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The Invisible Grind

By: Jason Hommel, Silver Stock Report

-- Posted 12 December, 2008 | | Discuss This Article - Comments: Source:

(Faith is the substance of things hoped for, the evidence of things not seen)

Silver Stock Report

In my last article, What if They Returned to the Gold Standard? December 10, 2008 I noted that gold should go to $40,750/oz. if the $10.5 trillion of U.S. Bonds were to be backed by gold.  For those who noticed, that was an understatement.

That figure, of course, would not include the following, which would all, also, need to be backed by U.S. gold:

1.  M3, money in the US banks.  Add $15 trillion.
2.  Unfunded liabilities, such as social security obligations.  Add $75 trillion.
3.  Corporate bonds and Mortgages.  Add $25 trillion.
4.  New government bail out give-a-way obligations.  Add $8.5 or 10 trillion.

Total: $110 trillion.

This, of course, would not include all derivative bets, which are like bonds.  These would include futures on bonds, options on bonds, leveraged currency bets, etc.  That would include another $1000 trillion or so, but let's not include that.

So, gold could go well beyond $440,000/oz., or $4 million/oz. if you include all derivatives.

But let's be conservative, and assume that society is not ready for such a drastic change, and let's be optimistic for our oppressors who print paper dollars, and assume that the current system will die a slow death that lasts 20 years as it takes a whole new generation to adapt to change.  After all, the gold bear market lasted 21-28 years, and the new bull market may well last another 20-30.

Most people don't understand how compounding works. 

Let's assume that it takes 20 years for gold to reach $40,000/oz. from $800.  How much of an increase per year would it take, on average, to get there?  The compound interest calculators answer.

All we need to do, is input the three figures. 

Starting amount: $800
Ending amount: $40,000
Duration: 20 years

Out pops the compounded gains, or interest rate: 21.6%

So, as you can see, this is not unrealistic.

After all, gold already rose from $250 in 2001 to $1000 by 2008, over 7 years, which is an annual increase of 21.9%.

The other problem would be:

Start with $800
End with $440,000
Duration: 30 years

Annual gain: 23.41%

But here's why I call this the "invisible grind".  Most people assume I'm talking about a parabolic spike in the price.  Yes, on a regular chart, it looks like that; unless you are looking at a log chart, in which case, it's a straight line.

But on a daily basis, you can also break that down, to determine the daily compounded gains!

Note, with gold trading 5 days/week, there are 261 trading days in a year.

(365 x 5/7 = 260)

So, to determine the daily gains, again, you only need input 3 numbers:

Initial investment: 1
Final investment: 1.23 (representing the annual interest rate of 23%)
Duration: 260 years (but in this case, the years, stand for days)

The annualized rate (which is the DAILY GAIN) 0.08%!

So, look.  I will always say, if you ask me, "Jason, which direction will gold (or silver) go?", I'll guess one way:  UP!  And the answer for how much is "A LOT".  And the answer for when is "now".

But the real story is that the daily gains are almost infinitesimal, unnoticeable, or invisible.

What is a 0.08% gain, on a daily basis?

$800 x 1.00.08 = $800.64

Do you understand a bit more now?  There is no need to watch the daily price of gold.  You will not see it move from $800 to $440,000, over a period of 30 years, on a daily basis.

The gold price could gain less than 1/10 of 1% per day, and take us there quite easily.

On that basis, manipulators can move the gold price down on 2/3 of the days, and let it spike up on 1/3 of the days, and convince most people who have an attention span of 15 minutes that gold was in a bear market during the entire bull market!

So, the common question of the day is, "Jason, if you know gold is headed to $40,000 and beyond, and silver is headed to $8000 and beyond, then why are you selling out?"

These people have no comprehension or understanding of compounding gains.

There are two ways to make it. 

A.  Hold silver.
B.  Deal silver. 

If I deal silver, I can make more than holding silver, but I need to make more than 0.08% per day, and I need to avoid default risk. 

What if it takes me a week to replace my silver?  Easy problem.  Again, 3 numbers on the compound interest calculator:

Initial investment: $1000
Rate of return: 0.08%
Years invested (standing for days) = 7
Final amount: 1006.

So, at $10.00/oz., if it takes me a week to turn my silver, I need to make $.06 per oz., after all costs, shipping, minting, packaging, labor, taxes, etc. just to break even with holding silver, but that still does not compensate for the default risk, which is an unknown quantity!

And if it takes me 14 days, I need to make $.11/oz. (after all costs), minimum, to break even.

If if the turn around time is 28 days, I need to make $.23/oz.! (after all costs), minimum, to break even.

And if the turn around time is 60 days, I need to make $.49/oz.! (after all costs), minimum, to break even.

And if the mint tells me it's a 5 month manufacturing time, I need to make $1.27/oz! (after all costs), minimum, to break even.

(All of that, is with an assumption of silver at $10/oz.  Costs double if silver doubles, naturally.)

And none of that is enough compensation for the default risk.  Mints with a 5 month delay should not be trusted.

And again, for people who noticed, there will be a LOT more inflation over the next 20-30 years, so, again, those are all understatements.

But some people understand, that a fast turn around time, in a bull market for metals, is worth quite a lot.

This is why I believe it is an advantage to you, for me to pre-package, and ship SAME DAY as your wire comes in, at my silver auctions at  I hope to encourage you to buy silver from me, and to encourage you to become silver dealers yourselves. 

So many people in other nations ask me where they can get silver.  I usually suggest a jeweler, who may know some bulk suppliers.  But more often, they don't seem to recognize that the lack of dealers is the gift of a monopoly on a territory, in a sea of people with no comprehension of money.

My current plan is to be able to offer silver on an increasingly regular basis, daily, in size, so that I can become a regular supplier for dealers.

I'm still working on speeding up my own turn around time, and processing ability, to facilitate your success in acquiring silver on a timely basis.

After all, time is money.


Jason Hommel

-- Posted 12 December, 2008 | | Discuss This Article - Comments:

Last Three Articles by Jason Hommel, Silver Stock Report

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