Thursday, September 22, 2011

Last Free Lunch

Many know of the biblical story of the last supper, or if not, the famous painting of it. Today's story is the last free lunch. Mother's are usually right when they say things like "there is no free lunch" and "you can't get something for nothing". On rare occasions, however, one can find a free lunch and get something for nothing. Today is one of those times, when gold and silver are on sale. This means you can get something (gold and silver) for nothing (paper money).

The first Independent item in March, 2010, suggested purchase of gold and silver which are the only real money on earth. As of yesterday, gold had nearly doubled, and silver had more than doubled, in USD prices. Today, with the stock market sell-off, gold and silver prices in USD dropped significantly. That is, these two precious metals went on sale.

The recent run-up in gold and silver prices has been rather steep, with some pundits proclaiming that gold and silver markets have entered a "parabolic rise" in price phase while other analysts characterized the market as "over-bought" and ready for a "correction". Well, today looks like the beginning of a correction. For savvy savers, "correction" means "buying opportunity".

At today's NYC close, gold was off about $40 USD per once and sitting on what we call the 50-day "simple moving average" (SMA). Over the last decade or so, this price range or somewhat below it has been a reliable time to add to gold inventory (your savings). Silver was off even more today percentage-wise -- almost 10 percent, and silver price is now sitting on the 200-day SMA. Again, this price range or somewhat below it has generally been a good buying opportunity.

In short, for both gold and silver, while others are scared, worried and perhaps facing margin calls from brokers because they (amateurs that they are) have over-leveraged their positions, is exactly when you and I buy to add to inventory. The best way to do that is to buy physical gold and silver (coins, bars) and take physical possession. Alternatively, there are funds like CEF on the NYSE.

During the prior week or so when gold, silver and their mining stocks were rising I was selling parts of my core position to take profits. In contrast, today I was buying gold, silver and their mining stocks, which were also on deep-discount sale, hand over fist or as they say, by "backing up the truck" for loading. Listen and learn. When others want to sell an undervalued asset or are forced to sell to raise paper (fiat) currency cash, we are buying in measured amounts according to free fiat cash on hand.

Tomorrow, Friday, Sep. 23, 2011, may see a recovery in these asset prices or a further deep decline. If prices drop further, we just buy more. I know where you will be tomorrow morning -- in front of your local coin shop ready to buy and add to your inventory.

The good thing about taking physical possession of your money (gold and silver) is that your savings are not leveraged. Thus, if gold or silver prices drop in a phase of these volatile markets, you really do not care. It just means that the relative purchasing power of the paper currency has momentarily increased. But this is to our advantage since we can get rid of it by conversion to (buying of) more gold and silver than would otherwise be the case. Notice the U.S. dollar (USD) rise in the last week or so merely records that it is valued somewhat more relative to other worthless fiat currencies.

When the music stops, those holding paper money in any form will be big losers and those holding real money -- gold and silver -- will be big winners. The zig-zag in the markets is merely a footnote in this bigger picture, but relevant, as described above, to timing when best to buy or sell.

The converse is also true. Let's say you need to raise some paper money to pay some expenses. If you can, you try to time this to periods when gold and silver prices have recently risen.

For those who follow these markets more closely, one commentator who often reflects the concepts described here is Stewart Thomson, whose articles have been regularly posted on www.goldseek.com.

Pop Quiz:
If gold price is down dramatically again tomorrow morning,
A. You cry about the lower price your gold coins will bring if you sold them.
B. You panic and sell all your precious metals and put the paper money in a bank.
C. You take the lunch hour to go to your gold coin shop/dealer and buy more.
In a coming article, we will use these ideas to "build a central bank in your kitchen".
© 2011 James J Keene