Loathing gold and silver

 Generally when a person sees an investment as  a bad one,  he just avoids it. He does not get agitated over the fact that others who disagree with him are putting money into it. Similarly if a writer or commentator on investing thinks an investment is a poor one, he just presents his reasons and tells people to put their money somewhere else. He does not  obsess on the  topic or attack anyone who disagrees with him as a fanatic or lunatic.

Yet that is just what one does see when various flacks of the political/financial establishment  get going on the subject of precious metals. They do not stop at calling metals a bad play and suggesting investing elsewhere. Rather they seem to take offense at the  notion that people would invest in gold or silver.  The hostility seems to go well beyond any pragmatic concern over the pros and cons of investing in metals.  It is worth considering why.

My guess is that it is because investing in metals often indicates skepticism about the political and financial establishments in general and the present administration in particular.  Such skepticism is both offensive and frightening to those in power and to those who defend them in the media. In fact it seems to scare and annoy the hell out of them. Rulers and their sycophants never like it when the proles get restless, and there is a lot of that going on.

Gleeful over Gold

Observant people could have found reason for suspecting something was going wrong in real estate during the time from 2005 to 2007 without being aware of the extremely loose or even nonexistent underwriting standards being used by many lenders or noticing  the bubbles in home prices in many markets around the country simply by surfing through late night cable TV channels and counting the number of programs on getting rich flipping real estate.  In a similar way the recent years’ abundance of TV advertisements for getting rich by buying gold and silver could have functioned as a warning of trouble coming in the precious metals markets.

Now that gold and silver have fallen a good bit from their recent highs,  many in the financial media, particularly those with ties to and affinities for the financial and political establishments, have been fairly joyfully proclaiming the death of gold and depicting the so-called gold bugs as fools and paranoiacs who do not know what they are doing.  On the surface this is an odd phenomenon. Prices of assets fluctuate with different things being attractively or unattractively priced at different times. There have been bear markets and bubbles in various  classes of assets. Precious metals do not differ from stocks, bonds, or real estate in that respect. Yet most of these people did not write or talk about foolish stock bugs when the indexes had huge declines in price twice in the last dozen years. Nor do they usually talk about foolish bond bugs of the present day piling into assets with little or no upside potential, prices artificially propped up by government actions,  and an almost guaranteed negative after-inflation return.  

It is worth thinking about why the general tone is so different with respect to the precious metals.  My guess is that it is in large part because purchasing precious metals,  at least by implication and often by explicit conclusion, shows a lack of trust in the government, its currency, and its partners in the financial establishment. It is natural for many in Washington and Manhattan to find such mistrust both déclassé and threatening, and perhaps even infuriating. 

Gold, Silver, and Dry Powder

There are a couple of  differences between silver and gold  that may have an effect on the prices in the next few months. Both metals appreciate when people become less confident in currencies and more fearful of governments, but silver may have  some  particular advantages when people get really scared. It is cheaper. If people with more modest incomes and portfolios get worried enough to want to own some metals, they will find they can buy a little silver here and there for less money than even a small gold coin. Also silver can be and traditionally has been used instead of gold for small and day to day transactions.  People in the late 19^th and early 20^th centuries  usually did not buy groceries, work shirts, or lunches with twenty or even five dollar gold pieces. They  used silver dimes, quarters, halves, and, for bigger purchases, dollars.

If more people get more concerned  - perhaps by a big monetary crisis in Europe or if Obama were  re-elected – there may be vigorous or even frantic demand for silver as a possible currency of last resort for ordinary expenses. Gold and silver could both go up in prices, but silver might go up faster. If there is some movement toward economic and political sanity – say an Obama defeat and a decline in government spending – silver might go down faster than gold as its fear premium faded and smaller investors lost interest. My  guess is that whatever happens in the next year, silver will move faster  than gold.

Irrespective of my guess a person should own some of each. They are part of a diversified portfolio and these days, more than at any time since  January of 1981, they  have important value as insurance. In many ways we have been replaying the disastrous 1970’s with Bush as Nixon and Obama as Carter.  The nation was spared a second Carter term by Reagan’s victory in 1980. We do not know now if we will be so lucky again. One should imagine how bad things would have gotten in a second Carter administration and recall that Obama’s record, associates, ideology, and predilections are if anything worse than Carter’s were in 1980. That should make the case for holding some gold and silver as insurance fairly strongly. They are some of the powder we all should be keeping dry.