IT'S ALL ABOUT COMMODITIES, JACK!
by The Mogambo Guru
I have been reminded that I have been somewhat remiss in pointing out the
anomaly in the price of silver, and why that makes silver so undervalued
that it is a screaming buy. But I was spared the trouble of getting up off
of my fat butt to correct that mistake when I read an essay, "Copper, Oil,
& Silver" by Jason Hommel
He writes, "Not all commodities move up at the same time, so this means
there is the opportunity to invest in those that have lagged behind, such
as silver and/or copper. It is important to look at charts of ratios
between commodities."
The first one out of his mouth is about silver! "In 1980, at the prior
peak prices for both silver and oil, oil hit about $43/barrel, and silver
hit $50/oz. In other words, an ounce of silver was worth more than a
barrel of oil."
Even at the recent low prices of silver and oil "silver languished at
$5/oz., and oil bottomed out at $10/barrel, maintaining the 2:1 ratio."
The upshot? "Using those high/low prices as guides, and given the price of
oil today, silver should be somewhere between $30 to $60 per ounce! Either
that, or oil should be worth between $7 and $14/barrel. But which is more
realistic?"
His point: "If you are bullish on oil, you should invest in silver
instead, because in the long run, silver will surely outperform oil prices
as the ratios return to historic ratios of 2:1 or 1:1."
So silver, currently selling at seven bucks (and change) per ounce, should
be, by historical precedent, selling at somewhere between $30 and $60 per
freaking ounce, you say? Which works out to (at $7.30 per ounce) a gain of
411% and 822%? Wow! A home run! Let me at it! There are not many
guarantees in this world, but the dead-bang certainty that silver will
rise in price faster than the rate of inflation seems to be one of them!
Even by its rough historical average ratio of 16:1 against gold, it should
be selling higher than twenty-five bucks an ounce right freaking now!
And don't get me started on the shortage of physical silver in the world,
or the blatant corruption and fraud that is apparently rampant on the
COMEX exchange, which is so bullish for silver in its OWN right that you
don't even NEED any of this ratio-to-oil or ratio-to-gold crap! And so
here is another Mogambo Tip O' The Day (MTOTD), where I reach out my arm
and put my hand on your shoulder, and look into your eyes and say, "Buy
silver."
And then you say, "What the hell are you talking about? A minute ago you
were telling me to buy corn. Now you are telling me to buy silver! I am
confused and your smell is making it really unpleasant to be here!"
I smile at the reference to the olfactory sense, and make a mental note to
put into your Permanent Record how you are a rude little bastard, which
will make it harder for you to enroll in the Mogambo University, where
everybody gets straight A's by just sitting around bitching and whining
about the idiots in charge of things, and how they are screwing it ALL up.
But I smile inscrutably, and I look into your eyes, and say only, "Okay.
Buy corn AND silver."
As you turn around to stomp out of the room in justified disgust, I
suddenly grow angry at your insolence, and I grab your shoulder and spin
you around, and start yelling into your face "And gold! And soybeans! And
wheat! And pork! And manganese! The one underlying theme, in case you
ain't noticed, is commodities, Jack! Commodities! Now, go make a fortune
in commodities and make us all proud of you!"
And it is not just me, Mr. Fry and a lot of other people who have an
opinion about this, but also Puru Saxena, who was asked specifically what
he thought would be "the best investment for the next ten years?" Without
missing a beat, we get the reply, "Commodities. Why have I chosen
commodities out of all the assets? For the simple reason that in 2001,
commodities were the cheapest they had ever been in the history or
capitalism."
The cheapest they have ever been! Ever!
He continues, "Let us take a look at the most important commodity - oil.
Over the past 35 years, there has not been a single major oil discovery
anywhere in the world! Global production is peaking and there is no
additional supply. Meanwhile, demand for oil continues to rise especially
in the emerging world where populations are huge and per-capita
consumption of oil is still extremely low. As global demand rises and
supply remains tight, oil prices will continue to surge."
I jump to my feet and excitedly exclaim, "See? I told you that oil was
going to keep going up!" As everyone appears irritated at my rude
interruption, I hurriedly sit back down, chastised. Now that I am no
longer "creating a disturbance," the class now learns that some
commodities are already in a bull market, as "So far, industrial
commodities such as metals and energy have done exceptionally well." The
best part (from an investor's perspective) and the worse part (from a
consumer's perspective) is that "agricultural commodities such as sugar,
corn, wheat and orange juice haven't gone up as much and are still close
to their all-time lows adjusted for inflation."
But once again, our old friend gold is alluded to, as we read,
"Furthermore, I expect gold and silver to outperform industrial metals
over the coming years. We now live in an era where inflation is the norm.
Fed Governor 'Helicopter' Bernanke comes to mind. Despite what the
mainstream media says the 'deflation threat' is not a real concern, but
only a smokescreen, which allows central bankers to continue printing more
money for their own benefit. In today's world, where paper currencies are
only empty promises backed by nothing, I expect all of them to keep losing
value against time-honored wealth - gold."
And speaking of gold, from BFIConsluting.com we learn, "The World Gold
Council recently released supply-and-demand statistics for the first
quarter of 2005. Demand for gold in the first three months of 2005 is up
32%, year-on-year. According to the Silver Institute, statistics for 2004
show that a boom in investor activity was largely responsible for a 36%
rise in the silver price to 17-year highs."
Further, the Japanese are apparently lifting the bank deposit guarantee,
and that "banks are in trouble in Japan, and the government is removing
the safety net that protected Japanese deposit holders." BFI sees this as
triggering "increased demand for precious metals."
And these BFI people are big believers in silver, as they note, "If the
gold price doubled from current levels, it would be at all-time highs of
$850 per ounce. However, if the silver price doubles from current levels,
it would on be a one-third of all-time highs of $50." A third! Wow!
To add more urgency to their argument, they note, "Silver production has
not been able to keep pace with demand for 16 straight years. The result
is a dwindling of above-ground supplies to alarmingly low levels."
Perhaps in a similar commodities vein, George Ure at Urban Survival got a
letter that said, "Just a note to update you on my conversation with a
longshoreman from the Port of Seattle last night.
"The ratio of full (30%) vs. empty (70%) cargo ships leaving the US has
stayed the same. We are still buying more than selling (except for scrap
and food). What is more important is that beginning in June this year,
when the cargo trade usually starts to significantly increase at a
seasonal level, trade is slowing. This year, cargo ships are not coming
into the port as they did in past years and the work load has been down
for those on the docks."
So, if the workload on the docks is down, then that means there is less
stuff going to retailers, which means that retailers are not buying as
much stuff, which means that consumers are not buying as much stuff. Hey!
I thought the economy was supposed to be booming!
The longshoreman said they are the first to know of an upturn or downturn
in business. They are now saying that with the downturn of imports, a
slowdown in the economy "could happen in 6 months or less." Then they also
bring up a little history. "If you remember, last year," they said, "the
ships were coming in so fast that a waiting line occurred at all the West
Coast ports. That line is not happening this year."
Regards,
The Mogambo Guru
for The Daily Reckoning
