THE BUBBLE IN SILVER

Silver is a friend of mine.
I can play him anytime.
He is outperforming gold.
Exciting story does unfold.

And when the time comes round to sell,
Silver will be doing well.
I’ll call my broker with great ease
And tell him “sell now if you please.”

The broker, he to me will say,
“Is this an order for the day?
Is there a limit on the price?
Cause that would not be very nice.”

Now 30 years ago a raid,
Old Bunker Hunt a corner made.
He said, “My flag is now unfurled.
I’ll buy all silver in the world.’

He bought the whole world’s silverware.
He was a bull and not a bear.
Yes, knives and forks and silver plate,
With destiny he had a date.

Then Bunker Hunt, he tried to squeeze
The shorts. He had them on their knees.
But then the shorts struck back you know,
And Bunker Hunt lost all his dough.

from the One-handed Economist, 10-1-10.

Ah, yes, the silver bubble of 1978-80 was a time to remember in financial history. Bunker Hunt, heir to the H.L. Hunt fortune, became an aggressive bull on silver and tried to engineer a silver corner. But no one has ever engineered a corner on a free market, and Bunker Hunt did not become the first. He stayed too long. He overplayed his hand. And when the bubble collapsed, he lost his daddy’s fortune.

WHAT IS A SPECULATOR?

This article is dedicated to those who are, or would become, successful speculators. So we begin, as usual, by asking what is a speculator?

A speculator is a person who tries to make money on his capital by buying low and selling high. This is as distinct from an investor, who tries to make money on his capital by using it to make real interest (or return on capital). The speculator lives and dies by price fluctuations. The investor is unconcerned about them. If he is in bonds, he wants the yield. If he is in stocks, he wants the earnings. If he is in real estate, he wants the rent.

Now here is the secret to successful speculation. All markets hit their lows when traders are most bearish. (A trader is either a speculator or an investor.) They hit their highs when traders are most bullish. A case of the first is the 1999 low in gold when even the gold mines were selling short on their own product. A case of the second is the Jan. 21, 1980 spike top, when gold hit $875/oz. (interday on the Comex).

The difficulty here is that man is a social animal. He is influenced in his beliefs by the people around him. But the person who allows himself to be so influenced in the markets is a loser. He sells at the low and buys at the high.

So the first virtue needed to be a successful speculator is an independent mind.

The job of the speculator is to figure out when there are either over valuations or under valuations in a market, and to do this, as noted, he must go against the people around him. That is, he must figure out when the people around him are wrong.

Here we must take a new tack. It is often stated that the man who is most successful in life is the one who has the best information. This is, unfortunately, a bad mistake. It ignores the fact that “information” comes in two types. There is concrete information, which is information about specific things, and abstract information, which is information true of things in general. For example, “The Allies defeated the Axis in World War II” is concrete information. “Man is the rational animal” is abstract information. It applies to all men and says that they have the capacity to reason.

The difference between abstract information and concrete information is crucial. Concrete information tells us about one (or a few) specific thing(s). Abstract information tells us about all of a certain type of entity. For example, Newton’s Law says:

Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it.

This is true for any object in motion. It is true for all the objects now in motion. It is true for all the objects which have been in motion. And it is true for all the objects which will be in motion in the future.

While someone might tell you, “The car came down the road very rapidly,” this is true for only one car in a specific time and place. But Newton’s Law is true for all moving objects in all times. So abstract information is far more powerful than concrete information. Thus we have to correct the above statement. The man who is most successful in life is the one who holds his information in the most abstract form. And since the widest abstractions are those discussed in philosophy, it is to philosophy we must turn for the solution of our most important problems.

Very well, what does philosophy have to say about economics and speculation in the markets? The answer is that the philosopher Thomas Aquinas taught that every good has a fair price. This was defined as the price which allowed the merchant (who sold it) to live at a standard appropriate to his status in the community.

Since community standards are subjective, the followers of Aquinas do not have an objective standard of a fair price. They therefore take the price to which they are accustomed, the price that stands out in their minds. This could be an important high or low or it could be a long, sideways period during which time many people traded.

For example, an important high in gold was $1,000 in March 2008. When gold broke above this number in October 2009, people started to feel that gold was too high. By the time that gold got to $1,225 in December 2009, this feeling had gotten strong enough that it led to the 2 month reaction of early Dec. 2009 to early Feb. 2010. Most of the time such reactions take us right back to the “fair” price. Hence, one could predict a decline in gold from $1,225 to $1,000. However, in this case the decline only carried to $1,050. As small as it was, this $50 gap (between the actual price and the predicted price) tells us that there is a powerful bullish long term force on the gold market.

An important high in silver was $21, also in March 2008. This has been considered the fair price by a great many traders for the past 2½ years. It thus provided resistance every time silver approached that number. But two weeks ago, with the aid of the long term trend, silver broke above $21, and this means that the old resistance is replaced by support. (Prior to late September, $21 was the high of the “fair” price range. But now that it has been penetrated many people will start to think of it as the low of the fair price range. They will therefore buy on any dip to $21. $21 therefore becomes a key number for silver. It is now a great place to buy. And if (which is not likely) silver falls below $21, then this is a caution sign which would probably lead us to take profits. Therefore, there is sort of a floor beneath silver at the present time. Any loss will be small; yet there is the opportunity for large profits. Consider, for the past 2½ years silver has moved sideways while gold advanced 25%. Yet, in the longer term gold and silver move together. It therefore follows that however much gold goes up over the foreseeable future, silver will go up 25% more. Over the past 5 weeks, silver has gotten off to a good start: up 22% (Aug. 24 to Oct. 1).

CONTRARY OPINION

Adolph Ochs, the founder of the (modern) New York Times, was a gold bug. However, Floyd Norris of the current-day New York Times is most definitely not a gold bug, He writes in Saturday’s paper:

“Americans became more pessimistic about their chances for higher incomes during the Great Recession than at any time in the past 45 years.”

“Recession May Be over, but Consumer Pessimism Is Still Plumbing New Depths,” NYT, Floyd Norris, 10-2-10, p. B-3.

The article goes on, thinking it is discussing the economy, but whenever a fact about the economy is required, Mr. Norris substitutes an opinion for the fact. For example, Americans may be more pessimistic about higher incomes, but that does not prove that their incomes are going down. For that we need facts about income, not opinions.

This is a standard technique in today’s media. Run an article to influence people’s opinions. Then take a poll (which will show what you want it to because there will always be a few people who are influenced by your article). Then cite the poll as though it were a fact. Using this technique we could prove that Columbus never discovered America because a poll taken at the time showed that the vast majority thought he would sail off the edge of the earth.

For example, as a result of a massive campaign of lying by the New York Times back in 2008, most of the people in the world have accepted the opinion that the world is headed for a decline in prices. But the actual reality is that we are headed for a massive rise in prices. As a result, most of the speculators in the financial markets are expecting the exact wrong thing. If you want to take their money, you have to play for prices rising. (And indeed, the current rise in the CRB is the first step of the coming rise in the Consumer Price Index.)

As I have noted, the New York Times came up with the idea early in the century that the DJI was going to 36,000. They became so excited by this idea that they bought their own stock circa $40 per share. In 2009, it declined to $4 per share. This was only one of many disastrous errors which cost Times readers enormous amounts of money. How many times do they have to do you before you wake up and realize that you have been made a sucker?

It is only a minor exaggeration to say that everything we have been taught is a lie, and all of the approved authority figures are a collection of confidence men and frauds. This is why so many people are wrong on the markets over and over and over.

If you would like to become a winning speculator, I write a fortnightly (every two weeks) financial letter, the One-handed Economist, to explain the proper principles of rational speculation. There are few economists in the country who can equal my record. I was a gold bug in 1970 (with gold at $35/oz.). I turned bearish on gold a day after the top (at $800/oz.). I then became a stock bug in 1982 (DJI 800). I predicted Black Monday 1987 and then turned bullish again until 2007. Over the past 11 years, my Model Conservative Portfolio has more than doubled in value.

You can subscribe to the One-handed Economist by going to my web site; www.thegoldspeculator.com and hitting the Pay Pal button ($300/year). Or you may subscribe by sending $290 ($10 cash discount) to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055. OHE is published every two weeks with the most recent issue dated 10-1-10.

Thank you for your interest.

# # #