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Color me
green
The Optimist wants to
demonstrate that he is sensitive to the environment by recycling one of his
old commentaries. This seems like an appropriate time to reinforce the
title of this work because pundits everywhere are focused on the soaring
dollar, and on the corresponding carnage in precious metals prices.
Many people are amazed that the dollar can rocket higher in the face of probably
insurmountable financial problems in the USA, while other people are
convinced that the dollar has room to advance further. The Optimist is
skeptical that the dollar will maintain its recent gains, but he tries to
skip to the beat of a different drummer. I hope readers can find a
catchy rhythm here.
I said it
before
My 2005 commentary Buy
Gold and Silver. Ignore the dollar!
made the point that the dollar, euro, yen, and all the other currencies are
fiat, with no more intrinsic value than the paper and the ink printed on
them. The dollar goes up, or down, but only in a teeter totter
comparison to the other fiat currencies which it is measured against.
Silver and gold, in contrast, have real value which is independent of
exchange rate fluctuations among the various fiat currencies. Since the
purchasing power of all fiat currencies is deteriorating over time, the value
of silver and gold increases in comparison to all fiat.
Same song,
second verse
Americans and many other people
around the world measure the price of silver and gold in U.S. dollars.
Unfortunately, the U.S. dollar is a benchmark that flexes up and down against
other currencies like a yo-yo. Using a variable FOREX exchange rate as
a basic measure of precious metals prices adds a substantial amount of
volatility in the changes of those prices. Admittedly, those changes
feel wonderful for precious metals bulls when the dollar weakens against
other currencies. Unfortunately, the dollar can also strengthen against
other currencies, like it has in the last few weeks, and many of us feel the
pain caused by using an exchange rate to measure prices. Live by the
FOREX, die by the FOREX!
The price volatility created by
changes in exchange rates provides great opportunity for short term traders
who can master the price swings. For those of you who have that skill,
there is no need to read more of this commentary. The Optimist is an
acknowledged failure at buying swing bottoms and selling the corresponding
tops, so no such advice will be offered here. Instead, I prefer to
focus on value investing in which I look for relatively low value zones in
which to buy, and relatively high value zones in which to take partial profits.
A better way
to view silver and gold value
For readers who dislike the
roller coaster price cycles of extreme highs punctuated by excessively lows,
and who share the Optimist’s preferred approach of value investing, I
offer a different way to view the value of silver and gold. My
preferred approach is to reduce the volatility caused by currency exchange
rate swings, and to chart the value of silver and gold against all fiat
currency. I do that by multiplying the USDX dollar exchange rate against
the dollar price of silver to create the MoreAg Index, and against the dollar
price of gold to chart the MoreAu Index. Additional background
information about this approach is presented in the Optimist’s Gold & Silver page.
The basis for this approach is that FOREX exchange rate variations in any
currency are directly reflected in the changing price of silver and gold when
measured in that currency. When the dollar increases (or decreases) by
10%, for example, that 10% change in the dollar currency exchange rate is
directly imposed on the price of silver and gold when measured in
dollars. If the dollar price of silver and gold declines (or advances)
by the same 10% as the dollar exchange rate in this example, then the value
of silver and gold (compared to all fiat) did not change appreciably.
The MoreAg Index and MoreAu Index filter out the exchange rate changes in the
dollar, and directly show the underlying value of silver and gold.
A picture is
worth a lot of words
As a more graphic example,
consider the chart below of the MoreAg Index updated after the trading on
8/08/08. I update the MoreAg
Index chart for the week each Friday evening. The MoreAu
Index also shows a comparable chart for gold.
 
My interpretation of the
message in this chart is that the value of silver continues to be bullish in
a large and rising channel. Admittedly, silver has declined from
overbought levels near the top of the rising channel to a much more
attractive buying area in the lower half of the channel, but I see that
decline as a normal correction process in a strong long term bull
market. I’m sure that everyone wants to know if the correction
has reached its bottom already, or if there is more downside ahead.
Unfortunately, I have learned that I can answer that question only after
enough time has passed that my answer may have little value. From a
value investing viewpoint, however, I am excited to see that the price of
silver has declined enough to be in a zone that offers great
opportunity. While I recognize that silver could drop more in the days
ahead, I bought to a fully invested position on 8/12/08 (on a paid in full
basis with no margin or leverage) and I plan to wait patiently until the
value of silver and gold rise higher so I can take partial profits again.
Value is the
conclusion
I have heard it said that the
keys to making a good presentation are to (1) tell them what you are going to
say, (2) say it, (3) say it again, and (4) tell them what you said. My
message here is that silver and gold continue to be excellent vehicles for
value investing, and the recent price declines have added to their bullish
potential. Cheers!
Jim Otis, “The Optimist”
The Optimist
* * * Notice * * *
This commentary presents only the viewpoints of the Optimist, and it is
intended only for perspective and entertainment. Please do not
interpret any portion of this work as investment advice. If any of the
concepts discussed here appeal to you, then you must do the work to decide if
and when and how you should invest. The Optimist does not ask for any
profits you make, and he cannot be liable for any losses incurred as a result
of your investment decisions. The Optimist wishes you the best of luck
in whatever you decide to do or not to do.
Reader contributions
are welcome, and excerpts will be added to this presentation. Please
send comments or suggestions to the Optimist.
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