August 23, 2007

Commodity Fetishism

SO I WAS TOOLING AROUND on Yahoo! Finance and much to my amazement I saw a column from one of their financial "experts" proclaiming --- wait for it -- silver as the next great investment. Yes, you read that right. Silver. Silver, which is down 16 pc over the last 15 months. Silver, which has historically traded around $4 to $5 per troy ounce. Silver, which since its recent historical lows in the Eighties and Nineties has seen a big run up to $13 per troy ounce or so, meaning you should have bought it back when it was cheap.

The author of this essay, one Robert Kiyosaki, is the author of the "Rich Dad, Poor Dad" series of books. He has sold about 26 million of these, proving at the very least he is an excellent salesman. As I have not read his books, I can't offer any real criticism of these works, although Wikipedia sure does. Still, I must say I admire the man's guts, because I have a feeling his words are going to come back to bite him like a pack of pit bulls. Mr Kiyosaki writes:

But as much as I love real estate, I believe the biggest opportunity today is in silver. I think this precious metal is about to become the most spectacular investment in recent history -- bigger than oil, even bigger than Google.

The Rant believes this statement is the stupidest thing we've read in years. Nearly as mindless is Mr Kiyosaki's statement about the potential upside appreciation one might find in the precious metal. He writes:

As I write, silver is approximately $13 an ounce. If industrial consumption continues and monetary panic sets in, who knows how high the price will go? Between 1979 and 1980, silver went to $48 an ounce. In today's dollars, that would be the same as $80 an ounce.

And recently, exchange traded funds in silver have been added as a way for investors to hold silver. The reason I find the silver ETF so intriguing is because an ETF represents real money -- not fake money like the U.S. dollar.

I don't mean to be rude, but it might be slightly important to mention the reason silver hit $48 an ounce back in the day -- actually, $49.45 per troy ounce at its peak -- was because the Hunts were scheming to corner the silver market. Of course, the economy was teetering on the brink of ruin at that point (Death of Equities!) and precious metals were a popular investment; but the idea that silver would have hit such a lofty height without the Hunts' machinations seems a bit much. Besides, once things got better, silver went on to crash spectacularly, losing two-thirds of its value over the next two decades. The S&P 500, meanwhile, went on to achieve more than a seven-fold return.

I have to say I just don't understand the commodity fetishism mindset that exists among economic doomsayers. If you look at the long-term trends and believe that all is lost -- an argument of which I am highly skeptical -- there are far better and more stable places to put your money. Real estate is probably the best of them, because they ain't making any more land and people always need places to live and work. Real estate is a good hard asset with tangible value. It also can't be stolen and melted down.

Plus, because God has blessed America with a stable system of laws and regulations governing the ownership and transfer of real-estate, the only way you'll truly lose out with real-estate is in the event of a nuclear holocaust (in which case we're all screwed) or some neo-Bolshevik movement seizes power (in which case we're all screwed). It should be worth noting that in the cases in which we are all screwed, NO investment -- except a plane ticket to Switzerland or Bermuda or the Caymans -- will save you. Those bars of silver and gold will only come in handy for getting one or two good swings at your local commissar before his socialist minions drag you off to be shot.

Of course, I realize some readers may look at this and complain that inflation is eating their dollars and the Government cannot be trusted and They -- whomever They are today -- Are Going to Sell Us Down the River. But here's the thing.

Let's say that all the above items are true. Let's say inflation is a bit higher than normal; let's say the Government is weak and ineffectual; and let's say the Trilateral Commission has somehow managed to spread its tentacles throughout the world of international finance, and its directors are spending their meetings looking at the stock tickers and laughing maniacally. As long as the returns on one's investments outpace inflation, there's no reason to switch to metals, because you're still making money in real terms and that is what counts at the end of the day. Real-estate and Treasuries and other investments would be far safer -- and arguably more liquid -- in such a situation. That's because if things improved -- as they almost certainly would -- they would still keep appreciating, whereas gold and silver would fall accordingly.

Besides, what if the doom one expects never arrives? Then you're really out of luck. Think of all those gold and silver bugs who held on to their metals portfolios throughout the Eighties and Nineties, expecting the crash that never came? The value of their holdings slowly diminished even as those who invested in more mainstream investments made a killing.

Now, I do not mean to completely dismiss metals enthusiasts here. Clearly, many are very smart and there's no denying there are some long-term trends extant that are cause for concern. But I have to wonder if a lot of these folks aren't perhaps being too clever for their own good, and thus extrapolating scenarios from their analyses that are possible, but certainly not very probable.

After all, the banking panics of the 19th and early 20th centuries are no more. There is no more wide demand, as the hotel operator in "The Good, the Bad and the Ugly" put it, for "gold, not paper dollars!" The gold standard has been sundered, even in Switzerland. Fiat money rules the world and there seems little chance that will change any time soon. Plus, the U.S. dollar still remains a great store of value -- after all, that's why so many foreigners hold dollars as a hedge against their own, far weaker, currencies.

So for the life of me, I can't see any reason to think silver is suddenly going to be the next big thing. Perhaps if things got really bad and there was a huge flight to quality, gold and silver would do well. But even then, those gains would only be temporary. Markets turn; that is their nature, and those who are accustomed to seeing the glass as half empty should always be prepared to accept the glass is actually half full.

Posted by Benjamin Kepple at August 23, 2007 01:01 AM | TrackBack
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