(There are no dumb questions!)
Silver Stock Report
by Jason Hommel, November 19th, 2010
Which is better, gold or silver?
I like silver better because it’s being consumed by industry. It’s a much smaller market, by far, and thus, will move up far more than gold.
If the silver to gold ratio returns to the historic value ratio of 15 oz. of silver for every 1 oz. of gold, you’d make far more on silver, since the current ratio is about 53:1.
But I think silver might exceed the historic ratio, since that ratio was last seen nearly 100 years ago, except for briefly in 1980.
Over the last 100 years, two major things have happened to silver. First, silver was demonetized, meaning, no nations on earth are using silver as money, or as a circulating currency today. Second, since the age of electronics began at the end of WWII, developed nations have been consuming about 6/10ths of an oz. of silver per person, per year, which has consumed most of the silver ever mined in history.
In contrast, only 5% of the annual gold market production is consumed by industry.
So if the silver to gold ratio just returns to historic norms, you’d make over 3 times as much in silver than in gold.
But silver should dramatically outperform gold as the bull market in precious metals continues.
How do I keep my purchases and sales anonymous? After all, I don’t want the government to know what I’m doing.
Well, your bank account will keep a record of you taking out cash, but they won’t know what you spend it on. They also track cash deposits, but won’t know the source.
But if you try to sell precious metals for US money, and end up depositing that cash into the bank, and if you want to borrow money to buy a home, you will likely have to declare the source of that cash, by providing the sales receipt of the bullion you sold. We have had quite a few people run into that problem already.
It may be illegal for me to even tell you what the exact reporting requirements on cash transactions are! However, it might not yet be illegal for me to direct you to the government website itself!
If you would like to look up the reporting limit requirements for cash, you can find it at fincen.gov, specifically, click on “Statutes and Regulations”. Posted clearly, there is a daily transaction limit of $10,000 on physical paper cash, among other regulations.
It’s sad that in the land of the free and the home of the brave that the government expects businesses to work for the government and fill out paperwork for free, and only under threat of punishment for non-compliance. Sounds a bit like slavery to me.
There is no reporting by us if you do a wire transfer, and thus, no limit to what you can buy via wire transfers.
What is the tax on gold and silver?
There is sales tax in California if you buy less than $1500; over that, there is no tax.
But people are often wondering if they will have to pay taxes when they sell it. And this question is often asked right on the heels of the previous question about reporting requirements.
Well, in the land of the free today, it is also illegal for me to give tax advice since I’m not a licensed tax attorney. It is also illegal for Suze Orman; but it does not seem to stop her.
So let me play it on the safe side, and talk philosophy, instead of taxes. So, I’ll tell you about a debate I learned in college. The question is, “If a tree falls in the forest, and if nobody is around to hear it, does it make a sound?” And more importantly, is that a taxable event, and does the tree have to file a 1040? Well, of course not, trees don’t have filing requirements.
In other nations, they’d just shoot the tree. Here in America, we are still allowed (in some places) to turn the fallen tree into firewood, but then you have to declare the “income” of wood if you want to be insanely and overly compliant with how they apply tax laws. But if you didn’t tell the government that you turned a tree into firewood, how would they know that for income purposes?
Why can’t I buy gold or silver at spot, instead of over spot?
Almost all of the products that we sell have a manufacturing cost to them. We typically have to buy raw bullion over spot, and then pay an additional cost to manufacture it into coins or bars. We sell 20 times more bullion to the public than we buy, in recent weeks!
So, you can buy bullion under spot if you spend the money to start up a coin shop, and wait for gold and silver to be sold to you. But customers only sell us 1/20th of the metals that we are selling.
All markets have a bid and an ask. The bid is the price a potential buyer is bidding. The ask is the price that a seller is asking.
Those bids and asks are from the large COMEX paper market that trade in lots of 5000 oz. of silver, and rarely result in any real delivery, because most of the buyers are only buying to gamble on short term price changes, and pay only a small deposit.
As a real shop, with real silver, we have real expenses; rent, ads, workers, electricity, phone, internet, insurance. And all of that must be paid monthly, regardless of if we make any sales.
The physical market is also very tiny, with low volume, only about $2.5 billion per year. With 1% average profit after all expenses, that’s barely $25 million for all physical silver sellers, worldwide. With 4000 coin shops nationwide, if that $25 million were divided equally, that’s $6,250 profit per shop, per year, on silver sales. (We do a bit better than average, but still!)
We also have risks; default risk from our suppliers, theft risk from workers, theft risk from the public. Risks must be offset by potential profits.
We also have trading volatility risk; we might sell silver to someone early in the day, and later in the day, if the price moves up, we might end up buying back that silver from our wholesalers at a loss, and thus, losing money.
We also have inventory composition risk and losses: we must keep cash to run the shop, and cash loses value in terms of silver as silver goes up; the cash always buys less and less silver.
We also have replacement delay risk and loss. Cash can’t be used immediately to buy back silver, there is always a delay between when it can be deposited into the bank.
We also have cash deposit charges that range from 1/2 of 1% to 1% on cash, because we deposit high volumes of cash; the bank charges us this just for counting the cash.
We also have a risk that the silver that we re-order gets delayed, and then, we risk running out of inventory sooner. If that happens, we must raise prices to ration product availability. It does no good to have low prices if we are sold out.
I’ve said numerous times that there is only about $1-2 out of every $10,000 that is in the banking system that is going into silver on an annual basis. As that increases, it will cause enormous pressure on everyone in the trade: miners, concentrators, refiners, mints, dealers, and coin shops. My goal is to make sure that bullion is available, at some price, because when no bullion is available, that’s much worse; that’s what happens under communism, and price fixing.
Sometimes, we can negotiate lower prices for larger orders. But not always. It never hurts to ask.
Where do you think silver prices are going in the next 3-6 months?
Generally, I tend to think silver prices are too volatile, changing, and unpredictable to make any guesses for the short term. Nevertheless, my gut tells me that silver is headed to about $35/oz. within this time frame, by July, 2011. That guess is based on my observation of the Fibonacci number sequence for silver’s peak prices in this bull market. Silver started at around $5/oz. Then, the successive peak prices were right on the Fibonacci sequence, 8, 13, 21, and the next number is 34. Each number is the additive of the prior two, which shows an average increase of about 66% over the prior peak. I would not bet on that kind of prediction though, and I would not buy any options on that either. The reason is that it might also take as long as 2 years to get there, because we have a manipulated market, whereby 99% of silver buyers are content with paper silver and don’t know they are being deceived, primarily by JP Morgan.
Also, with options, price increases are built in. Generally, since silver is expected to go up by about 30% per year, since that’s the trend, silver has to do significantly better than that in order for you to make money on options, so they are generally a waste of money. Just buy physical silver, and earn the 30% or more per year continually over the next few decades. Remember, the world cannot make 30% per year on paper phantom silver that does not exist — so all of that will default during this bull market, and you have to get out of that kind of bad silver before this bull market finishes if you ever hope to have any major gains at all. Also the options market is very illiquid and very small beyond 6 months away, so the entire paper game seems quite ridiculous to me.
Think of it like this. Let’s say there were two silver shops right next door to each other. Mine, and the “paper market” next door. You go into my shop, see all the bullion, and see my prices. Then, you go next door to the paper shop, and they have no bullion available, only a bunch of traders standing around holding paper tickets. You read up on their open interest, and you can instantly see that they are bankrupt, having sold up to 800 million ounces while their published warehouse inventories are a mere 50 million ounces. You see that they only offer silver for delivery “in a month” and the delivery day can be any day in the entire month. And, the only product you can buy, and the minimum order size is 5 large 1000 oz. bars that nearly nobody wants. Where would you shop? Hint, not even our largest wholesaler shops there; instead, they buy directly from refiners, or mints, as do we. Please note, not all refiners are honorable or have good products. Be careful out there.
Where do you think silver prices are going in the next year then?
On average, over the last ten years of this bull market in precious metals, silver has gone from a low of $4.15/oz in the spring of 2003, to $29 or so last week. Over seven years, that’s an average of 32% per year. But I think silver will tend to go up in greater percentage numbers per year, on average, as the bull market continues. The trouble with averages, is that they can be misleading. In 2008, silver hit $21.50 or so, and bottomed around $9.50 or so in 2009. That’s a loss of 55% in one year, which led many to speculate that silver prices had “crashed” and that the bull market was over. Of course, such “advisors” did not tell anyone to buy silver at $9.50 in 2009 either.