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Monday, January 13, 2014

Precious Manipulations

For my precious metals business, 2013 was a real head-scratcher.  We - and the rest of the world - saw the price of gold drop by 28%.  Silver's loss was even greater.

Logic says this is all backwards.  Every single economic action and indicator pointed towards the exact opposite "reaction".  Gold and silver should have soared in price.  The dollar was devalued by at least another trillion dollars via Quantitative Easing.  Physical gold shipments to China, India, Russia and others broke all kinds of records.  The US mint, once again, had to limit shipments of gold and silver Eagles at points throughout the year because demand out-stripped supply.

Germany asked for their gold to be returned from the NY Federal Reserve bank, and they got permission to view their gold (LOL!) in the vaults.  And were then told they'll get it over the next 7 years!  WTF?

Why not just crate up their gold, and have it shipped?

Clearly, there's a disconnect between supply and demand, with demand outstripping physical supplies.  Yet gold posted its first loss in 12 years.  How the hell could that have happened?

Many people have asked that question.  Robert Barone has some ideas -
The answer lies in leverage and hypothecation, the modus operandi of Wall Street, London and financiers worldwide. The paper gold market, the one that trades the ETFs such as GLD, is 92 times bigger than the physical supply of gold, according to Hathaway. 
Think about that. It means that each physical ounce of gold that actually exists has been loaned, pledged and reloaned 92 times on average. Each holder in the paper gold market thinks that the ounce of paper gold held in the brokerage account is backed by an ounce of real gold. But, there are, on average, 92 others who apparently have a claim on the same real physical ounce.
Oh.  Crap.  Wonder what would happen if they all said, "Show me the REAL money" at the same time.

If I've said it once, I've said it a hundred times:  If you can't hold it, you don't really own it.  Speculation - not economics - is driving the price of precious metals.  More now than ever.

What does that mean to the small, private individual that either holds PMs or is considering it?

Expect the unexpected.  Prices may soar, or they may crash.  For now, the standard economics of it are largely irrelevant.  The Big Dogs of the investment world are driving prices now.  Those "dogs" include major investors and hedge funds, and world governments.

Governments, in particular, have a vested interest in keeping down the price of gold.  Gold is the anti-fiat currency.  Confidence in gold is a lack of confidence in government funny-money, and that's not good for TPTB.

The thing is, economics, eventually, win out.  Always have, always will.  Some unforeseen event - a Black Swan, if you will - pokes it's beak into the markets, and real economics come into play.

The problem is, it's impossible to predict when this will happen.  It may be tomorrow, it may not happen in your lifetime.

The Soviet Union was able to prop up its communist/socialist economy for 70 years before real economics kicked in.  Then, it crumbled before our very eyes.  Similar things appear to be happening in the once super-heated Chinese economy.

Here at home, no one with the power to change things dares to attempt to fix our national debt, Social Security and Medicare problems.  None want to leave any fingerprints at the scene of the crime.  Like the house of cards it is, if you try to fix the base, it all comes a-tumblin' down.  These problems cannot be fixed by any means other than a crash.  It's mathematically impossible.

We'll keep devaluing the dollar to pay for these "entitlement" programs.  Other nations are following a similar path, so in relative terms, the dollar is maintaining its value to other currencies.  We're the tallest midget in the circus, so to speak.

But it will eventually end.  We'll go the way of every other hyper-inflated currency, and then only tangible, real money will be worth a damn.

Hopefully, that outcome won't include - as it did in Germany after the Weimar Republic financial crash - a charismatic individual coming to power with promises of riches and equality for all subjects.  I mean citizens, of course.

Naw, that'd never happen here.

Accept The Challenge

Precious metals, IMO, should be a part of everyone's wealth bucket.  Be it 5% or 50%, PMs provide stability and maintain purchasing power during turbulent economic times.

Like now.

My recommendations, as before:

  • Pay off your debt first.  Debt kills.
  • Build a cash (fiat) fund for emergencies where you need cash right now.
  • If you're looking to buy a long-term asset, such as real property or something automotive, contribute to that fund
  • THEN, buy some precious metals.  Consider them to be the "401(k) of last resort".  Liquidate fiat currency-based savings first
  • PLEASE, don't go, "All In".  I see this all the time in our store.  People have done all of their reading, saved a ton of bucks, and then like a roulette wheel gambler, put it all on red.  Some times it works, some times it doesn't.  I recommend a planned purchase schedule.  $5000 over three months, or $1000 a month for a year.  Whatever you can afford.  Something where you start a planned, conservative investment portfolio.
  • If at all possible, buy from a local coin or bullion dealer, and pay in cash.  (No, I'm not feathering my own bed.  I don't sell online, nor have I mentioned the name of my PM store for those of you in Nor. Cal)  No one - federal, state or local government officials - needs to know what you've got.  Buying locally will almost certainly cost you a few bucks extra, but I believe that the anonymity is worth the price of admission.  YMMV.  Buy online, and at least 3 entities know you bought precious metals - the online PM store, the credit card company and the delivery company.  Way too many people for my liking.

Copyright 2014 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.


suek said...

You've recommended that if one buys locally, that the dealer should be .... certified...

Ummm...what is the organization that certifies local precious metal dealers? And just exactly what do they certify them for? (that is...expertise, honesty - both?)

Chief Instructor said...

Sue, great question. Locally, they should be Better Business Bureau certified. While the BBB doesn't have the power to force a business to be ethical, it DOES report complaints and how the business responded.

Nationally, coin stores can be certified by the American Numismatic Association. This is the top of the line certification.

To be a member, a dealer has to be in business for (I believe) two years, and have written letters of recommendation from 4 other local dealers. Yeah, your competition must say you're a legit business!

Another great source is online reviews. Yelp and Google+ are two of the best. These can, at times, be overly harsh or overly complimentary. More reviews the better, as it gives you a great average rating. Also, see if your local business also uses Ebay for some sales. The Ebay rating system will give you a good snapshot on how you'll be treated face-to-face.

Far and away the best source is friends and acquaintances. Ask around for recommendations.