7 Aug 2011
Buy Your Next Home With Silver
I had two purposes in writing today's commentary. The most obvious intent is to help people avoid committing financial suicide in our real estate markets. However, an equally important goal was to provide people with some sort of quasi-objective "measuring stick" to answer an important question: how high is "high", when it comes to precious metals prices - and in particular the price of silver?
The first topic can be dealt with (in general terms) rather quickly. The criminal near-zero interest rates imposed on us by our banker-serving governments mean that any and every economy which allows such recklessness will always have a housing market in some stage of "bubble".
Near-zero interest rates punish savers. When near-zero interest rates are combined with high inflation, this is nothing less than the economic rape of savers - the specialty of Western bankers. With savers forced to disgorge any/all savings (to avoid it being 'stolen' via banker-created inflation), the first place capital flows in such situations is into real estate markets.
There are two reasons why real estate will always represent the first/worst bubbles to afflict such markets. First of all real estate is the most obvious asset-class to turn to in such circumstances. Secondly, many/most Western economies provide some level of subsidization for home-ownership - further "juicing" these real estate bubbles. The fact that the U.S. subsidizes home-buying more than any other economy is one of the reasons the U.S. housing market continues to represent the world's worst real estate bubble (with massive, systemic fraud being the other main driver).
In such circumstances, there is no such thing as "investing" in real estate - only in gambling on it. The exponential money-printing and near-zero interest rates have resulted in more capital sloshing around asset markets than at any other time in history - by a factor of ten. In such circumstances no one can attach a rational/objective assessment to home prices. With absolutely no way of determining how overvalued is any particular real estate market, then obviously any/every purchase is a gamble.
This means that any sane individual contemplating buying a home today would do only one thing: run! With no real estate market on the planet being a desirable place to invest our capital, the only sane strategy for future buyers is to delay buying a home - and instead to prepare to make that purchase under more optimal conditions.
While we wait for our interest rates (and eventually our housing markets) to return to sanity, the obvious step for future-buyers to take today is to buy silver - to reduce the price they ultimately pay for a house to a small fraction of current prices. The dynamics could not be simpler: house prices (in "real" dollars) will fall a long ways in most/all markets, while the price of silver is headed to many multiples of the current price. With both of these price-trends clearly telegraphed, there has rarely been such an obvious opportunity for a profitable arbitrage in all of history.
The best way I can attempt to describe/define this opportunity would be to provide an estimate of how much silver it will take to buy a secure, comfortable home: 500 ounces. This is a figure which I have seen quoted by more than one other writer, so I will presume they have looked at some historical data which suggests such a price-relationship.
I made no attempt to verify this, for two obvious reasons: real estate markets have never (collectively) been so over-supplied and over-priced in all of history. Conversely, in relative terms silver has not been this scarce in thousands of years. This means that as the "pendulum" swings back in these markets that at some point there will be an opportunity for people (in many parts of the world) to buy a house with less silver than at any other time in history. Thus, when I use an estimate of 500 ounces of silver to buy a home I'm not thinking of a "best-case scenario" (for silver-holders) but closer to a worst-case scenario.
In some of the worst bubble-plagued markets that ratio would/will go much lower. In the U.S., Americans have a very realistic probability of purchasing a respectable home (at some point) in the future with 100 - 200 ounces of silver.
I realize there will be many who view such figures skeptically. I have no space here to debate that point. I can only encourage such skeptics to look over the dozens of previous commentaries which I have written about the U.S. housing market, and/or the dozens of commentaries which I have written about the silver market.
The more general point which I do wish to argue here is the necessity to look for new ways to express prices which are not dependent on/connected to the worthless paper currencies of Western bankers. An ever more frequent question asked of precious metals commentators is "how high will gold and silver prices go?"
Expressed in banker-paper (i.e. our worthless "fiat currencies"), this is now a question which has essentially become meaningless. When the bull market began for gold, the veteran commentators in this sector were gravitating toward $2,000/oz as a "long-term price target" for gold. As we see today, that number could easily be our "rearview mirrors" (permanently) by the start of 2012.
Were those original commentators too timid, or lacking in "foresight"? Not at all, rather our paper-pushing bankers have been diluting their fraudulent paper so rapidly that gold and silver are more undervalued today than they were a decade ago. Rather than moving "toward a peak" in precious metals prices, we are more distant from a top in these markets than ever before. And in the more extreme (but highly probable) outcome of hyperinflation, the "prices" for all goods (expressed in worthless paper) are near-infinity.
This means that the only, rational way in which we can "price" any/all hard assets - in meaningful terms - is to price these hard assets versus each other. I have already endeavoured to "price" silver in terms of real estate, and now I will seek to do so with two other, notable hard assets: gold and oil.
By necessity, these will be crude estimates. The same banker-insanity which has grossly distorted real estate prices all over the world also impacts the prices of gold, silver and oil. However, with the current gold, silver, and oil markets also being the three most heavily-manipulated, heavily-suppressed markets in the history of the global economy, assigning precise price levels/ratios is impossible.
Naturally, the price-ratio where we can come closest to a precise estimate is the gold/silver price ratio, since we have nearly 5,000 years of price data to guide us - during which time the average gold/silver price ratio has been 15:1. However, as previously noted, in relative terms (i.e. "relative" to gold) there has not been this little silver in the world in thousands of years. This ensures that at some point before any long-term equilibrium can be reached that the price-ratio must descend to well-below that 5,000-year equilibrium.
A very conservative estimate for that ratio would be 10:1. In terms of above-ground silver-to-gold, the figures I have heard as estimates range from a 6:1 ratio and lower. With industrial demand for silver "massive" and rising, we know this supply-ratio will continue to shrink (in silver's favor), since so much of the "industrial" silver is not recycled, but essentially "consumed".
With today's price-ratio still being at an extreme level of more than 40:1, this explains why all informed commentators in the precious metals sector expect silver to significantly outperform gold in the future (while gold itself "outperforms" all other asset classes). Let me note that I am not advocating that bullion-holders start swapping their gold for silver.
While we know that the gold/silver price ratio is going to move drastically in silver's favor, we cannot predict with certainty over what time-horizon this adjustment will take place. Given that we are acquiring our bullion as financial insurance, and given that we could need such "insurance" at literally any moment, all prudent investors will hold significant amounts of gold and silver. For those who consider themselves "gold heavy" today, such individuals should simply focus on silver with their future purchases of bullion.
The most-speculative of these price ratios is the silver-to-oil ratio. Oil is one of the few commodities on the planet whose own scarcity rivals (and perhaps exceeds?) that of silver. Combine that with massive market-manipulation, enormous geopolitical uncertainty, enormous economic uncertainty, and extremely dubious numbers on actual oil "reserves", and here we can literally do little except make our "best guess".
My best 'guesstimate' on a rough equilibrium between silver and oil prices is for a 2:1 silver-to-oil ratio (i.e. two ounces of silver = 1 barrel of oil). Readers will immediately note that I expect this price-ratio to remain much "flatter" than the other two price-comparisons I've made. While we cannot assign precise price-ratios, we can certainly rank these ratios with precision.
With housing markets grossly over-supplied, and (demand) in Western economies certain to remain weak for many years to come, the silver-to-housing price ratio is certain to plummet by the greatest amount. The supply in the (under-supplied) gold market will remain relatively flat. Mine supply raises the total, global stockpile of gold by merely 1% per year, since very little gold is ever consumed. Under these circumstances, obviously the gold/silver price ratio will not fall nearly as far as the silver/housing price ratio.
My estimate with respect to oil reflects two, mixed dynamics. On the one hand, in terms of inventories the supply of silver is even more restricted than that of oil, hence the expectation for the price ratio to move somewhat in silver's favor. Conversely, there is every reason to believe that we still have access to more "new" silver (still in the Earth's crust) than "new" oil (again in relative terms).
Those people who mistakenly believe that we have "lots of oil" because of what has been identified in shale deposits need to refer to the ground-breaking work which Chris Martenson did in this area. To my knowledge, Martenson was the first to point out the most important dynamic here: that given current technology, extracting any of this shale oil will consume nearly one full barrel of oil for each barrel produced - leaving zero (surplus) oil for anyone to actually use.
When the brain-dead U.S. government begins massive extraction of its shale-oil, it will make a lot of Oil Oligarchs fabulously wealthy. It will pollute/devastate much of the U.S. "environment". However, it will not ever produce any extra oil for us to "fuel" the global economy.
Certainly the subject-matter of this commentary is something about which I could have written several chapters, rather than merely a few pages. However, with any analysis here unavoidably speculative, I concluded that it was a better use of time (for both myself and readers) to produce a concise but general "guide" rather than endeavour to produce an exact treatise on the subject - given that such precision here is impossible.
More selfishly, when readers ask me in the future "how high will the price of silver go?", my answer will now be as follows:
1 barrel of oil = 2 ounces of silver
1 ounce of gold = 10 ounces of silver
1 house = 500 ounces of silver
The best "service" which I and other precious metals commentators can perform for our readers is to divorce their thinking on "prices" away from the ludicrous/meaningless nominal numbers attached to the banksters' fraudulent paper currencies - and back toward "pricing" assets in some sort of rational manner to each other.
Pricing goods in terms of "dollars" today is every bit as ludicrous as when the Dutch priced all goods in their society in terms of tulips (four centuries earlier). Just as we laugh at the Dutch for foolishly assigning extreme "value" to common plants which could be produced in infinite quantities, so too will our distant descendants laugh at us for foolishly pricing our own valuable assets in terms of utterly worthless scraps of paper - which have already been produced in near-infinite quantities.
Before I conclude this piece, I want to refer one more time to the proposition I raised at the beginning of this commentary: the marvelous "arbitrage" opportunity involving silver and housing. Readers of "business news" have always been looking for guidance on successful strategies for investing their wealth.
Living in an age of near-zero interest rates and worthless paper currencies has transformed this desire into a desperate quest to find somewhere/some way in which they can protect their wealth from the monetary depravity of bankers. To these people, it will hopefully come as a relief that they can adopt a strategy which is as simple as it is secure.
Buy Silver Bars and Coins today....buy a house tomorrow