.  If logic prevailed, this would mean banks would pay more interest on savings and people might move from PM to savings accounts, causing PMs to drop in price.

I don't know if this would happen, though, as banks would have to increase their interest income (on loans) to offset these costs.  They're not borrowing from the Fed to make business and home loans at nearly zero interest costs NOW, so why would they do it at higher costs?

-  A major competing currency takes a hit.  If something (more) disastrous happened to the euro, the pound, the yen or other major currency, the dollar would rise in relative value, causing the price of PMs to drop.

We just saw Japan take a hard shot to the chin with the earthquake/tsunami/nukes, and their government is printing up gazillions of yen to pay for the mess.  The EC is in tatters with a number of member-states nearing insolvency.  England [is in the middle of an austerity program], yet PMs have continued to rise.

-  A rush to the perceived relative safety of bonds.  That requires business fundamentals to be strong, so they can expand their companies by borrowing via bonds.  Anyone see businesses expanding any time soon?

And why would you buy US Treasury bonds or city/state Municipal bonds when none of them have sufficient revenue streams to pay you back?

-  Real inflation (not the fantasy numbers produced by the US) drops significantly.  That would include the unreported "volatile" food and energy numbers.  If you think you will have the ability to spend the same number of dollars each month, but get more goods than you did the month before, PMs are not for you.

-  Calls for more "sacrifice" from taxpayers to continue funding the lifestyle of non-taxpayers will cease.  This implies that government will spend no more than it takes in.

Someone convince me any of these are likely, or that there are other possibilities to make the value of the dollar increase/PMs to decrease.

I'll leave you with this thought::  Ten gallons of gasoline at $4 per gallon will cost you $1.20 in pre-1965 silver coins...

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Copyright 2011 Bison Risk Management Associates. All rights reserved. Please note that in addition to owning Bison Risk Management, Chief Instructor is also a partner in a precious metals business. You are encouraged to repost this information so long as it is credited to Bison Risk Management Associates.


mama4x said...

Great article, great questions to ask when considering purchasing. I'm linking to your post. Thanks!

Chief Instructor said...

Mama, glad you liked it. I don't know how I missed this article, but it seems that the University of Texas just took delivery of $1 billion in gold bars!

It will be interesting to see what Bernanke has to say today at his press conference, and how it will affect the markets....

Chief Instructor said...

Oops, Wednesday at his press conference...