By Trace Mayer, on June 10th, 2009
I remember an offhand remark someone made about ‘If you think the gold bugs are crazy just wait until you meet a silver bug.’ Well, a few months ago at an investment conference I met David Morgan of Silver-Investor.com. I found him to be another right thinking person.
 We talked for a while, became friends and occasionally collaborate. He gave me a signed copy of his book Get The Skinny On Silver Investing. At only 120 pages it was a fairly quick read.
It lays a very good and objective groundwork of silver history, the silver industry, silver’s use as money, silver leasing, potential market manipulation along with suggestions on the different ways to invest in silver.
Occasionally I receive a question from a reader about where and how to buy silver. More often than not the question could be answered by reading Get The Skinny On Silver Investing. Therefore, for anyone thinking of investing in the silver market I highly recommend getting a copy so you can quickly assess the terrain.
Order a digital copy for $10.
Order a physical copy from Amazon.
By Trace Mayer, on June 9th, 2009
Gold and silver are made for each other like peanut butter and jelly or milk and cookies. The ’sweat of the sun’ and ‘tears of the moon’ have served as money and currency for millennia. At all times and in all circumstances they remain money.
On 7 May 2009 when the gold to silver ratio was about 66.5 I wrote, “Silver will likely continue its upward ascent and return to a more normal ratio with gold around 55.” The current ratio is about 62.5 or about a 6% change.
SILVER BACKWARDATION ENDS
Fortunately a failure to deliver on silver contracts at the COMEX was averted although silver was backwardated for a record nine weeks. To get a good understanding of the silver market I recommend reading Get The Skinny On Silver Investing by David Morgan of Silver-Investor.com.
On 24 February I wrote, “The chronic silver backwardation began on 8 December 2008, the same day I wrote about gold in backwardation, and silver was priced about $9.60. Currently silver is trading about $13.82. Predictably, the gold/silver ratio is narrowing. If the backwardation persists it will be interesting to see if silver’s price in illusory FRN$ continues rising.”
Since December silver has rocketed from about $10 to $16 or about a 60% rise. Likewise the silver forward mid-rates (SIFO) have jumped recently. If you are considering how to buy silver and searching for a third-party to handle storage then you may want to consider GoldMoney as opposed to the problematic SLV ETF where the bullion may learn how to vanish because under the appropriate legal documents you are not provided with the right to physical delivery at any time.
 
CONCLUSION
The bi-polar white metal is terribly volatile. The effect is compounded by the recent volatility in the Dollar Index which slipped significantly below 80 before having a monstrous rally on Friday. Despite usual negative seasonality sentiment this bull up-leg in the precious metals appears to still be intact. If you are new to the silver market then get a copy of David Morgan’s Get The Skinny On Silver Investing so you can ascertain the terrain before you allocate your capital.
In addition, silver has had a huge run lately but is still only at about 1.27x its 200dma when measured in FRN$s. During previous rallies it stretched that ratio to about 1.45x, 1.7x and 1.45x. The rising SIFO rates portend interest rate movements. Consequently, the gold to silver ratio will most likely continue narrowing but the market is beginning to price in central bank action and therefore caution is warranted.
Disclosures: Long physical gold and silver with no position in the GLD or SLV ETFs.
By Eldon Mast, on June 9th, 2009
It was a week that was flush with positive news stories.
1. Personal income in April was reported to rebound sharply. Personal income jumped 0.5 percent in April far better than the forecast by most economists for a 0.2 percent drop. House investor’s rental income also spiked up 3.1 percent after several months of decline. The combination of higher overall income and cuts in personal income taxes from the Stimulus Act resulted in a 1.1 percent jump in disposable personal income after only a 0.1 percent rise in March. Year over year, personal income growth improved to +0.7 percent from +0.3 percent in March.
2. The ISM’s manufacturing report is moving incrementally just as we forecast here since March. Their index rose to 42.8 in May vs. 40.1 April. New orders were big news in the report. They rose above 50 for the first time in 17 months to indicate month-to-month stability for durable goods orders. Order backlogs are also improving and production was up more than 5-1/2 points in May over April.
3. Construction spending unexpectedly bounced in April. Construction outlays improved by 0.8 percent. The April gain also came in much better than most economist’s views. Most were wrong looking for a 0.8 percent decrease.
4. The Pending Existing-Home Sales index jumped a much sharper-than-expected 6.7 percent in the data for April.
5. The Challenger, Gray & Christmas, Inc. corporate job cut index continues to plummet. It is now down 55% since its peak in January.
6. NY Fed Treasury Spread Model continues to show significantly improving economic conditions. The New York Fed states that, “Research beginning in the late 1980s documents the empirical regularity that the slope of the yield curve is a reliable predictor of future real economic activity.”
7. Payroll employment in May was unexpectedly and significantly less negative than in recent months. Initial and continuing claims for unemployment benefits are now both falling. We have now likely seen the worst of the jobs deterioration. The unemployment rate currently, might just well prove to be the high based on the confluence of this week’s positive employment data.
By Dan McLaughlin, on June 9th, 2009
June 5th is the birthday of John Maynard Keynes, a brilliant economist whose influential work during the 1930’s changed the course of history. He has had a great deal of influence on generations of economists, including advisers to our current president and congress. It’s too bad he was wrong in virtually all of his innovations.
Keynes is considered the father of macroeconomics, one of the two major divisions of modern mainstream economics. Microeconomics is the description of reality, the study of how people interact and how markets work. Macroeconomics, on the other hand, is the study of how government can efficiently manipulate markets and people.
In the present world, economic reality and truth is largely ignored. The vast body of brilliant intellectuals involved in economics occupy themselves with building and analyzing macro models for government to more easily control the economy. They use their massive mathematical and analytical brainpower to try to develop more clever and complex models to predict the future and show politicians which strings to pull.
It can be clearly seen that the macroeconomists have failed miserably with their interventions to achieve a stable economy and well being for the people. It was a vast experiment over many decades and is a profound and horrible tragedy. All macroeconomists who promoted the interventionist state should be ashamed that they brought this great country to its knees. They should be crawling under a rock in embarrassment. That is not the way of the intellectual, however. The problem, they say, is that they didn’t intervene enough.
All of the macro models and manipulation are built on false premises. The first one is that government intervention can be successful at bringing long term to people in an economy. The second one is that they should intervene, even if success was possible.
Keynes’s conceived that, by measuring and controlling aggregates, such as aggregate demand, total unemployment and gross domestic product, the central planning gurus pulling the strings could make everything coordinate, put everyone to work and advance toward a post scarcity utopia.
The coordination problem is one that central planners have always had to deal with, and the former Soviet Union was one of the clearest examples of the problem and its results. The abolition of voluntary markets and the institution of central planning after the Bolshevik Revolution resulted in mass starvation and deprivation for many millions of people. Lenin was forced by reality to enact the New Economic Program in 1922, the limited reinstitution of markets, to prevent further deaths and possible overthrow of the regime.
Macroeconomics is, in its very essence, the rationalization of central planning. The core fallacy with all of macroeconomics is that data aggregated over a large, diverse area can be used to coordinate the activities in each locality and each transaction between actors in the markets. Each locality in a vast economy has its own peculiarities of weather, geography, demographics, culture and a host of other characteristics. The people each have their own goals, hopes, dreams, advantages and limitations.
It is not possible to impose a uniform solution on 300 million different people over millions of square miles of coastline, mountains, deserts and tundra. The problems and opportunities for small desert communities is vastly different than those of northern metropolitan centers. Macroeconomic policy is necessarily a generic solution to particular problems. The inevitable result is discord, waste and conflict. Because macroeconomics is inherently political, the macro solutions pit one group against another for control of the strings.
This brings us to the second inherent weakness of macroeconomic policy. Even if it was possible to have efficient macro solutions, it is wrong to impose those solutions. A slave owner might become an expert at wringing the most productivity from slaves. That he is able to do so does not mean he should. He should, rather, not enslave them. He should respect their rights and only enter into voluntary trade.
The same applies to national governments. Many people assume that it is a proper role of government to use coercion and confiscation to make people do things that will increase employment, aggregate income, gross domestic product or any other artificial measure. People in a free country, however, are not slaves of the state. Whether a policy will increase GDP or not does not give a politician the right to interfere with the voluntary interaction of market participants.
J.M. Keynes was indeed a brilliant man. Like so many brilliant people today, he was profoundly wrong and arrogant in his wrongness.
By Eldon Mast, on June 8th, 2009
Japan’s Nikkei stock index registered its highest mark in eight months on Monday. Investors were betting on the U.S. economy after Friday’s report that far fewer U.S. corporate jobs were lost in May than most economists had forecast.
The Nikkei is now approaching the important 10,000 mark, a milestone watched closely by many traders.
“Money is flowing into assets such as commodities and stocks as risk tolerance has steadily improved on the back of hopes for a recovery.” said Takahiko Murai, general manager of equities at Nozomi Securities.
After gaining more than 2.5% last week, the index has now recovered almost 40% from it’s low in March.
By Bron Suchecki, on June 8th, 2009
In the past week it has been reported that the Royal Canadian Mint (RCM) has “lost gold”. The reports contain statements that to the lay reader may seem unremarkable, but which to me give an indication of what is really going on.
It is also a story of particular interest to me not just because I work in a Mint, but because one job (of the many) I held at the Perth Mint was that of Metal Accountant. The Mint is so obsessive about metal control that it developed four parallel metal general ledgers (au, ag, pt, & pd) and employs a Metal Account full time on ensuring debits equal credits down to one thousandth of an ounce.
My experience in this area is also why I get annoyed at the Jason Hommels who make unsubstantiated claims that the Perth Mint is short gold and/or runs a fractional Depository – for many years it was my job to make sure metal liabilities were backed by metal assets. Anyway, enough of my gripes. For those who haven’t seen the reports, below are the key “facts”, with each number hyperlinked backed to the source of the quote.
1. a significant quantity of gold, silver and other precious metals is unaccounted for.
2. The Royal Canadian Mint is withholding employee bonus pay as special auditors enter a fourth month hunting for unaccounted gold insiders say could be worth as much as several million dollars.
3. In recent years, the mint has become a rich source of cash for the government, generating net income of $21.6 million in 2007 on record revenue of $632 million.
4. external auditors have been working since early March to reconcile the precious metals discrepancy, apparently without success. Even retired mint staff have been quietly brought into the Sussex Drive plant on weekends to try solve the discrepancy, according to a source.
5. external auditors are investigating a discrepancy between the mint’s 2008 financial accounting of its precious metals holdings and the physical stockpile.
6. possibilities from sloppy bookkeeping to a gold heist.
7. “An unprecedented demand in gold in 2008 has led to an unreconciled difference between the mint’s financial statements and the physical count of precious metals. There’s a difference there that we’re looking into.”
8. Officials will only say the discrepancy may be related to an unprecedented demand for gold in 2008, including a 352-per-cent surge in production of its popular Gold Maple Leaf coins.
9. She said an unprecedented demand for gold in 2008 put pressure on the mint’s internal control systems, which led to the “unreconciled difference” between the gold on hand and the value recorded in the mint’s books.
10. “includes the analysis of precious metal by-products and financial data”
11. “We’re looking at many different angles right now,”
12. would not say whether the gold and other metals in question were part of the refinery and bullion operation or one of the mint’s three other business lines.
13. It’s not known when or what triggered the audit review or what external auditor is conducting the review.
14. The corporation’s fiscal 2008 runs from Jan. 1 to Dec. 31 and its normal external auditor is the Auditor General of Canada, who is required to audit the mint’s year-end consolidated financial statements.
15. “Doing business with the mint is still safe and this review will likely give us some suggestions on how to improve our processes.”
16. Notably absent, however, is any expression of optimism the affair will turn out to be a case of sloppy bookkeeping or another accounting mix-up. Asked this week to acknowledge the mint is fairly confident the unaccounted for gold has not been stolen, Aquino replied: “We really want to wait for the review before we make any conclusions. We don’t want to come to any conclusion until then.”
17. police have not been called into what mint officials considered an internal matter.
Firstly, exactly how many millions is “significant”? External auditors have a lot of things to check when reviewing accounting records, so they focus on those that will have a material effect. Accounting standards say that if an item will affect profit by 10% then it is clearly material, with 5% a sort of bottom cut off. If RCM made $21m in 2007, and had a 352% increase in Maple sales, then I think conservatively we could assume they will make $40m this year. This means that the “discrepancy” must be at least $2m, if not $4m. That’s a fair amount of gold, or silver.
The second thing of interest is that the external auditors have been working on the problem since early March. What is interesting about this statement is that if the RCM had process problems (#15) and pressure on their internal controls (#9) as a result of increases in volumes (#8), then discrepancies would have starting being evident during 2008. I find it hard to believe they would just have found out about it at the 31 Dec stocktake.
The Perth Mint, for example, performs quarterly physical stocktakes and metal reconciliations. If there were process/control problems, abnormal variations would show up well before year end, prompting investigations. That is the point of doing it quarterly, so there are no surprises come year end.
I suspect that they only started reconciling book records to the stocktake result mid Jan (holidays etc), I can that taking a month or so. Come late Feb they realise they have a problem, do some more work on it but the external auditors are around then doing their usual stuff and they can’t resolve it so mid-Mar the auditors become aware of the problem. It would also not surprise me that considering the size of the problem, one response would be to question the stocktake result, leading to another stocktake at the end of March.
Why one could question a stocktake (if your inventory records say 10 widgets in stock then you either have 10 or not, don’t you?), how one would not know for certain if gold had been stolen, how one could have a “discrepancy”, why the need for retired workers and what would they have to offer, and why it would take so long to solve the problem requires us to delve into the esoteric world of precious metal manufacture, by-products, and giveaway. In short, stocktaking precious metals is not a straightforward counting of gold widgets – it involves estimations, hence the potential for accounting process stuffups. This I will discuss in my next blog.
By Eldon Mast, on June 8th, 2009
Last year Wal-mart added close to 30,000 jobs to it’s domestic labor force. In 2009 it now predicts it will add another 22,000 positions nationwide. In fact in some hard hit states like California, Florida and Michigan, Wal-Mart plans to add over 1,000 jobs in each.
Wal-Mart is the largest private-sector employer in the US with a labor force of 1.45 million workers. Wal-Mart’s strong retail sales outlook for 2009 continues to highlight a significant rebound in from discount and value retailers since the dismal Q4 of last year.
Expect similar hiring metrics from 10 top retailers that have also experienced strong than expected Q1 results.
“We’re proud to be able to create quality jobs for thousands of Americans this year,” said Eduardo Castro-Wright, vice-chairman in a company statement.
New Wal-mart employees have found jobs this year in a wide swath of disciplines including pharmacists, human resource managers, and customer service associates.
Separately new data from Challenger, Gray & Christmas, shows that corporate layoffs in May have free fallen 55% from their January high. The reported levels are now close to rates that could almost be considered “normal.”
On Thursday the government reported that the number of continuing claims for state unemployment benefits has now started to decline. This is one of the last indicators to mark the stabilization of the labor market following a recessionary period. First-time claims also continued to fall, reaching the lowest level since early May.
Now that the recession has ended, the rate at which these labor level indicators continue to fall will be an additional indicator on how strong this new growth cycle will be.
 Join the forum discussion on this post - (1) Posts
By Eldon Mast, on June 4th, 2009
From the gloomster Nouriel Roubini on Apr 23, 2009:
“Today we present some of the main conclusions of the recently released update to the RGE 2009 Global Economic Outlook: The global economy is in the middle of a synchronized contraction that will push global growth into negative territory in 2009 for the first time in decades. This will be the worst financial crisis since the Great Depression and the worst global economic downturn in decades. Global trade volumes face their sharpest contractions of the postwar era – trade is expected to contract 12% in 2009 due to the severe and prolonged global demand slump, excess capacity across supply chains and the continued crunch in trade finance.”
Mr Roubini, please have a seat. The data simply does not support your old, tired, gloomy claims.
1. US. Exports are rebounding sharply. You may have been able to claim that trade was collapsing in the final months of last year as consumers everywhere shut their pocketbooks, but the international wheels of commerce now seem to be spinning well again. The US economy is not collapsing. Export data point to stabilization.
2. The is no “continued crunch in trade finance.” Whether you look at the TED spread, or the Libor/OIS spread they are well below the peak of late October ‘08.
3. There is now a significantly growing list of tangibles that have bounced from their year-end lows. What is probably most notable is that capital goods orders are now up. We are not caught up in your “negative-feedback loop” that will eventually turn into a depression.
4. What is most notable from the past two weeks are bank earnings. Although many like Roubini choose to focus on small increases in allowances for bad debt over the next 1-2 years, what many failed to note was the incredible earnings based on extension of credit by banks in Q1. For instance Wells Fargo took advantage of the drop in interest rates to issue more than $100 billion of mortgages in Q1 alone. Revenues almost doubled to $21 billion, including Wachovia’s contribution, and helped the company overcome $3.3 billion of charges from unpaid loans. The allowance for credit losses totaled $23 billion. If those new loan origination rates continue for Wells, that’s $400B in new loans for 2009 against the $23B reserved for potential losses in 2009 and 2010. Looks pretty bullish to me. In fact, not all banks increased loss allowances.
So Roubini, please sit down. Things may not be completely back to normal. But there is no doubt that conditions aren’t as dire as you continue to claim.
By J.D. Seagraves, on June 4th, 2009
Thinkers on the Left blame the current financial crisis on the excesses of capitalism. Free-market partisans say it’s the government’s fault. Distributists say they’re both right, and their “third way” philosophy has a lot of appeal to the majority of Americans who are somewhere in the middle between socialism and laissez-faire, and yet recognize that the current “mixed economy” welfare state doesn’t work.
Speaking in the past tense, Ode Magazine says this of distributism: “The distributists saw private property as the salvation of society, and its concentration in too few hands as the greatest scourge.” But far from being an extinct school of thought, distributism is on the rise in the marketplace of ideas.
What is Distributism?
Distributism—also known as distributivism and distributionism—is an economic philosophy formulated by Roman Catholic thinkers in accordance with the principles of Catholic Social Teaching. It holds that the “means of production and distribution” should not be owned collectively (as with socialism), nor allotted haphazardly by the free market (as with capitalism), but dispersed widely among the general populace. In this way, it is like socialism in that it attempts to keep capital out of the hands of “capitalists,” but like capitalism in that it affirms the desirability of private ownership. Distributism is equally scornful of Wal-Mart and the welfare state, and thus has appeal to middle-America populists.
Distributists also support a guild system for the regulation of business, and are opposed to for-profit banking. The philosophy emphasizes radical decentralism to the extent that it holds that nothing that can be done by a smaller unit should be done by a larger unit. If a town can produce its own bread, for example, then it should not trade for bread produced elsewhere. In this way, it rejects the basic tenets of Adam Smith’s capitalism.
Distributism: From Left to Right
Distributism has its roots in the nineteenth century but reached its greatest heights in the mid-to-late twentieth century as the economic philosophy propelling the Catholic Worker Movement. Then, distributism was considered a “left-wing” phenomenon, but now its strongest constituency is on the far right of the American political sphere. Indeed, full page ads for distributist books have been featured on the back cover of the last two issues of The American Conservative.
The American Conservative (TAC) is a paleoconservative publication, and paleoconservatism differs from neoconservatism in that the former is staunchly antiwar: you will not find praise for Dick Cheney within TAC’s pages. But unlike libertarianism, the other antiwar philosophy of the right, paleoconservatism is ambivalent (at best) towards free-market capitalism. Paleocons are traditionally opposed to free trade and strongly support immigration quotas. More shockingly, they tend to support limited nationalization of industry: this month’s issue of TAC features an editorial in favor of “bailing out” the U.S. auto industry.
Generally, however, paleoconservatives are unconcerned with economics. Their chief causes are non-intervention in foreign policy (which, when combined with their anti-free trade views is correctly considered “isolationism”) and the promotion of “traditional values.” These concerns dovetail nicely with distributism, which supports the Christian Just War doctrine (under which virtually no wars are justified) and the primacy of the “Trinitarian” family consisting of one man, one woman, and their children. Thus, paleocons—which are far from being insignificant in number—who are exposed to distributism are likely to find the philosophy tailor made for the preexisting prejudices.
So What’s Wrong with Distributism?
So what’s wrong with distributism? Well, as theological ethicist Dr. Todd R. Flanders told the audience of an Austrian economics scholars conference in 2000, distributism isn’t really an economic theory at all, but an ethical one. Distributists have no coherent or practical plan for implementing their vision of a society of widely diffused property ownership; they only hold that it is morally just.
But is it really? Distributists refer to capitalism as “neo-feudalism,” but in reality, what they propose is a return to pre-capitalistic, medieval life. Their antipathy for the division of labor—that basic Smithian principle that has brought so much prosperity to the world—is grounded in a Marxist understanding of “worker alienation.” Indeed, distributism could be considered a kinder, gentler Communism, and we all know how well that worked.
A Preemptive Defense
The danger presented by distributism may be minimal, but that is not to say it’s non-existent. Big ideas have a way of sweeping over the world quickly, particularly in times of economic and political turmoil—times we are likely to be facing in the very near future. The economic ignorance fostered by a century of public schooling plays right into the reactionary creed of distributism. Its appeal to the Left, which thinks capitalism has failed; and to the Right, which blames the welfare state; makes it a potentially unifying force for anti-capitalists.
As a preemptive defense, capitalists must educate themselves on distributism and refute arguments made in favor of its core tenets: protectionism, socialized banking, occupational licensure (the guild system), glorification of smallness for smallness’s sake, etc. Free-market capitalists must articulate their arguments in a way that convince would-be distributists that their goals are best served by a truly free-market economy in which unhampered property rights are the foundation of ethics and prosperity.
Join the forum discussion on this post - (3) Posts
By Winton Bates, on June 3rd, 2009
The Gallup World Poll has asked people in a large number of countries: “Are you satisfied or dissatisfied with your freedom to choose what you do with your life?” Recent research has shown that, even after controlling for other relevant variables, people tend to be more satisfied with their lives in countries in which a relatively high proportion of the population are satisfied with their freedom to choose. (See: John Helliwell, Christopher Barrington-Leigh, Anthony Harris and Haifang Huang, ‘International Evidence on the Social Context of Well-being’, Working paper 14720, NBER, 2009.)
This is hardly surprising. People who feel relatively satisfied with their lives could generally be expected to be satisfied with their freedom to choose what they do with their lives. Do the results have more profound implications? Is the proportion of people who are satisfied with their lives related to economic freedom (encompassing personal choice, voluntary exchange, freedom to enter and compete in markets and protection of persons and their property from aggression by others) and civil liberties? Alternatively, is satisfaction with freedom an emotional state that is unrelated to objective circumstances?
The Figure below has been obtained by matching the Gallup data on satisfaction with freedom with the Fraser Institute’s data on economic freedom and Freedom House’s data on civil liberties for 121 countries, and then ranking countries according to the percentage of people who are satisfied with their freedom to choose what to do with their lives. The results suggest that economic freedom and civil liberties tend to be substantially greater in countries where people are more satisfied with their freedom to choose.
Regression analysis suggests that economic freedom and civil liberties have a positive influence on the degree of satisfaction with freedom in different countries but only explain a modest proportion of the variation in this variable. In some countries (including China) the degree of satisfaction with freedom is much higher than predicted and in some countries (including Hungary) it is much lower than predicted.
In order to test whether there is a link between satisfaction with freedom and emotional states, another data set has been constructed which incorporates data on inner freedom (percentages who feel they have a great deal of choice and control over their lives) from the World Values Survey. Unfortunately the inner freedom data was collected for a smaller number of countries, so the matched data set only covers 70 countries. (Another problem with the inner freedom data is that it does not match very well in terms of the time at which it was collected. It was collected around 2000, substantially earlier than the other data.)
The second Figure, including inner freedom, provides a similar picture to the first one. Countries in which relatively high proportions are satisfied with the amount of freedom in their lives tend to have relatively high proportions who feel a great deal of inner freedom.
Inclusion of the additional variable in the regression analysis results in a substantial increase in the proportion of variation in the degree of satisfaction with freedom explained by the model, but reduces the coefficients on the other variables. This is not surprising in view of the apparent links between economic freedom and inner freedom discussed in an earlier post.
This simple analysis does not enable me to conclude to what extent perceptions of freedom are based on objective factors. The important point that emerges is that all four varieties of freedom tend to go together.
|
|
Most Popular Posts