Precious metals musings

[HuFlungDung]

With the current uproar going on in the world economy, I have been pondering the trend to invest in precious metals like gold and silver.

I suppose this type of investment only makes sense in the first place if one has savings languishing in a bank account somewhere, where the spectre of runaway inflation may threaten to diminish its value considerably in a relatively few years.

But, what I have wondered, is where does one attempt to draw the line on a fair price for precious metals? I think that currently there is quite a bit of hysteria leading people to buy gold and silver, and that possibly the prices being paid are creating yet another bubble in yet another market. What kind of a 'safe haven' is it when you pay 10x the monetary value that the precious metal would have had in a non-panic situation?

In Canada, it becomes annoyingly complex to figure out one's buying position in the precious metals given the uncertain future of the Canadian $ versus the US$. Like today for instance, the price of silver went up a bit in US$ but so did the Can$ versus the US$, so the net effect was that the price of silver decreased for a Canadian buyer. It must be nice to be an American where you never have to factor in the exchange in anything you do in the markets!

So the talk is that converting paper to gold or silver is a safe haven for individuals whenever the big inflation (if it comes) hits us. Yes, that sounds logical, but the trouble is, everyone knows this. So if the crunch were to come worldwide, how is gold and silver going to come back in style on a daily basis? Are you really going to work for a silver dollar a day? How much time has to elapse between the beginning of hyperinflation before ordinary people rationalize the value of their services in terms of metal?

If this adjustment time period is more than a growing season long, there will be hell to pay in food production. But that is a very short timespan!

We all have memories that will give us a rough approximation of what we think an ounce of gold should barter for, but the range of value could easily vary by a factor of....4...or 10....which is a heck of a lot. I can barely imagine the turmoil in trying to make gold and silver work again in a society that has revered US$ for so long.

Even the gold and silver nuts seem to be in a constant state of flux, converting their metals into US$ and then buying back into metals again to increase their holdings. But it seems like a game of musical chairs is being played. Ultimately, one is going to want to buy something with that metal, something big like a house, a machine tool or a business, and then the valuation is going to be tough to do. Most likely, the seller of the asset is going to take a beating on the deal, just so that the metal holder "makes sure" that he got sufficient overkill with the trade off of his precious metal to cover his butt in case the metal is not worth as much as anticipated.

If one buys precious metals and sits complacently on them, then that person is still imagining a future profit based on inflation of the value of the metal in terms of the next fiat currency to arise.

So if the world economy is going to crash, and the supposed precious metals are going to bring in the new world order (with he who has the biggest hoard becoming top dog), why don't we just do this voluntarily now? Repeg the US dollar (or some currency) to gold. Make something like gold grams the new currency of the world?

If one currency were repegged to a gold standard, this would kill gold trading in that currency stone dead, because of the equivalence of value. All other currencies would still trade gold because traders would still seek out the differential in value. I'm not dead certain that various currencies are really a good thing anymore. Maybe we should just have the one, that way, there will be less competitive advantage in constantly shifting the manufacturing base from nation to nation, creating artificial trade incentives based on 'my dollar is worth more than your dollar'.

However, a new gold standard would not solve the current sickness of debt in the world. We'd still have to agree on an international forgiveness formula, which, IMO, is the only solution to overindebtedness.

This is just a bunch of random thoughts to mull over. Please add what comments and thoughts you might have.

[LeeWay]

The only thing I will say is that gold or silver will never loose all it's value like stocks sometimes do. Here's what I would do rather than buy stock.
Buy some gold and silver. Have it turned into a box. Put your extra cash inside and bury it in your yard. You and me then set up a raffle for the treasure map. We would each make ten times the cost of the initial buried treasure. Do the map right and only one genious would ever make it to your yard.
We stand a better chance this way than we do with the stock market.

[LeeWay]

Here are some afterthoughts.
Perhaps the World should go bankrupt and foregive all debts. While I am not effected much by the current recession, worldwide chapter 11 would surely hit me harder.

Before times of cash, people used to trade in valuable commodities, which might be labor, tools, pelts, furniture and even offspring.
Perhaps it would be better to get back to such a system.
Stock markets have been offering one offspring to a thousand people and then she turns out to be ugly and can't cook. In old times, the stock seller would have been hung or run out of town on a rail.
Instead, now these guys are getting even richer in the US.

I have no solution to the problems facing the world right now, but I sure pray the the people across the world that knew what they were doing was under handed, suffer at least a little bit. I have nothing but distain for anyone doing business dishonestly. There are only two choices. One is honest and the other is stealing money.

[Geof]

Buy non-precious metals; aluminum, copper, lead, nickel. Gold is likely to only maintain value by keeping up with inflation; metals that have significant commercial use will increase in value much faster than inflation when the world ewconomy picks up again. In particular look for metals that are likely to be in short supply because the current downturn has stopped mine exploration and development or, like aluminum, are going to increase in value with increasing energy costs.

[CJL5585]

Buy non-precious metals; aluminum, copper, lead, nickel. Gold is likely to only maintain value by keeping up with inflation; metals that have significant commercial use will increase in value much faster than inflation when the world ewconomy picks up again. In particular look for metals that are likely to be in short supply because the current downturn has stopped mine exploration and development or, like aluminum, are going to increase in value with increasing energy costs.

I agree with Geof. Also, exotic metals that are used by major industry, by our missle defense systems, space programs, satellites, and so forth are only going to sky-rocket in price, as the supply dwindles.

I have heard forcasts that put the future price of gold at $1550.00 - $2000.00 per oz. in US Dollars.

I have also heard that some of the oil producing countries, and also China are wanting gold in place of US currency, at the present price. If that occurs, then Fort Knox would most likely be an empty building.

[ViperTX]

Personally, I don't think gold or silver should be the investment choice. What will be in demand are those minerals that are not commonly available in the US, Canada, or Mexico.

Those minerals will be those used to make any of the alloys which are used in the defense industry, space industry, etc.

Titanium sponge comes to mind....

[Edwardo]

cnc is my hobby, mining exploration is my job, i've been doing it for 28 years now drilling around the world, our industry has been going full out for the past few years up until summer that is. The stock market melt down pretty much gutted us. I thought with the price of gold being what it is that there would be alot of interest for mining companies to be drilling for more, but there isnt. It slowly starting to pick up again, but last fall we were told there was nothing starting this year and to be prepared for the worst, im lucky to be working now, i know alot of guys are sitting at home waiting. It used to be that gold @ 500 a ounce we were so busy you could pick and choose where you wanted to work, now with gold between 800-1000 a ounce you are lucky to have a job???

EDD

[KIMFAB]

Gold and silver were $931 and $13.53 respectively at last check. I prefer silver because it has industrial use being the best conductor of heat and electricity. However if and when you do buy it get the actual product in your hand and not a promise that it exists in somebody's vault. You can buy it as an investment or as a hedge for a WTSHTF scenario.

Keep in mind that it is a long term investment that will not pay dividends but also will never go to zero value like some stocks I have purchased. If you are really interested google Jason Hommel and check some of his articles - keeping in mind he has his own ax to grind

[HuFlungDung]

cnc is my hobby, mining exploration is my job, i've been doing it for 28 years now drilling around the world, our industry has been going full out for the past few years up until summer that is. The stock market melt down pretty much gutted us. I thought with the price of gold being what it is that there would be alot of interest for mining companies to be drilling for more, but there isnt. It slowly starting to pick up again, but last fall we were told there was nothing starting this year and to be prepared for the worst, im lucky to be working now, i know alot of guys are sitting at home waiting. It used to be that gold @ 500 a ounce we were so busy you could pick and choose where you wanted to work, now with gold between 800-1000 a ounce you are lucky to have a job???

EDD

Edwardo,
That is interesting. Do you suppose that the drop in exploration could be due to many central banks selling off some of their reserves?

I am suspicious that we have entered a new paradigm in business: price manipulation through supply control. Gone are the days of producing all you can produce until the market is saturated, in order to find a equilibrium between supply and demand based on maximum output.

Why work hard, when you can make more money doing less work, but waiting for the higher prices? When business conglomerates get big enough, they can pull this off, without actually having to kill off competitors, because the competitors are equally 'smart'.

Just goes to show that the 'best people' rise to the top where the big money is

[Geof]

... Do you suppose that the drop in exploration could be due to many central banks selling off some of their reserves?....

In some instances junior mining companies had parked their capital in things like Asset Backed Corporate Paper because it was presented as a stable short term way to earn interest on money that was not needed immediately. Now they find their money is either gone for good or is going to be tied up for years rather than weeks or months so they have no choice but to close down their operations.

In other cases it is simply the case that companies cannot get financing because the banks are conserving capital to cover their exposure in ABCPs and default swaps.

The chances are it is going to get much worse before it gets better. I know someone (family actually, not a friend of a friend ) who happens to be a geophysicist working for one of the largest Canadian geotechnical companies. In just a few months they have gone from have a full order book out two or more years into the future to shedding staff and looking for ways to cut expenses so they can keep key people. You know when this type of contraction occurs with a company that is the one involved right at the beginning of a new project that these projects are now back-burnered for several years or totally gone.

[Edwardo]

I think the situation affecting the mining/exploration industry is the same as any other industry suffering at the moment. I remember quite a few years ago some country decided to cash in its gold reserves for paper money, the price of gold dropped, then the Bre-X scandel happened and work slowed down, but then exploration for diamonds came along in Canada and and work picked up again. I think this time it was just general panic among investers and the invester that depend on their investments for a income, my dad has alot of money tied up in mining stocks, but he is fortunate enough not to need that money to survive on so he's sitting on them, actually buying more now at a lower price! Yet another older fellow i know has had half his worth of RRSP's wiped out in the blink of a eye and is now not sure about his retirement and may have to try and find a job!
Being on the front line i have had opperunities to buy stocks, but i have seen the way some mining co's can manipulate the market, so i have never bought 1 share of anything ever, probly why im still poor and will work my guts out till 65....unless i get my cnc plasma business going

EDD

[KIMFAB]

This illustrates again the need to diversify. You should never invest money in anything that you cannot afford to lose. Between stocks, bonds, precious metals, real estate, or anything else don't put all your eggs in one hat. Keep enuf cash on hand to tide you over the rough times. Right now tho there are some screaming deals on machinery out there, so much the better if you know how to operate them properly.