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The drop in
price of gold and silver is because they are considered to be in a bubble. In
my opinion a bubble is when the underlying asset trades in high volumes at
prices that are inflated to their true values. There are economists that
assert that asset prices often deviate from their intrinsic values. Because
it is often difficult to determine what the intrinsic value of an asset is
bubbles are often seen in retrospect like when sudden drops in prices appear.
They are seen as a crash or a bubble burst. It is important to recognize that
prices of a bubble can fluctuate erratically and make it impossible to
predict from supply and demand alone.
The new safe havens are perceived as the dollar and
US Treasuries. To prove this point the media points to that fact that gold
and silver have sold off. They pointed to the strengthening of the dollar and
reported that the safe haven was US Treasuries. Please
see the chart of the TLT
below.
As we can see on this chart the treasuries ran up
from August to October as the dollar grew stronger. However what the media
failed to mention is that the United States is bankrupt! Imagine investing in
US debt for 30 years. It reminds me of the old cartoon where the guy says I
will gladly pay you for a hamburger next Tuesday for one today. As if he ever
had any intention of paying for it in the first place. Investing in 30 year Treasuries is the ultimate bubble.
I admit it. I have been a gold and silver bug since
I was 8 years old. As far as I know I’m the only 13 year old that asked
for a double eagle for my birthday present. You should have seen the look on
my dad’s face when I came out with that. Back then it was a hobby and
my grandma taught me the love of numismatics. Now it’s serious
business.
There are too many very smart people who
couldn’t care less about gold and silver. Who am I to say they’re
wrong? They chose to invest in high yielding, large cap stocks and are
content to trade their positions (buy on the dips and sell on the rips) and
collect their yields while they wait. In all honesty, half my portfolio is a
diversified collection of these stocks. The other half however is more risky.
I like SPXU and UPRO, which are plays on the S&P.
I like the gold and silver trade. My favorite junior
miner is US Gold (UXG) and while the sheep were herded into
the US treasuries thanks to the talking heads, I was buying US Gold (UXG) at
@.$2.22 a share and my favorite silver stock Silver Wheaton b(SLW) at $27.45 a share. Please see these
two charts below and notice how they correlate to the run up in the TLT.
Please take note that as TLT hit its highs UXG hit
extreme lows. Please see chart of SLW below.
Again, please take note that as TLT hit its highs
SLW hit its extreme lows.
In conclusion, the treasuries have
been very strong in the last few weeks but it won’t last. The dollar
which has been beaten down has for a short bright shining moment it had its
day in the sun as it was the best house on the worst block. Compared to the
imminent Greek default, the contagion in Europe, the global
economic slowdown and the tepid economic conditions here in the treasuries
are on the way back down. Let us not forget that no matter what may come out
of the mouths of the politicians a key to this administration is to keep the
dollar low. This is the only way we will be able to pay off the staggering
debt we have amassed. A dollar that is worth 70% of what we borrowed makes it
30% easier to pay back the debt. This will not stop. The debasement of the
currency will continue.
After gold’s parabolic move it
is healthy for a stock to pull back before it begins its move up again. My
expectation is for gold to rise to a minimum of $2000.00 by the end of the
year and if we use the generous historic ratio of gold to silver of 50 to 1 silver will be $50.00 by
the year’s end.
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