"Bullion is for Survivalists", Go with GDX

[chux03]

DON'T SHOOT!! :D I'm just the messenger but I thought it....interesting even though it's about gold. Now, let's have some of your "survivalist" comments AFTER the story and link and that's here:

http://seekingalpha.com/article/122461-why-gold-etfs-trump-gold-bullion

by Matt Weinschenk

I really don’t care for talk of gold investments. There are a small but dedicated group of “gold bugs” that seem to think gold is the only thing anyone should invest in. When someone starts blathering on about gold, I normally shut down pretty quickly – can you blame me?

But lately, gold is one of the leading topics in the investment world. The interesting thing is that it’s been acting counter to what most market watchers have expected.

First, gold didn’t rise as sharply as expected during the flight-to-safety after the markets collapsed. Then government spending raised fears of a legitimate currency collapse. Finally, gold did top out, just over $1,000 an ounce.

And today it’s continued turning around, falling almost 2% as of the time of this writing.

I’ll also mention the chatter caused by my colleague Louis Basenese to recommend that we should start shorting gold now. You can read more here about his Shorting Gold Call.

I’m sure some people do well trading the volatility and movement from gold. And there are many who hoard gold as the currency of “last resort” to prepare for a apocalyptic collapse of, well, pretty much everything…

But for most, it should simply be a specific percentage of your asset allocation, held as a hedge against inflation and uncertainty. It’s the smart way to get the most out of this asset – like any other in your portfolio.

So with all the activity and interest right now, I thought I’d share my favorite way to invest in gold.

Bullion is for Survivalists, Here’s a Better Option

Sinking your precious investment resources into “hard” currency like gold may work for some. But for the rest of us, we need something a bit more liquid. And while there are lots of ways to add this Midas metal to your portfolio, I like Market Vectors Gold Miners ETF (GDX) over anything else. Here’s why…

Instead of investing in actual gold bullion (or even worse, derivatives thereof), Market Vectors Gold Miners ETF invests in a basket of gold mining company stocks.

And believe me, this is a good thing.

The real return on gold is essentially (and by definition) zero. Jeremy Siegel’s database shows that $1 invested in gold in 1800 was worth $0.98 in 2000 when adjusted for inflation.

Research by William Bernstein, author of The Intelligent Asset Allocator and The Four Pillars of Wealth, shows that gold equities do significantly better. The annualized returns of his make-shift gold shares index were 12.81% from January 1969 to September 1996. That not only slaughters gold, but outpaced most other classes of stocks over the same period.

But if you look into it, the first thing you’ll notice is since the start of 2008, investment in a gold bullion fund, like SPDR Gold Shares (GLD), has far outpaced that of gold equities.

That’s mostly a symptom of a sharp decline in the P/E ratios on equities overall. However, I consider this a significant buying opportunity. When the stock markets do rebound, gold equities will outpace bullion by leaps and bounds.

Now, if you invest in gold to be sure that you can buy shotgun shells and canned food when the world economy collapses, you’d be better off with gold coins in your wall safe.

But if you’re looking to round out your diversification (and not make a particular long or short call on gold), now is the perfect time to utilized gold equities through Market Vectors Gold Miners ETF as a method of diversification that still provides exposure to precious metals.

[chux03]

You know something? This guy that wrote this is a knuckle head and I'll base that statement on this right here:

"The real return on gold is essentially (and by definition) zero. Jeremy Siegel’s database shows that $1 invested in gold in 1800 was worth $0.98 in 2000 when adjusted for inflation."

Let's get this straight....that $1 invested in gold in 1800 HELD IT'S VALUE FOR 200 YEARS WITH NO PRICE INFLATION/APPRECIATION AND THIS IS SUPPOSEDLY BAD???? Did anyone else catch this??

My response would be that could you please give us an example of something.....no ANYTHING, that has similarly held it's "value" for that same 200 years, that would prove to be a BETTER INVESTMENT??? How about even as good of an investment?? (O.K. how about platinum or diamonds? I dunno...) This is a PERFECT EXAMPLE of our collective ignorance (present company around here excused) about what real money really is and why we really are in financial doo-doo.

200 years of a steady, rock solid price with NO inflation and that's perceived as being....bad. AMAZING and disgusting! :(

[Irishfan1]

I think the point in that article is, you arent going to get rich investing in gold bullion. True. Its for preserving wealth not nessessarily increasing wealth. I think that silver has an actual chance of making you rich because we are consuming it, unlike gold which is still hanging around somewhere. As silver runs out it will skyrocket. Gold will go up with inflation but it wont make you rich. Therefore you wouldnt want all of your retirement money sitting in gold bullion for 30 years for the best return, just part of it for safety. Anyway, thats the theory.

[Argyria]

Too bad silver's not running out. We're mining more of it annually than we are destructively consuming.

[silverheartbone]

Too bad silver's not running out. We're mining more of it annually than we are destructively consuming.

That depends on what you mean by destructively consuming.

From The Silver Institute (http://www.silverinstitute.org/supply_demand.php).

2008 Mine Production = 680.9 million ounces
-----------------------------------------------
2008 Industrial Applications - 447.2 = 233.7
2008 Photography - 104.8 = 128.9
2008 Jewelery - 158.3 = -29.4
2008 Silverware - 57.3 = -87.6
2008 Coins & Medals - 64.9 = -151.6

If it is not fabricated into bullion, then it is considered consumed.
All but 128.9 million ounces of the mined silver consumed "destructively" as you put it.
The rest is consumed, but could be recovered if the price is right.
That 151.6 million ounce shortfall in 2008 was covered by

2008 Government Sales (net) + 30.9 = -120.7
2008 Old Silver Scrap +176.6 = 55.9

That remaining 55,900,000 ounces was taken off the market by silver investors and de-hedging by producers.

Practically all of the "excess" silver is stashed by investors waiting for the government sales to end (I thought they have practically ceased) and the silver "scrap" supply to be exhausted.

Based on the data in following graph, and the institute's data,
I figure four years max, until silver is the most precious metal.

http://goldseek.com/news/2009/7-13jt/6.jpg

What is wrong with my analysis Argyria?

[Argyria]

The problem is you consider jewelry, silverware, coins and medals to be silver that is 'lost'. I don't. That silver exists as above ground reserves, which can be brought into play for the right price. Admittedly, as silver gets tight it will take a bit of a rise in the price to convince some of these people to sell, but it isn't like silver will hit $500 an ounce in current dollars because people will sell and the demand will be met long before that. The argument is made that 'all the gold ever mined is still above ground, thus silver is rarer'. Alright, fair enough, but the flip side is that much of that gold is in jewelry, coins, medals, etc.... So I'm making the same argument with silver. If it isn't actually destroyed, its still part of the above ground silver supply.

Here is what I said about this once before in another thread.

One thing that has been bugging me. Silver 'demand' figures count things like coinage, jewelry, silverware and so on. Those 'uses' of silver do not result in silver being lost or destroyed. In fact they are a buildup of total available silver inventory above ground. So I think it is fairer to compare silver mining alone vs. industrial+photography demand alone. Here, check out this chart from

http://www.silverinstitute.org/supply_demand.php#demand

Scroll to the last chart down the page.

So for 2008 for example, 680.9 million Toz were mined, while 552 million Toz were used for photography and industrial application. Thus above ground silver rose by 128.9 million Toz. On top of that, some fraction of industrially used silver can be recovered, for instance from recycling batteries or computer parts.

Now, maybe demand for jewelry and coinage and such will force the price up, but I just wanted to point out that mine production easily keeps pace and then some with destructive uses of silver. Above ground silver is growing, year by year.

Thus, if industrial demand were to go up to where mined production wasn't enough, the price would go up only enough to entice investors and those who own jewelry and silverware to sell to meet that demand. So I don't see how silver can take off to over $100 a Toz unless the dollar were to inflate by a corresponding amount. In which case it has only about preserved its value, maybe a little more. That's why that is all I ask of silver, to preserve the value of my investment in it.


As you yourself admit with your figures, with industrial and photographic demand subtracted from mining output, there is a net surplus. Just because its going into silverware or jewelry doesn't mean its gone anymore than it does with world gold supply.

Also, I don't know if its a fact or not, but someone pointed out to me on that thread that 80% or so of silver used in photography is recovered.

[silverheartbone]

In addition if the silver ETF is run by the usual scammers as many suspect (http://www.zerohedge.com/sites/default/files/SilverETFs_1_PDF.pdf),
there is much less silver than is reported.

"A data analysis was conducted of the inventory holdings of two publicly available silver ETFs: iShares SLV and London-based ETF Securities. Custom software was written to analyze published silver bar information for anomalies. Multiple anomalies were found. We detected numerous duplicate bar entries within both lists, which comprised 11.88% and 0.4619% of the SLV and ETFS bar totals, respectively. In addition, we found several 'perfect duplicate' entries within the iShares SLV bar list: that is, the same weight, manufacturer, and serial number were listed multiple times. These comprised 0.0025% of the SLV bar totals. More disturbing, however, was our accidental discovery of the presence of what we have termed 'rough internal duplicates' -- bars with near-identical serial numbers, identical weights, and identical brands. The reason the latter are more problematic is their very low-statistical probability, suggesting some level of fraud and or accounting incompetence is present. We noticed other data anomalies as well, including large amounts of low serial number clustering, which was identified by our industry sources as 'unusual'. Furthermore, we tested for the presence of 'weight duplicates' -- which upon exclusion -- reduced the bar inventories by an astonishing 82% and 50% for the SLV and ETFS funds. We suspect the number of 'weight duplicates' lie well outside the expected Gaussian distribution, but leave this for the subject of future research. Finally, we found multiple cross-referenced bars with identical brands and serial numbers present in both the London and U.S. funds -- funds ostensibly with different custodians. Taken together with evidence of 'revisions' published to the public ETFS data after exposure of the initial flaws, these data suggest there is a degree of systematic fraud or gross incompetence in these funds -- perhaps both."

[Argyria]

Perhaps, but you asked what was wrong with your analysis, given the data you presented. I presented some of my own, which was largely in agreement with your data, and showed how I saw it differently, with either your data or mine.

[silverheartbone]

The problem is you consider jewelry, silverware, coins and medals to be silver that is 'lost'. I don't. That silver exists as above ground reserves, which can be brought into play for the right price. Admittedly, as silver gets tight it will take a bit of a rise in the price to convince some of these people to sell, but it isn't like silver will hit $500 an ounce in current dollars because people will sell and the demand will be met long before that. The argument is made that 'all the gold ever mined is still above ground, thus silver is rarer'. Alright, fair enough, but the flip side is that much of that gold is in jewelry, coins, medals, etc.... So I'm making the same argument with silver. If it isn't actually destroyed, its still part of the above ground silver supply.

Here is what I said about this once before in another thread.

As you yourself admit with your figures, with industrial and photographic demand subtracted from mining output, there is a net surplus. Just because its going into silverware or jewelry doesn't mean its gone anymore than it does with world gold supply.

Also, I don't know if its a fact or not, but someone pointed out to me on that thread that 80% or so of silver used in photography is recovered.

Apparently you missed this line in my post.
The rest is consumed, but could be recovered if the price is right.

I believe the recovered photographic silver is part of the scrap count.

[Argyria]

Apparently you missed this line in my post.
The rest is consumed, but could be recovered if the price is right.

I believe the recovered photographic silver is part of the scrap count.

Ok then, you apparently admit what I said in the first place.

"Too bad silver's not running out. We're mining more of it annually than we are destructively consuming."

I never said it wasn't consumed, only that it wasn't destructively consumed. Which is another way of saying, it could be recovered if the price is right.

[silverheartbone]

Now, maybe demand for jewelry and coinage and such will force the price up, but I just wanted to point out that mine production easily keeps pace and then some with destructive uses of silver. Above ground silver is growing, year by year.

Thus, if industrial demand were to go up to where mined production wasn't enough, the price would go up only enough to entice investors and those who own jewelry and silverware to sell to meet that demand. So I don't see how silver can take off to over $100 a Toz unless the dollar were to inflate by a corresponding amount. In which case it has only about preserved its value, maybe a little more. That's why that is all I ask of silver, to preserve the value of my investment in it.
Maybe it is now, perhaps not, but your statement about the above ground silver growing had not been true for many years according to the experts.

I do not see how silver can not take off if silver is rarer than gold.

What is it that makes gold so valuable?

Perhaps my speculation about gold going into the $500 range is accurate after all,
as another predicts that that will happen (http://goldchat.blogspot.com/2009/08/gold-to-break-1000-but-then-down-to-500.html).

That would hold silver down alright.

[silverheartbone]

Ok then, you apparently admit what I said in the first place.

"Too bad silver's not running out. We're mining more of it annually than we are destructively consuming."

I never said it wasn't consumed, only that it wasn't destructively consumed. Which is another way of saying, it could be recovered if the price is right.

I am making the point that the "destructively" consumed classification is based on the price of silver.

At the current low price, I say the creation of any finished form of silver such as silverware or coins is "destructive" consumption.

Therefore we are not mining more of it that is being "destructively" consumed.

Semantics. :rolleyes:

However if the price goes high enough,
then silver recovery efforts will occur in materials that were previously classified as un-economical to recycle.

I just believe that your original premise about a market condition based on some distinct "destructive" consumption is not significant in the final analysis when it comes down to it.
Silver is an element that has lower supplies and greater demand than gold.
Either silver goes up, gold goes down, or most likely a combination of the two.

Bottom line _________ trade all your gold for silver now.

[Argyria]

I just believe that your original premise about a market condition based on some distinct "destructive" consumption is not significant in the final analysis when it comes down to it.
Silver is an element that has lower supplies and greater demand than gold.
Either silver goes up, gold goes down, or most likely a combination of the two.

Bottom line _________ trade all your gold for silver now.

I'm agreeable that I think the price of silver will rise compared with gold. After all, we're not destructively consuming any significant quantity of gold. Silver prices will have to rise until they cause holders of silverware, jewelry and other items to sell out. I maintain that destructive consumption is less than current mining. To me, destructive means consumed in a way that makes it very hard to recycle. Once you exhaust photography recovery and computer parts recovery, recovery of the rest is all but impossible. Take, for example, silver plated bearings. Trucks leave picogram nuggets of silver on the highway because of this. That's not going to be recovered at any price that I can see.

Yes, jewelry and silverware and such are ways that silver leaves the market for now, but it would only take $50 or so per ounce to start getting that silver back, I think. At $100 per ounce, they'll be lining up around the block to sell it. So this prevents a 'hard' supply vs demand problem. The price will go up, but only to the point it gets holders of such items to sell. The people that are counting on silver to hit $500 an ounce or more in today's dollars don't get that long before that, a lot of silverware would hit the smelter, satisfying demand. Silver is more like petroleum than plutonium. There's resilience in the market to keep it from shooting to the moon.