Saturday, June 22, 2013

Commodity Prices Are Dropping

Gold, Platinum and Silver have taken quite a hit in the last few weeks. To a lot of people these metals are investment and as such, they follow the prices quite intensely. I know my wife has been tracking their prices for quite a while. So she sees a loss in our portfolio from their highs to their present lows and points out to me that we could have purchased a BMW with our losses.

There is a reason for buying gold and silver and it has nothing to do with investments. If Bernanke starts this tapering off of purchasing T-bills and real estate paper, interest rates have to rise. If they rise to 8.5 percent, the total amount collected in taxes in the United States will only pay the interest on the National Debt and at that point, the country is bankrupt.. I was discussing this conundrum with my wife; she said “well they will just print more dollars to pay it off.”

The thing to realize here is that gold, silver and platinum have value not determined by any government. Their net worth at any point in time tends to be relative to wages in general. As a measure of worth, assume that an ounce of silver is one day’s wages, an ounce of gold is one week’s wages and an ounce of platinum is probably worth a lot more. Don’t hold me to the values stated; they are just a guide for survival. What you are looking at here is a way to preserve part of your wealth in a tangible way. 1,000 ounces of silver is going to provide you about three years of income if the dollar was to tank. One ounce of gold would pay the rent for a month. What we are really purchasing is peace of mind and security for the future.

To a lot of people, if gold went to $10,000 an ounce, they would sell, but think about it. Has gold or silver really appreciated over time? In 50 years silver has risen from a dollar an ounce to about $20 an ounce. Real estate prices have risen in the same time span from $28,000 to $280,000. A pack of cigarettes has risen from 21 cents a pack to six dollars. Do you sell gold at $10,000 only to find out that a loaf of bread and a package of hot dogs is $5,000? If you think gold could drop to 30 dollars an ounce, do you think that cigarettes could drop back to a quarter a pack?

So when you see the price of silver and gold drop, relax it is of little concern. Realize one thing, the reason you are holding them is because of government foolishness. Inflation is their mistress. Profit is not your motive; preservation of a portion of your wealth is the objective.

Just as food for thought, in 1964, when I was being paid $2.00 per hour, I could buy 16 ounces of silver for a day worked. So take 16 oz. of silver time $22 spot today and you get $352. Divide that by 8 hours and you get $44 dollars an hour. I guess that explains why my mom didn’t have to work when I was a kid. People made real money back then. Our standard of living has dropped considerably, both the husband and wife work today. But by God, we are making 10 times the $5,000 my dad brought home a year—and paying 10 times more in taxes. Anybody catching on to what is happening???? Our employer gives us a pay raise because the government printed more dollars?  We get happy. Are we getting richer? The raise feels good, it just doesn’t go very far.


Joseph Oppenheim said...

The fact that your dollars can buy gold means the dollar is a real currency. It is convertible into all kinds of things. Tell Warren Buffet he was stupid he converted dollars to KO stock at abt $4/sh years ago and still collects dividends on it, now = 50%/yr on orig cost.

Anonymous said...

Gold is just as much at risk as stocks or bonds are (gold and silver may not be the big SAVE that many goldbugs think it wii be). We've got cronyism, fascism, totalitarianism (or whatever you want to call it) slowly settling upon the developed countries. Insurmountable debt will tear everything to shreds. No one can predict what governments will do. Governments are big, corrupt, stupid and self-interested. They are inverted in their purpose (and their primary purpose is to retain power, at the expense of everything, including the citizenry). When they get desperate it is tantamount to your being in a windowless and doorless room with a wounded tiger (you will most likely wind up as collateral damage).

Government can devalue or confiscate gold and silver. We're obviously moving towards electronic currency. If so, gold will only be good for necklaces and rings.

Everyone has to determine the following for themselves... what is wealth for me? what will sustain me? what is true preparation? what will happen in the area that I live? do I need to move (and if so, where)? how can I survive the all the possible end scenarios that could manifest as a result of our FUBAR systems? etc?

dearieme said...

Talk about luck: we sold much of our gold ETF a few weeks ago so we could clear our mortgage. Phew!

Anonymous said...

A lot of doomers didn't sell there gold and didn't buy real estate, now they are kicking themselves, you Jim sound like one of them.

Imagine if you had sold your gold and bought real estate? you wouldn't be down 30% in your silver, gold, and platinum, and would up another 20% in your RE. that's a total of 50%, actually more bc of compounding!!!!

In addition, if you are holding precious metals as an insurance policy, then it shouldn't be something you are counting everyday but if it is a large portion of your money, then I understand why.

I have car insurance, home insurance, and life insurance, but it doesn't mean I want to use them. You on the other hand Jim are looking forward to the day that you can use your insurance policy and that doesn't make sense.
I hold PM for an insurance policy but I don't want to see the day where I'll need them.
Imagine you are right and the economy goes to hell and Gold is 50,000 dollars an ounce, better yet million dollars a ounce. People are killing each other in the streets. And a hungry women and child show up to your door begging for food, are you going to tell them that they should have bought gold?
point is, that we do take steps to insure ourselves for 0.01% probability event but most don't pry for the day when they can use such insurance!

Should have sold some of your gold and bought other assets, mainly real estate but like most gold bugs, you got greedy and missed out on the high of gold and the low of interest rates, not the would has to suffer, so you can take joy in being right, kind of twisted if you ask me...

best of luck to you.

p.s. i'm glad you didn't chase joseph away, he does a good job of balancing your doom and gloom, imo.

Anonymous said...

"not the would has to suffer, so you can take joy in being right, kind of twisted if you ask me..."

should read, now the world has to suffer...

Jim in San Marcos said...

Hi Anon 6:19

I entered the adult world in 1964. I witnessed inflation from 1964 thru 2013. I am amazed when people who bought a house in 1964 for 28k and then marvel at the fact that it is now worth 300K. A 50 year old house is a piece of crap. The only thing the owner is looking at is what inflation has done to the value of his home over time. As his home appreciated over time, he got to pay more real estate taxes. And I'm not sure how long he will be able to escape capital gains on any profit. Gold and silver have no taxes unless you buy ETF's.

I acquired most of my gold at $300 an ounce and my silver at $4 per ounce. I did trade off half of my gold for platinum last December when gold was worth more than platinum. I also own a rental in Colorado that is paid off. I rent a home in California for $1700 that would cost me $3,600 a month to own.

Precious metals are not insurance, they are a store of value that governments can't tamper with.

All you have to do is figure it out, the government can't raise taxes so they print money and inflate. Joe 6 pack loves it, he gets a pay raise and his home is worth more. This is your basic government carrot on a stick mentality, the target is most definitely a beet head. If you are a saver, your savings buy even less.

We are not talking catastrophe yet. My point about picking an absurd price for gold was that most people will think they are suddenly rich when in reality, the government is pissing in the whiskey.

I've lost 100K on my gold and silver in the last 2 months. I've lost 80k on my rental in Colorado in the last 5 years (built in 1960). My 20k investment in the rental returns $825 a month on a 20K investment. The rent paid the house off in 15 years, 12 years ago.

What I am trying to point out is that if the government could print food and cars, we wouldn't have to work for a living. That hasn't stopped them from printing, has it?

Inflation is not going to make you rich if you have savings. You need to be able to preserve it. And if you are my age, I can't do real estate for another 20 years, but I can do gold and silver.

Jim in San Marcos said...

Hi dearieme

A house/home is better than gold, you can live in it and in most cases is the equivalent of about 175 ounces of gold. I'm glad you were able to put the dollars where they did the most good.

I would avoid ETF's, they are not really linked to the product advertised. I'm just guessing, but I would bet that there are 100 ETF's for every ounce of gold in existence.

Jim in San Marcos said...

Hi Joseph

I don't think that Warren Buffet is going to sell you any Coca Cola at $4 per share.

What we are looking at right now is, what can you buy to imitate what Warren Buffet bought?

As a real currency, the inflation factor is kind of like an additional straw on the camels back--its been working OK so far. There is a point to where the camel has a problem with the load.

AIM said...

To paraphrase Mark Twain... history doesn't repeat but it rhymes.

We didn't have the magnitude of the '29 stock market collapse or the depression in our 2007-2008 crash. And luckily we didn't have another dust bowl to go along with it.

And now we are not having anywhere near the recovery that occurred in '33 thru '37. Ours is a lot milder.

So we're rhyming, not repeating. But we are tending to repeat what FDR did in '37 to bring everything crashing down: raising taxes, regulating businesses, crushing the entrepreneur.

So I assume we'll have another recession or depression coming up soon since Obama and Congress haven't learned from history and are going to "do an FDR" on us all over again.

Best to have some gold and silver, some cash, some blue chip stocks and some income properties. Cover all aspects and you'll have the best chance of not being big collateral damage as most Americans are going to be.

Joseph Oppenheim said...

I don't copy anyone, but I do own some KO stock, orig cost $22 a few years ago. raises div each yr. I like protection from inflation and deflation, plus low taxes on divs and cap gains. But don't really care what the stock price does, just like the cash coming in, more each yr. I just go where the opportunities present themselves. Recently, short sales and cash from stocks and the profits to get a home, built in 2005, 1/3 cheaper than it cost, move-in-ready, now worth abt 1/3 more in 6 mos, in a top community. Cash, the US dollar talks beating out a higher bidder using debt. Don't know what I'll do next.

mannfm11 said...

Jim, I find it interesting that the only time interest rates have gone up the past 5 years has been when Bernanke was doing QE. I don't think it enters anyone's mind that having an extra trillion or more in the banking system, free to move around is going to prevent a bidding war for cash. The only ones bidding will be broke. The real purpose of QE is to blow financial bubbles and propagate theft by the insiders. Double entry makes sure there are plenty of liabilities on each side. It appears the system is more resilient than we think, in that we can have a group of idiots running it as they have and it hasn't failed yet. They are quite apt to blow the bond market up, if they continue and they will probably step on the gas, when the brake is needed. The derivatives market must be exploding about now.

mannfm11 said...

Anonymous, you sound like a guy who failed to renew his home owners insurance and is celebrating because the tornado only to your next door neighbors house. Now you have moved into the 15 year flood plain, because it hasn't flooded in the past 50 years. The government isn't going to have another $10 trillion to bail out housing again. In fact, it would have been cheaper to have eaten the entire mortgage industry than what they have done. Zero equals zero and that is what zero interest implies for all. Hope you have taken your profits.

mannfm11 said...

AIM, that is the biggest fiction in history. There was no recovery between 1933 and 1937. Only another stock bubble.

Jim in San Marcos said...

Hi Manndm11

I thing what AIM was talking about in that time frame, was things went from tragic to awfully bad and then FDR kicked it back into tragic mode.

Nobody had a job or a dime from 1933 to 1937. Hope and prospertiy were right around the corner when FDR thougt he knew what he was doing.

Same thing today, statistics claim that we have been out of the recession for 2 years. But we're still in a depression.

People want to hear good news. Bad news only sells newspapers.

AIM said...


I think you should recheck your facts. The stock market went up and up and up during that period of 33-37 and look at the GDP trend during those years as well. There was innovation occurring as well. Show me facts that disprove what I'm saying.

Another misnomer that most people have... the crash that happened around 1919-1920. It was severe. But The Fed and the Govmt remained laissez faire and lo and behold a recovery came pretty quickly and off we went into the roaring 20s. The Keynesian Interventionists don't want the public to know about that. They want everyone to believe that central planning and government involvement is the only safe way to go.

AIM said...

Prior to the 30's Americans never even considered the idea that the government should take care of them, run education, protect them with unemployment and health insurance and give them any of the various social safety nets.

FDR started implementing planks from the Communist Manifesto. This is where the wave of socialism began. NYC was the model city for it and then FDR spread it out to the rest of the country. Socialism... the stepping stone to Communism and Fascism.

Now look at us. Cronyism, government intervention and central planning, a huge welfare/warfare state, NSA spying on us, super high taxes, IRS targeting groups and people, taxing Americans who live and work abroad, IRS stopping Americans from having foreign bank accounts, enforced health care, regulations out the kazoo, and on and on and on.

Moving into a new era.

Anonymous said...

"Gold isn't a store of anything except gold. It just dropped 14% in a mere 2 weeks, hardly a store of wealth. In the 80s, after the crash, the inflation adjusted price of gold kept going down for nearly 20 years. Despite this hard reality gold bugs keep repeating this debunked myth that gold is a store of wealth."

just sharing...