Bitcoin inflation hedge: The new gold and silver

Here are 4 reasons why I believe bitcoin will serve as a better hedge against than gold or silver in the years to come.

Here are 4 reasons why I believe bitcoin will serve as a better hedge against inflation than gold or silver in the years to come:

1) Limited supply. We know exactly how many bitcoin will ever be mined. As of this writing, there are 11,956,400 bitcoins in existence. New bitcoins will continue to be “mined” until we reach 21,000,000. Once we hit that number that’s it. No more bitcoin. Nada. Zilch. That, of course, stands in stark contact to gold, silver and fiat currencies.

2) Simplicity. Buying bitcoin is as easy as transferring money between say your checking and savings accounts (check out my guide on How to buy bitcoin). Buying gold or silver requires some knowledge. You’ve either got to buy physical coins or bullion, mining stocks, ETFs, a stake in a trust or you need to pay someone else to buy and hold gold or silver for you. With bitcoin, you’re responsible for keeping your private security keys safe. That’s it.

3) Liquidity. There is no practical limit to how much or how little bitcoin you can buy. Want to buy $0.25 worth? Go for it. Want to buy $1,000,000? You can do that, too. Think of it like going to the currency exchange counter after flying to Mexico. You hand someone some dollars, they give you pesos. If you’re trying to sell an ounce of gold that’s worth $1,300 on the other hand, you might have to search quite a bit to find a buyer near you.

4) Speed. We’ve already seen how quickly the price of bitcoin can move. That’s particularly true in the midst of a crisis of confidence or currency problem. Take the example of Cyprus. Earlier this year, the tiny island country announced it was confiscating a portion of the funds foreigners held in the country’s bank accounts as part of a bailout package. In a rush to withdraw their cash from Cypriot banks, investors poured their money into bitcoin pushing the price of the digital currency up twofold in a week. Similar currency problems in other countries could accelerate bitcoin’s phenomenal growth.

How high could bitcoin go? Check out our post: The case for bitcoin at $100,000.

Four reasons to be bullish on silver in 2013

Global Resource Specialist Peter Krauth of Money Morning believes silver prices could hit $54 an ounce in 2013. Here’s why.

Global Resource Specialist Peter Krauth of Money Morning believes silver prices could hit $54 an ounce in 2013. Here are four reasons why he’s so bullish on the metal:

  1. An expected normalization in the gold-silver ratio
  2. President Obama’s prediliction for money-printing
  3. Hard asset investor demand as paper currencies continue to slide
  4. Growing industrial demand

More at ETFDailyNews.

When will inflation hit the U.S.? 2013?

When we’re going to see the serious inflation – and perhaps even hyperinflation – that economists have been predicting?

The price of gold, oil, energy and other hard commodities has risen steadily for more than a decade, and that can only mean one thing: global currencies are weakening and inflation has settled in. The real question, though, is when we’re going to see the serious inflation that economists have been predicting?

To answer that, we’ve got to do some data mining. First: what’s the current inflation rate? According to the U.S. government, it’s a paltry 1.7 percent. Ask anyone who goes grocery shopping or pays household energy bills and they’ll probably shake their heads at that number.

In fact, if we calculate inflation the way the government did in 1989, we’d see inflation’s actually hovering at an annualized rate of 5 percent (per ShadowStats). If we calculated inflation the way our own government did in 1980, we’d see it’s even worse at somewhere north of 8 percent (again per ShadowStats).

Those are scary numbers. And they’re indicative of just how fragile our so-called recovery has been. And yet, most investors – and particularly the media – are happy to get spoon-fed the more palatable modified inflation numbers that get announced every month. It’s just a matter of time before that changes.

When will inflation get worse?

Inflation’s already bad, but it’s probably just a glimmer of how bad it will ultimately get in the U.S. Unfortunately, we don’t have a roadmap that spells out exactly when the bottom will drop out, but we can take educated guesses.

Right now, the U.S. dollar is artificially propped up thanks to the fact that it’s in better shape than some of its neighbors. The EU is worse off than the US, China’s yuan is pegged to the dollar, India’s got official inflation numbers north of 7 percent and inflation’s ravaging South America. Since the U.S. is printing money at will, that gives central banks around the world little incentive not to do the same. In fact, other economies get penalized if their currency stays strong relative to the dollar and Euro because their exports effectively cost more.

That’s created a race among central banks, with each of them trying to devalue their currencies faster than their neighbors.

The U.S. is doing particularly well at devaluing the dollar. Yes, the government can say that unemployment is under 8 percent, and that our budget will be balanced in a decade, but the facts just don’t support those claims. We think we’re insulated from riots, draconian budget cuts and hyperinflation, but I would argue we’re just a black swan away from a bout of hyperinflation in the U.S.

And that black swan would be a sudden rise in interest rates that the government is forced to pay on bonds. At the moment, interest rates on bonds are unnaturally low. That’s thanks to investor uncertainty and the Federal Reserve’s bond buying spree (known as quantitative easing). Yields on bonds are so low they’ve crumpled 50 percent over the past decade and more than 70 percent over the past 20 years.

We truly are at a pivot point. The U.S. debt load threatens to collapse the economy, and if investors lose faith in the U.S. government’s ability to pay back it’s bonds, the U.S. national debt could transform itself from a heavy burden into a crippling death blow. That’s no exaggeration, either. The same thing, in fact, happened in Ireland, Greece and Spain. How? Investors stopped buying bonds and the rates those governments had to pay to borrow cash skyrocketed.

It can’t happen here

Surely Greece is in worse shape than the U.S., right? In fact, the U.S. has surpassed Greece’s debt-to-GDP ratio (per GlobalFinance), and Italy’s debt-to-GDP is only about 16 percent higher than the U.S. government’s. Should investors stop buying bonds, the U.S. would have to sell them at ever higher interest rates with each tick up in rates further burdening the ability for our economy to “grow it’s way out” of debt.

Since most of Europe shares a currency in the Euro, countries in the EU don’t have the luxury of cranking up the printing presses at will. The U.S. on the other hand, does, and when investors stop dumping money into U.S. treasuries (which they eventually will), the U.S. will be forced to print money even faster than they are right now.

When that comes, we’ll finally see the rampant inflation that everyone’s afraid.

Will it happen in 2013?

The short answer is, I’m not sure. The long answer is, it’ll probably happen when conditions start improving in Europe. The Euro is in bad shape right now, but the fact that it’s tied together a diverse group of countries means the EU can exert pressure on troubled countries, forcing them to cut their budgets and get on a more sustainable fiscal path.

We can’t say the same thing about the dollar, and that means our government’s going to be reluctant to make the hard cuts it has to make. Without those cuts, the only choice the Fed will have is to print even more than the $85 billion a month that it’s already printing. Once that happens, we’ll really understand what it’s like to live in an economy rampant with inflation – no matter what numbers the government throws at us.

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Three signs silver prices have further to fall

While we’re certain the 12-year bull market in precious metals isn’t over, we do think there could be more pain for silver investors in the near-term. Here’s why…

A month ago, an ounce of silver was worth $33. Today, that same ounce is worth $29.50 – a drop of more than 10 percent. While we’re certain the 12-year bull market in precious metals isn’t over, we do think there could be more pain for silver investors in the near-term. Here’s why:

1) The Gold/Silver Ratio. The gold:silver ratio has been trending up since early March, and that trend probably won’t stop until the ratio re-tests January’s highs around 57:1. Why? Because swing and momentum traders themselves help cause the fluctuations in the gold:silver ratio. So long as the ratio is showing a clearly defined trend, and it’s not nearing any key resistance levels (or psychological barriers), those swing traders are going to short silver. Check out the steady upward climb in the gold:silver ratio:

[Source: Seeking Alpha]

2) Long live the dollar. The greenback can’t seem to do anything wrong. That’s despite explosive growth in True Money Supply (or the sum total of all the cash, deposits and notes that are floating about in our economy). Just check out this chart from Mises.org:

During ordinary economic times, you could expect the yields on U.S. bonds to spike in the face of such aggressive monetary easing. Instead, the dollar looks stable compared to the financial situation across the pond.

The Eurozone “is on a path that leads to eventual dismantling,” Peter Tchir of TF Market Advisors wrote in a note to clients on Monday (per IB Times). “Greece restructured debt, made different rules for different holders, and yet, the new bonds trade at 20% of par.”

Investors are telling the Eurozone countries that they no longer believe there’s a way out. That threat of a Eurozone breakup has bought the dollar some street cred that it probably shouldn’t have – and that’s bad for silver prices.

3) Even die-hard silver bulls are losing some of their excitement over the white metal. “While I do remain very bullish on silver, I must also admit that for the first time I can envision a scenario in which silver does not reach $100,” writes Simit Patel at Seeking Alpha. His reasoning? Gold will likely outperform everything (silver and stocks) if the equity markets remain soft.

Of course, all of the arguments above have me thinking that now might be the perfect time to buy silver. I’m not alone either. Check out my recent post Why Eric Sprott believes silver prices will triple to $100 an ounce in 2012. Just remember that if you do buy, though, you need to be able to hold onto the metal in the face of near-term weakness. Prices may be higher in three months, but what happens between now and then might not be pretty.

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Five reasons Ben Bernanke hates the gold standard

From the Great Depression to the Great Inflation, here are five reasons why Federal Reserve Chairman Ben Bernanke hates the idea of moving the U.S. off its fiat currency.

Here are five reasons why Federal Reserve Chairman Ben Bernanke hates the idea of moving the U.S. off its fiat currency:

1) The gold standard helped create the Great Depression. Pegging the dollar to gold led to financial panics during the Great Depression Bernanke argued during a recent speech at George Washington University (per Politico).

“The gold standard would not be feasible for both practical reasons and policy reasons,” he said. “I understand the impulse, but I think if you look at actual history the gold standard didn’t work well.”

I disagree as much of the world operated on some form of precious metals-based monetary standards between the late 1700s and the 1970s. Financial panics occur when the public loses faith in a government’s ability to meet it debt obligations (and it doesn’t matter if that country’s operating with a gold standard or a fiat currency). Rather than a history of failed gold standards, I think it’s more likely that the world will look back on fiat currencies as something that “didn’t work well.”

2) There’s not enough gold to go around. Bernanke claims this is one of the biggest problems with a return to the gold standard. In fact, the move would just require valuing gold at a much higher level. The often-quoted figure is $10,000 per ounce.

3) Less control over the economy. It’s no secret that the Fed uses the dollar as way to manipulate the economy. It gooses a tough economy with easy cash or it caps off a good economy with higher interest rates when it shows signs of overheating. If the U.S. returned to a gold standard, the Fed would no longer have that control.

4) Fiscal discipline would be imposed. Washington’s putting lots of pressure on the Fed to ensure the country can continue offering touch-point social programs: things like Medicare and Social Security. So long as Washington is unwilling to make cuts to those programs, the Fed will have little choice but to keep printing money to pay for them.

5) Gold standards benefit creditors. Gold standards inject price stability into an economy. That means governments can’t “inflate” their way out of debt by printing more “cheap” cash to pay off long-standing bills. Putting the U.S. on a gold standard with a national debt north of $15 trillion would be a form of financial suicide. Bernanke knows that, and the rest of Washington does, too. That’s why they’re publicly lobbying against a gold standard. If another country moves to it first, though, we may not have any choice but to follow.

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Top 10 gold price predictions for 2012

With gold prices up 10 percent in January alone, where do professional analysts predict gold prices will go in 2012?

The gold market got a powerful jolt last week when the Federal Reserve announced plans to keep interest rates at historic lows through at least 2014. It was a sign, perhaps, that the gold rally has more than a year’s worth of climbing to do (until the Fed gets serious about combating inflation). The news has helped push gold prices up 10 percent in January alone, and that’s got us wondering what’s in store for the metal in 2012. Let’s take a look then at the Top 10 gold price predictions for 2012:

1) An average price of $1,765 an ounce. A Reuters survey of 45 analysts predicted an average spot gold price of $1,765 an ounce in 2012. That’s 14 percent higher than last year’s average spot price for gold.

2) New all-time high for gold. After getting pressed in an interview with the Washington Post, Puru Saxena, chief executive officer of Puru Saxena Wealth Management, didn’t name a price target for gold, but he did say: “My best guess is the price of gold could reach a new high.”

3) $2,300 an ounce. That prediction comes from Peter Schiff, a former U.S. senatorial candidate from Connecticut. He believes 2012 will be the year the dollar finally starts to “fizzle” out (per ETFDailyNews). “We’re a long way from a blow-off top that you would get at the end of a bubble,” Schiff said in the interview. “We might eventually get there, but we’re years away and thousands of dollars an ounce away.”

4) $1,845 an ounce. Global banking giant Morgan Stanley revised their gold price predictions lower on Jan. 17. They believe gold will average $1,845 an ounce in 2012.

5) $1,681 an ounce. Investment bank Goldman Sachs was more bullish than Morgan Stanley. On Jan. 9, they were predicting gold would hit a new record of $1,940 an ounce in 2012 (per Bloomberg). Two weeks later, they were revising that figure down to $1,681 an ounce in 2012.

6) $1,892 an ounce. Barclays Capital believes the yellow metal will surge 21 percent on the year. That said, they also believe the gold price could go even higher by Q3 2012: “Gold is likely to reach a new all-time record high above $2,000 per ounce during the third quarter of 2012.” (per IBT).

7) $1,450-$1,750 an ounce. Jeffrey Wright, senior research analyst at Global Hunter Securities, believes gold will remain range bound for the year between $1,450 and $1,750 an ounce (per NuWireInvestor). He echoes many other analysts, though, in arguing that we will likely see a sprint north of $2,000 an ounce in 2012 at some point during the year.

8) $1,000 an ounce. The bulls are tempered by Jon Nadler, a senior analyst at Kitco.com. Nadler argues gold will hit $1,000 an ounce before it hits $2,000 an ounce. “The question will remain for 2012, to what extent will investment demand be able to remain the principle driver and continue to attract interest from speculators and investors,” Nadler told TheStreet.

9) $3,000 an ounce. John Ing of Maison Placements Canada Inc. expects to see gold at $3,000 an ounce in 2012. “There’s just a lack of compelling investment alternatives,” Ing writes.

10) A Long-Term Prediction: $3,600 an ounce. Frank Holmes, CEO of U.S. Global Investors, believes gold prices could double in the next five years to $3,600 an ounce (per NuWireInvestor). “Does anyone really believe in the long term strength of the U.S. dollar … We’re just going to have to live with this volatility for another 12 months,” Holmes told NuWire.

The biggest beneficiary of high gold prices in 2012 could be gold and silver mining stocks. See which companies we think our poised for success in our BRAND NEW book: the Top 500 gold and silver mining stocks.

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Why invest in gold?

Too many investors miss the point of gold, but the yellow metal has something that dollars, yen, euros and yuan do not: it’s price can’t be easily manipulated. Therein lies its beauty.

Too many investors miss the point of gold. They look at it like a lump of metal well-suited for gathering dust in a vault. Gold, though, has something that dollars, yen, euros and yuan do not: it’s price can’t be easily manipulated. And that’s the key behind the metal’s meteoric price rise over the past decade.

As governments around the world quietly inflate their currencies, they are – in effect – reaching into our bank accounts and skimming some coin off the top. They do it quietly and most of us are none the wiser.

Right now, for instance, the official inflation rate in the U.S. stands at 3.56 percent. That means that if you stuff $10,000 into your mattress on Jan. 1, it’ll be worth $356 less than it would have if you spent it right away.

The numbers on the front of your bills stayed the same, but the actual purchasing power of those dollars went down. The supply of gold, on the other hand, can’t be arbitrarily increased based on political decisions out of Washington. If demand goes up, the price of gold is going to go up with it.

And, if the dollar’s going down at the same time the demand for gold is going up, the relative change in the value of gold will be compounded.

Still not sold? What if we hit double-digit inflation? You might have your cash sitting in a bank account that’s earning 1 percent interest every year. If inflation hits 10 percent, that means every dollar you have actually loses 9 percent of it’s purchasing power every year!

What’s scarier is the fact that many believe we’re already suffering through double-digit inflation. John Williams at ShadowStats.com calculates what’s known as the SGS-Alternate CPI number. It’s not something he made up. It’s actually the exact method Bureau of Labor Statistics used to report inflation through 1980. Since 1980, though, the government’s continuously fiddled with its calculations to make inflation look tamer than it would otherwise be.

Right now, ShadowStats reports that the inflation rate stands at 11 percent. That’s a scary number – unless, of course, you’re getting an 11 percent raise at work every year and your 401K is pumping out double-digit returns. Since most of us aren’t that lucky, precious metals like gold start looking attractive.

And, if metals look attractive to you and me, then they definitely look attractive to the Top 10 percent of the wealthiest Americans. Keep in mind, too, that that Top 10 percent owns fully 80 percent of all the outstanding stock in public companies. They know how and where to place their bets, and a lot of them are flocking to gold.

More arguments against gold

I’d rather invest in something tangible, naysayers argue. Something like oil or real estate.

Those aren’t bad ideas, but gold has distinct advantages over each of those alternatives. The most important advantage is the fact that supply of gold is largely static. Oil and real estate are intimately tied to market conditions.

If the cost of oil goes too high, consumers drive less and spend less. On top of that, businesses incur greater expenses and the price of goods rises. That slows down economic expansion and eventually drives down the price of oil. The same goes for real estate.

If the official inflation rate hits double-digits, there won’t be a bank in its right mind that would be willing to loan a consumer the funds to buy a house at today’s interest rates. And not many consumers would be interested in buying a house with a fixed mortgage around 10 percent.

The value of gold can’t be inflated away, and therein lies its power. In a world where economies around the world are racing to devalue their money, there are few places investors can turn. That’s why I’m confident we haven’t see the end of the bull market in gold.

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5 reasons to ditch your silver investments today

I’m still a silver bull, but the case against the metal in the near-term seems to be growing every day. Let me play devil’s advocate and give you five reasons to ditch your silver investments.

Silver price volatility and the intense media coverage of the white metal is making it difficult to decide which side of the fence to stand on. Now more than ever, it’s important that investors remove emotions from the equation and take a fresh, rational look at their silver holdings.

Long-term, I’m still a silver bull, but the case against the metal in the near-term seems to be growing every day. Let me play devil’s advocate and give you five reasons to ditch your silver investments:

1) Over-reacting to inflation. There’s certainly an industrial component to the silver story, but inflation has been the primary driver for the metal since it bottomed in 2008. Still, as Pradeep Kandasamy at SeekingAlpha, points out, silver has over-reacted to the threat of inflation. The monetary base has increased by 100 percent since the launch of QE1 nearly three years ago.

Gold’s price rise perfectly mirrors the expansion of the money supply (up roughly 100 percent over the same time period). Silver, though, has rocketed up 300 percent, Kandasamy writes. That’s even after the recent crash! Late last month, silver was up 400 percent from it’s October 2008 lows. If silver is responding to inflation, it’s clear that response was too fast and too furious.

2) Uncharted waters. We constantly find ourselves referring back to the 1980 highs in the silver market as an indication that the metal has plenty of room to run. After all, if we adjust silver’s 1980 high for inflation, the metal actually hit prices above $130 an ounce.

We have to weigh those numbers against what the Hunt Brothers were doing, though. The two sons of a wealthy Texas oil baron almost single-handedly cornered the market in the white metal. At one point, they held nearly $4.5 billion of silver in bullion and futures contracts! (See my post Silver Thursday, the Hunt Brothers, and the collapse of a precious metal for more on silver’s last record run). If we take the Hunt Brothers out of the equation, it’s hard to argue that silver prices would have gone as high as they did.

3) New margin requirements. It’s not just the COMEX that’s making it harder on silver speculators. Now, we’ve learned that the Hong Kong Mercantile Exchange (HKMEx) has also raised margin requirements on silver futures contracts (per TheStreet). Periods of extreme price volatility in the silver market don’t just ratchet up the price of the metal, they also ratchets up the risk involved. That forces the COMEX and HKMEx to protect themselves by driving up margin requirements (see my post Why does the COMEX raise silver margin requirements? for more). Likewise, hedge fund managers and financial institutions likely ease off their positions and/or hedge their precious metals holdings during periods of extreme volatility as risk ratchets up.

4) ETFs losing steam. One of the more pervasive arguments against silver in the short-term is the relative under-performance of the silver ETFs, which could indicate that retail stock investors are losing interest in the metal. Yesterday, for example, the New York spot price for silver rose from $33.25 to more than $34.50 – a gain of 3.8 percent. Nonetheless, the iShares Silver Trust ETF (NYSE:SLV) shed nearly 1 percent of its value (including the after-hours bounce). If the trend away from SLV continues, silver spot prices will fall as the silver tail starts wagging the dog.

5) Opportunity cost. Even though I’m optimistic about silver prices six months from now, that’s a long time to leave your investments languishing. If you do foresee a lengthy period of consolidation in precious metals, it makes sense to park your cash somewhere else for the next few months. Every long position you hold, after all, means you can’t be invested somewhere else. That’s the definition of “opportunity cost.” While silver languishes, opportunities in other sectors will emerge. Park your money there until silver resumes its upward climb.

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Gold standard in the U.S. by 2016?

Steve Forbes offers several reasons why he thinks the U.S. will end up on a gold standard again within the next five years. And he might just be right.

The notion that the U.S. might one day return to the gold standard got a big boost in credibility yesterday when Steve Forbes, founder of the influential business news magazine and Web site, Forbes, predicted the U.S. would revert back to a gold standard in the next five years.

“People know that something is wrong with the dollar,” Forbes told Human Events. “You cannot trash your money without repercussions.”

Forbes offered several justifications as to why he thinks the move is “likely” by 2016. Among them:

  • A stronger dollar
  • An end to reckless federal spending
  • Smaller and less damaging economic booms and busts

Since the U.S. adopted a fiat currency during the 1970s, we’ve almost been conditioned to accept inflation as a fact of life. It hasn’t always been that way, though, and it shouldn’t. In 2008, Representative Ron Paul (sitting Chairman of the Subcommittee on Domestic Monetary Policy) drove this point home when arguing against HR 5512 – a bill that called for alternative metallic content in U.S. pennies and nickels:

“At the time of the penny’s introduction, it actually had some purchasing power,” Rep. Paul said. “Based on the price of gold, what one penny would have purchased in 1909 requires 47 cents today. It is no wonder then that few people nowadays would stoop to pick up any coin smaller than a quarter.”

The value of the dollar has fallen to the point where the metals required for our coinage outstrip the cost to produce those coins. If inflation weren’t endemic, pennies might actually be worth something.

“HR 5512 is a sad commentary on how far we have fallen, not just since the days of the Founders, but only in the last 75 to 100 years,” Rep. Paul continued. “We could not maintain the gold standard nor the silver standard. We could not maintain the copper standard, and now we cannot even maintain the zinc standard. Paper money inevitably breeds inflation and destroys the value of the currency.”

As more and more people realize that current rates of inflation are unsustainable, our country’s leaders will have some tough decisions to make. We can either take the hard medicine we need, and slash government spending while simultaneously raising interest rates, or we can send the fiat dollar to its grave.

Younger Americans probably don’t realize that the fiat dollar was an unprecedented experiment. Forbes drives this point home in his interview with Human Events by pointing out that country successfully ran on the gold standard for 180 years before it was abolished just four decades ago.

Now that experiment has run its course, we’ve seen it’s too difficult to limit spending when there’s nothing in our way but an arbitrary debt ceiling. In such an environment, a return to a gold-backed currency might be the only workable solution. Linking the dollar with an asset that we can’t reproduce on a computer or printing press makes fiscal responsibility not a necessity but an absolute requirement. Forbes understands that, and it looks like the public’s starting to as well.

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3 reasons a powerful rally in silver mining stocks is overdue

No matter what silver prices do in the near-term, silver mining companies are making money hand over fist. One of these days, the stock market is going to catch on to that fact.

In a single week of trading between May 2 and May 6, 2011, silver spot prices collapsed more than 25 percent on weak economic data, new NYMEX margin requirements and a general sense that the silver market was overheating. On top of that, public SEC filings showed that several noted hedge fund managers and silver bulls had started trimming back their silver holdings as early as February.

Even after last week’s brutal sell-off in the silver market, though, analysts remain bullish on silver mining stocks. Here are three reasons why a powerful rally in silver mining stocks is overdue:

1) The cost of production is static. Even though silver lost more than 25 percent of its value in a single week of trading, the white metal’s still up nearly 20 percent since the start of the year. “The silver companies are making very good money at $35 an ounce,” Sprott Asset Management’s Charles Oliver told Reuters last week. “They’d be making very good money at $30 and most of them would be making very good money at $25.”

Indeed, the article points out that most of the world’s largest silver mining companies report production costs between $4 and $8 an ounce. If they can turn around and sell that silver for $35 an ounce, their profit margins are enormous – even after a drop in the price of silver.

2) Consolidation on the way. The one thing that’s been missing from the 10-year bull market in precious metals has been a wave of buyouts, takeovers and consolidation in the mining space. The world’s largest mining companies are sitting on war chests full of cash, and they’ll likely target junior mining companies to ensure a steady supply of silver in the years to come.

Silver Wheaton Corp.’s (NYSE:SLW) CEO Randy Smallwood went on the record last month predicting a wave of buyouts after silver prices stabilize. Smallwood argues that small cap silver mining stocks don’t want to sell when prices are rising rapidly. The fear, of course, is that they could have gotten more money for their company and operations if they’d held out for a few more months. This steep correction in silver prices could be just the opportunity Silver Wheaton and other silver mining giants have been waiting for.

3) The fundamental trend is up. Extreme market volatility can make anyone question their reasons for investing in silver, but the long-term trend remains intact. The Federal Reserve’s continuing its inflationary monetary easing program and interest rates remain near zero. The net effect is a dollar that’s headed down.

ShadowStats.com calculates the inflation rate at 10 percent using formulas our own government used just two decades ago (before they began stripping out costs for things like food and energy from the CPI). In such an environment, holding your cash in a low-interest bank account is akin to losing 10 percent of its purchasing power every year. By contrast, silver prices are still up nearly 20 percent this year, and they’ll likely head higher by 2012. No matter what the silver price does in the near-term, though, silver miners are still making money, and they’re doing it hand over fist. One of these days, the stock market is going to catch on to that fact.

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