Silver and Gold

October 28, 2008 by Mark T. Rafter

The warden says,
the exit is sold,
If you want a way out - silver and gold.
Silver and gold.

-from Silver and Gold by U2

I keep telling people to buy gold (and silver … which I think will have a longer term upside as the Au/Ag ratio is way skewed to the high side right now). After I pronounce this small piece of now seemingly commonplace investing wisdom, I will usually get asked one of two questions (or both):

1) Yeah, but why do they keep going DOWN?

2) I have tried to buy gold (or silver) and cant find it anywhere without it being 30-50% above the spot market price.

Precious metals are getting crushed like everything else by hedge fund deleveraging. These funds are having to dump everything of value to meet their margin calls (paying back borrowed money they have plowed into stocks, etc. that are now way down in value). Mostly they are dumping paper contracts to buy gold andsilver which drives the aggregate market price down (supply and demand). I also think there is some market manipulation going on but that is my paranoia coming through (when our country gets renamed the United Socialist States of America, then you’ll believe me!).

NOW, when you go out on the street and try and actually BUY any PMs, the big online dealers (Monex, Bullion Direct, Kitco) are doing an Old Mother Hubbard routine and finding the cupboards are bare. They have no idea when they will get the actually stock from the mints and they have stopped selling nearly everything. Most are selling a couple items from their extensive catalogs and even those are set for delivery in a TBD timeline (I last bought something from Bullion Direct 5 weeks ago and just last week they told me it was shipped).

Just one example of how stupid-o things are - Yamana Gold (ticker symbol AUY) is currently trading at HALF it’s book value of $8. Since the book value of a company is the total value of the company’s assets that shareholders would theoretically receive if a company were liquidated, it is pretty clear to any one-eyed dog this stock is grossly undervalued.

However, that would be an assessment based on fundamentals and as we know, this market is so messed up, fundamentals don’t mean ‘jack.’

We do live in interesting times….