-- Posted 2 August, 2007 | | Discuss This Article - Comments:
Rosen Blasts my Short Term Thinking
Silver Stock Report
This month, I was honored to be interviewed by Maurice Rosen who publishes the Rosen Numismatic Advisory. It was a very good and comprehensive interview, with hard questions, and provides me a good occasion to send out an email, my first in over a month. Here it is: (with clarifications in parenthesis)
The Rosen Numismatic Advisory
IN-DEPTH ANALYIS FOR THE RARE COIN INVESTOR
VOL. 32 NO. 5 AUGUST/SEPTEMBER 2007
Special Report, $25
WE INTERVIEW: JASON HOMMEL
"I think silver will head beyond $8000 an oz. in less than 15 years!"
LAST YEAR I INTERVIEWED JAMES TURK who talked about $8,000 gold. Now, I present you with a bizarre forecast of $8,000 silver. What's going on here? We'll have to read Jason Hommel's reasoning to find out, but I'll tell you upfront he's from the School of Hyperinflation Forecasting, not an especially enviable place to have learned how to manage one's money or to forecast the economy since the 1980s. Some of that institution's graduates have told their stories in these pages and been proven dead wrong -- so far. This latest graduate, all of 37 years old, goes a big step farther than James Turk who, by comparison, looks to have presented the far more moderate forecast. Turk talked of $400 silver. Hommel says $8000+.
You see, I need to challenge Hommel's prediction of hyperinflation engulfing the U.S. and the world for fear that you believe I joined the hyperinflation camp. But, what if he's right? Even partially right? Go back to the early 1970s when silver was $1.29. Who would then have believed that silver would soar to $52.00 in less than ten years, 40-times its starting price? The inflation we experienced then peaked at about 13%. I tremble to think of the inflation rate required for silver to go from $13 now to $8000. Can you imagine a $1000 face value bag of 90% silver coins valued at $5.70 million? A roll of silver quarters at $57,000? A lowly silver dime at $570? I can't. I assume you can't either. But Jason Hommel can. Let's read what he has to say.
MR: Jason, please give us a brief background of yourself and your career.
JH: I have a BA in Psychology from University of Colorado at Boulder. I developed an interest in gold and silver and made extremely successful investments in silver stocks. I started a newsletter in 2003 and now have 51,000 website subscribers. (55,000 now, on this free email list, and about 800 subscribers who pay for a monthly look at my portfolio.) I was the first analyst to regularly publish comprehensive reports on silver stocks. By the way, I am not solely immersed in silver. I analyze other metals and stocks, such as copper, nickel, zinc, molybdenum, and of course, gold.
MR: Let me start off by asking you why you insist that silver is so undervalued?
JH: Going back a century, virtually every major country in the world was using gold and silver as currency. Today, no country uses either metal as currency, yet gold has been hoarded by the central banks of the world, but not silver. In all of history nearly 5.0 bilion ozs. (155,000 tonnes) of gold have been mined with over 90% of that gold still existing. On the other hand, of the total 45 billion ounces of silver ever mined, about 9% remains, the rest has been consumed. Doing the math, the total value of existing gold equals about $3.3 trillion, yet for silver only $52 billion!. At the end of World War-2, total known stocks of silver amounted to about 10 billion ounces, with the U.S. government holding 4 billion ounces. Now, total stocks are down to well under one billion ounces, a reduction of about 95%, with the U.S. government's stockpile virtually gone. Silver's growing use in electronics since WW-2 has helped to dwindle those once-huge silver supplies. In this regard, looking to the future of China and other once-underdeveloped nations, their use of silver should expand greatly as their populations prosper and they join the "consumer age."
Besides all this, we have strong evidence of government manipulation in the gold market that has been going on since the 1990s. It is strongly suspected that the world's central banks have sold about one-half of their combined "reported" 33,000 tonnes (1 billion ozs.) of gold into the market to depress prices. Were it not for this selling, the gold price could well be $2,000 to $3,000 now!
MR: Here we are with silver at $13. In a report of yours dated 9/21/06, you state that silver will head beyond $8,000 an ounce in less than 15-years. To me, that's an unbelievable, even a potentially reckless, forecast. How in the world do you justify it?
(Report of reference: "Silver Summit Speech", September 21, 2006 http://www.silverstockreport.com/email/speech.html)
(Report of original $8000/oz. silver forecast: "Future Gold and Silver Prices", December 21, 2005 http://www.silverstockreport.com/email/Future_Gold_and_Silver_Prices.html)
JH: I've done a lot of work on how high the price of silver could go in terms of dollars. Considering how bullish I am for silver, it is actually reckless for me to be conservative with my forecast! Otherwise I would allow people who bought silver at, say $12, to sell at $25 and be happy that they doubled their money when, in fact, I am confident that silver will be going much higher. It's important to analyze not only the silver market but the market for dollars as well. That's what we are really talking about here -- the ratio between dollars and silver.
Many trillions of dollars have been created in just the past few years, but there is a time lag when those new dollars begin to affect the purchasing value of the dollar. We have had tremendous inflation since 1914. Yet, despite the higher prices we see today, inflation's full impact has yet to express itself. When you take into account all these trillions of new dollars and the trillions more that will most certainly be created in only the next several years, you begin to see the awesome potential of inflation's impact on the dollar and the price of silver.
Looking at gold, the price today would have to be about $45,000/oz. to fully back all the M-3 created money supply. If you include all bonds, then maybe there's only enough gold held by the U.S. government to back every $100,000 with an oz. of gold. Look at it this way, all the gold that exists in the world is worth about $3.3 trillion today. That is about the same amount of newly created paper money that was created worldwide just last year! China could easily buy over 2,500 tonnes of gold (which is one year's mine supply)--(78 million ozs.) by a diversification of about 5% of their U.S. dollar reserves. Add to this the U.S. government's enormous $70 trillion in unfunded liabilities (mostly Medicare and Social Security) and eventually this fraud of paper money will collapse, as all frauds do.
MR: Are you saying that this dollar collapse will occur within 15 years, hence $8,000 silver?
JH: The collapse has already begun since about the year 2001. Look at the value of M-3, a very broad measure of the nation's money supply. Today, that total is $12 trillion. Divide this by the price of gold and you will see in theory how many ounces of gold M-3 will buy. The point here is that the value of the dollar is declining faster than the rate at which it is being printed -- the very definition of hyperinflation! We've been in this situation for the last six years but almost no one recognizes or talks about it! People are still debating whether or not we even have inflation!
People are being defrauded by the government's phony inflation statistics. The actual inflation is at a rate of 10-13%, mirroring the creation of new dollars by the Fed. During this period, gold and silver have been rising in price at a faster rate than which these dollars are created -- the definition of hyperinflation. Therefore, what I did in that article where I talk about $8,000 silver is project that if silver appreciates at a rate of 50-60% per year for the next 15 years where will its price be.
MR: How realistic is it to expect silver to increase at a 50+% annual rate for 15 years?
JH: What I'm projecting is not a true growth rate but a decay rate for the dollar. The real, inflation-adjusted rate of increase for silver will be less than 50%, the difference will constitute the decay, or inflation, rate. Another way to look at this is that by the time silver is $8,000/oz., it will have the purchasing power of about $200/oz. today. So, it is a combination of those two forces -- the deflation of the value of the dollar plus the incrementally higher rate of the rise in the value of silver--that are at work here. That is actually the opposite of what we've seen for the 21 years from 1980 to 2001 when the price of silver went down while inflation continued to erode the dollar.
MR: But how realistic is it to use the period since 2001 to make your case that silver has to rocket to $8,000? I've seen too many projections like yours fall apart when made by gold and silver "experts" who used limited periods of study.
JH: That's a very good question. I haven't used only the experience of those seven years to make my case. Actually many commodities have risen greatly since 2001, some rising by ten times or more, for instance: molybdenum, uranium, cobalt, selenium, manganese and indium. Even lead has gone from 20 cents to $1.56. These are harbingers of monetary destruction, exactly what occurred during 18th century France under John Law, and 1914-1923 Germany.
I'd like to refer your readers to two interesting Internet articles. One shows some fascinating comparisons of the purchasing power of gold in 1430's Florence, claiming that gold now should be valued at $35,000+. Go to: http://www.gold-eagle.com/editorials_04/wang090104.html
The other is a 600-year chart showing silver historically vastly undervalued today. Go to: http://goldinfo.net/silver600.html
MR: How much investible silver exists?
JH: The vast majority of the estimated existing 4.0 billion ozs. of silver is in the form of jewelry, flatware, tableware, etc. The world consumes more silver annually --about 900 million ozs.-- than is mined each year, which is about 650 million ozs., the difference is made up by scrap recycling. What's left for investment amounts to some 300-600 million ounces which includes all pre-1965 dated silver coins and all the various silver medallions, bars and ingots made for investors.
MR: Much is made of the gold to silver ratio. Some analysts see the current 50-1 ratio falling to the so-called "historic ratio" of 15 or 16 to one, even less. What is your opinion?
JH: I absolutely agree. Decades ago when the ratio was comfortably in that 15 - 16 range, the world had some 15-16 times more silver than gold. That was when gold and silver were used as money. However, now there is far less silver around compared to gold, a fact not yet factored into the current silver price. Today the ratio is actually closer to five or six to one based on the amount of silver mined compared to gold. As the true scarcity of silver becomes known, and we are well on the way towards the public's recognition and understanding of the hyperinflation in progress, it is possible that in a "silver mania" stage for the silver-to-gold ratio to fall close to a one-to-one ratio, perhaps even to the point where silver is worth more than gold! I know this sounds incredible but history shows that great economic chaos can produce incredible market results.
MR: What forms of silver do you recommend for investment?
JH: My number one recommendation is to take physical possession of any silver you buy. That means not buying any contracts, storage receipts, papered "ownership" of silver of any kind. I can not overemphasize this requirement enough. I am certain that as this bull market progresses there will be many sad stories of good folks who will find out that they've been taken by bad firms. We are entering a potentially dangerous stage of the era of financial fraud. Don't make the mistake of correctly making an outstanding and timely investment in silver only to later discover that the silver you thought you owned doesn't exist! Those kinds of frauds happened in the 1970s and 1980s when silver rose from the $4/$6 level to $20, eventually to $50+. Imagine the awesome scope of fraud that could occur with silver going from $13 to $8,000!
For those with the means to buy a lot of silver, 1000-oz. bars are a good way to go. They weigh about 70 pounds and with the best hallmarks are very liquid. For less affluent buyers, 100-oz. sized bars of .999 fineness, also with quality hallmarks, are an excellent choice, as are the one-ounce rounds from various producers, and 90% pre 1965 dated U.S. dimes, quarters, and halves. I'd avoid the 1-oz. American Eagles because of today's high premium required to buy them.
MR: What do you say for the possibility of government attacks on silver and gold speculators? This could take the form of higher taxes, intrusive transactions requirements, limits on ownership, licenses, and labeling us as unpatriotic profiteers and hoarders.
JH: Anytime the government wages war against precious metals owners, it's the beginning of the end for that country's currency, and the government as well. We enjoy in this country a strong history of gold and silver ownership. There are thousands of coin shops across the land. Maurice, when you think of how relatively small is the quantity of gold and silver existing in this country, I think the government won't get involved. The $12 trillion in M-3 money supply that exists today will be soaring in the future, and even with the enormous gains I foresee for the prices of silver and gold the number of dollars will incredibly eclipse all the silver and gold that could possibly be confiscated or otherwise infuriate the politicians because some citizens own them. Still, if the government ever wages that war, silver will be well into the $1,000s, maybe $10,000/oz. and I wouldn't mind letting them buy some of my silver at that price, still holding on to the rest!
MR: Let's bring in the time frame from 15 years to six months. Where do you see silver then?
JH: I see silver easily at $30 by early next year. Gold should be over $1,000 maybe $1,200.
MR: $30 silver might not arouse the public, but won't $1,000 gold be a big event?
JH: We tend to think that because we're so isolated in our little world of precious metals and coins, but when the rest of the world sees gold going above the 1980 high of $850/$875, yes, it will be a breakout. It will cause some news and might push higher to that $1,200 area, but then people are going to back away from buying because gold will be as high as its ever been. They will feel they missed the boat, that the price is too high. The time when the public furiously buys gold probably won't start to occur until the price is well into the many thousands of dollars. By then, silver's price too will be measured in terms of four figures!
Maurice Rosen: MY CONCLUSION What is it with the hard-asset community's fascination with silver? Can it be that the "poor man's gold" appeals to folks desiring a weighty investment in precious metals? Is it the memory of silver's stellar performance in the 1970s that fuels their passions? Is it the work of the silver investment industry promoting a greedy allure for their products?
Jason Hommel: To read the rest of Maurice Rosen's conclusion on what I had to say, send your physical post mail mailing address, usually your home address, in an email, to MauriceRosen@aol.com, and ask for a hard copy of the "Hommel interview."
As many of you know, I do NOT recommend buying any sort of numismatic coins for investment purposes. Sure, I've bought a few Roman coins, denari coins about the size of a dime, containing $1 worth of silver, for about $30 each, but only for the novelty, and as gifts. But I'd never buy $100,000 of such things, just as I wouldn't buy $100,000 worth of silly putty or Rubik's cubes.
So, why would I give Maurice some press? Well, his industry knowledge led to a good interview! Also, Maurice is not into hyping overvalued numismatics. His idea of a good numismatic coin for minor portfolio diversification purposes would be some 100 year old gold coins that might only cost about 15% above the spot price for gold, so you are not overpaying much at all. Also, Maurice admitted to me, quite frankly, that if the scenario that I suggest comes true, then people will not have much money left over for "numismatics" and that rare coin speculation will probably not be very affordable for anyone!
Maurice also suggested that if my readers wanted to sell their numismatic coins, to get the money to buy more gold and silver, he would be happy to help with that kind of request, and would give a good, fair price.
I also appreciated Maurice's perspective that 15 years is "the short term".
As you know, this IS the Silver Stock Report. I apologize for slacking off on giving you silver stock picks in emails lately. I've been spending a lot of time working on our online database of mining stocks that now has over 600 companies listed (up from just over 250 last month). (For paying subscribers only at this stage.)
Besides, our market has been relatively quiet, and you have not missed much in the last few months. But I think the time is ripe for another major rise, where we could see gains of several hundred percent. But I don't like any of the major silver stocks these days over $1 billion in market cap, such as SSRI, PAAS, SIL, CDE, HL, or Silver Wheaton. I don't even like many of the mid-tier stocks in the $300 million range. Here are some company names that I do like. (Most of these companies are only explorers and still need to drill and discover something to put into a 43-101 resource study, and are nowhere near having a feasible mine.) But note they have such tiny market caps!
[Editors Note: Please visit Silver Stock Report for specific stock picks.]
-- Posted 2 August, 2007 | | Discuss This Article - Comments:
Last Three Articles by Jason Hommel and Maurice Rosen