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Buy Silver and Gold. The dollar doesn’t matter! (posted
8/14/08)
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!
8/15/08 update by the Optimist
Now I know why I call myself the Optimist. I hoped that $14 was the
bottom for silver. What a difference a day makes! Hopefully, this
Olympic sized rally in the dollar, and the corresponding cliff dive by the
metals, will come to an end soon.
Since until a few days ago I would have happily bet several silver dollars
that silver would not drop below $15, I am not the best reference for what
silver and gold will do next. I will, however, be astounded if there is
much more downside left for either silver or gold. I don't think that
breaking a technical support line or level will create a bear market, though
it could reinforce additional short term selling. I continue to believe
that this time it really is different. Just like in the
1970s, precious metals will be in a solid bull market regardless of price
levels until the FED raises short term interest rates to higher than the real
rate of inflation. That Volcker solution seems to be politically
impossible now, so I intend to continue buying and holding in anticipation of
higher prices ahead. Cheers!
FYI, Readers looking for more information about silver should consider the
new blog page SILVERAXIS - TODAY IN SILVER. Tom of SilverAxis.com
provides insight that is well worth reading. Cheers!
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