Didn’t Get into Gold Early Enough? This
Other Metal’s Your Second Chance

SilverIf you are sitting in front of your computer reading this, and regret not buying gold bullion earlier, you have another option. Silver, the “poor man’s gold,” dear reader, is still undervalued.

Similar to gold bullion, silver is a precious metal that provides safety and a store of value. Plus, silver has even more industrial uses than gold bullion.

In the past few weeks, silver prices have increased significantly. Gold bullion prices have done the same, but if you look at the percentages, silver prices have outperformed gold bullion.

At the beginning of August, silver was trading around $27.00 an ounce. It has now reached $34.00 an ounce—a $7.00 increase, which was a 26% gain.

During the same time period, gold bullion climbed $176.50 an ounce to $1776.50—that’s an increase of little more than 11%—still better than the key stock indices such as the S&P 500 and NASDAQ 100; but less than silver.

From a technical analysis perspective, silver shows price action that suggests a big move to the upside is in process. Just like gold bullion, silver prices were correcting after a long run-up (maybe waiting for the official QE3 announcement) and investors were hesitant to take the price higher. Since hitting highs around $50.00 an ounce in April 2011, silver traded in a downward trading channel; trickling as low as $26.15 an ounce.

Silver Spot Price EOD CME

Chart courtesy of www.StockCharts.com

Since speculation about the third round of quantitative easing (QE3) by the Federal Reserve started to come into the markets, silver prices started to climb. Silver broke the psychological resistance level at $30.00 an ounce and the upper resistance (black line on the chart) of the downward channel. Since then, the price has continuously increased.

On the fundamental side, silver continues to look strong. Silver is not only a precious metal—it is used in many different technologies. As well documented in these pages, dear reader, uncertainly in the global economy is increasing day by day. The world economic slowdown is widespread and the printing presses of some central banks are running at higher speed.

As Thomas Jefferson said: “Paper is poverty … it is the ghost of money, and not money itself.” Silver prices will benefit from the after-effects of central banks money printing and ongoing economic uncertainty, just like gold bullion. Silver has great upside potential and could be following gold bullion in sync; but may also outperform in percentage gain.

Remember, there will be pullbacks as the price of silver rises, but I’d see every pullback as a buying opportunity. The tides are turning in the silver market and there are still good opportunities available in the stocks of quality junior silver producers. (Also see: “Why the Sizzle in Silver May Stick Around.”)

Michael’s Personal Notes:

September 17, 2012, marked the one-year anniversary of “Occupy Wall Street”—a movement made up of protests that started in cities across U.S. last year. At one point, in New York alone, this cause had an estimated 10,000 people marching. (Source: The Guardian, September 18, 2012.)

The U.S. economy hit rock bottom in the financial crisis of 2008, and it has struggled to get back up for far too long. Occupy Wall Street protests are just about that—protesting against stagnant economic growth, unemployment, disparities between the rich and poor, poverty, and the death of the middle class.

In New York alone, there were 200 people arrested on the anniversary of this event. I believe that the protests and possible riots will only become more frequent and larger. But, as time goes by for the U.S. economy, I believe these protests will go from being against Wall Street to being against the government, as the poor retaliate. QE1, QE2, QE3—they’re not helping the poor man. They are helping the rich.

The Occupy Wall Street protestors are definitely not out of their minds; they know the U.S. economy has a very bleak future. The U.S. dollar erodes each passing day in value, food prices have risen, and consumer pockets have thinned significantly.

The financial crisis witnessed by the U.S. economy will cost Americans $7.6 trillion in lost gross domestic product (GDP) between 2008 and 2018, according to advocacy group Better Markets. (Source: Market Watch, September 12, 2012.) U.S. home values dropped 34% from their peak in 2006 through 2011—a loss of $7.0 trillion in home values. In the same period, 3.7 million homes were foreclosed on.

There are other problems that cannot be quantified by the financial crisis. Lost dollars cannot make up for the personal loss, the human tragedy many Americans have faced becoming jobless and homeless, often at the same time.

Sure, there has been some job creation since 2009, but the jobs created are mostly in low-wage industries—working in a restaurant or retail store. More and more people are leaving the labor force because they cannot find the work they need. The number of discouraged workers has increased in the U.S. economy. How can you identify the cost associated with workers leaving the labor force?

The U.S. economy is showing no signs of growth. The reality is that there is no healing to the wounds of financial crisis for the middle class or poor. I have been harping in these pages that nothing has changed. The government keeps borrowing, the Fed keeps interest rates artificially low, and the Fed keeps creating money out of thin air.

The stock market is basking in the fact the Fed has announced QE3 with a twist—the Fed didn’t tell us when they would stop QE3. It is open-ended. If a bank can take junk mortgage-backed securities off its books, get hard cash in return, and give those mortgage-backed securities to the Fed, it’s a dream U.S. economy for the banks. But most Americans, especially the poor, gave up on their dreams a long time ago.

What happens to the U.S. economy if we take three things out of the equation: artificially low interest rates; $6.0 trillion in new government debt since President Obama took office; and trillions of newly created money by the Fed? If you take these three events out, the U.S. would be in a depression. There have been no structural improvements to the U.S. economy since the credit crisis hit in 2008—this is my biggest concern. (Also see: “We Can’t Ignore it: America’s Going Broke.”)

Where the Market Stands; Where it’s Headed:

It’s almost a week now since QE3 was announced. The markets are cooling to news of open-ended buying of mortgage-backed securities by the Federal Reserve. This morning, we get news the Bank of Japan will increase the size of its quantitative easing program by $126 billion (U.S.). The stock market sure does love new money printing.

But on the opposite side of the equation, all this money printing is causing inflation, which will eventually push interest rates higher. According to the U.S. Labor Department, the Consumer Price Index (CPI) rose by the most in three years in August. As I have been writing since QE1 was announced, you can’t print money out of thin air without causing inflation.

Three rounds of quantitative easing, trillions in newly created money, trillions in new government debt, and the Dow Jones Industrial Average still can’t break above its 2007 high? Hmm…maybe that bear market rally that started in March of 2009 is running out of steam.

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in Profit Confidential, January 21, 2008. Michael started talking about and predicting the economic catastrophe we began experiencing in 2008 long before anyone else.