Posts Tagged ‘Commodities’

Why Invest in Gold?

02/25/2010

By Levik Dubov

Simple Answer:

The reason why investors own precious metals, is to insure themselves from a debasement of currency at a greater rate than available market returns. Few people actually own precious metals physically, and those who do often do for the wrong reasons.

Gold is not a reliable vehicle for appreciation, yet it is an outstanding store of value. The sensible capitalist does not “invest” in gold. He merely safeguards his wealth in the form of non-financed physical-assets in times when currency competency comes into question, and waits until either the inflation subsides or an opportunity of adequate returns to be restored.

As one hedge fund manager recently put it: “All investments have their day, and right now gold is having its day”.

In-Depth Analysis:

For all those who aren’t familiar with Talmudic-style dissection, Get ready!

Some people are natural cynics and approach everything with a good dose of skepticism. (These people often spend years owning nothing but AAA-bonds and Market Funds). Others are opportunists and approach everything with a gullible zeal. (These people are often looking for the next Microsoft). We see ourselves as mere realists, in an attempt to approach everything with a logical and objective frame of mind.

To understand results we must first find reason…

Questions Scott Adams poses:

I am referring to a recent article by famed Dilbert cartoonist, Scott Adams. I enjoy his posts very much and I hope this article will clarify his perplexities regarding precious metals investment.

1. “People aren’t good at predicting the future, no matter how obvious the future path seems”.

It is for precisely this reason, that when things do change, (such as the turn of the English Empire), so few expect it and are prepared. Ask people interested in precious metals, exactly how many ounces of physical metal they own. You’ll notice how few people truly stand behind the words they’ve spoken. As a matter of fact, just glancing through the comments on Adams’ blog, it seems that most of the forum comes across as hypothetical folks who either own too little of a position, or are influenced by invalid reasoning.

2. “Warren Buffett isn’t putting all of his money in gold”.

I will get to the reason behind this in a moment, but it must be understood that Mr. Buffett is a “Common Stock Man”. That’s what fascinates him, that’s what engages him, that’s what he does best. So why should he invest in gold when he has found far greater returns in an under-valued marketplace?

3. “My failure to imagine how the debt can be contained might be just that: a failure of my imagination”.

When it comes to debt there is far too many variables to consider (i.e. Chinese Bond-ownership, Dollar Replacement, Federal Bankruptcy, Currency Revaluation, The Gold Standard). In other words, the ownership of gold stands not as an investment with the intention of appreciation, but as an clever insurance policy against a catastrophic hyper-inflation or currency debasement.

Explanation:

In “The Intelligent Investor” written by Benjamin Graham (Buffett’s famed mentor), which was revised as of 1971, Graham says in Chapter 2, “The Investor and Inflation”, in the article “Alternatives to Common Stock as Inflation Hedges”:

“The standard policy of people all over the world who mistrust their currency is to buy and hold gold… the holder of gold has received no income return on his capital”.

He adds in summation:

“There is no certainty that a stock component will insure adequately against such inflation” [emphasis ours].

A few points need to be highlighted:

1) Graham informs us that the hoarding of gold was an age old practice. This made total sense as in fore-times bank panics, currency debasement and depressions occurred just about once a decade.

2) He cites the years between 1935-71 as “proof” that gold has been a lousy and inadequate investment class. However, between the years of 1969 and 1981, gold appreciated phenomenally, outperforming each and every other asset class by a wide margin. Had Graham witnessed this spectacle there is strong reason to believe that he would have reconsidered his position, and may have made room for precious metals in a conservative portfolio.

3) In that paragraph he also frowns upon investing in real estate claiming that it is subject to “wide fluctuations” and “serious errors”. His only advice to such business is:

“Be sure it’s yours before you go into it”.

What Graham is telling us here, is that any asset is a bad investment if done for speculative reason, or with improper judgement.

4) In his closing remark, Graham even warns that even while common stocks offer great opportunity, they may nevertheless fail to overcome the challenges of inflation, or currency debasement.

What’s Changed?

Much! Too much actually. As a matter of fact, from an economic standpoint America is no longer similar to the America Graham was familiar with. For one, America has lost its status as the world’s largest manufacturer of goods, and has gained a frightening lead in terms of consumptions and spending. (For those familiar with European history, this is how 16th Century Spain lost its position as the world leader in trade and commerce).

The world of currencies have also changed drastically. While I will not delve into the fascinating history of barter, trade and the properties of monetary exchange here, one enormous variable differentiates the Pre-1974 and the Common Eras. In ancient times, every single transaction took place with an element of exchange in mind. Whether it was sea shells, or cattle, or wooden sticks, the value of any transaction or credit was accurately measured in terms of a monetary exchange unit. With the agreement to terminate convertability from gold to Dollars in 1974, this all changed. No longer would the U.S. Dollar, the “ineffable” reserve currency of the world, be exchangeable for the gold metal.

Thus began, the current era of a universally-accpeted fiat (non-commodity based) currency. No longer would each transaction be measurable in accurate terms. And no longer would any Government, foreign or domestic, be compelled and obligated to abide to the regulations of supply and demand. So long as We The People would accept and stand loyal behind the mere faith and credit of the United States Government, so long would our ever-glorified Dollar endure.

4.
“What happens to the price of gold if people simply change their minds about its value?”

Adams’ question seems pertinently logical. However, there is one crucial question that he fails to address…

What is a currency?

The following I adapt from the works of Doug Casey:

In the 4th century BC, Aristotle defined 5 reasons why gold is money, and they are just as valid today as they were then. A good form of money must be: consistent, convenient, durable, divisible, and have value in and of itself.

Consistent. The lack of consistency is why we don’t use real estate as money. One piece is always different from another piece.
Convenient. That’s why we don’t use, for instance, other metals like lead, or even copper. The coins would have to be too huge to handle easily to be of sufficient value.
Durable. That’s pretty obvious – you can’t have your money disintegrating in your pockets or bank vaults. That’s why we don’t use wheat for money; it can rot, be eaten by insects, and so on. It doesn’t last.
Divisible. Again, obvious. It’s why we don’t use diamonds for money, nor artwork. You can’t split them into pieces without destroying the value of the whole.
Value of itself. The lack here is why you shouldn’t use paper as money.

A 6th reason that Aristotle may have overlooked since it wasn’t relevant in his age, and nobody would have thought of it: It can’t be created out of thin air!

This is not a gold bug religion, nor a barbaric superstition. It’s simply common sense. Gold is particularly good for use as money, just as aluminum is particularly good for making aircraft, steel is good for the structures of buildings, uranium is good for fueling nuclear power plants, and paper is good for making books. Not money. If you try to make airplanes out of lead, or money out of paper, you’re in for a crash.

That gold is money is simply the result of the market process, seeking optimum means of storing value and making exchanges.

Buffett’s Investment in Silver, Style and The Finale of an Era:

Buffett It should be noted, that Buffett did make a significant investment into Silver (not gold) in the late 90s, one that has come under sharp scrutiny in recent years, as few are knowledgeable of exactly what led Buffett to purchase over 100 million ounces of physical silver on the open market, and moreover what ever happened to the holding. Those who know him, have even mentioned his fascination with silver over the decades. All in all, we cannot say that Buffett “only” invested in common securities.

We may also add, that the majority of Buffett’s tenure as the “world’s greatest investor” coincided with an era that was quintessential for the class of Common Stocks. The 50s, 60s, 80, and 90s, were all part of a two-part secular bull-market that captivated the attention of Wall Street and Main Street, concluding in the most absurd valuations for up-and-coming Tech start-ups that had neither money nor model. However, one may realize that Buffett’s years of 50-100% returns are far behind him. With over $100 Billion under his management, investment opportunities are slim as: a) Stocks have become a staple of investment and speculation, thus raising valuations to their highest in modern history, and b) The potential for significant returns diminish greatly as the ability for a multi-national corporation to grow is minimal, if not non-existent. This is known in economic circles as The Law of Diminishing Returns.

All in all, it can be assumed that the heyday in common stock are over, as long as current valuations remain at their elevated levels, and investor exuberance and hopeful optimism remain.

Depleting Commodities:

In summation, I’d like to point out why investors and speculators have begun a gradual influx into commodities and precious metals in particular. In brief: They’re disappearing. This doesn’t mean that there will be none left soon, the same way that Peak Oil doesn’t mean that there’ll be no more oil. It simply means that these goods will no longer be available at these prices. This may sound reminiscent to anyone who experienced oil sky-rocket from $1.50/ barrel to over $40 in the late 70s. When the government capped the price level, supply and demand kicked in: Boom! No more gas! Extended lines of anxious cars waiting to be fueled but to no avail. There is no more gasoline left at the price it sells for.

This is why investors flood commodities when inflationary scenarios take hold. Because with all the over-investment into service companies, manufacturing facilities, tech stocks, real estate developments and paper currencies, people have completely forgotten the elements all that possible: physical goods. Oil, Lumber, Cotton,

So take Adams’ post as you wish. But bear in mind that markets aren’t very intuitive. They tend to evaluate the here-and-now and the probable, and don’t have much patience for abstract and the possible.

I only restate the famed Ben Graham’s empirical warning: “Be sure it’s yours before you go into it”.

Good investing!
Levik

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Why 2010 May Be Quite Similar to 2009

01/08/2010

If you did well this past year, I guess that’s a good thing!

Friday is my market day and it seems that with the new year some realignment of the big picture is in order. Note of optimism: When you know what’s going on you can properly position yourself to benefit from its leverage. No condition is ever entirely good or entirely bad. So here’s what’s going on…

“Sentiment Oscillation” or “Paradigm Shift”.
That’s the reason for all this mayhem. As general conditions continue to change (as they have since 2007), so will the general mindset. From growing to sustaining. From net profit to net loss. From Investment to saving. From short-term gains to long-term advantage.

Let’s focus solely on economic facts:

The How:

  1. Internationally Governments have already allocated rescue money that will be spent over the next few years
  2. They have also lowered Interest Rates which spurs a higher inflation of credit
  3. When Rates rise savings gains precedence and production falls decreasing the supply of goods and labor
  4. Less supply causes over-demand and higher prices for real goods and commodities
  5. When commodities prices rise, they tend to cut into expenses thus lowering profits
  6. Lower profits and demand for cash decrease momentum of corporate investment and the stock markets decline
  7. Lower Markets lower the sentiment of the consumer and spending decreases
  8. Less sales means less revenue and retail venues under pressure go under causing a Commercial Real Estate bust
  9. With Investing and Equity down and out people turn to Savings and Cash
  10. With Bond markets already pressured by higher Interest Rates and a debt laden currency people begin to turn to Precious Metals and Tangible Goods

Why:

  1. Someone say Bailout? Trillions have been spent and Trillions more will
  2. With the lowest Interest Rates in decades credit is merely being deferred
  3. Businesses decide to save rather than reinvest profits
  4. This one’s tricky but the former ALWAYS leads to latter
  5. Even if businesses raise prices, profits will fall
  6. Bond yields begin to resemble stock dividends only with less apparent risk
  7. Higher stock prices are always met with consumer exuberance
  8. This has already begun but has been prevented by soon ending rescue funds
  9. With higher Interest rates CD’s and Money Market funds begin to make sense again
  10. This is what happened during the 70’s as Real Interest Rates remained negative

Investing Advice: If you are going to “invest”, you must understand that the next 10 years will be similar to the last. Much higher prices for real goods, much lower valuations for equity and paper. This is because we’re doing the same things over (lower rates, more issuance of credit, more debt to pay off). These are times to seek under-valued out-of-favor securities.

Business Advice: If you are going to do business, I believe you will be better off than many people trying to make ends meet on unemployment checks and the reason for that is the ability to be proactive. Your success is what you make of it, and if you’re determination is deep then no recession or even depression could abstain it. Focus on providing customers with durable and consistent value.

Fundraising Advice: If you are in the legions of the eager financiers trying to keep the lights on in your non-profit, raising for a local charity or even seeking capital for your small business, remember that people are always searching for the best place to put their money. Your job is to provide them with the sense of value that its going to the right place for the right reasons.

Have an awesome weekend!

05/29/2008
Deflation! When smaller is better.

Well, sort of. You see, we’re not referring to commodity prices. We’re talking about consumer prices. Until now we have seen Wal-Mart, the nation’s largest retailer, cutting prices of goods from cereal to coffee (as much as 30% this year). But how?

[The following may also explain the miraculously low CPI reports over the past few months]

Here are some ways to cut costs:

Shrink the goods. Cereal boxes only two-thirds full, Hamburger Helper with denser pasta (allowing the same amount of food to fit into a 20% smaller box at the same price) and even repackaging (the 750ml bottle that was once 1000ml). This cuts resource costs.

Cut out the middleman. Wal-Mart now buys its brand-name coffee directly from a cooperative of Brazilian coffee farmers for its Sam’s Choice brand, cutting out suppliers, cooperatives, roasters. This cuts labor.

Go local. Stores are sourcing more produce locally instead of trucking to distribution centers nationwide. This cuts shipping costs.

Will it last? We don’t know but we are sure of one thing: There are many methods of getting great stuff for damn good prices, be it oil and metals (due to easy, cheap drilling), affordable housing and loans (due to low rates), stocks (due to high profit margins) or even labor (thanks to low-wage paying Asia).

But needless to say these days are passing us and they may be gone for quite a while. Rates are rising, easy oil is depleted, profits are declining, cheap labor is harder to find and those extra money saving efforts are dwindling… and so may the easy money.

For a nation seemingly addicted to Hummers, I think the retailers have begun to think differently: Smaller is better!

The Real Bubbles

05/04/2008

 

“It is the measure of wealth itself [the Dollar] that is overvalued, not the goods that it represents”

 

 

I’m beginning to understand what is going on. I hope this article will shed some light on a variety of issues, some of which have been fairly complicated for the common investor to digest.

I will begin with a paragraph of adages and mantras being proclaimed on Wall Street, followed by a thorough analysis of why they are either baseless or misconceived. For the sake of simplicity I won’t use references but they are all available.

Mr. Market says

“The Commodities Bubble has begin to blow over, with everything from gold to oil to potash collapsing from their artificially inflated prices to mediate norms. Much of these gains have been driven by speculator demand, from hedge funds and the like, as well as consumer demand, including China, India and Russia.

“Investors have bought in every premium into these contracts and optimism is high. Furthermore, commodities have been a very poor investment relative to stocks and bonds. Even gold has underperformed inflation. As equities recoup its gains and inflows of capital return, pushing inflation down with it, commodities will be a relic of the past.

“Recessions are times of diminishing consumer demand and this will further help in reducing prices. With much of the investing community already discounting shares due to recession we can expect a bottom in the stock market with a rally beginning just as the economy is officially in recession. Financials and Homebuilders are set to gain the most as they have been beaten down severely, looking awefully cheap from a value prospective.

“The Dollar is set to rally as stark pessimism has oversold it. Recession will strengthen the currency. This will bring in investment flow previously allocated to Euro, Yen and Gold.”

The Problems With Mr. Market and the rest of the Wall Street gang (CNBC)

1. Wrong Biases
Wall Street as we know it is not a the Mutual Fund Industry, a group Hedge Funds or even large network of multi-national corporations. It is simply the media’s opinion of the former. There are few companies that end up becoming large corporations and even fewer speculators-wanna-be-billionaire-investors who actually live up to their own aspirations.

This is due to its ill-conceived sentiment, nothing more. It has all the facts (most do at least) yet the small investor constantly fails to make the integral judgments necessary to fulfill his lifelong ambition of success, or even of financial independence. They run after Enrons, Devalued Russian Rubles and dot coms believing beyond any doubt that they have it made for themselves and they have indeed “beat the street“.

However, the only way to real gains is to bet against the crowd, to look where no one else is looking, or even better, to see past the unsound biases that have plagued investors since the Mississippi Scheme in the early 18th century.

2. Confusing Short and Long Term
This is probably the most extreme variable, one which offers the most profits to he who can see past its vile inadequacies. Many (not all) of the arguements presented in favor of the Dow 36,000 were in one way or another grounded fundamentally. The problem with the gushes of cash inflow was they were based on an economic phenomenon that was years into the future, results that we are only beginning to see today – and interestingly enough by quite a different group of influences. While investors were placing bets on Yahoo and Juno, Google wasn’t yet a public company.

3. Forgetting Premium and Discount
In addition, shares were discounted many times over yet speculators failed to realize it. Any price was a great price because in the mind of these irrational gamblers the gains were infinite it seemed. It was hard for investors themselves to understand that they were betting that the company of purchase was one of sound safety that would last, and therewith deliver on its earnings 100-1000 times over, without any interruption whatsoever.

4. Wall Street too has Seasons
There are financial equinoxes, waxing and waning over decades. Warren Buffett himself cautioned Saturday not to expect big gains from the stock market in future years. Indeed, there are periods when year after year people move from the New York Stock Exchange to the commodity pits of the Midwest in search of better returns.

5. In The Dollar We Trust
A currency is present only to act as a constant method of exchange between goods. Yet the U.S. currency is nothing of the sort. It has become a staple of growth and a signal of everlasting creditability. Unfortunately for many this will not last. Contrary to many pundits the present rally in the Dollar, however great it may seem, is a mere decoy and will be short-lived.

Even Treasury Secretary Paulson has advocated that a weak dollar is in America’s best interest. While this may or may not be a positive development, one thing may be guaranteed by any student of financial history dating back to Cicero in ancient Rome: every fiat currency has failed, frequently bringing its empire down with it.

6. Action and Consequence
Finally it pays dearly for the prudent investor, who has the sole initiative to first protect and only then appreciate his capital, to understand the elements of check and balance. Every action that does not act as a stimulus for long term growth but merely for short term gain will inevitably be met by an equal and opposite loss. Failing to understand this will, for the ignorant, deplete capital faster than you can say “Bear Sterns”.

Commodities will not blow over.
Long term investors understand the need for correction and rest. Things that go straight up are indeed called bubbles and we are not there yet. Like fire feeding off oxygen and fuel, so too do bubbles feed off of extreme optimism and public involvement, both of which can’t disappear over a few weeks. The perceptive analyst will look around and tell with utmost certainty there is no sign of a any euphoria. If anything the investor relies on solid fundamentals, all of which are intact, and buys when the crowds are telling him to be cautious. If he didn’t sell he is sorry but it is insignificant because a bottom is close at hand.

Has all the oil inventories been replenished with years of supply? Have investors the fear that would send each preferring a Krugerrand over a wad of hundreds? Are the cheerleaders over at CNBC telling you to buy Krugerrands and load up on more shares of Nemont Mining?

Market Norms
I have read through many books on markets, investment and financial history yet I have never seen evidence of such a thing. Everything has an intrinsic value and it either sells at a premium to that value or a discount. Professional Traders look for market “norms” in the sense that they seek a short term variable and attempt to trade within that range yet they abandon all affiliation when this trend is broken, that which all may be confident that it will.

The Real Bubble
With pundits of financially-based markets they seem to make two awfully wrong assumptions. Firstly, that the a Commodity Bubble exists in Dollar denominated form and secondly that it has been inflated by artificial and speculative demand.

The first misconception is one that one would almost fail to consider to begin with. After all, the U.S. Dollar has been on the center stage of international trade since the Bretton Woods Agreement shortly after the Great Depression in 1941. Yet since 1913 its intrinsic value relative to goods and services has fallen by over 93%. The fact that there is still any goodwill left to the Dollar at all resembles a Bubble of sorts. It is the measure of wealth itself that is overvalued, not the goods that it represents.

Thus, it is not the goods and services that rise but the Dollars that fall; their inability to maintain their value. Nevertheless instead of markets taking their natural course and correcting itself, the Government is artificially inflating the money supply whilst protecting the very economy that its currency stands for. This devaluing of the Dollar to be able to finance its debts is in no way different than if Enron was given the very ability to print its own currency to continue its business operations or pay out to its shareholders.

This explains the underlying developements we have seen in physical goods, not too different from what we experienced in the 1970s, with a dangerous undersupply of commodities, runaway deficits and financial derivatives of enormous proportions.

I ask of the conscious minded economist, “With over $500 trillion in financial promises, which now seems to be Dollar-backed and secured by the Federal Government, what meager value may be given to the price for real goods, that which feeds and sustains mankind? Furthermore, if demand for goods the world over is rising is it not reasonable to assume that prices rise with it, if not to curb demand, then to act as an incentive for the farmer to increase production? Finally, what would have offset the interest for the speculator to profit from these gains if the fundamental demand continues unabated?”

To quote Charlie Munger “We have convulsions now that make Enron look like a tea party.”

Critical Optimism
Does the financial community really believe that there is excess optimism in commodities? That gold bullion are selling off shelves? That people left and right are participating in buying goods that will benefit from real demand? On the contrary, I see that many have found an opportunity to sell the only gold that they may have in their possessions to take advantage of higher market. This denotes good business sense of buying low and selling high, but certainly not in the realm of exuberance that we have seen in previous meltdowns.

Physical vs. Fiscal
Commodities and Equities. Gold and The Dow. It is a subject that many seem to overlook from a generation-term prospective (considering that Buffett’s long term is 10 years). It is the flaw you will see in every commodity-bearish argument: “Commodities just don’t cut it relative to equities”.

But let us look at the origins for monetary protocol: Traders bartered goods in the marketplace. With many various items coming from numerous townships it was necessary to create a measure of value, a pivot whereby difference between supply and demand may mediate; a method by which payment may be expandable without the physical presence of currency.

Thus began the credit cycle. Producer sold to seller, who bartered with traders, who retailed to the marketplace, who took home their foods from their labor and fed their families.

This “Credit”, unlike the commodity-based currencies of old, had but one restriction: the tolerance of the lender. As long as the lender would risk would the industry borrow. It is of no coincidence that this cycle of credit take years to build and then years to crumble.

The “historical trend”, if we may call it, offers fairly simple advice to the novice merchant who wishes to conserve and grow his capital:

When in times of expansion… lend, invest and do business. In times of contraction and uncertainty… Pay debts, take inventory and accumulate capital.

Recessions of Supply and Demand
It is interesting how mainstream economists will focus on something specific in great detail and fanfare and at the same time fail to see its direct opposite exposure. For instance, it is assumed that a recession diminishes demand for goods and therefore lowers prices overall, not only in the U.S. but also in China. Consequently however, a loss of demand will hurt producers who may decrease production. This will have the opposite effect and raise prices.

Furthermore, it is assumed that as we move into recession, investors have already discounted all the possible losses and write downs. At first glance this possibility seems preposterous. How can a market, however “efficient” it may be, properly and throroughly account for the very speculations that everyone from the companies to the Federal Reserve can only guess at? Besides, it’s quite humorous that Wall Street can call the middle of a recession when they can’t even call the beginning, let alone its happenstance altogether.

It goes without saying that the same case may be made for commodities, in the sense that recessionary results have already been discounted and accounted for, or that they even sell at a discount relative to post-recessionary time-tables.

Capitalism that would make Marx smile?
Capitalism works. And for he who says it doesn’t should look no further than every innovation and technological advancement since the Middle Ages. Nevertheless, it is a process and it may not be looked at point blank. There are times when the advantages of Capitalism may overextend its true worth, while there may be times that it will seem to underestimate it (much like your average share price).

For the last 28 years we have lived in a credit expansion. Yes, there have been pitfalls – the Crash of 87, LTCM, the DotCom collapse – yet we have rolled on. The world has undergone quite a change in that time and has made people sentimentally and physically wealthier than ever before. Liquidity was fluid, credit was available for anyone who needed it, lending was commercialized and industrialized allowing the investor in China to buy equity in a startup in Australia. What the lender would risk would the industry borrow.

Yet now the payments are due, and the funds we have borrowed to finance this wonderful world we have built for ourselves must be paid in full. We are not veering off a path of success, not failing at our ambitions, we are merely paying for what we have taken.

Our past actions have now brought about the future results. For years we benefited when investors fled from commodities to purchase equities and financial paper, suppressing prices through shorting, or “selling forward”, neglecting the farmers and producers. Now we must compensate those to increase supply in order to feed a larger, hungrier, wealthier, more innovated world.

04/25/2008
So Who’s The Fittest?

“What a fool does in the end, the wise do in the beginning” (Spanish Proverb)

Whether or not we conform to the Evolutionary theories of Charles Darwin, there is most certainly an element of truth behind the prospect that there is indeed a “survival of the fittest”. He who flaunts his wealth, is released from it. He who mistreats his body, withers. He who disrespects other men, is himself reputed.

We see this in our world from every perspective possible. China remains to its thousands year old traditions, as it is, by a philosophy inherently averse to war. Presidents, world leaders, CEOs and Activists usually maintain the stamina throughout even the most challenging times since it was that inbred zeal that got them there in the first place. Many of the happenstances of our history are due not to mere chance but to the wiring of our very fiber.

Hitler failed not because the West defeated him in military strategy or intelligence, but because all hope was forfeited from the beginning; he couldn’t control his own faculties, how would he a nation, how would he the world?

In the makeup of Capitalism as we know it, the earliest laissez-faire economists realized that monies are safest in the private hands, and handiest in the possession of those who understand its value most. Wal-Mart together with its proprietors, the Waltons, is one of the wealthiest economies on the planet, yet at the same time it ranks as the second largest charitable institution on the planet.

Small Money and Smart Money
What has all this to do with practice investment application? Yesterday I was chatting with a friend of mine. She mentioned how she had recently pawned in her gold. “Why?” I asked. She said she wasn’t exactly sure, only that gold had run up quite some bit over the last few years and she decided to profit from it. “Do you reckon it could go any higher?” I asked with a smirk. “It’s already fallen!” she replied.

We may call the above example the Small Money. These are the people, most of society actually, who just go about their daily business and they act, well, pretty much because they are not quite sure.

Then there is what we may call the Smart Money (this does not necessarily Big Money). For examples of such we must look to large institutions that carry a sound sense of financial responsibility; Governments that provide the world with resources and labor, Funds that manage the wealth of many of the affluent with full regard to risk and reward (major ETFs and Mutual Funds may be included in this group), as well as value-conscious long-term investors.

While the Small Money (and so they shall remain) are selling – Real Estate and hard assets – the Smart Money is buying. We see this day after day as the mortgage predicament continues to unravel, but nowhere in economics does it have any mention of leaving bargains on the table.

Where I live there was a “W 55” building that was set to be completed. Unfortunately, the building went under as property values and lending fell. At auction each penthouse sold for $150,000 down from the 300s. 50 cents on the dollar!

Long Term Investors
So what are the long-term investors doing now? They are Buying. Many now see the perfect opportunity to get in on an ongoing commodity boom – read ‘Boom’ not ‘Bubble’. Gold and silver are down 12% and 20% off their highs, respectively. Where many see ‘correction’ others see ‘opportunity’.

Go out to any coin dealer and try to buy more than 50 ounces of silver. Firstly, you moat probably won’t find it. If you do it will probably be in small denominations with pictures of Brett Farve or the Twin Towers on them. The piles of metal from the mints seems rather depleted.

Secondly, you’ll face a hefty premium. It’s almost as if the real over-the-counter market has become completely estranged towards the paper market and fails to believe it. Go on eBay and try to buy silver. You’ll face premiums (outright or in the form of shipping) of $2-$10 per ounce! In a sense, the actual silver market hasn’t fallen much at all.

Many pundits of the industry stated that as prices rise, supply of scrap silver will flood the market. One thing for sure, it ain’t floodin’ it. If it is coming online, it’s coming too slow relative to demand. Regardless, it seems that higher prices are secured sooner than later.

Did someone say Rice? Let’s not even go there.

Funds and Institutions
What about the big funds? Buying. The iShares Silver Trust (SLV) has actually been accumulating physical silver as prices have fallen. This is probably in line with relative demand by the funds investors (I’m one myself).

Governments
Big Governments? Also Buying. It is said that the Central Bank of Russia has been adding to its capital gold reserves and for all we know China and others may be following suit.

“After all is said and done, more is said than done” as Aesop said and the markets seem to reflect that. Those who have bought are destined to be wealthy and those who have sold are destined to buy again.

Oh, and the essential difference between a ‘Boom’ and a ‘Bubble’ is that a boom is when everyone is trying to buy something which no one else owns but everyone else wants, while a bubble is when everyone wants to eventually sell that which everyone has and practically nobody needs.

04/25/2008
“Here’s To The Americans”

There has been strong argument recently shunning methods of accumulating wealth through unethical and socially unjust investing. These include, but are not limited to: shorting stocks, buying into the “Commodities Bubble” as a hedge against further inflation, leveraging, selling mortgages, and the list goes on.

Let us break apart a few of these fallacies one by one.

Shorting
Since the day of the earliest market exploiters, “shorting” (the act of selling an issue on loan and then later buying it back, offering the issue back to the creditor plus interest, dividends and fees) has been known as an act synonymous with treachery and monetary deceit.

While this may indeed be the case, it is so on the reverse side as well. Acts of manipulation are done with equal zeal, if not greater, on the “long-side”. I heard one older fellow say to me “They shorted all my shares of Citigroup! Those unamerican traders!” He probably meant traitors… But have these shares vanished? Are these traders really traitors?

Warren Buffett, once asked regarding his opinion on shorting said “Let them short as many shares as they want! Any share that is sold must eventually be bought back”. And indeed. From a purely economic perspective there is absolutely no loss whatsoever, merely trade of one good or service for another.

Buying Goods
“Buying Goods is bad” people say. Before we would even delve into the matter as it relates to the current state of affairs, I would like to pose some questions:

Are “goods” not made for the sole purpose of their distribution and thereafter consumption? Does the prudent minded not understand that when demand increases and production has diminished (partly due to the fact that producers got sick of shelving out product at a loss relative to cost) there are only two alternatives, a) shortage or b) price increase? Do we only care about ourselves and not the farmers, miners and drillers who put their capital and often their lives at risk for our wellbeing? Why must there be an emphasis on commodity price rises only in times of scarcity? What about the fact that we may be indebted to over 20 years of falling prices?

Leverage
I love this one. There are actually people who propose that the act of using leverage uncalled for. The arguement is that these traders use funds provided by banks and investment funds for greater and loftier profits.

My first question is this: What is “leverage”? Is leverage not another form of debt? If so, there can be nothing more American than to use credit to increase ones wealth, contrast with the actions of consumers the world over who use credit and mortgaged monies to purchase delicacies and pleasures that will very soon pass into worthlessness.

Are the banks and financial institutions at fault for loaning out this money that they will certainly retrieve plus a hefty interest that will, in one way or another be passed onto the very customers who hold interest yielding accounts by that bank?

Mortgages
This above would follow through for the argument of offering mortgages. Yes, there are in every day and age lenders who seek to profit from those who will be forced into higher rates due to their insolvency of credit, or even to foreclosure due to default.

But is this not inverse with the greedy borrowers who wished to bite far more than they can chew? Have the speculators and holders of maxed credit card not yet learned from where depression of wealth derives itself? After all, many of these brokers seemed to be merely offering a service that we, ourselves demanded.

These are the underlying factors of basic capitalism. Unfortunately many Americans, and even non-Americans, fail to understand them. America is the country that stands for nothing more than “Life, Liberty and The Pursuit of Happiness”. Yet, wealth is lost as easily, if not easier, than it comes. Babylon once the richest of the rich owed its empire to the prudence and discipline of its inhabitance.

For America to thrive throughout the 21st century it will be necessary to either learn monetary solvency or forever be lost to the tales of ancient Babylon, Greece and Rome.

06/26/2007
What is Inflation?

After pondering the issue for sometime I was finally struck with the answer. It was during a conversation with a friend explaining him the ramifications of the financial system and where financial and physical assets play a role.

We will begin with the difference between commodities and money. We will then explain how they relate to each other.

The Difference Between Commodities and Money
Commodities are real things – they are actual wealth and are made of the stuff that we eat, build and travel with. Money by contrast derives itself from the physical asset and wealth represents, a credit for something real.

Over the course of a generation, the amount of credit will expand to accommodate business growth, borrowing for investment and for the sake of increasing the amount and efficiency of actual goods and services. This will then contract and will leave each own with his profit or loss.

The Credit Cycle
It is this ratio – goods to derived goods – that paint the economic picture of tomorrow. When the Dow is selling for an ounce of gold, one can be sure that the physical and fiscal assets have realigned. However, when the economy is flush with liquidity and the Dow is selling for 44 gold coins then the future, although it may contain more of an expansion, it is nonetheless bound for a retreat.

Inflation and Deflation
Now that we have these extremes, it is a simple matter of equalizing the ratios, an x-factor, that has yet to be either extended or narrowed. And there are two ways of this occurring.

The first is by raising the lower quotient (Commodities), this is what the investing public now refers to as “Inflation”. The second scenario is by a lowering of the higher quotient (Fiscal Assets).

Realize that the choice inherent to obtain the objective is a lesser of two evils. Either the holders of the physical will be happy and the holders of the financial assets unsettled (due to the fact that their goods now sell at a more expensive price). This is the “Inflation” we saw so vividly during the 1970s. The financial institutions aimed at increasing liquidity.

Or the holders of the financial assets will be, for lack of a better word “deflated” and the holders of physical assets content. This is “Deflation” by Keynesian definitions, that occurred during the debacle of the 1930s. Then the financial institutions allowed the liquidity to dry up itself.

Depression and Recession
Obviously the term Depression was provided for the latter, and the term Recession for the former since psychologically it is far more painful to lose $1000 than for your $1000 to be worth less, albeit with the same result – mediocrity of value.

In Summery
We now understand the difference between the common use of the terms “Inflation” and “Deflation” used to describe a nominal expansion and contraction of the money supply and the practical definition of those terms that relate primarily to the increasing spread between actual and monetary assets.

Inflation
According to its common and generally defined term Inflation refers solely to an increase in prices. The reason this description is so vague, is because the goods with one wishes to refer to as a guide may be relatively important to one individual but at the same time irrelevant to another. The proper term of Inflation refers not to the monetary price of goods but rather, more importantly, the ability to buy more goods at a better value. For example, if $100 now buys you 100 apples instead of 90, this would be an inflation of the credit supply.

Deflation
This categorize the opposite effect. The modern and widely used term Deflation refers to falling prices. While the proper and more appropriate term refers to falling valuations. – $100 buying you 90 apples instead of 100. This means that Inflation and Deflation in the modern sense refer only to prices which change daily as does the dollar, and is thus harder to grasp. The proper terms refers to value – the only reason money was created in the first place.

“The fools are those who know the price of everything and the value of nothing”

03/08/2007
Why Gold May Head Lower

Francois Soto from EMphase Finance shows us how true downside exists for gold.

  • There is a psychological resistance at $700.
  • The current trend is down and is likely to continue.
  • Gold is well above its technical trend lines that began in 2001.
  • The metal may fall to as much as $500 or even $400 ($8-10 Silver).
  • Fundamentals support this as many large traders may remain patient.

Why We Don’t Care

This is what I like to see, primarily because many have come to speculate, albeit short-term on the Precious Metals and even those who haven’t yet definitely have considered it since last May. Thus two scenarios seem in the cards right now.

1. A stagnant calm that should last at least until September, with gold trading between 550-700. This will once again create a strong psychological resistance level causing many trader’s sentiment to level as well.

2. A Trend Break sending gold well below many traders comfort level, an even greater scenario allowing us to buy gold at unbelievable bargain prices (similar to those in late May after the great sell-off) and it will bring out the bears, something every contrarian wants to see.

In either case we will be faced with both a buying opportunity and a general sentiment that will favor long-term investors, chasing out the speculators.

As a matter if fact… We Love It!

We are young investors who don’t care a bit about the short-term and are looking for things that will make us wealthy 10, 20 or even 50 years from now. If you’re an aging retiree you may want to stick to dividend and interest yielding assets, but if you have time to stick around and are still earning money to invest then you want to buy what will appreciate over time.

Stocks and Real Estate (and the Dollar mind you) are all gone, at least for the next few years. And that’s why commodities (and gold) are in.

We are in the process of a necessary correction. But who will be among the buyers after such a decline? IMHO this may include many very large traders sending billions (even trillions) of dollars into gold. This will take gold well into the four-digits and possibly into the fives (yes, the fives. Ever considered $10,000 gold?).

  • Massive shorts exist that will need to be covered. This amounts to hundreds of millions of ounces of gold and silver that will need to be bought up and returned.
  • Central Banks that are more than eager to increase their gold holdings. Countries like China, India, Russia even the U.S. may seize the opportunity.
  • Warren Buffett also comes to mind. He has over the many years claimed his lore for silver in particular. He bought a major holding in 1997 which many speculate has either been sold or leased out (and sold). If his conscious is stirred we may again see Silver in the Berkshire Hathaway holdings, which the sight alone may attract millions into the market.

We won’t know when this is to begin (any of the above can buy tomorrow) or how strong it will be (ever considered a day when markets closed due to daily caps), but when it does, traders from all walks of life eager for some return will come flourishing back into the market.

As Jim Rogers said “Corrections go down long enough to scare everybody out and make sure they give up, and then they turn around. We are in a secular bull market for commodities which has another decade or two to go.”

02/21/2007

Commodities – The Next Tech Stocks?

Moira Herbst has written an article that I found on BusinessWeek.com. It was too rich of an opportunity for me to pass up and show just how much unwarranted skepticism there is towards commodities as an asset class.

I’ll just quote and comment:

“With the prices of gold, corn, and other commodities on the rise, marketers are luring new investors. But the risks are high”

Risk. I fail to see the risks in owning food we eat, money we trade and assets that actually incorporate intrinsic value.


“Commodities seem to have become the new tech stocks.”

Have they now? Seems to me everyone is still talking about stocks like Microsoft, Apple and Google. I haven’t been offered a great mining stock at a barbecue or some gold bullion for my birthday in quite some time.


“Commodities are a really great way to lose money,” says David Wyss, chief economist for Standard & Poor’s, which like BusinessWeek, is a unit of the McGraw-Hill Cos. (MHP).

Commodities also seem like a great way to make money, especially before the Chief-Economists-come-Gold-mine experts crash the party!

“You’re better off playing poker in Vegas.”

Well good luck to you David. We can’t all be right. As a matter of fact its precisely because of people like you that I have so much faith in the future for commodities. And I would strongly suggest he read Ben Graham’s definition of the world “speculation”. You can make more money in Vegas than you can on Wall Street if, and only if, you have your money in the right places and can think for yourself, something very few economists seem to be doing nowadays.



“Leverage Can Be Lethal”

No kidding! But do consider that Tech stocks often supported price-per-earning ratios of over 60. You would be paying a premium of over 60 times earnings. By contrast with commodities the leverage is in the favor of the investor paying only 5% of the issue. One doesn’t have to take on the extra risk. Yes, it could go both ways, like anything.


“The stock market tends to go up over time, though, of course, there are booms and busts. Not so with commodities, where prices depend on a complex nexus of supply and demand, from geopolitical events and the weather to speculation on daily news headlines and analysts’ technical charts.”

Between the years of 1966 to 1980 stocks practically went nowhere gaining on average 0.4% a year. By contrast commodities during those years rose by over 800%! And supply and demand are the very principles that run our markets. Unless of course the author is unfamiliar with the fact that stocks actually represent real companies with real earnings that work on… well, supply and demand.


“A trader navigating this minefield needs a deep understanding of these dynamics because the competition can be cutthroat. “Commodities trading is a zero-sum game,” says Wyss. “The only way you make money is to be smarter than the other guys doing it. Since they’ve been at it a long time, your odds aren’t good.”

I’m not understanding. How is trading in stocks any different? Unless of course we have reached such a climax in stocks that people have come under the impression that the tide raises all boats… for good.

“Short-term commodities trading and speculation are the most dangerous.”

Short-term trading or speculating on anything is the most dangerous. It is not commodities that you should be wary of but yourself. Anything can become overvalued. Think Tulip Bulbs in the 17th century, Florida Real Estate in 1926, Gold in 1980 or Asian stocks in the 90s.


“To put their money into commodities is similar to the marketing behind day-trading in the 1990s, when many small investors tried to trade stocks daily and ended up losing large sums of money. But he says the current trend could be even worse.”

Let me tell you something, dear readers. Many people who are investing in stocks for the short-term are going to be feeling awfully similar to those same Day Traders of the late Tech bubble. Unless you bought into the market at fair prices and intend on holding onto those shares receiving dividends while commodities boom over the next few years, these next few years aren’t going to be that exciting.

O’ how the sentiment of man changes with time. One things remains certain…

The masses have never thirsted after truth. Whoever can supply them with illusions is easily their master whoever attempts to destroy their illusions is always their victim.
Gustave Le Bon from his 1896 book “The Crowd”

Source:
Commodities – The Next Tech Stocks?
Moira Herbst
February 20, 2007
Business Week
http://tinyurl.com/22wd3k

12/11/2006

Why the Hype?

“What wise men do in the beginning, idiots do at the end”

Hard Assets
As you can see I’ve been posting many articles about gold, precious metals and commodities. The simple reasoning behind it, is that we are now heading into a recessionary stage, where most people begin pulling out of equities and paper-IOUs and transfer over to hard assets. We have already seen a huge move of this sort from the Stock Market boom of the late 90s into the Real Estate sector, but no doubt this has too become speculative, appreciating the average price of a home by over 50%.

I asked myself however, while housing has already begun its decline, what makes it any less speculative than say commodities or precious metals that have seen a phenomenal increase in price over the past few years.

But when thinking it over a bit, I realized that the buying of a home and the purchase of gold, silver or platinum bullion vary extremely. It is not what they bought but why they bought.


Why Real Estate
Real Estate is property, usually in the form of a home. Everyone needs a home. However homes are costly and are expensive to build. In addition the area in which a home is located will send up the price indefinitely, hence the famous buyers beware “Location, Location, Location!”.

Financing a home can also be complicated. Very few people ever buy a home with cash. Many take on mortgages, loans and financing help with which to place a down payment and enough trust to the lender to mortgage the property.

In 2001, after the post-tech-boom recession the Federal Reserve made money and credit readily available for all those who needed it. Flushing the economy with liquidity and making loans and home equity financing easier to do.

Thus set stage for a wave of speculation in housing, inviting millions of developers, lenders and speculators alike into a house-flipping, easy-money making frenzy. Many, who for years were able only to rent, now leaped at the opportunity to begin the venture of buying their own home. This fueled the market giving off steam for an ever increasing tolerance to the risks of home owning.

As we mentioned however, houses are not bought for cash and could easily be returned to those who hold the deed of lien. When dealing with hundreds of thousands of dollars worth of real estate those who aren’t in the “Know” can get severely hurt.

Why Precious Metals
Precious metals, such as Gold, silver and platinum on the other hand, are bought with entirely different intention. Although similar to the “Real estate is the safest investment” mantra often repeated, gold and silver are bought with real money and remain in the sole possession of the buyer.

Now remember that buying into a frenzy can be detrimental regardless of what asset class you’re buying into, but think about it. Unemployment is at very low levels. This means that one can assume that the average American has a roof over their heads. This means that regardless of status everyone is paying something to someone to sleep. There is and always will be a demand for homes, albeit at different prices.

Metals and commodities follow the same suit but how many people have invested recently in assets such as corn, wheat, sugar, lumber or oil. More so we have come so accustomed to paying for these resources in cash that we often forget that the primary medium of wealth for centuries has been in gold and silver. It’s only a 35 year old novelty to use cash, unbacked by any hard asset, in its stead.

This is what I mean when I say that people will turn to hard assets. Things that they can carry around with them, feel and touch. Not promises that they have to check quotes on every 20 minutes or worry about how they’ll pay back thousands of dollars in mortgages over a lifetime loan.

The transition will be massive and it will take years. The last time we had a bull market in commodities it lasted 16 years from 1964 – 1980. In that time many commodities soared 10-15 times in value. Instead of how many shares Wall Street traded that day many will want to be in on how many bushels of soybeans were produced in the past month. Interest in Tech companies and the newest iPod will be replaced by Farms and farming tools to make agriculture more efficient.

But don’t get me wrong. The same euphoric speculation and risk-tolerance we have seen in stocks and real estate will show up in time. So when you hear from the waiter at McDonalds about that new gold mine that just opened up or how they made a fortune in corn futures, time to get out!

Learning about commodities and how to trade can take time and effort. If you’re interested simply go to the nearest bookstore (or any online retailers) and grab a book or two on the subject (You may have trouble finding some though, I found Jim Rogers book “Hot Commodities” alone on the bottom shelf!).

Until then, go to your local coin shop, buy a few coins and hold it through all the while. Remember, Buy what you know. (I know a guy who bought a gold sovereign with a hefty premium and later found out it only sells for spot price). You won’t regret it!

12/07/2006
Commodities History Charts

Well it doesn’t really exist yet. I just spent a good load of my time developing my own personal commodities index. It’s based entirely on ratios of Gold, silver, commodities, such oil, softs, grains and a few Indexes (The Dow, S&P and the Rogers’ Intl. Commodity Index). It also includes currencies. Taking a look back at it now just thought there were a few things that stood out I thought were worth sharing.

The Inflation Theory – Historical evidence shows how an ounce of silver was often used as a days payment of a dollar, hence the Silver Dollar. At a current price of silver at 13.59 and the Dow at 12309, I arrived at a ratio of 905.74. The price it would have cost to buy the Dow in 1980 just before charging off onto the longest bull market in history!

The Gold/Dow Ratio – In that year as commodities and stocks transfered batons, you could have bought the Dow for all of 1 – that’s one – ounce of gold! This happened before in April 1942 (2.7 oz.) and in 1933 (1.6). Gold in addition has matched silver at a ratio of 16 – compared with 46 today.

Your house for my coins? – From 1950 till around 1998, 48 years, the average price of a home in the US would cost $110,000. In Gold ounces in 1980 that would be about 135. Today (after the Real Estate boom) it’s more like 348. I would figure that a house in Spain in the 16th century would cost somewhere in between – depending on the market.

Black Gold – In 1980 you were able to buy about 12 barrels of crude for an ounce of gold. Today its about 11. Many point to times when the ratio was closer to 16.

I couldn’t find a lot of information on commodity prices from historical periods. I’m sure that as this commodity cycle continues the information will become more available.

11/23/2006
The Dow/Dollar Ratio
For some long-term perspective, today’s chart illustrates the Dow adjusted for inflation since 1925. There are several points of interest. For one, when adjusted for inflation, the bear market that concluded in the early 1980s was almost as severe as the one that concluded in the early 1930s. It is also interesting to note that the inflation-adjusted Dow is now a touch less than three times higher than where was in 1929 and a little over double where it was in 1965. Not that spectacular of a performance considering the time frames involved. However, the magnitude of the bull market of 1982 to 1999 (even when adjusted for inflation) was truly of historic proportions. While the Dow has recently been making new record highs on a non-inflation-adjusted basis, today’s chart does illustrate that on an inflation-adjusted basis the Dow still trades below its 1999 peak. Further proof that time is money.

What more can I say other than “I think it’s about time to start thinking about commodities…at least for the next 10-15 years”. An economic slowdown (which the short-term-minded world is so speculative about) would last about a year, even considering the most bearish predictions. This bull market in commodities however should last for over a decade. When you see stocks trending towards the green line, you’ll know to get out.

11/21/2006
What type of exposure could we have in commodities markets? Plenty.

This is an excerpt from an older article (hence $10 silver) found on SilverStockReport.com, but I believe it’s just as relevant. I’ve tried updating a few numbers with todays prices.

The potential demand for real money, is the total of paper money, or other wealth, that exists that could, one day, show up as demand for real money: gold and silver.

Notes of Interest:
$400,000,000,000,000: Estimated total derivative exposure of all banks in the entire world.
$118,000,000,000,000: World Global Capital Markets (Stocks, Bonds, &?) Feb 2005 McKinsey Global Inst.
$49,000,000,000,000: World bond market, Fall 2004 PWL Capital Inc.
$46,000,000,000,000: Total World Paper Money supply 2004; from M2 & GDP of EU, USA, Japan, & China
$45,
153,000,000,000: U.S. Household wealth, as of first quarter, 2004. (Includes Real Estate, and investments)
Updated: $2,900,000,000,000: Total gold mined in all of history, 150,000 T (4.6 bil oz.) @ $630/oz. http://tinyurl.com/vrcc
Updated: $520,000,000,000: Total silver mined in all of history: 40 billion oz. @ $13/oz. http://snipurl.com/93j1
$110,000,000,000: all the world’s gold stocks/equities (Sept. 25, 2005, Denver Gold Conference)
Updated: $13: Approximate amount of silver available per person in the U.S. at $13/oz., given 300 million oz., if that is available.

Therefore, when you hear that billions and billions of dollars are going to be invested in gold and silver stocks, just know that’s an understatement.

I believe in 1980, the total market cap of all gold stocks was $1 trillion, and the total market cap of all NYSE stocks was $1 trillion.
Today, the figures are about $110 billion for gold stocks, and $21 trillion for NYSE stocks.

It’s going to be a great decade for gold, and especially silver investors.

Click Here for Full Article

11/11/2006
My case for the Commodities Bull:

The Wave Effect. Many bull markets start by a rare group of investors seeking appreciation in a fairly undervalued market or equity. It then catches the attention of institutional investors throwing in their share of the “next hot thing”. This creates a wave of speculation by which mere mortals and momentum investors ride the wave dry. All the while projecting and correcting.

In this effect we see how commodities have begun their run-up. We have seen the value investors such as Warren Buffett make their purchases. Now we are seeing institutional investors getting in on a piece of the action. But its still a drop in the ocean. How many people do you know with over $10,000 in stocks? Now how many in corn stocks, oil futures or gold Krugerrands in their jewelry stash? This party has just begun, and the fearfulness should just be making us more greedy.

The Vacuum Effect. What goes up, must come down. Once the Wave has taken its full strength, by laws governing science and physics it will begin to stabilize, deflate or break through its limited barriers – in other words “pop”. Just like the wave needs all aspects of its force to continue, so to in any market the run must be fueled by speculation.

Warren Buffett always jokes how when the first cars hit the market there must have been around 300 “promising” automobile producers on the map. Ford and General Motors were mere names on the list. Who would have known? Shorting horses however would have probably been your fairest bet.

With all the geopolitical speculation regrading Iran, the War in Iraq, the new government and so on, we can’t know what will happen to the world economy, housing bubble/bust , the stock markets or the in the enormous derivatives market. What we do know is that it can’t last forever. So instead of betting on the next “sure thing” you may have a greater chance of heading to the source. Commodities.

What China will transfer their currency reserves into, the Yen or Euro, only time will tell. What cars will be riding on a hundred years from now I don’t know. What houses will be worth then, I wouldn’t even try to guess. But whatever it is, if history is our guide, you will most probably be able to pay for it in gold.

If gold is your hedge for risk, then Wave or Vacuum I’m betting that risk is seriously undervalued.

10/16/2006
Why I think the commodities party is just beginning.

The Facts:

Tens of trillions of dollars invested in global bonds and stocks, still only $80 billion in commodities.

Many surveys showing far less interest in commodities than in any other sector including, High-Yield Bonds, Cash, Stocks and Real Estate.

General commodities and gold, usually work inversely with stocks and the Dollar. Commodities topped in 1980, just when Dow was warming up, and bottomed out in 2000 at the peak of the Tech Bubble.

A wave of vehicles running on ethanol would greatly under supply the corn and sugar sectors.

In times of what seems to be inevitable inflation and a currently overvalued dollar, currency hedges of gold and silver will become more common place.

Worries of diminishing supply in oil, gold, silver and agricultural crops could greatly surge a demand in the coming years.

Stocks doubled more than 3 times before it was called a “Bubble”. Stocks still have vast room to correct while many commodities are currently below their doubling mark.

The last Bull in commodities lasted almost 14 years. This “Bull” is still but a calf.

The $20-something “Iranian-War-Premium” is what’s evaporating, not the price for oil.

Inflation adjusted, Gold holds a record above $2,000 an ounce, silver at about $50 and Oil at $160 a barrel.