September 22nd, 2011 by Dissolving Dollars

Well, for the time being, the Federal Reserve is shying away from blatantly bailing out Banks with more quantitative easing to instead concentrate on buying more time for the government. This action is being called Operation Twist. The Fed said it is going to sell $400 billion in short term US government debt to buy $400 billion in long term debt. The intent is to drive down long term interest rates and buy the government a little more time. The Fed also said it will reinvest proceeds from maturing mortgage-backed securities back into mortgage-backed securities, instead of its previous practice of buying Treasuries with the proceeds.

Wall Street didn’t initially respond well to this news, especially considering the Fed is now saying there is “significant downside risk to the economic outlook.” It is looking like the Bailout Bubble created out of the 2008 credit crisis has finally fizzled.

Gold and silver (especially silver) have been selling off big on this latest news, which is fine by me since it just spells an opportunity to buy more. I see these sell offs as gifts. Dollar cost averaging is the key to buying metals. However, a lot of the time when silver in particular goes way down in price you can’t find much because the physical market isn’t really as volatile as the paper market; the paper market can be manipulated with things like margin calls and leveraged shorting but not the physical market. This sell off is just a knee jerk reaction to no new immediate blatant quantitative easing (money printing) from the Fed; it is short term noise.

There is no new news indicating that the bull market in gold and silver is anywhere near over. For the last several years, every time gold has had a run up in prices, hack financial commentators with way too much faith in paper money have come out calling the end of the gold bubble. I don’t know about what you see, but I still see a hell of a lot more ads and signs around for “we buy gold” than “we sell gold,” which means the smart money is still accumulating. Relative to fiat money, gold has been in a perpetual bubble since the advent of fiat money. Just following the government’s own bogus inflation numbers, gold should be at least double the price it was 25 years ago in 1986, which means it should be at least $800 an ounce. When you consider all the people in the world and all the fiat money floating around the world, gold is still very cheap. Only 1/3 of an ounce of gold is available for each person on the planet (and due to industrial use, there is only 1/14 of an ounce per person of investment silver available). Therefore, the more distrustful people become of fiat money the higher gold can go. If gold simply repeats its last bull market back in the 70s, it should reach $8000 before settling down around $3000-4000 (and silver should reach $250 before settling down around $75-$100).

Every 30-40 years the monetary system becomes screwed up so bad that it needs to be reordered. We are entering one of those reordering periods. And until we know what money will be for the next 30-40 years, we can’t be sure what the price of gold should be. Eventually, gold will truly be in a bubble and it will be time to bail. But I haven’t seen anything lately that says to me that the dollar has been saved or the appetite for gold has gone crazy. I’m certainly still bullish on gold and silver, in fact, as events have unfolded over time I’ve become more bullish. However, I personally was a hell of a lot more comfortable with the idea of investing in gold and silver when gold was $800 an ounce and silver was $15 an ounce. Unfortunately, I put way too much money in gold stocks at that time instead of into physical metal. So, I know what it is like to have to buy at these higher prices. And for anyone still hesitant about taking the plunge and putting some dollars into gold and silver I’ve been pondering an easy way for people to hedge and thus minimize risk. Because we could see another 2008 or something where everything drops in price except the dollar.

Fortunately, there are two simple tools any person with a US brokerage account can use to cheaply hedge their physical bullion purchases against the absence of monetary collapse and inflation. For gold you can use the double short gold etn with the symbol DZZ. And for silver, you can use the double short silver etf with the symbol ZSL. Taxes on DZZ are the same as with a regular stock and thus simple, but with ZSL, taxes are a bit more complex since you are given a schedule k-1 form annually that you have to report on your taxes regardless of if you sold your position or not. So, if ZSL appreciates, you could have a tax burden regardless of if you sold or not. DZZ has a 0.75% annual fee and ZSL has a 0.95% annual fee; both fees are negligible, unless you are betting big money. DZZ and ZSL are very cheap these days, especially ZSL ($1200 at inception, $15 today). Say you buy a one ounce gold eagle for $1850. You can rest easy if you put 5% of that, or about $100, into DZZ. Then, even if the price of gold collapses, you could still potentially make a profit. With silver, at current prices, you could possibly protect 50 ounces of silver from a huge silver collapse with perhaps as little as 10 shares of ZSL. Those are just estimates though; I can’t know for sure how DZZ or ZSL would preform under a gold and silver collapse. However, something like that would likely remove your risk without stifling the upside if you don’t have the cojones and conviction to buy at current prices without some insurance. And those two tools, DZZ and ZSL, could be used to help avoid selling too early or too late as the price of gold and silver rises. In a total economic collapse DZZ and ZSL could blow up and become worthless, but that’s more of an argument for not going long gold and silver using etfs or etns rather than short. But regardless, this bull market isn’t going to last forever. So, not only do you have to have an entrance strategy but you also have to think about an exit strategy. I’m not giving financial advice, I’m just letting you know the kinds of things I think about doing with my own extra money.

September 21st, 2011 by Dissolving Dollars

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September 15th, 2011 by Dissolving Dollars