 | | The Daily Reckoning | Friday, February 3, 2012 |
- Trust in Silver...with this outstanding silver trust,
- Tech Crunch: What’s in your digital wallet?
- Plus, Bill Bonner on just about everything else...
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|  | | | | Inflation-Proof Vest | | Buying Gold in Uncertain Times | | |  | | Bill Bonner |
Reckoning today from Baltimore, Maryland...
Dow down slightly yesterday. Oil falling further below $100. And gold still going up.
What is most interesting is the movement in the price of gold. It seems to be heading up again — almost no matter what else is happening.
So, let’s look at what might be going on...
If investors sensed a recovery...they would expect banks to lend more freely...people to shop more freely...and prices to rise.
This would raise consumer prices; the price of gold should go up.
But if the market sees growth and inflation ahead, why is oil slipping? And why is the Baltic Dry Index — which measures shipping prices — at a 25-year low? And how come last month’s employment figures were disappointing? And why aren’t stock market prices going up?
Most important, if the economy is really recovering, why is the 10- year note yielding only 1.82%? And what about the long bond? Shouldn’t it be trading at a yield higher than 3%?
And how come house prices fell over the last year...and the last month?
And how come incomes are falling?
Or, to look at it from the opposite point of view, how is it possible for a real recovery to take root in the hard, barren soil of falling house prices and slipping consumer earnings?
But if the economy is not improving...then there should be no increase in inflation...and no pressure on the price of gold, right?
Maybe investors don’t anticipate a recovery at all. Maybe they’re buying gold because they see the economy getting worse, not better. We associate a rise in the price of gold with inflation. But gold is much more versatile than we think. It protects your wealth when paper money loses its value. It also protects your wealth when paper money gains in value. It protects you when you are right...and when you are wrong.
How so?
During the Great Depression, for example, the price of gold rose...against dollars...even though the prices of food, clothing and other consumer items...as well as the prices of investment assets...were falling in dollar terms. Why? Because money gains value — relative to things — in a depression. Gold is money. It is the best money. It is the only money that has stood the test of time.
Besides, there is more going on. In a financial crisis...or a depression...investors begin to doubt that their counterparties will make good. Banks fail. Investors go broke. You own a mortgage, and then you discover that the homeowner has left town...and the house has lost half its value. You own a note, and then you discover than the payer is bankrupt; your note is worthless. You own shares in a company; and then the company goes out of business.
When you are in a de-leveraging phase, you discover that many of the assets of the previous credit bubble are not assets at all. And while you’re waiting to find out, the best thing to have in your safe is gold.
As uncertainty rises; so does the price of gold.
The price of gold also rises when the return on other assets declines. At 1.82%, the real return on a 10-year T-note is negative. Consumer prices are rising faster. So, the reward for lending to the government is less than zero.
Normally, holding gold costs you money. You give up the return you could get from ‘risk free’ investments (Treasury debt). Now, you give up the risk from reward-free investments.
Gold goes nowhere. It produces no yield. It pays no dividends. It makes no profits. You can’t live in it. You can’t drive it. You can’t hang it on your wall and admire it.
But when the return on Treasury debt is negative, what do you give up by owning gold? You give up a loss!
You also give up the risk of a much bigger loss. The Fed is bound and determined to bring up the inflation rate. Ben Bernanke has suggested that he might set the inflation target higher than 2%. He has announced that he will keep the Fed’s key lending rate near zero for the next 3 years. He has hinted that he is ready to print more money — QEIII — if conditions warrant.
Holding gold protects you from Bernanke’s success. For if he succeeds in raising the rate of inflation, gold will surely soar. And there is substantial risk — bordering on certainty — that he will be no better at creating moderately more inflation than he has been at creating moderately more GDP growth.
It is quite possible that he will overshoot.
Normally, inflation is a feature of the banking system. The system takes the Fed’s monetary grubstake and parleys it into the nation’s money supply. Banks magnify the money supply by lending...and thereby create more demand, which raises prices. They do this by making loans...to people who then spend the money.
This sort of inflation is controllable, by raising interest rates and tightening banking credit rules. But there’s another form of inflation. The kind that starts with an “h.”
Hyperinflation happens when the banking system breaks down. People lose faith in the money itself...and the people who control it. Foreign dollar holders may worry that the Fed is printing too much money. It may even be good economic news that causes them distress; they may anticipate higher inflation rates, and a sell-off of the dollar, which would lower the value of their dollar reserves. They may figure that they are better off diversifying into yuan...or gold.
Then, when other investors and householders see the dollar falling...they get panicky too. Pretty soon, people are digging around in drawers, bank accounts and mattresses...looking for dollars — just so they can get rid of them.
That is when dollars hit the hyperinflationary fan. Our old friend Michael Checkan tells what it was like in Argentina in the late ’80s:
“Imagine a $2.00 gallon of milk spiking to $775.40 within a year — like in Argentina, 1988.”
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| | The Daily Reckoning Presents | | My Favorite Way to Own Silver | | |  | | Byron King |
My favorite way to own silver is the Sprott Physical Silver Trust (NYSE:PSLV). This is a product of the Eric Sprott group, of Toronto.
Units of this trust were trading well above $20 a few months ago. But today, even after silver’s January rally, the units are trading below $15. That’s a 25% decline, which is in sync with the drop in the price of silver.
This recommendation isn’t intended to focus on short-term moves. The idea is to build a solid silver position for the longer term. It’s your way of building a silver play for the next couple of years, by which time we should see very healthy gains.
The Sprott Physical Silver Trust is a closed-end trust that’s entirely focused on physical silver. The intent behind the trust is to invest in and hold substantially all of its assets in silver bullion. It provides a secure, convenient means for investors to hold silver without taking personal physical delivery. The trust does NOT speculate with regard to short-term changes in silver prices.
Specifically, the trust invests in unencumbered, fully allocated London Good Delivery (LGD) silver bars. That is, it owns real silver — the metallic kind that hurts when you drop it on your foot — and not paper promises from any counterparty. About 99.8% of the trust’s current net assets are invested in physical LGD silver bars.
The trust stores its silver at the Royal Canadian Mint, a “Crown corporation” located in Ottawa, Canada. The Mint is responsible for loss or damage to silver in its custody. To ensure security, the silver bullion is subject to periodic inspections and annual audits.
The Mint is also the counterparty to the Sprott Trust, meaning that there’s no financial institution standing between the unit holder and the silver. Thus, this Sprott Trust is almost as good as keeping silver yourself (which I still recommend, in reasonable quantities). I’ll even grant that this trust is, in some respects, more convenient than buying the metal and having to store it on your own.
The trust has a unique physical redemption feature for large unit holders. Investors who hold the equivalent dollar value of 10,000 ounces of LGD silver bars, or more, may “redeem” their units for physical silver. If you do that, then the Mint will deliver the bars (almost) anywhere in the world via an armored transportation service. The trust is structured such that any physical redemptions will not dilute remaining unit holders.
Furthermore, there’s a nice tax advantage for non-corporate US investors. If you hold trust units for a minimum of one year, and timely file the appropriate forms with the IRS, the trust units are taxed at a capital gains rate of 15%, versus 28% — which is the higher rate that applies against most silver exchange-traded funds and silver coins.
I’ve seen an estimate that, over the course of history, mankind has mined and produced over 42 billion ounces of silver. If that’s true, I have no idea where most of it is. Evidently, all that silver has been used up in industrial processes or lost to corrosion and the like. The point to keep in mind is that there’s very little silver out there for investment purposes.
According to the silver scholars at Sprott, the current physical silver supply that’s available for investment, in US dollars terms, is worth less than 1% of the equivalent value for investable gold.
Looking at it another way, for every one dollar available in physical gold bullion and coins, there’s less than one cent available in investable silver. This supply discrepancy isn’t reflected in the current silver price.
What else? Among other things, we’re already seeing a slowdown in copper output due to declining industrial demand. But a copper slowdown will — as night follows day — certainly cause a slowdown in silver output. That’s because a large percentage of the world’s available silver comes as a byproduct of copper mining.
Give the copper slowdown a few months and the decline will induce a shortage of silver. This phenomenon will just plain bite the silver markets in the rear end. We may even see another sharp upward spike in silver prices a few months down the road.
I would never tell you that silver prices couldn’t fall further. In this market, anything is possible. But if silver prices do fall in the near term, this Sprott Trust is still a solid play over the long term.
The bottom line here is that the Sprott Physical Silver Trust offers a convenient and tax-efficient investment in physical silver. It’s the next best thing to buying your own bars.
Regards,
Byron King
for The Daily Reckoning
Joel’s Note: In addition to inflation-crushing ideas and strategies, Byron recently shared with readers of his Outstanding Investments newsletter a special “Re-Made in America” report. To learn, in Byron’s words, “why May 2012 will spark a new age of wealth and prosperity that puts the USA back on top,” click here.
| | | | | Banking on Your Phone |  | | Patrick Cox |
America has lagged behind much of the world in terms of digital wallets. Elsewhere, people routinely use phones instead of credit cards. There are several reasons for this.
Partly, it is because North America saw mobile phones so early. When other regions finally rolled out mobile phones, infrastructures were more modern. The larger reason, however, is that there is so much at stake.
Right now, there are a limited number of players in the lucrative payment network world. Visa, MasterCard and American Express would like to move to your phone. They fear, however, that enabling electronic wallets in phones would allow aggressive young players onto their turf. PayPal, Amazon and Google are, in fact, financial networks, and they would love to do your banking.
So far, progress has been slow, but the emergence of Android is opening up new possibilities. Work is being done by the Mobile Payments Industry Workgroup that would establish standards. What we know for sure is that the established payment networks will do their best to keep out upstarts. We also know they will fail.
Part of the reason for this is political. Part is cultural.
The politics are that Wall Street and the major banks have never enjoyed lower public regard and support. Consumers sense that the bailout profited rich bankers more than consumers. The customer base is not going to support politicians who continue to put the interests of favored banking institutions above those of consumers.
Eventually, market forces always win. Currently, retailers are capable of dealing with only a few credit and debit card companies. This limits competition and keeps prices higher than they would otherwise be. A sophisticated mobile payments infrastructure, which is inevitable now that the Android has broken free, will arise. In fact, it will arise before most people know it’s happened.
The cultural factor I referred to is the difference between the old- school financial institutions and the new electronic services. I have little confidence that Visa or MasterCard is going to do what’s necessary to exploit the convergence. They’re too habituated and institutionalized.
PayPal, Amazon and Google, however, are populated by people who want to transform the financial world. They will find a way to force themselves into an industry that has lost serious credibility and clout due to its participation in the ongoing subprime mortgage fiasco.
Fortunes will be made by financially sophisticated app developers.
Finally, I’d like to get a little speculative and tell you what I think the real long-term consequences of the Linux/Android revolution will be.
It’s not well known, but Peter Thiel, one of the founders of PayPal, was motivated by quite subversive goals. His initial purpose was to create a mechanism for financial transaction outside the reach of governments. He has written:
As an entrepreneur and investor, I have focused my efforts on the Internet. In the late 1990s, the founding vision of PayPal centered on the creation of a new world currency, free from all government control and dilution — the end of monetary sovereignty, as it were.
Obviously, he has not succeeded. Nor do I think we’re going to see such a purely private system in the near future. However, we are moving very rapidly toward developing an electronic infrastructure that would enable brand-new forms of banking. Given our recent experience with the federally controlled financial system, the need is clear.
I won’t detail here how I think this new banking will function. For now, however, I’d just like to warn you that you shouldn’t be too surprised to see completely transformed financial institutions arise from the current rubble. Who knows? Maybe Thiel will be proved right. For extra credit, you can read F.A. Hayek’s Denationalisation of Money: The Argument Refined online here.
Regards,
Patrick Cox
for The Daily Reckoning
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| | | | | And now back to Bill Bonner with more Hayek-related banter... | | | | | Bill Bonner |
The Financial Times has continued its series on ‘Capitalism in Crisis’ much longer than we expected. Longer than seems decent, actually. The crisis will be over before the series ends.
Each of the Davos-list celebrities to write on the subject basically ‘talks his own book.’ The politicians tell us that they can fix what is wrong with capitalism. The regulators want more regulations; do- gooders urge us to rely more on good works. The economists have their economic solutions. The entrepreneurs put their faith in can- do hustlers.
Bill Clinton used to be a sharp politician. Now, judging from his comments in the FT, he has moved rapidly from becoming an elder statesman to the kind of senility that affects aging world improvers. Try to figure out what this means:
“Governments, businesses and extra-governmental organizations [can] work together to share expertise and implement lasting solutions...
“What we need is innovation, imagination and commitment. The most effective global citizens will be those who succeed in merging their business and philanthropic missions to build a future of shared prosperity and shared responsibility.” Those are words that could have been written by a dull-witted robot...or Thomas Friedman.
The words were empty; at least they were not stupid. But there were plenty of stupid words, too, in the series. A representative of Occupy London wrote to say that Friedrich Hayek had “helped us to find capitalism’s flaws.” Hayek pointed out that the widely distributed knowledge of a market economy was much better for making decisions than the centralized information and planning of a state- directed system. But the Occupy writer missed the point completely. He quoted Hayek and then went on to suggest the very sort of meddles that Hayek warned against.
Some writers seemed to have nothing to say whatever. Others seemed to have nothing to say about capitalism; it was as if they had not thought about it. And some, we couldn’t figure out what they were talking about.
All in all, the series has been a big letdown. Capitalism has no real friends and no clear defenders, not at the FT.
We will have to do the job ourselves. Look for our ‘Capitalists’ Manifesto’...
..next week.
Regards,
Bill Bonner
for The Daily Reckoning |
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