Grab Silver with Both Hands and Hang On

The dynamics of the silver market over the next decade are incredible. Both industrial demand and investment demand will by themselves significantly exceed new supply.

I encourage you to watch  David Morgan’s Lecture at the Sound Money Conference from January, 2011 to gain the valuable background knowledge to understand the silver market.

After watching the video, you will have heard David talk a few times about investor Eric Sprott and the silver ETF that his firm created. Both it and the investment funds set up by EuroPacific Capital are legitimate holders of all the silver their funds claim. David hints at or speculates that others like SLV do not have the silver they claim to have, instead holding promissory notes for them.

He also spoke briefly about how two Texans and a few Arabs were alone responsible for driving up the price of silver in the late 70’s to $50/ounce. He also demonstrates how the above ground available supply of silver at that time was four times greater than it is today. In a very simplistic assumption, silver could extend to $200/ounce if all else were the same as it was during its historic rise. But things are not the same. The market conditions that caused the Hunt brothers to buy up the silver are immeasurably worse today than they were back then.

While I won’t rehash everything David spoke about, I will provide you with my own long term investment plan that incorporates all the economic warnings and takes advantage of the opportunities that exist in silver. I wrote about part of this strategy earlier in an article entitled Time to Get Your 10-Year Mortgage?.  Since that time, rates have moved up marginally but it is very prudent to get your borrowing locked in at these historically lower than average rates and to do so for as long as possible. This 10 year mortgage allows me to go long in my investments without having to worry about the short term fluctuations and instead focus on the fundamentals that David Morgan spoke about for the silver market.

To invest in silver, you’ll want both physical metal – stay away from numismatics, proof sets, and anything else that has some imagined value other than the silver content – as well as some non-physical as in Sprott’s silver ETF (PSLV) and if you are willing to engage in some risk, leverage up your investments with silver mining stocks. I call Sprott’s PSLV a non-physical silver because his fund holds the silver and you don’t.

The best pure silver stock out there, in my opinion, is Silver Wheaton as it only holds silver royalties and is known as a silver streaming stock. I don’t own it yet though I did own its predecessor Wheaton River a few years ago. I need to correct this glaring omission soon!

After that, my risk tolerance is pretty high and I turn to near producing juniors. As mentioned in a previous article, I am buying into Canadian Zinc, owners of the very silver mine that the Hunt Brothers were about the exploit before their empire crashed down.

The way I see it, David Morgan among others has been doing his homework in this area far better than any typical Wall Streeter (I’ve done mine as well first buying into silver at $7.17/ounce but the best is yet to come).  I thoroughly trust his fundamental research. While there can be a speculative swing to the downside, it can’t last and over time we will see this demand pressure or lack of supply cause a movement towards an equilibrium at a much, much, higher price. Your 10 year or longer mortgage will buy you all the time you need.

America to Add $1 Trillion Debt Every Year - Forever

A short while ago, just an hour or so before this writing, the following news article was posted at Kitco:

Kitco News -- Gold futures have fallen back below $1,600-an-ounce mark on prospects for progress in U.S. budget and deficit-ceiling talks. Bipartisan “Gang of Six” senators have  offered a plan with $3.75 trillion in savings over 10 years that includes $1.2 trillion in new revenues, and the proposal has been supported by President Obama. “Something is making the stock market calm down considerably, and it’s probably the idea of the ‘Gang of Six’ mentioned by Mr. Obama as being on the right course,” says Sterling Smith, commodity trading advisor and market analyst with Country Hedging. Worries about the debt-ceiling impasse, and the potential for a U.S. default, had been one of several factors supporting gold lately, with observers saying a resolution could prompt a correction. “Being above $1,600 did make it vulnerable to a sell-off,” Smith says. As of 2:15 p.m. EDT, August gold was $14.90 lower at $1,587.50 an ounce

It’s plainly obvious to me that this ‘deal’ is just another spin on raising the debt ceiling and screwing the American taxpayer ever deeper into a financial coffin. The socialist Obama will not be happy until every last dime is extracted from those with “the ability to pay” and given to those who refuse to be productive. First off, the $3.75 trillion over ten years is coined as savings – not cuts. In all recent discussions with this bi-partisan group, the savings have merely been ‘less of an increase’ rather than a real cut in spending. A good analogy is that of a fat man who needs to lose 100lbs to regain his health. He needs to stop consuming 4500 calories a day and if can start consuming just 1500 calories a day he’ll be on track. Instead, he consumes 4000 calories a day and convinces himself that he is still losing weight because he has cut back his calories. A month later the scale shows he is heavier but to him that doesn’t matter, he's not fatter as fast as before. Such is the nonsensical argument of the democrats and the left wing republicans. (Thanks to Peter Schiff for imprinting this analogy)

Take a close look at what this ‘deal’ implies! $3.75 trillion is really $375 billion per year and that includes $120 billion in new revenues meaning the net cut in spending proposals is $495 billion. Since the current spending is $1.6 trillion beyond revenues, that means they are agreeing to spend $1.105 trillion beyond revenues in 2012 and beyond.

If we consider that interest rates on the debt cannot get any lower, then they must remain the same or go higher. As there is more debt, there will have to be a greater and greater portion of revenues being used to pay down the debt. More cuts will have to be announced next year in order to meet interest payments. Not only that, but Moody’s reported that 5 of 15 U.S. states that they currently have rated AAA  and that rely on Federal funding to make ends meet are now on a watch list for debt. If the Fed chooses not to bail out the States, then those states will see much higher interest rates from private sector borrowing which will be passed on to the taxpayers. With less personal income due to state taxes, there will be less money available for consumption causing further pressure on retailers in an environment where commercial retail properties are already experiencing sky high vacancies and record bankruptcies. The cycle will deepen and America will be forced to go deeper and deeper in debt to the tune of at least a trillion a year and I would suggest that is probably being conservative.

The only real hedge is physical commodities. I am buying commodity based companies and using the profits to buy physical commodities. I am also financing my mortgage debt at the longest time frame I can afford – 10 years. Sometime in the next 2-5 years, control of interest rates will have been relinquished to the bond market and rates will begin a homeowner crushing ascent. and everyone will be wishing they could buy gold for $2500 an ounce.

Stop Listening to Propaganda and Start Thinking for Yourself

You have been told so many lies that you no longer know what the truth is. For many people, perhaps most people that is exactly the scary truth. You have been told the national security is at stake so the military spending needs to be maintained if not expanded. You have been told that there is a social security trust fund to protect you when you retire. You have been told that public education is just as good as private education. You have been told a weaker currency is good for the economy because it helps develop the export market. You have been told that financing a country is not the same as financing a family home or a business. You have been told that turning corn into fuel will not affect food prices.

Tim Geithner is trying desperately to convince everyone that NOT raising the debt ceiling will be catastrophic for America.

In the last U.S. election, most of the American public and indeed the world was mesmerized by Barack Obama’s rhetoric. The lies were so pervasive that the Nobel Prize committee gave the new president a Peace Prize.

WAKE UP!!

Yes people, WAKE UP!! And start THINKING for yourself.

When individuals stop listening to lies and start reading only the facts, they will discover through connecting the dots – thinking is that easy – that much of what they hear on the news about the government and Wall Street is propaganda.

I’ll explain some simple facts starting with my favourite lie known as “the weak currency is good theory”. Like MOST things that have a sliding scale of good on one end and bad on the other, this one is pretty easy to disprove. Ask yourself this simple question, “if the existing money in bank account declines in value (it takes more dollars to buy basic necessities), then am I better off or worse off”?  Now ask yourself the opposite question, “If the existing money in my account grows in value (it takes less dollars to buy basic necessities), then am I better off or worse off”? Currencies work on a sliding scale from weak to strong. People who hold weak currencies are generally poor. People who hold strong currencies are generally not poor. Economic history clearly demonstrates that no country has ever achieved greatness nor maintained it by debasing its currency. Now let’s move on.

In America, your government spends more on its military than the rest of the world – combined! Do you think they are really under any threat of attack? Of course not, but there could be a threat in the future as I’ll explain, but let’s look at Mr Geithner’s debt ceiling first.

Good Ol’ Timmy is sounding the alarm trying to scare the pants off all the Members of Congress because they don’t think too clearly either. Ask yourself this simple question, “If I am in debt up to my eyeballs, will a bigger loan make the situation better or worse”?  

Ah, now there’s the rub. Timmy and his gang of monetary thugs are telling everyone that they have a long term plan to pay down the debt and they will be able to implement it if only they are allowed to spend more money now.” The comedy really is divine.

If America allows the debt ceiling to be raised, as soon as interest rates start to rise – and they will eventually – then the servicing the debt will cripple the country. When that happens, the spending cuts will have to be even more dramatic than they would have to be today. It is very likely that the US Military would experience drastic cuts in both active personnel and active equipment. When this occurs, the US will be much more on par with the rest of the world militarily although they will still have far superior equipment and technology. It is at that time when America will experience a real threat, but not today. The European Union faces the exact same situation. It is probably inevitable that within a generation, the Chinese will rule the world militarily. Fighting a false threat will bring on a real threat – like I said, its comedy.

How about public education? Can it be as good as private? Think of it this way. Take a bunch of motivated parents who decide to hire some teachers to teach their children. If they are putting in the effort, they’ll hire the best teachers they can find while the bad ones will always be working in public education. These parents will also try hard to make the facilities good to learn in. Not only that, but these parents will also be more likely to make their kids work hard in school so that the money they spend on the education is not wasted. Public education simply cannot compete. It’s not the kids’ fault, its just the way it is. Most kids from drug addicted or alcohol abused families will be in public education and the odds are heavily against these kids. The important factor is your child’s future – don’t worry about equity when it comes to ensuring them a good future. If you can afford it in America, get your kids in private schools.

President Obama, winner of the Nobel Peace Prize, unilaterally declared war on Libya – how funny is that?

Now it’s time for more thinking on your part. Ask yourself this question, “If one of the directors of the social security program can’t come up with any differences between social security and a ponzi scheme – like the one run by Bernard Madoff – then is there a difference?”.  We can thank Peter Schiff for exposing that one and you can watch it on YouTube.

On June 21, the US Senate killed a bill that would have ended the subsidies for ethanol. “Was this the right thing to do or the political thing to do?” That is your homework.

Kiting, Chaining and a Tornado of Government IOU’s

"All frauds, if allowed to continue will first destroy the entity’s reputation and then destroy the entity."-
Shaun Larocque

What the heck is kiting? Or chaining for that matter? And what exactly is a government IOU? For those in the financial and legal sectors, you know all too well about the type of people that perpetrate frauds like kiting, the transactional fraud of usually small amounts of money, but are you familiar with the lesser known term of chaining and how it compares to the current state of the economy or should I say, the current economy of the states.

Chaining was a method developed by the senior management at E.F.Hutton in the early 1980’s to perform a very large kiting scam using different bank branches or the chain of branches. It enabled these corporate scammers to use $250 million in funds without ever having to pay a penny in interest. The discovery of the chaining fraud eventually destroyed the company and they ceased to exist in 1987.

According to Bob Chapman and his International Forecaster, “more than 40 states are struggling to balance their budgets. Most will, some will not and they'll default on the interest payment on their bonds and probably have to pay vendors with IOU's.” Chapman is drawing on recent history for his evidence. On July 2, 2009, California issued $3.36 billion in promissory notes instead of giving tax refunds in order to allow the state to continue spending tax dollars elsewhere.

If Chapman is right, and there is no reason to think it won’t happen in large numbers this time, then many state governments will be playing the kiting game with state based vendors and taxpayers. The sad part of this is that we all know this is fraudulent. We know inherently that the United States and many of its member states no longer have the ability to pay, but we continue to do business with them anyway. Where is the organization in charge of frauds perpetrated by governments?

The government IOU scam means that all those tax dollars that the government stole from its constituents over the course of the year simply wasn’t enough. They need to raise taxes on real wage earners because they fear cutting back on all the people on the dole will hurt them at the polling booths come the next election. But real wage earners are declining in numbers because government taxes and regulations are killing jobs by destroying the reward side of starting and maintaining businesses. And it’s cyclical. It’s a storm of ever growing magnitude that will kill every decent job in its path until the fraud comes to an end.

Falling Real Wages

The job killing tornado can persist for a very long time. In the mean time, the IOU’s will continue to mount and the government will have to print more paper dollars to pay back the taxpayers. This monetary inflation will NOT be accompanied by higher and higher wages like we’ve seen in the past because employers simply have no room to pay higher wages because they are paying most of their margin to the government in the form of taxation. If wages did rise, then these businesses would fail and the storm would continue. The only logical conclusion is that inflation will grow, not necessarily out of control, but certainly high enough to allow state and federal governments to start climbing out of their debt mess without having to cut back on spending. This implies that the standard of living will be declining across the United States for a very long time to come.

Finding Shelter

The only way to find shelter from the coming decline in the standard of living is to use a natural hedge against inflation – precious metals. As Peter Schiff continues to remind us, buy PMs from reputable dealers and don’t buy collectibles. Stick to purchasing minted coins with gold, silver and even platinum and only pay SPOT PRICE PLUS A SMALL PREMIUM to the dealer, or buy older circulated coins at or near the spot price of the intrinsic metal value. For current prices of older circulated coins, both for the U.S. and Canada use http://www.coinflation.com/ and you will quickly see which coins to hoard and which ones to get rid of. There isn’t a better visual display of Gresham’s law than coinflation.

Time to Get Your 10 year Mortgage?

Time to Get Your 10 year Mortgage ?

(First published by Rockenomics May 1, 2011 at PinnacleDigest.com)

Anyone reading financial articles already knows that there is significant economic trouble around the entire world. Earlier this week, Ben Bernanke reiterated the Fed policy of maintaining near zero interest rates and the Bank of Canada has also backed away from raising rates at least until the fall of this year. This of course means that both countries will continue to print money  - the Yanks to monetize the debt that no one else wants and the Canucks to prevent the Loonie from running too far ahead of the Greenback.

A recent article published by Agora Financial’s Bill Bonner recommended that people start spending their money like they stole it. When you fully understand the fundamentals around the US debt situation and the fallout that could ensue, his argument makes a whole lot of sense.

Mortgage interest rates have been hovering near historic lows for much of the past 7 years and pressure is mounting for governments to start fighting inflation. Inflation figures according to Bernanke are nominal and meet their ‘target’ of 2% annually. (Why any country is targeting a minimum inflation rate is beyond me – it makes no sense economically). His preference for the government’s core rate which excludes the volatile food and energy components makes him look like a soothsayer which of course is the result of the aim of all Keynesian economic theory – to create an image of the economy rather than tell what is happening in the economy.

According to John Williams of Shadowstats.com, the real rate of interest is near 10% based on the calculation method used up until the Reagan Presidency. If you don’t believe in John’s truth telling mission, perhaps you would believe Google’s Price Index instead? Google is developing its own basket of goods to judge the value of inflation. In Applied Economics Quarterly Vol. 55. No 2 (2009) , the entire methodology is laid bare and it will put the current measurement methods to shame in both accuracy and speed of delivery.  Since that measure has not published any data yet you could use the MIT measure that is available called the “Billion Prices Project” which has automated the process by using web-bots that troll the internet. Inflation is at 3.45% over the past year in the U.S, double the amount the Fed admits to, but 3.1% of that amount has come in just the past 4 months suggesting that inflation is spiking upwards.

Now to the title of this week’s blog: Time to Get Your 10 Year Mortgage.
There are a few lenders in Canada that offer 10 year fixed rate mortgages (and many more in the USA) with the lowest national published rate available being 4.84%. You can knock another 15 basis points off if you have a solid credit score and argue for it. Of course, the question is why you would want it when you can get an adjustable 1 year rate for just 2.1%.
Here’s the rationale and you certainly don’t have to agree with me. I can afford a fixed rate loan under 5% with the lowest possible payments pretty much forever. It eliminates the interest rate risk for a full 10 years and that is a lot of peace of mind. In the early 1980’s when Volcker raised rates to fight inflation, millions lost their homes because they couldn’t afford the interest payments and since I can see this coming, I don’t want to be in that boat. By taking on this 10 year fixed rate mortgage, I effectively shift the interest rate risk to the financial institution.

Here’s a scenario that may help to clarify (skip to last paragraph if it’s already clear)

Assuming we both borrow $500,000 (for simplification I am using interest only loans rather than a blended mortgage) – you choose the 1 year variable rates and I choose the 10 year fixed rate. The interest only portion of the 1 year loan is $2100/100K while the 10 year rate at 4.69% will cost me $4690/100K. That’s an additional $2590 out of pocket to go with the 10 year rate. WOW – doesn’t look good for me does it?

Let’s assume that the Bernanke miracle of zero interest rates continues for 2 more years and that Carney follows suit in Canada. Over that time I’ve spent $7770 more in interest than you. In year 4, interest rates climb by 2% to 4.1% so you now pay $4100 and I’m still paying $4690 and by year’s end I‘ve now paid $8360 more than you in interest.
Year 5 and rates continue to climb but at a faster pace as inflation is getting out of control. Bernanke raises rates to 6.5% (at this rate, the interest portion of the US debt is nearly equivalent to the total Federal tax revenue) and you still pay the 1.1% loan premium or 7.6% for a total of $7600 in interest. By year end I have paid $5450  more than you.
Year 6 is when it really gets interesting. Fearing the Us becoming a banana republic, Bernanke tries to emulate Paul Volcker and raises the US prime rate to 14.5% and you’re paying 15.1% or $15,100 interest. In year 7 the rate hikes continue upwards to 21.5% and you pay $22600 in interest unless of course you default on the loan. By the end of year 7 you have now paid $22870 more than me and there are still 3 years left on my fixed rate loan.
By the end of the 10th year, you have paid at least $50,000 in interest more than I did under this scenario. Of course, I didn’t tell you that I borrowed the money to invest in gold and silver, both of which grew exponentially over the life of this interest only loan and by the end of year ten I sold a small portion and paid off the principle.
I am putting this into action right now because a 5 year term rate would cost about 4.35% and the 10 year rate can be had for 4.84% or less via True North Mortgage. Historically these rates are extremely low and by the fall they will likely be heading higher. Within three years they could easily be 10% to 15% for a 10 year fixed, so the time to do this is before September. Most companies offering 10 year mortgages will only accept 1st mortgages so you will have to discharge your current mortgage and that could be costly. Be careful and weigh all your options but be cognizant of the debt time bomb that is going to drive inflation higher as the U.S. monetizes its debt.

Mass Market Manipulation by Mega Media

(First published by Rockenomics on April 17th, 2011 at PinnacleDigest.com)


Huge government debt is not a problem…

....Inflation is under control…….

....... Central banks have it all under control…..

 ..........Charlie Sheen matters….

 ...............The rich don’t pay enough taxes….

 ....................Gold is in a bubble….

All of these statements are of course nonsense, but the mega media companies of Canada and the United States continue to propagandize this garbage and as expected it is working. The average person knows nothing about the tidal wave of debt and how it will destroy America when interest rates are forced up just to the long term average. From 1926 to 2010, the average interest rate on US Treasuries was 5.4%. Applying this rate to the US Debt would crush America. Nobody talks about that and nobody ever talks about the fact that all debts are supposed to be paid back. When is the last time you got an interest only loan with no requirement to ever pay back the principle?

Central bankers like Bernanke and Carney want everyone to believe that they can control the markets by simply adjusting interest rates, but reality suggests otherwise. They actually create the bubbles in the markets. The housing market in the US grew far too fast because of easy credit exacerbated by near zero interest rates and when that bubble burst in 2007, the entire financial world was affected. Where was Helicopter Ben to prevent that from happening? Not too many years ago, the irrational exuberance of Greenspan allowed the tech bubble to grow out of control. Anyone who believes Central Bankers make good decisions for the benefit of the average person has obviously been corrupted by the media moguls.

Unless you are actively looking for the bad news about the economy, such as Wal-Mart’s CEO telling of a huge inflation wave that will hit consumers this June, you will only hear of the Charlie Sheen nonsense and the royal wedding. Why is the People Magazine agenda always the top news story when there isn’t a major disaster to cover?  Why can’t all of that crap be relegated to the entertainment section? Are there really that many people drinking the kool-aid?

And how about this notion that rich don’t pay enough taxes. Watch the youtube video Eat the Rich if you need a reality check in that department. While I am not rich yet, making significantly less than 100k per year, I do live in a ritzy area. I chose to spend my money to live in a good neighborhood, and spend it I am – on TAXES. I just had a conversation with someone who pays 1/6 of the property tax I pay and she lives in the same community as I do. She gets all the same services from the city that I get plus she has bus service and municipal sewers. The reality is that the rich pay a far greater share of the taxes than what they get credit for.

Now, let’s all jump on the bandwagon about gold being in a bubble. After all it just another all-time high. Never mind the fact that most people don’t own any gold and never mind that junior gold stocks are still significantly below the levels they reached before the housing market crashed….If you are still with me, I do believe gold WILL be in a bubble some day, but that is a long, long time away. When junior exploration companies are 50 to 100 times their current values, then gold will be in a bubble and owning these stocks will be scary. But right now, they are still at bargain basement prices and don’t let any newspaper editor tell you otherwise. I am buying these with all the spare change I can find and before the gold bubble bursts, I just may be rich.

It’s said that 5 families control greater than 90% of the US media and without figuring it out, I would guess that less than 5 families control 99% of the Canadian media. These media mogul families will promote garbage on the front page until they see things that will benefit themselves. The inflation warning by the CEO of Wal-Mart was back page news but the commodities sell-off urged by Goldman Sachs last week made the front page. It is nothing if not fraudulent. Goldman stated that they recommended being underweight commodities for the next 3-6 months (sell now so Goldman and the media families can buy cheap) and overweight in 9-12 months (so you can buy it back at higher prices).

Ignore big media and use timely independent news sources. Not only will you be better informed, but you’ll also make better financial decisions.

Always the Contrarian: Should We Help Japan?

(First published by Rockenomics March 31, 2011 at PinnacleDigest.com)

This is a serious question. The world has seen the horrifying natural and man made disasters that have taken place in Japan and the cost to rebuild is probably somewhat higher than the $300 billion that has been estimated. Everywhere you turn, more and more companies, agencies and others are hanging out a shingle asking for Japanese relief funds, but I contend they do not need your money and they do not need mine as they are already prepared financially to deal with this. This is not an assumption, so please don't think I'm being heartless.

 Japan, up until this catastrophe, had the world’s third largest economy behind the European Union and the United States and had been building a ‘rainy day fund’ of approximately $900 billion American dollars (USD). Is this not a rainy day for Japan? Is this not the worst set of circumstances to ever hit that country?

The rainy day fund is their own insurance program and they aren’t using it. Why not?

The answer lies on our side of the Pacific and has its roots in entitlement programs and government spending in America. With the USD being the world’s reserve currency - the currency of business - it forces other countries to hold its currency in order to conduct business. Since Japan as well as many other countries have built up huge reserves of USD, it is in their best interest to help those dollars maintain their value relative to other currencies. However, the American government has been taking advantage of the reserve status for many years and has been counting on these other countries to continue to support the USD.

The short answer: The enormous debt load in the US is growing rapidly and is putting the reserve status in jeopardy. If the dollar loses its reserve status, the value of the USD will drop precipitously and Japan with its $900 billion in reserves will lose a significant portion of the value. By supporting Japanese relief efforts, you are inadvertently supporting all of those people on entitlement programs in the United States and delaying the reality check that the American government will face when the USD does lose its reserve status.

What should Japan do? With $900 billion, the Japanese should be funding a new sovereign wealth fund that will purchase basic commodities and large industrial companies. Then using their keiretsu methodology (vertical and horizontal integration of businesses) they can sole source contracts to rebuild their devastated country and have the profit margin in the countracts come back to them. This will require them to SPEND a lot of the rainy day fund and stop buying USD treasuries, which will cause the remaining USDs in that fund to lose value. Not doing this will cause the Yen to continue to erode and it will cost the Japanese much more money to rebuild their country, effectively increasing the burden to the Japanese taxpayer. Their choice boils down to either supporting the Japanese people by spending the dollars they have, or supporting the American people by buying more USD . Which one makes sense to you?

It is completely foolhardy for any person, organization or government to give money to a wealthy person who has had a financial set back. Why then would you give to Japan who are net creditors in the global marketplace. If you feel a need to help out, continue giving to Haiti or other impoverished nations (through organizations like the Red Cross and Rotary International) where the government does not have a bank roll to fix the problem.