Summary of Inflation and Deflation the United States

The following is an excerpt from the March issue of The Morgan Report. This followed a lengthy discussion of how silver and gold both performed during inflationary and deflationary periods. Most of what I wrote was based upon the work of Roy Jastram and his work on Silver the Restless Metal and the Golden Constant.

Since 1800, the U.S. has had more years of inflation than deflation, 92 versus 53. The record for the two precious metals is remarkably similar. Both lost purchasing power in every inflation in the United States until the last period mentioned, 1951 to 1979, where silver out-performed gold. What adds interest to this similarity is that silver was effectively demonetized in 1834, whereas the gold standard prevailed a century longer. It is true that the U.S. Congress was fiddling with the silver market from 1807 through 1920, but the effect was to put a floor under the silver price, with the gold price being strictly set. And from 1933 until 1975, U.S. citizens could not buy gold.

However, precious metals have a long-standing reputation as hedges against inflation. Jastram writes, “This is not valid based on evidence of a century and a half in the United States and more than three centuries in England. The truth is, in most cases, the two metals, yes, both silver and gold, gained operational wealth in deflations.” From a long-term perspective, gold has held its purchasing power very well in the United States.

The long-term view of silver is different. Silver did fairly well, relative to gold, until 1890. After that, the purchasing power has been erratic. At times, silver’s performed poorly, compared to gold, until the last period mentioned in Jastram’s book, where the silver outperformed the gold by a very wide margin. However, we must be cautious here because so much of the upward move in both gold and silver took place in such a small timeframe.

Before moving from this historical study, I wish to mention a few other items the good professor was able to forecast. Chapter 5 is titled “Silver’s Industrial Revolution.” Jastram recognized that silver was to be a high-tech metal required by industry. I think even he would be astounded to learn that during the past ten years, silver’s use in industry has gone from roughly 35% of the entire annual production in silver, to greater than 50%. Not only that, but it is the fastest growing area of the silver market. The lithium ion battery for laptops will have a competitor and that is the Z power silver zinc battery that I’ve mentioned in other reports.

Apple Computer will be the first company to announce using this new battery. Silver’s use as a biocide continues to grow, being used in washing machines, refrigerators, and a host of other water purification systems, on both an individual and a municipal level. The supply side of silver is likely to decrease from 2009 to 2010, as base metals production will decline during this deflationary environment. As we all know, about 75% of silver is a result of base metal mining. Time and time again, the evidence is clearer and the facts are that silver is absolutely crucial to our way of life. However, it still remains the metal least understood by most of the world.

Now, we must look into the future. Indeed, the future is more uncertain at this point than at any point during my lifetime. My original intent in doing this study was to extrapolate the data so carefully laid by Professor Jastram, and lead you to a very solid conclusion. It is my determination that this cannot be done, because, in most of his study, the metals retain a monetary component, either officially or unofficially. Even the coinage in the United States was silver through 1964. So, I took a step back and evaluated the facts that we do know.

Presently, we have the deflationist Robert Prechter being the best known, and to this audience, perhaps, Ian Gordon or Bob Hoye, but even in this Canadian structure and in these camps, we have different signals. Prechter claims gold is topped and would be a bad investment during the ensuing depression, whereas both Ian Gordon and Bob Hoye extol the virtues of gold and gold only as the place to be during a deflationary period. Certainly, gold stocks play an important part in both of their analyses and, of course, gold stocks, as I’m writing this in February of 2009, really have under-performed the metal.

Gold has maintained. But so far, gold stocks have done poorly and the credit crisis continues taking its effect on the stock market. Silver has not kept up with gold, but has fared better than any of the base metals, thus acting, in my view, as silver would be expected to at this point in time—not as good as gold, but better than anything else in the metals category—showing once again the dual nature of silver being both an industrial and precious metal asset.

My view as to where we are heading actually supersedes both inflation and deflation. My very studied observation is that we are in what Robert Prechter refers to as a grand super cycle. However, my view is that we are at the tail end of the destruction of a currency and these events only take place every 200 to 300 years. This is crucial to know.

As stated in one of my early reports, a hyperinflation is not a function of the amount of money printed. If that were the case, we have more than enough money now to see a destruction in the United States currency. No, it’s a function of confidence and monetary velocity. I believe that over the next year, we’re probably going to see a rally into probably mid March, perhaps as long as into mid April 2009, and then I believe that the deflationary forces are going to be so overwhelming that the only good place to invest will be in cash or just keep accumulating metals and mining stocks on the dollar cost average basis. In other words, accumulate positions slowly over time rather than rush in and try to pick a bottom.

It’s not out of my realm of thinking, but we might see gold touch the major uptrend line before the bull market resumes. That would not invalidate a bull market in gold, it would only confirm it, but it could go lower than it is presently and still maintain a bull market. In fact, most major secular bull markets do test the major uptrend line at least once. Silver has already done this. It has touched the major uptrend line; whether it comes back and we test it or not remains to be seen. It would not be outside of my thinking that it’s actually done it already, preceding gold doing it, and it may not get down into the 880 level or whatever. But, again, the market knows more than any of us.

So, to re-emphasize my conclusion, we are in very, very interesting times and I do believe that the deflationary scenario does have merit at this time but, again, it’s way beyond that. We’re looking at a destruction of the currency. We’re looking at the United States dollar no longer being the reserve currency of the world. In other words, simply stated, we’re looking at a currency crisis.

During a currency crisis, the one thing that you don’t want is the currency that’s being destroyed, which is the United States dollar; you need an alternative currency. The only alternative currencies that I know of that have held up well are, of course, gold and silver. I do believe you need both. I do believe that I could certainly be wrong. Perhaps there’ll be some miracle cure here. I really doubt it, but you don’t need much more than a 10% or 20% protection in order to be well protected if things break down quite substantially for you to come out of this in very, very good condition.

On the other hand, I know many of you are what I call metal heads, like me, and you prefer a higher weighting than that; of course, that’s your personal choice. I’m not going to advocate much more than, say, 20% for most people. There will be a day, in my view, probably in the 2010 to 2012 timeframe, where the dollar just gets to a position where people don’t want it, not only on an international basis with our trading partners, which is already showing up, but also on an individual basis. And this is where you’ve got to be very careful to see what’s going on.

There will be a time when people decide that they’d rather purchase something that’s a hard good that can be stored and maybe bartered later, rather than hold the currency. Again, I don’t think we’re going to see that this year. I think 2009 will be mostly a deflationary year; 2010 is when I expect all of this monetary stimulus and printing of money will work itself into the economy. By that timeframe, it’ll start manifesting in huge increases in inflation. However, it could take off at any time and I’m well aware of that. I do have key indicators that we watch and keep watching.

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Tags: deflation, inflation

Volatility Subsides: Weekly Silver Recap

Volatility has left the silver market, save for a 5% plunge on Monday that eventually found support at the $14 level. Silver closed $14.22 on Friday, down 4.1% on the week. Gold fared better than the official metal of the Olympic runner-up, losing only a half a percent in closing the week at $934.30 and bumping the Silver:Gold Ratio up from 63.3 last week to close 65.7 this week.

In the big picture, despite silver’s $2 drop from its recent 10 month highs, it still remains up 31.8% on the year, while the ratio has dropped over 18% from 80 on Jan 1 to under 66 currently. The uptrend since Fall 08 lows remains, and the $14 level looks like good support at this point, certainly making sense when you look at this chart below. A definitive violation would be very surprising and worrisome (short term) for silver bulls, but can’t be ruled out.

SILVER 6 MONTHS thru 6/19/09

The metals markets are taking their cue from the dollar these days, as silver’s 10 month high on 6/2/09 was the same day the dollar hit its 9 month lows. Also, silver’s bloody Monday was the same day the dollar had its best day of the week. Right now the dollar has a magnet to the 80 level on the dollar index, closing between 80 & 81 all week.

Govt long bonds have also stabilized, with the 10 yr now yielding 3.79%, exactly where it started the week, while the 30 yr yield dropped 11 basis points to 4.52%. Stop and think about those yields for a bit, on an absolute basis, in light of the current economic situation and historic govt bond yields.

• Continued record issuance of govt debt, roughly 4X greater than just last year.
• Foreign creditors not only publicly stating their concerns about treasury issuance and dollar stability, but also actively pursuing and closing deals to bypass the dollar in international commodity agreements.
• Reduction of treasury purchases by foreigners.
• Yields that are still over 200 basis points lower than the average during the Clinton years, when by comparison the Federal Govt was downright frugal!

Commentary

Govt debt at this point is a massive Ponzi scheme and foreigners are getting wise to it. While borrowing record amounts, creating record deficits, and dominating the American economy, the govt is also enacting programs and policies that guarantee no healthy recovery by which to raise revenues through a larger tax base – the massive borrowing will continue ad infinitum (they hope). The govt has no faith in true free market capitalism; it feels it is the answer to all of our problems, denying the reality of its own culpability. We are not in control of our destiny; debt makes slaves of governments, too.

Other Markets of Note:

Oil – finally closed down for the week, off 3.2% to 69.55, after rallying 17.1% the prior 3 weeks.

S&P 500 – also took a breather after a healthy run, down 2.6% on the week to 921after rallying 6.7% from 887 to 946 the prior 3 weeks.

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The Noisy Micro Price Action, Silver Technicals

So last week in this column we looked at the possibility of silver finally entering a trading range after a straight up May, and so far that’s exactly what’s happened. Silver hasn’t yet probed the $14.50 support area, but it has consolidated and bounced around 10-12% below its recent highs.

Of course, throughout history silver has proven to be quite volatile, and it’s actually scary to think of sizable $$$ coming into silver in a big way – how volatile and bullish the action would be. What would you rather own, a US Govt bond or the most important metal for the future of technology and advancement of science, that doubles as real money? I know my answer.

The key levels to watch in silver right now remain 14.50 and 16.50. Any meaningful break above or below those levels and watch out for a major, volatile move. Everything in between is the noisy micro price action that leaves hints as to which way the chart is going to go…watch it closely.

Popularity: 4% [?]

Audit the Fed Bill Reaches Benchmark

June 11 – Washington D.C. – A bill started by Congressman Ron Paul reached a critical benchmark of 218 cosponsors in the House of Representatives, which means it is now cosponsored by a majority of the members.

The bill, named the Federal Reserve Transparency Act will demand full transparency from the Federal Reserve for the first time in history by removing all restrictions from Government Accountability Office (GAO) audits of the Fed and mandating an audit by the end of 2010.

Based on the Campaign for Liberty’s website, an organization Ron Paul supports, explains the need for Fed Transparency “Since its inception in 1913, the Federal Reserve has helped to devalue our dollar by 95%. During the recent economic crisis, it has poured trillions of dollars into the economy with no oversight, made secret agreements with foreign banks and governments, and has refused to tell Congress who is getting the money or to give it the details of what deals are being made.”

“The tremendous grass-roots and bipartisan support in Congress for [Fed Transparency] is an indicator of how mainstream America is fed up with Fed secrecy,” said Congressman Paul. “I look forward to this issue receiving greater public exposure.”

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Tags: fed transparency, ron paul, the fed

Volatility Reigns: Weekly Silver Recap

Silver traded above $16.20 on Tuesday this week, but that was as high as it could go before falling the next day to the 15.30 level, rocketing back to 15.90, and then crashing Friday under 15.20, before closing at $15.28, down 3.1% for the week.  Yes, it is getting volatile after the strong 5 week advance since late April.  Gold fell from $980 to $956 for the week, putting the Silver:Gold Ratio at 62.6, up a half point on the week after getting below 61 on Tues.

The argument that silver has started a basing period is still valid with this price action, but with these turbulent economic times, any major fundamental development could completely take over the price action, driving silver right through support/resistance levels.  Of course, looking at the fundamental background – money printing, higher interest rates, record deficit spending, record investment demand, continued excellence as an industrial and medicinal metal, along with flat to down production – that move is more likely to be up than down, I would think.

The real volatility this week was in govt long bonds, where yields jumped around all over the place in the continued bursting of the treasury bubble.  In the last two weeks, the 10 yr yield has moved at least 15 basis points in 5 of the 9 trading sessions, remarkable volatility.  10 Yr yields jumped from 3.72% to 3.86% on Friday, closing up 11.2% from last week’s close and now up 72% on the year since closing 2008 at 2.24%. 

The Fed is actively attempting, and failing, to artificially suppress long rates.  All short term rates are near zero, and we send Tiny Tim to beg the Chinese to continue to buy the U.S.’s latest version of toxic debt – its own (‘of course we’ll repay you, we can always print more dollars!’).  These are the acts of a desperate nation still scrambling for quick fix solutions to major fundamental problems, and completely disregarding fiscal responsibility.

Other Markets of Note:

Govt Bonds – 30 Yr yields jumped from 4.34 to 4.66% this week, a nice 7.3% move, while the aforementioned 10 yr went from 3.47 to 3.86%.  Think how far yields still have to go to accurate reflect their risk…it could get ugly.

$Dollar$ – the dollar index stayed with its inverse bond market theme, rallying for the week 1.8% to close 80.7.  On Tues it traded under 78.50.

Oil – After bursting 8% last week, black gold rallied another 4% this week to close at $68.95, officially double its late 08 and early 09 lows…tell me more about deflation please?  It’s inflation in necessities, and deflation in non-essentials.

S & P 500 – amazingly, the S&P was up exactly 3.6% for the 2^nd week in a row.  Great news that only 345,000 jobs were lost last month, and unemployment is now at 26 year highs of 9.4%…and those unemployment numbers are radically understated as well. Check http://www.shadowstats.com/ for the true numbers.

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Silver: Technically Speaking

Is silver ready for a trading range after a virtually straight up 5 week advance? Silver has rallied from $12 to $16 since late April, and looks like it could be ready to possibly make a base up here with $14.50 as the low and $16.50 as the high. June 3^rd saw silver experience its worst day since April, dropping from an overnight Asian market high of $16.20 to $15.30 towards the end of the NY trading session hours later.

The sharp uptrend is in tact if silver holds above the $15.20 area in the next few days, and then continues an advance back towards $16, otherwise, it might be headed for a perfectly healthy basing session as it braces for its eventual march to the Mar 08 highs above $20…we think…and hope. Watch it closely these next few days for more clues.

Silver Chart, Daily, 6 Months

Popularity: 6% [?]

Tags: silver, technical analysis, trading

Bloomberg Notices Silver:Gold Ratio

Bloomberg today (June 3, 2009) has published an article by Jason Scott that specifically points to the massive drop in the silver:gold ratio since it peaked above 84 in early October to the current 61 area. It’s not often that the mainstream press mentions this ratio, and it bodes well for the future spreading of the silver story.

Of course, when the ratio has gone from over 70 to 61 in around a month’s time, and silver is now up almost 50% on the year (compared to gold’s 14%), the financial media are supposed to notice these things. Let’s see how long it takes CNBC to pick up on the news.

Meanwhile on June 2nd, a Silverseek.com article quoted British scientist Valerie Edward Jones on how “advances in technology, particularly nanotechnology, are allowing scientists to increasingly apply silver’s benefits in more areas”, including “healthcare and hygiene”. She then pointed out its use in deodorants in Europe.

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Tags: bloomer news, silver gold ratio, Silver News, silver's benefit

Best Month in 22 Years: Weekly Silver Recap

What a week for the shiny metal, closing its best month in 22 years! Silver ended May at $15.77, up 24.9% from its April close, and up 7.2% for the week. Gold was up 2.4% this last week and 10.9% in May closing $980. As these numbers attest, the Silver:Gold Ratio continued to drop during May and last week, and now stands at 62.1. It was at 80.6 to open 2009. Despite this 22.8% fall, the ratio still greatly exceeds its 2006 through first half of 2008 average of 53.

On a technical basis, the weekly move was not surprising, as late the week before it broke through the overhead resistance in the $14.50 area. There’s really not much resistance until the $16 – 16.50 area. Silver hadn’t been above $15 since Aug 08, when it fell from $17.50 to $13.76, on its way to sub $9 before bottoming out – easily one of the quickest, most vicious bear markets I’ve ever seen.

Reflecting upon the big picture with silver’s performance, it’s not surprising that it has outperformed gold so thoroughly this year. Gold is roughly 15% above its nominal highs of $850 almost 30 years ago, while silver is almost 70% below its 1980 highs. Even if you assume the Hunt’s activities artificially boosted the silver price by 100%, going from $25 to $50, then silver still resides nearly 40% under a $25 high.

This is while industry has continued to find new uses for the miracle metal, above ground stocks have shrunk sharply over the decades, and now new technologies like nanotechnology promise even more uses. Do I even need to mention the U.S.’s and most other governments’ recklessly irresponsible fiscal policies that silver protects against?

In the broader picture, and related to worldwide government policies, silver’s strength was part of a strong week for commodities (oil up over 8%), as more investors are following China’s lead by exchanging fiat currencies for tangible, wealth-protecting assets.

Other Markets of Note:

Govt Bonds – both the 10 year and 30 year were hammered on Wednesday, but staged a baffling rally on Friday (yields dropping roughly 20 basis points), for the week finishing up .02% at 3.47% (10YR) and down .05% at 4.34% (30YR).

$Dollar$ – the dollar index actually rallied from 80 to 80.5 on Wed while bonds were being abused, but fell sharply during the bond rally Fri, from 80.5 to close 79.23. As recently as April the index was 87. Dollar:Euro back over $1.41 now.

Oil – at 66.31 now, almost double its winter 08 lows.

S & P 500 – up 3.6% on the week to 919. GM bankruptcy, North Korea nukes, and continued poor economic numbers don’t scare equities, or is it a reflation (inflation) based rally?

Popularity: 6% [?]

Silver Rounds Review: 5 Best Places to Buy Silver Rounds

Surprisingly there are few places to buy silver rounds. Silver rounds, the investment option with the lowest premium, isn’t the most popular choice for many investors. Yet, even with the limited retailers, there are some excellent choices. Below, we’ve organized the silver rounds sellers into categories based on order size: best for 1oz orders, small, medium, large orders. While still taking into consideration the customer service, return policy, and reputation, the single most influential factor remained price. Each seller for each category was the lowest price we could find (if you know of a better option drop a comment below).

Best All Around — the Best All Around review goes to Lynn Coins, who also serves medium orders best as well. Lynn Coins gets the Best All Around review because of the number designs available, I counted six different designs; the combination of order sizes, need as little as 10, or how about 20, even lots of 100 are available; in addition to designs and order sizes, the price is rather competitive and reasonable, which is why Lynn Coins wins in Best All Around.

Best for 1 oz Orders — this was the hardest to find a place to buy super small orders. The place to buy as little as one ounce was Littleton Coin Company. The price, however, was absurd. Littleton offers a “Snowman Season’s Greetings 1 oz. Silver Round” for an absurd markup above the price of silver. For investors, it doesn’t make sense to order a single ounce of silver at such a high premium. It’s a much better idea to order small orders of 10 or more silver rounds because of the premium on a single onc

Best for Small Orders — The options for customers looking for more than 1 oz. increase significantly. For those investors looking for 10-100 silver rounds, look to Lynn Coins. Lynn Coins provides multiple designs and options for silver rounds at an attractive price. A low premium on each product offering makes Lynn Coins the best place to buy small orders of silver rounds. One point of disappointment is the limited stock they hold. Under each product offering Lynn Coins gives customers a view of inventory–some of the time a low quantity. I could see how some might be irritated by a lower quantity than desired.

Best for Medium Orders — A relatively new company fits the bill for medium orders. TMG Silver or Silver50.com has a competitively priced selection of silver rounds in numbers of 100-499 at one price and above 500 at an even lower price. At this time Silver50.com has three designs, all replicas of beautiful coins: Peace Dollar Replica, Mercury Dime Replica, and the Buffalo Nickel Replica. Again, like others, Silver50.com is rather inconvenient by requiring customers order by phone or email.

Best for Large Orders — Orders of 1000 or more, a very large order, is best served by Northwest Territorial Mint, or NWT. At almost a dollar above the price of silver–even below one dollar–NWT has the lowest prices for very large orders. Along with a great price, there’s even two designs to choose from. NWT has their own design as well as the silver rounds from Pan American Silver Corp. To make up for the lack of on-line ordering, NWT gives free shipping and insurance to these very large orders.

Popularity: 21% [?]

Tags: buy silver rounds, silver rounds, silver rounds review

Silver Blog Bash, The Prizes

This list will be updated as the sponsors update Silver Monthly for the Silver Blog Bash. Be sure to read the complete details on prizes and methods of contest entry.

1. Talk with David Morgan one on one for 1/2 hour ($187.50). The blog member who leaves the most thoughtful comments will win a phone call from David Morgan.

2. 5 signed copies ofThe Collapse of the Dollar and How to Profit from It: Make a Fortune by Investing in Gold and Other Hard Assets by James Turk and John Rubino ($14.95/copy). 5 visitors who leave thoughtful comments will be entered to win a copy of the book–leaving a comment does not require registration.

3. 10 Silver Rounds provided by silver50.com. Each silver round is .999 fine silver weighing 1 troy ounce. ($153.90). The member who submits the story with the highest number of votes by the end of the week wins this lot of silver rounds.

4. 10 accounts credited with $50 each from BullionPost.com. 10 New Users are entered to win, so just register for the blog to enter.

5. 1 sealed treasury roll of 2006 American Silver Eagles brought to you by Silver Monthly. The blog member who submits the most number of relevant stories wins this roll of 20 coins.

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Tags: silver blog bash