Gold and silver down hard today. YEEEE-HAW!

[Atash Hagmahani]

For those who haven't heard, precious metals took a hit today.

I might go out buying if I have some time. If they go down more, which they might, I might buy more. I'm more concerned about turning paper into gold than arguments about inflation and deflation. The pie is shrinking. Grab your share with both hands. 

[Mike]

I wish I could remember who said they were hoping for gold to fall to $1600 in which case they would be a buyer.

Lee Adler wrote that $1600 is technical support for gold.  Well it pierced that.

For years, Nicole Foss (Stoneleigh) has been writing that this is a deflation and that precious metals would fall in relation to dollars.

The gold silver ratio is up, nearly 3% today.  The idea behind the gold/silver ratio is that gold is more of a money than silver and silver is more of an industrial  commodity than gold.  So when the gold /silver ratio increases, that means money is dear (recession depression).  And when the gold/silver ratio declines, that means silver is dearly needed by industry.

In My Opinion, in this immediate case, this is partly knee jerk.

The real part is a liquidity problem that is being compounded by solvency problems.  As a result anything and everything is being sold to get liquid,.... liquid in dollars.  People are trying to sell stocks, gold, silver, Everything and anything to get a buck to pay a bill.

Investors believe the gold/silver story I mentioned above.  So they tend to sell more silver than gold.  That is "the knee jerk."  "Knee Jerk" IMO, because I don't believe the gold/silver ratio story.  I believe in the Jason Hommel story; that silver is more of a bi-product of industrial metals mining than a product of mining for silver's sake.  So in a recession or depression silver production will fall precipitously because industrial mining will close down.

So silver remains a superior investment to gold.

I have recently come across a little cash.  I have been thinking of buying some silver.  I really think deflation will flip to inflation.  And our (I mean, 'my') paradigm could change quite rapidly.  That is, it would be so severe that offdalip and I would quit having esoteric arguments about inflation.

Even though deflation could flip to inflation quite quickly, this dip makes me hold off on buying any silver quite yet. 

[offdalip]

yeah, I was gonna post about this but didn't think I had a big audience here.

Even though deflation could flip to inflation quite quickly, this dip makes me hold off on buying any silver quite yet. 

Smart move.

My thoughts:

I never said there could never be deflation, but in the overall scheme there will always be inflation in a fiat based system.
I.E. you will have a LONG-TERM paradigm of inflation built into the system with short term bouts of deflation/deleveraging occasionally hitting.
Think 1933 , 1974 and 2008. But while these periods certainly had price deflation in some assets, it didn't last that long. Of course we also didn't
have as large of a credit bubble back then either as now. Note , gold did NOT deflate in 1933 and 1974 but it did in 2008 AFTER kitting an all time high.

Further, the $USD just broke decisively up to 80.59, a level not seen since January and it looks like it's headed higher. Strength in dollar usually means
weaker gold and vice versa. The reason for this is flight to safety, the Euro is gonna become Humpty Dumpty. BUT they will keep stalling as much as possible.
Hope springs eternal somehow , even though mathematics and logic say otherwise. They will keep it together till March Russian elections and maybe
till May French elections by a series of more empty summits. The sad truth is Italy Greece and Spain can't pay 7% forever. They have a trillion to roll over
next year? By the summer things there will shatter sending the dollar skyrocketing. Ireland will take that distraction to exit the Euro while eyes are away
from them.
The suddenly supreme strength of the dollar will make all imports super cheap. $2 gas? , all imported items way down in price ( deflation or ??? ).
But at a price......... our exports will all be overpriced and uncompetitive. This means jobs are lost. To counteract this, the FED does QEIII, about a trillion $$$
worth. Hey,,, inflation is non-existant and the presidential elections are right around the corner and the FED just wants to help, right? soo, $750BB in MBS
and $250BB in treasuries sounds like a nice round number to goose things up, and apply downward pressure on the dollar .
That, could be the time to step back into gold and silver in a big way. Or just before.
I am out of , or trying to get out of paper assets as well. Some things I have no choice. Those 401K's only give access to Money Market Mutual Funds and not
Money Market Funds themselves. So not insured a la MF Global re-hypothecation customer account money grab.
One last thing, last September the Gold to Real Estate ratio reached the lowest point in the last 30 years, same as it was in 1980. Now with gold going down
the ratio is going up. Sooo, it was actually a good time to buy Real Estate, if you locked in a long term low rate, if it is a good rental property in a highly
desirable neighborhood at a low price...............
 

[Atash Hagmahani]

A stock broker once told me the story about the old guy in the back-room who made a humble living all his life, into his old age, until one day in the 1970s he rushed excited into the room yelling "BUY, BOYS, BUY!", referring to the stock of a railroad that had just gone bankrupt and was selling for pennies.

He calculated that the railroad's right-of-way through Chicago and other cities was worth dramatically more than its book value.

The old boy was right and finally got to retire--very rich.

BUY, BOYS, BUY! (Girls too!):

Platinum    1403.00    -16.00
Gold: Bid/Ask    1570.20 -    1571.20

PLATINUM IS CHEAPER THAN GOLD!!!!!!

All the Platinum ever mined would FIT IN MY BASEMENT!!!!!! It's that rare! Rarer than gold.

Darn useful too. Like gold it resists corrosion; unlike gold it is hard and can keep an edge. Surgeon's tools are coated with a tiny amount of Platinum.

Silver is typically more volatile than gold. Good to buy on corrections.

"Buy the best. Pay cash. Take delivery."

[offdalip]

Ummmmmmm

the current PM bear market won't cease until platinum and gold reach parity

that means $1400 gold, unless the economy picks up as the unemployment figures
are "skewing" towards? temporarily?

I do think we will have an EXPLOSIVE upside to PM's, maybe 100% in a year, as soon as the elections are
over. That is unless Ron Paul wins, then PM's will go down for awhile. Anybody else wins PM's skyrocket

[hippiechick]

Looking at silver, but also threw like $80 worth of copper in the cart. Looks tempting , as it a very cheap way to get a little more metals. They are making the pieces attractive with the same designs the silver coins come in. Any one else buying silver coins? Do you expect copper to be the new silver? Even if the copper never goes up at less than $2 per coin they will be fun collections.
Also which silver do you like best? American eagles, bars, etc. I think some of the attractive ones will hold value more for collectors. But if the economy gets real tough and people actually start trading silver for food, I'm thinking maybe the junk stuff will be good.
What are you all collecting?

[offdalip]

Any one else buying silver coins? Do you expect copper to be the new silver? Even if the copper never goes up at less than $2 per coin they will be fun collections.
Also which silver do you like best? American eagles, bars, etc. I think some of the attractive ones will hold value more for collectors. But if the economy gets real tough and people actually start trading silver for food, I'm thinking maybe the junk stuff will be good.

Yes , I think everybody is buying silver, just not specifically now, copper will NEVER be the new silver as it is tooooo heavy to lug around a pound for a loaf of bread.
American Silver Eagles are the best for holding value way and above spot and easily recognizable for trade above random rounds or sterling silverware.
If the economy gets really tough, your precious metals are the last thing you will want to sell as they will be hugely devalued (but not compared to paper currency)
but they will be worth 100X more after the emergency. Which makes it vital  to hold PM's thru the crisis and use other things if possible for barter

[offdalip]

ATASH,

I would also wait for parity of gold and platinum before plunging into anything

this is highly disturbing............. really............

[Eddie]

I think I'll take your advice on waiting too, but I wonder how far Gold can really go down since central banks and countries, namely China are buying huge volumes on the dips as well. So I've read. I think I'll keep an eye on platinum, it seems to have big highs and lows that take time to get to either one. Right now it seems to be working it's way down.
Im done with silver, no more for me.

[Mike]

I like the junk pre-1966 coins that are worn and circulated.  I like them because they come in a variety of partial ounce sizes.

I also like the generic silver rounds.  They make cool gifts.  Even though I grew up with pre-1966 coins and my mom had some sterling silver, I never held real .999 silver until I bought some rounds.

Eddie,

Im done with silver, no more for me.

I hear ya!  When one has a certain amount, one (I) should probably say what you said.

[Atash Hagmahani]

Barter is the "money" of peasants...
Copper is the money of common people...
Silver is the money of gentlemen...
GOLD is the money of KINGS!
(old saying)

Hippychick, Offdalip made a good point on another thread that if you want to invest in physical copper, it might make sense to buy up common useful items made from copper.

If you can find them!! I swear a lot of copper and brass parts getting scarce in the hardware stores.

Anyway, not a bad idea.

Offdalip, thanks for the observations and advice. Platinum is hard enough to take possession of--at least, in my part of the world--that if I can get some at all I am doing well.

If PMs keep going down I will be happy to average down quite a ways before giving up...and I have difficulty imagining why they would reverse this early in the game.

I'm actually hoping that the correction lasts into the first quarter of 2012. In the case of silver, maybe it will, because probably by then the "recession" (it's a depression) will become official.

Gold is likely to recover sooner. I am curious if at least part of gold's pull-back is related to all the gold longs being closed out in the aftermath of MF Global. There are rumors that this was indeed the intentional effect of what happened, but I doubt it. More likely, a serendipitous (from the counterparty's point of view) side-effect.

What about the shorts? If I had to guess, relatively larger players would have been short, and they would not have had accounts at MF Global.

In any case, as more and more paper wealth starts evaporating, I can still see a stampede into tangibles. Mike, would you agree, at least in terms of tangibles with traditional monetary associations?

Eddie, it's good to diversify your metal holdings. Now consider this: around the turn of the 19th-20th centuries, a quarter was a day's wages for semi-skilled labor. In other words, if you owned a bag of what is now "junk silver", you could pay for 4000 man/days labor.

The amount of silver in one pre-1965 quarter is just .17875 ounce.

[offdalip]

Yeah, I think I you want to hold copper don't get pennies or coins, get copper electrical wire or copper plumbing pipe. Then ya gotta keep all that stuff somewhere!!!!
sounds like a headache 

[offdalip]

Ann Barnhardt again, commodities chick.......

Finally, a very simplistic explanation of how the cash commodity markets are soon going to decouple from the futures markets. This is a little complex, but stay with me. I think this is important to understand because none of us who have lived our whole lives in the U.S. have ever seen a market disintegrate.

The threat (or promise) of delivery upon expiration is what keeps the futures markets tethered to the cash markets. Up until now, if an unreasonably wide spread between the futures price and the underlying physical commodity market got too out of whack, a process called "arbitrage" would kick in. Arbitrage is when a party simultaneously buys and sells on two separate but related markets in order to capture an inefficient spread between those two markets.

I'm going to use precious metals as my example commodity because there are alot of metals guys reading this, and because the metals markets will be the big tell in term of when decoupling and thus total futures market disintegration is upon us. But these examples apply to all of the physical commodities.

Let's say that the physical silver market is trading far lower than the silver futures price. This is what is called a WEAK BASIS. The BASIS is the relationship between the cash market and the futures market and is very simply defined as (CASH minus FUTURES). If cash silver can be bought at $25.00 per ounce and the futures are at $30.00 per ounce, the cash is $5.00 under the futures. When cash is under the futures, this is called a WEAK basis.

Up until now, what would a metals trader do? In very simple terms, he would buy the cash silver at $25.00 per ounce and then simultaneously sell the futures at $30.00. Because he has short-sold the futures, he could hold the contract to expiry and then deliver the $25.00 cash silver he bought to make good on the contract and receive his $30.00 price. So his simple net profit would be $5.00 per ounce. As many traders saw this spread and simultaneously executed this same strategy of buying the cash and selling the futures, what effect would this have? Right. It would cause the cash-futures spread to move back in toward convergence by pushing the futures price down (lots of sellers) and propping the cash market up (lots of buyers).

Now the opposite scenario: a STRONG basis. Let's say cash silver is trading at $32.00 and the futures are trading at $28.00. A trader might take physical silver that he has in inventory and sell it in the cash market, and then immediately take those proceeds and buy back and equal number of ounces in the futures market and take delivery. Since the same number of ounces in the futures market cost $4.00 per ounce LESS, he would end up with the same number of ounces in his inventory PLUS $4.00 per ounce in CASH in his pocket. If he and many other traders saw this condition and they all sold cash silver and bought the futures, this would, again, converge the spread between the cash market and the futures market.

The lynchpin that is holding this dynamic together and keeping the futures markets tied to the underlying cash market is the fact that the futures contracts are deliverable, and a trader can either deliver or take delivery of actual physical silver via his futures position.

Are we seeing a problem yet? The futures markets have lost their viability and trustworthiness because of the MF collapse and theft. At some point in the not-too-distant future, people everywhere are going to realize that the delivery mechanism is not reliable. Heck, just holding cash and/or positions in a futures account is no longer reliable. The the market itself is not reliable, traders will no longer attempt to arbitrage these basis spreads because the risk to the trader that the rug will be pulled out from underneath them is simply too great.

And in the metals markets, the delivery process itself is . . . um . . . shall we say, easily corrupted? When you "take delivery" of physical metals, it doesn't get sent to your house. All you get is a certificate saying that X number of ounces are being held in a certified vault somewhere with your name on them. After the MF collapse, that sounds like a joke, right? A CERTIFICATE with my NAME ON IT? Yeah. That really is how it works.

When the arbitrageurs finally lose all confidence in the markets, the cash market will decouple from the futures because no one will be willing to take the risk of having their money, positions and/or physical metals stolen/confiscated. If no arbitrageurs are willing to trade these spreads - no matter how wide they may become - and thus there is no force causing the cash and futures to converge, we will see the basis spreads become extremely wide. As people flee the futures markets, the futures prices will drop, while the cash markets hold steady or even diverge and actually rise as all of the former paper players realize that physicals are the only remaining game to be played.

Watch for this. Watch for the gold and silver futures to sell off as people walk away from paper while the online cash dealers, seeing that market demand for their physical inventory is robust, begin to ignore the futures prices and hold their prices steady or even raise them. When you see this basis decoupling and absence of arbitrage, lo, the end is nigh. A parabolic spike is coming.

[silverseeds]

Yeah, I think I you want to hold copper don't get pennies or coins, get copper electrical wire or copper plumbing pipe. Then ya gotta keep all that stuff somewhere!!!!
sounds like a headache 

I dont know. You can sort out copper pennies for way under spot, and even buy them under spot. Other copper Im aware of unless your buying scrap I guess (which I wouldnt know how to do) you would pay well over spot...

Imo, if you want some copper go to a bank, get 100 face value in pennies sort out the 12-25 percent that are 1981 and older and keep them. rinse and repeat. In fact I know where you can sell them for over spot, and I know several people who make money from this. Including people who somehow get so many they have enough copper pennies you can literally buy many tons from them and have it drop freighted still under spot.

[offdalip]

yeah and then pend your weekend sorting them all out for a gain of a few dollars?
ten dollars? $20 dollars? unless you buy a $500 sorting machine?
No thanks, I'll just throw all my pocket pennies in a jar.
The part that people don't realize is that the zinc pennies are very very useful for things
like galvanizing, making batteries etc etc.