Yes, there are a few other asset and income plays as well in the market. After all, there’s still an economy to run out there. There are 303 million Americans, and 6.2 billion other people in this world, who want to eat every day. But much of the stock market is a crapshoot. If you love pain, then the broad stock market is the place for you. While gold and silver represent the flight to safety and quality.

The U.K. Telegraph put it nicely: “As investors scrambled to make sense of last week’s events, already one conclusion was all but irrefutable — the U.S. dollar will have to take another major fall. The dollar rally that began in July and pushed the pound’s value against the greenback significantly lower has come to an abrupt end as markets face up to the fact that the currency will have to absorb the effects of a sudden shocking increase in America’s budget deficit.”

So we see lots of bad news for the dollar. But when you own gold, it’s your asset. With a specific gravity of 19.3, gold is dense, non-reactive and otherwise immutable. Gold is nobody’s liability. As one of my old professors at Harvard used to say, “That’s physics.”

Gloomy News from Wall Street

Speaking of physics, I’ve looked east of the sun and west of the moon. I can’t see much good news for the U.S. dollar on any horizon. Really, what’s gloomier than the news from Wall Street? The investment model of the modern era (borrow short, lend long, pay big bonuses) is dying before our eyes. “And it’s about time,” some might say. But it’s happening on our watch. So we had better suit up in battle-rattle.

Wall Street’s losses are in the range of hundreds of billions, maybe trillions. Which prompts me to inquire, where are Bonnie and Clyde when you need them? At least the Barrow couple knew who they were and what they did for a living. To their credit, on their last foray the dynamic duet had the guts to shoot it out with the cops and go out in tragic style.

But now the modern bank robbers are talking about how they should get big bonuses for all the good work they put in up until things blew up. Really, I’m serious. Lehman Brothers wants to pay $2.5 billion in bonuses to 10,000 employees. That’s an average of $250,000 per person. (Except I think the office runners and secretaries will get less than $250K and a select few will rake in a lot more.) What has anyone there done to deserve $250,000? Did I miss the news about somebody at Lehman discovering a cure for cancer? It’s all just so…Baby Boomer.

At the end of the day — and the clock is ticking fast — it’s too bad that the wrong people are going to get paid. And bonuses? Oh, if only I could be a bankruptcy judge for just one hour.

The War on Risk

Do you recall the $700 billion of borrowed money that the U.S. paid over the past seven years to fight the so-called “War on Terror?” Well now, with the stroke of a pen the U.S. taxpayers will pay another $700 billion (and probably more) for the “War on Risk” in the next year or so.

War on risk? It seems that way to me. Let’s back up. In the past few years — seven or so, coincidentally — a lot of people gambled and lost. People bought houses they couldn’t afford. Brokers arranged the loans. Bankers lent the money. Other bankers bundled-up the mortgages and sold them as “asset-backed securities.” Rating agencies sprinkled their holy water on the transaction. Insurance companies insured everything against default and loss.

A lot of people were making a darn good living for a while. But it was all a farce based on cheap credit and an abiding faith in a “something-for-nothing” way of life. And it’s too bad that a lot of people bought — as the saying goes — “as much house as they could afford.” Except they couldn’t afford it.

So now the whole mess is falling apart. And in true Baby Boomer fashion, the key perps on Wall Street want to change the rules and stick the house with the bill. That is, the White House and the House of Representatives, and your household as well.

The advertised number of $700 billion for the Wall Street bailout is just the posted price — the “loss leader” to get the American people into the store, so to speak. But get set for a bad case of sticker shock as events unfold. A group of business reporters at Bloomberg tallied up the raw numbers and came up with their own number of $1.8 trillion.

$700 billion? $1.8 trillion? When the numbers are that big, does it even matter? It’s the inflation-adjusted equivalent of fighting World War II again. Except who is the enemy?

Whatever the final tally may be, it cannot be good for the U.S. dollar. So buy gold and silver. If you can’t acquire the metal in the form of coins or bars, then buy precious metal stocks of companies with ore in the ground.

Until we meet again…
Byron W. King
September 24, 2008

Gloomy Dollar News Strengthens Precious Metals was originally featured in the Penny Sleuth.

Many “silverbugs” out there use a common price ratio between silver and gold to predict silver’s future price. Here’s why you shouldn’t only use that…

Think about shares of a company. A single share of Company ABC could be $2 per share, but that doesn’t mean that company is only a $2 company. If Company ABC has 100 million shares outstanding, that would make it worth $200 million. That’s its market value. And that is exactly how you should look at precious metals.

We’re talking about the market’s value for all the gold and silver in the world. According to Theodore Butler, contributor to SilverSeek.com, that number is quite telling.

In 1900, there were one billion ounces of gold in the world, and gold had a $20 per ounce price tag. That made gold’s market value $20 billion. There were 12 billion ounces of silver in the world with a price tag of 65 cents. That gave silver a market value of $7.8 billion. It led to a ratio of only 2.6.

Today, gold’s market value is $3 trillion, and silver’s is only $12 billion. Here’s how Butler figured that out:

The amount of gold has gone up five-fold since 1900, yet the amount of silver decreased from 12 billion ounces to only one billion ounces, because silver has many industrial applications like electronics and batteries, while gold’s only use other than wealth storage is jewelry.

That mere fact makes this ratio so astronomical. While the price ratio has only shifted from 30 to 56 over the past 108 years, the real market value ratio has jumped from 2.6 to 281.

That means that silver’s price has been suppressed for far too long. The ratio doesn’t have to correct the whole way back to 2.6 for you to make money off of silver. Even a slight drop is big money in your pocket. You also don’t have to store a bunch of silver bars in your house to get rich off of this anomaly either.

One of the most effective ways to profit from a precious metals rally is leveraging the rise in price by investing in junior miners. We’ve talked about this before. During the last big rally in gold and silver, junior miners beat every other investment with gains of 2,464%, 3,987%, and even 13,025%. We may have a chance to see those kinds of gains this time around. And only penny stock miners can offer those types of gains. When we find one we’ll let you know…

Sincerely,
Jim Nelson
August 14, 2008

Invest Using the Gold Silver Market Ratio was originally featured in the Penny Sleuth.

So we’ve seen quite a tumble, led by declining oil. But then again, oil had quite a run-up. I’ve said before that oil was climbing too far, too fast. And over the past few weeks, oil tested the $150 mark. But like Gen. Pickett at Gettysburg, this charge to $150 failed.

What seems pretty clear is that at $140, a lot of things in this world just don’t work anymore. Airlines are, obviously, one business not built around highly priced oil. Worldwide, 24 airlines have gone bankrupt so far this year.

But there are other parts of the transport system, the food system and the economy that are cratering with the oil run-up.

Sure, a lot of things don’t work well even with oil at $130, $120 or $110. But that’s not the point. It seems that above $140, the developing world just stops developing. We saw pain at $100 and above. We were beginning to see true demand destruction above $140. So oil pulled back, and perhaps for a while.

I should add that the recent rally in financials pulled a lot of money out of oil. Last week, the U.S. monetary authorities made a fateful decision. Rather than let Fannie Mae and Freddie Mac fail, or take these two horribly mismanaged firms over via receivership, the U.S. Fed and Treasury Department, essentially, nationalized the bad risks and socialized the losses. This is going to come back to haunt and hurt us, like a guy with a chain saw on Halloween night.

Efficient Capital Markets? No Way!

And despite the oil pullback, crude petroleum is still double the price of what it was just two years ago. So we are living with a 100% increase in the nominal oil price.

The oil run-up was not all just insatiable demand meeting flat supply. I’ve discussed this in other articles. The U.S. dollar has been mismanaged for decades, and thus we live in chronically inflationary times. And couple this with the horrid shenanigans of Wall Street and the overall U.S. banking system in this modern era. Ugh!

Remember how some people used to dismiss the fact that the U.S. was de-industrializing? Remember how some people used to praise the so-called “service economy”? They would say things like, “The U.S. capital markets are the most efficient in the world.”

To which we now reply, “Oh, really?”

How could the U.S. banking and finance system ever have gotten so bad? Don’t we have regulators who are supposed to look over the shoulders of the bankers? Don’t they teach people how to be careful in business schools? Heck, here at Penny Sleuth, we’ve been writing about the looming implosion for several years. It’s not like it was some state secret.

So now we are at the moment of decision. How many billions of dollars does the U.S. banking system have to lose? OK, how many tens of billions? Hundreds of billions? When you add in the toxic derivative instruments, it adds up to trillions of dollars. And it looks like the nation is on the hook for a lot of it.

Where can things go from here, what with all that worthless paper floating around?

I understand that the Fed does not want to raise interest rates. That would just plain hit the economy in the gut with the left fist. The politicians would scream. But when the Fed wimps out, the dollar declines in value. And the cost for foreign imports, such as oil, rises. That hits the economy in the gut with the right fist. One way or the other — a left or a right to the gut — our U.S. economy is getting beat up. I’d prefer it if we just took our own national medicine and stabilized the dollar.

If the dollar stabilizes, oil should level off. And we could see the market begin to recover. So watch the dollar for your signal.

Meanwhile, the gold and precious metals stocks benefited from the declining dollar. Toward the end of June, most gold stocks all had good run-ups as the dollar fell.

You can’t really time these kinds of moves over the short term. But over the long term, the U.S. dollar has been declining in value. And precious metals have been climbing. My colleague Ed Bugos, a true gold bug, foresees gold at $1,200 per ounce by early 2009. Another precious metals trader of my acquaintance is forecasting silver at $26 per ounce. If that happens, the mining stocks will soar.

Until we meet again…
Byron King
August 12, 2008

Falling Oil Still Gives Us Investment Opportunities was originally featured in the Penny Sleuth.

As we see the dollar fall further every day, we have to think about how to protect ourselves from what some call an inevitable collapse of the dollar. Now, we could recommend buying other currencies or foreign stocks, but that won’t do it. Every other currency has been falling, too.

After thinking long and hard about it, there’s only one way to go…precious metals. But here at Penny Sleuth, we’re not going to tell you to invest in gold and silver bullion (although it’s not a bad idea). There is a much more lucrative way to make serious money, while protecting yourself from the dollar debacle — junior mining companies.

Quite often, Wall Street dismisses juniors for being “too risky” and “unstable investments.” But we’re used to that; they always say that about small-caps. However, to be fair to the suits in Manhattan, many juniors fizzle out without bringing investors the big money they promise. But, we do have one junior silver miner that’s about to graduate to major’s status, in a matter of months. More on that in a minute…

We first have to discuss why silver is the best investment.

For thousands of years, silver has been the currency of choice everywhere from Ancient Greece to the Spanish colonies in South America.

But times are different today. Money no longer has silver in it (excluding certain Mexican peso denominations). It’s common to think of gold as an investment, but not so with silver. Here’s why: There are hundreds of different purposes for silver outside of investment. The majority of all silver produced makes up everything from silverware and jewelry to photography and other industrial applications. Take a look at the breakdown below:

As you can see, investments only account for a small amount of demand. Gold is another story. Governments, investment houses, and even private investors hoard gold.

However, this ideology changes during recessions and market downturns. Most investors flee the stock market by holding a large portion of cash, and when the dollar also falls, they flee to precious metals, including not just gold, but silver as well. You can see this happening here.

This trend is just beginning. As James Turk, founder of GoldMoney, was quoted in The 5 Min. Forecast last week, “Silver needs to break above $14.85 to confirm that both precious metals have resumed their major uptrend.” It was only a matter of hours after he said that for silver to break its previous 26-year high of $14.85. Over the next 24 hours after breaking this mark, silver shot up over $16 an ounce.

While it has corrected a bit since then, this just marks the start to an enormous rally in the precious metals market. Experts are falling all over themselves to be the one who predicts how high it will go. But the truth is, no one knows. The important thing is that it will go much higher from here.

We’ll just keep our eyes’ peeled here at Sleuth central for the best way to play it…

Sincerely,
Jim Nelson
November 13, 2007

P.S.: Don’t worry. I didn’t forget. That junior miner is still kind of a secret. You see, in the next few weeks, fellow Sleuth editor Greg Guenthner will be recommending it to his Penny Stock Fortunes readers. I hate to lead you on like that, but it’s such a big opportunity, I had to let you know about it.

Junior Mining Companies was originally featured in the Penny Sleuth.