Is Silver Still A Bubble at $35 An Ounce?

There was a Seeking Alpha author who wrote an article last week called; 4 Reasons Why Silver Will Continue to Deflate. His article was picked up by David Oldenburg, from The Online Money Show and then the live interview was posted on Seeking Alpha’s main page. So I had to respond to it. You can listen to the show and follow the discussion by going here: The Online Money Show: 4 Reasons the Silver Bubble Should Continue to Deflate

Keep in mind there are a few people on Seeking Alpha that like to attack those of use who use logic in our replies to these articles. They typically hide behind fake names and I try to ignore them as much as I can. They say things like, “you sell gold for a living and therefore you are biased.” Well, does that mean that anyone who writes for the millions who read Money Magazine, Morningstar, Forbes, etc. and sells stocks and mutual funds for a living, is biased too? Or do we just trust what a journalist, who has zero experience in the industry, says as gospel? There will always be those who try and throw a person such as I off track by trying to attack me personally, or relate me to what others have said. I stand on what I say and to that they cannot refute. I know I am not perfect, but I also don’t make wild predictions, talk of conspiracy theories or scream “hyperinflation” to make my points. I don’t need to use fear, but rather a good analysis of the data to convince people that gold and silver need to be a part of a well diversified portfolio.

What I try to do is give an opinion based on my over 20 years as a financial advisor, which gives me the unique ability to see things from their eyes, and critique it. Those financial advisors that wish to debate me on the data, are free to do so.

In the article I referenced above, I am not sure why Oldenburg used the word “Bubble” in his title, as the original article by Jarman, the one referenced on his show, did not use the “bubble” description of the silver market. But it is the word “bubble” that I address in my reply, as well as the general outlook for silver and why it needs to be a part of everyone’s portfolio to counter government and Fed interference and lack of concern for anyone but the banks.

Here is my reply:

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How can the author (Jarman) of that article last week claim silver is in a bubble? You bury it in your back yard 10 years ago, dig it up today, it’s the same silver right?

So how exactly is silver in a bubble?

The difference is, what silver is priced in buys more today than it did 10 years ago. If it is priced in U.S. dollars, it buys you more than it does say priced in Swiss Francs. Why is that? It’s the same silver right?

*Edit* (I realized I wrote this backwards after someone brought it to my attention. It should say, “The difference is, silver buys you more priced in dollars today than it did 10 years ago. If  silver was priced in Swiss Francs, it didn’t appreciate as much as if it was priced in U.S. dollars.”

So what is the real bubble?

History has clearly shown what the clear bubbles are through the machinations of government/monetary authority not living within their means.

In the Roman era they started putting other, cheaper, metals into the coins and trying to pass it off as money. That’s because they couldn’t plunder other nations any longer and steal it. In this era, they debase the currency through abuses in fractional reserve lending, printing presses and quantitative easing. Quantitative easing only props things up for the short term in hopes that GDP can turn the corner.

The funny thing to me is, that people actually believe there is no consequence to the above. They think the same folks who got us into this financial mess can get us out. Timmy Geithner and Ben Bernanke asking Congress to raise the debt ceiling instead of telling congress to cut expenses now. What the hell does $1 Trillion of cuts over the next 10 years do when you just spent over $2 trillion last year? Has Congress ever cut any spending? Ever? Do they dare tell the lobbyist’s “no” to the millions they shower upon them? 8 years of service and they are set for life, whether it is through the lifetime pension you pay them, or the sweet deals with the companies they handed out favors to.

Does Congress really care about you?

How can silver be a bubble when congress and the Fed have our back? I mean, they didn’t confiscate gold in 1933 to help the banks did they? They didn’t tell the rest of the world get lost in 1971 when they didn’t want to give away anymore of their gold did they?

40 short years of a non-relationship of our money without gold (and we all remember the reneging on silver certificates right?) and people have faith in a government that will surpass $14.3 trillion of debt soon and a Fed that will do anything at your expense to save the banks.

2008 is just the prelude for what’s to come. The only thing that is a bubble is one’s faith in the Fed and our Government to do the right thing. How many times do you have to be slapped around before you fight back? At least you have free will to make a good decision to buy gold and silver today. There is a reason they have consistently gone up in price 10 straight years.

By the way…silver is up just over 14% this year. If the DOW rose as fast as silver did, and then was still up 14%, would the folks on CNBC be calling the DOW a bubble?”

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My Second Reply, Addressing The U.S. Dollar and the Unsustainable Path Congress and the Fed Are Taking

 

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Where I agree with Jarman…

1. Dollar is in a trend higher because of weakness in Euro (and eventually Yen and Pound) which will put pressure on the normal inverse relationship of the dollar to gold and silver. The last couple days though, this hasn’t happened, but it still could as the dollar moves higher. I said the dollar would bounce back on May 5th; https://buygoldandsilversafely.com/gold-and-silver/2011-gold-and-silver-prices-falling-nothing-to-panic-about-declines-always-occur/

Where I disagree with Jarman…

1. Not one mention of silver as money. Supply and demand are only part of the equation. But silver has a historic use as money. How many more fiat currencies will be chasing gold and silver when their is a rush to trade in illusions of wealth (derivatives of) for real wealth should some crisis develop? If Greece, Ireland, Italy, Spain and Portugal implode, will the holders of the Euro just turn to the U.S. dollar with all its issues, or will they turn to gold and silver, which have a better track record?

2. While Jarman did mention quantitative easing (QE) as the reason for silver’s most recent rise, the last round of QE, the first round of $2 trillion didn’t push prices up as fast as the second round, which was less than 1/3 the first round. Why is there no discussion of the unsustainable aspect to government spending? the raise in the debt limit that never ends? the higher interest payments? the higher Debt to GDP ratios? The running out of funds by states since the American Recovery and Reinvestment Act?

States like California are already having to budget in cuts to education, the prison system, welfare, Medi-Cal and libraries. States have to, because they can’t print money (think Greece here, who takes on more debt via the IMF and elsewhere rather than make the cuts needed to survive). Pay later is always a better solution than facing the rioters right? That’s what our Congress and the Fed do, with Geithner and Bernanke leading the way of late.

Unsustainable. Our kids calculators can’t keep up with the kind of math our government does. It doesn’t compute.

Silver is money and will rise in price as the rest of the economy struggles with what our government has done. Supply and demand are only part of the equation. In fact, when supply is limited, what does the rest of the world demanding real wealth dictate?

While I don’t ever talk of silver going to a certain price. I don’t predict hyperinflation as I am see a deflationary credit contraction still occurring with oil (Egypt, Libya etc) issues occurring and grains being of higher demand because of Ethanol (govt. subsidies) and rain issues the last few years.

I can however understand economics and can do simple math. But I will give you this…as long as people “believe” in something, it can make the game last longer than people expect. The dollar moving higher can have some short term effects on gold and silver. But it is clearly only a temporary phenomenon. All currencies are on the same sinking ship for mostly the same reason; spending more than one earns. Propping up GDP with government spending can only keep this going for the short term. Sooner or later, it will catch up to the real bubble blowers.

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So Is Silver Still A Bubble At $35 An Ounce?

What those who buy silver have to understand, is that it is more volatile than gold. That’s why in my book, Buy Gold and Silver Safely, I recommended a 75% allocation to gold and 25% to silver. Because silver shot up so quickly, and has now fallen back in price, there is the possibility it could touch its 200 day moving average of just under $30 an ounce. If you believe in the unsustainable aspect of what our government and the Fed is doing to the economy, then dollar cost averaging into a silver position makes sense right now. In this case, you buy now and “hope” the price falls further so you get an overall better price. Silver is not going to capitulate from here when you study, as I have, the data. For those who think silver will now capitulate, stay tuned for a forthcoming article on the nations top banks that I am writing. You know…those banks that had to be saved in 2008? Once you read that article, you will want to own silver (and gold) as insurance.

I am ok right now with a higher percentage into silver than I was at the time I wrote my book. At some point in the future, when silver is north of $50, approaching $60 an ounce, I might be making a recommendation to convert some of the silver to gold. Silver should have a nice run up, much faster than gold, when it finally does turn higher. In the meantime, the dollar is still king, despite all of its future problems, and gold and silver as no one’s liability, will be much, much, higher in price in the years to come. But don’t get caught buying the wrong type of gold and silver. Read my free report on the 4 Ways Gold Dealers Rip You Off. It can save you from paying 30% or more in commission.