Saturday, May 7, 2011

Silverfinger - The True Story Of Nelson Bunker Hunt

Over 30 years ago, a man by the name of Nelson Bunker Hunt hatched the perfect plan: protect his inherited wealth (which then was one of the largest legacy fortunes in the world) from the inflationary destruction of "paper" assets by converting his assets into silver, and in the process cover the silver market, and send the price of silver to an inflation adjusted price of over $140 (nearly three times higher than the nearly record nominal silver price hit last week). Understandably, Hunt's name has appeared very often in the popular media in recent months, since after all it was the "Hunt" price that the May 1 silver smackdown (which will most certainly never be investigated) that sent silver from $48 to $42 in seconds that was being protected by the paper cartel. Yet just who is Nelson Bunker Hunt? And how did he cover the silver market when did? What exactly did he do, and is someone doing a comparable silver cornering right now? And, most importantly, why? The answers, all of which are provided in this September 1980 Playboy article reprint, will surprise and astound many, primarily due to the myriad parallels between the world of the 1970s and our own. What follows is one man's attempt to escape from the "system."

From "Silverfinger"

IN THE SUMMER of 1979, an invisible hand reached out from an island in the Atlantic and quietly began tightening its grip on the world’s supply of silver. The fingers of that hand extended to London, New York, Dallas, Zurich and Jidda. But the only visible clue to its existence was a newly formed Bermuda shell corporation called International Metals Investment Company Ltd. That dull sounding little trading company was not just another offshore tax scam but the operating front for a secret partnership seemingly capable of controlling the world price and supply of silver.

Full article (pdf)

Silver Finger by Harry Hurt III - September Issue 1980 - PlayboySilver Finger by Harry Hurt III - September Issue 1980 - Playboy

Two super simple steps to long-term financial security

Believe it or not, financial planning is so simple it's ludicrous…

Step 1: How To Build Wealth:

Spend less than you earn and invest the savings wisely.

Rinse and repeat until step 2…

Step 2: How To Have Enough To Retire:

Spend less than your investment income and invest the savings wisely.

That's it. Seriously!

You will enjoy massive financial success if you just run your life from start to finish according to these two sentences. You don't have to be a financial genius and you don't have to learn tons of technical mumbo jumbo. Anyone can do it.

It's so simple it's a joke… except for one minor, little detail…

Why So Few Succeed

The obvious question is, "If it is so simple to achieve financial security then how come almost nobody succeeds?"

I'm glad you asked :-)

There are actually many reasons. I will start the conversation with a few obvious choices then I will let you finish it by adding any ideas I overlooked in the comments below…

  1. Procrastination: Most people wait until tomorrow to start saving and building wealth. The problem is eventually there aren't enough tomorrows left to do the job.
  2. Lack Of Discipline: Thomas Huxley said it best, "Perhaps the most valuable result of all education is the ability to make yourself do the the thing you have to do, when it ought to be done, whether you like it or not; it is the first lesson that ought to be learned; and however early a man's training begins, it is probably the last lesson that he learns thoroughly."
  3. Short-Term Perspective: The essence of spending less than you earn is delayed gratification. You must view your goals from a 20-30 year perspective so that saving isn't a sacrifice. Instead, it is remembering what you truly want (freedom and independence instead of more stuff) and acknowledging it daily with proper action.
  4. No Perspective: Some people simply don't connect their daily spending habits to long-term implications. Retirement is so far in the future it equates to Neverland. They live unconsciously and spend, spend, spend until there is more month than money. They're just not paying attention.
  5. Ignorance: They just don't know any better.
  6. Can't Invest Wisely: This is the only part of the equation that requires financial skill. It is not complex. There are simple solutions that work. However, this is the one excuse that legitimately takes fortunes down when everything else is done correctly.

Two Things To Notice…

There are two things you should notice from the above list.

  1. All the obstacles except for the the last item on the list (investment skill) are caused by your own mental blocks. More importantly, you have the power to overcome these obstacles since they are inside you. In other words, anyone can build wealth if you just develop the essential personal skills. It is not rocket science.
  2. Even though building wealth is a financial goal notice how only one of the 6 causes listed above is financially related! I'm always amazed how achieving financial goals has very little to do with finance and everything to do with you.

As Steven Pressfield wisely wrote, "It may be that the human race is not ready for freedom. The air of liberty may be too rarified for us to breathe… The paradox seems to be, as Socrates demonstrated long ago, that the truly free individual is free only to the extent of his own self-mastery. While those who will not govern themselves are condemned to find masters to govern over them."

In other words, freedom is within you. You have the power to choose it (including financial freedom).

How The Financial Services Industry Has Failed

Most studies show 5% or less of working Americans retire with anything remotely close to financial security.

Applying the previous quote, it means 95% are governed by masters other than themselves.

The solution to the problem is simple. However, implementing the solution has proven elusive to the financial services industry because the cause has nothing to do with "financial" and everything to do with human nature.

The problem is you've got a financial services industry trained to sell investment products when the only service most people need is accountability, support and coaching to do the right thing.

The technical aspects of implementing a financial plan are beyond simple. Anyone who can fog a mirror can get adequate diversification at low cost using ETF's or mutual funds. You don't need an "expert" to do the job. The prescription for a conventional, diversified portfolio is well-documented and requires no serious expertise. You can learn everything necessary to implement the investment side of the wealth building equation in a few hours or less.

People are failing financially not because of financial reasons… they are failing for no other reason than simply because they aren't doing what they know needs to be done.

The Conundrum

Think about it…

People are turning to financial experts for financial guidance. They want help in resolving their financial challenges.

The experts are selling them investment products as the solution.

Unfortunately, investment products are the easiest part of the equation. Nobody needs an expert for that. What they need is an expert for the more complicated, personal stuff that is truly keeping them from building wealth.

In other words, they need help building wealth in the first place, but what they get is a group of financial experts who are only in the business of managing the wealth they already built.

If you don't believe this is true just try getting the attention of a high quality financial planner when you have nothing to invest.

The person with nothing to invest needs the most help; yet, the financial planning profession isn't designed to serve that person. They are in the business of selling investment products.

Do you see the confusion?

The primary obstacles to wealth are not financially caused. People seek expert guidance. The experts sell them financial solutions.

It's a mess. It doesn't work.

That's why I got in the money coaching business. People need personal solutions… not investment solutions.

As I said in the opening, the financial planning part is simple – spend less than you earn and invest the savings wisely. The problem isn't in knowing what to do. The problem is getting it done.

It is time people got the help they really needed.

Life After the Silver Mania: Where Silver Prices Go From Here

With the demise of the "silver mania" we've seen in the past week, I thought it was time to take a closer look at where silver prices will likely go from here.

I first recommended silver to Money Morning readers back in September -- with silver trading at $19 and change - and along with that "Buy" call to readers I gave a $50 price target.

Back in mid-April, when we had our roundtable conversation on silver, this "other" precious metal had been trading in the $42 to $43-per-ounce range.

At the time of this "roundtable," I felt strongly that silver would see the mid $30s before it traded into the mid $50s. It appears I was partially correct: Silver ran up to $50.22 in the spot market, hitting my first target of $50 per ounce - before dropping 35% in the next week.

That kind of price action is almost a textbook example of a silver mania.

Life After the Silver Mania

As of late yesterday (Thursday), silver was trading in the mid $30s, with the iShares Silver Trust (NYSE:SLV) having experienced more share volume than the SPDR S&P 500 ETF (NYSE: SPY) did in yesterday's trading.

I wish I had good near-term news for the silver bulls, but I am now expecting silver to continue to grind lower, with expectations of seeing it in the upper $20s.

I have no idea where silver will finally bottom this time. But I can't help but recall when crude oil ran up to $50 per barrel for the first time: Once it had a chance to reset, it returned to new highs significantly higher than its previous highs.

I believe that silver will act similarly - once the carnage of this blow-off top is in the history books.

It will take months to repair the damage done to the charts. But in the future, I expect to see silver trading at $75 per ounce - and without this crazy volatility.

It just might take a year or two to get there. However, if the U.S. Federal Reserve's "QE3" is announced, you can expect that silver will be setting new highs before it is over.

When I recommended this precious metal back in September, I outlined a forecast for silver: Indeed, I wrote that "silver is trading at just under $20 an ounce right now. I think it could hit $50 an ounce by the 2012 presidential election, which would represent a 150% move from here."

Silver Mania Scenarios

Since we achieved the $50 dollar target so quickly, it's not a surprise to me that we've pulled back to the low $30s just as quickly. Let's move the new projected high-water marker out to $75 per ounce before the next election in 2012. That gives it about 18 months to reach its target.

There's also one other wildcard in the silver mania saga.

I'm talking about Greece.

In the latest development in the Eurozone debt crisis, reports circulated today (Friday) that Greece might pull out of the Eurozone bloc. Greece has denied this.

However, if Greece does leave the European euro block - or is kicked out - I would not be surprised if the $75-an-ounce target price that I've forecasted here is reached by Christmas.

You see, if the euro is shown to be nothing more than pieces of paper with pictures on it, investors will freak out.

In the last eight months, there have been at least 10 margin changes at the Chicago Mercantile Exchange (Nasdaq: CME) - and five of those have happened in the last 10 trading days. Since November, the level of leverage allowed to a speculator went from 28-to-1 per futures contract in maintenance margin levels in early November to 8-to-1 currently.

In the next few weeks, you want to watch the levels of silver available in the bonded warehouses, available for prompt delivery. If the amount of silver available for delivery continues to drop, things could get interesting again this summer. By "interesting," I mean a steady climb back to the mid $40s to mid-$50s.

At this point in the curve, the "change" in available supply in the bonded warehouses is a better indicator of the future direction of silver than speculative interest. That is, a drop in available product in the bonded warehouses can drive the price of silver back up.

I will be focused on available supply: This could have been a giant "bear raid," with no new deposits in the warehouses arriving behind it. If so, silver could stay volatile for a while.

Another Look at Silver Wheaton

Now, Money Morning Executive Editor Bill Patalon specifically asked me about Silver Wheaton Corp. (NYSE: SLW) - the topic of my "Buy, Sell or Hold" column back on Oct. 10 (a "Buy" that I reiterated during the roundtable discussion last month. For the original column, see the link in the "related stories" list that follows this essay).

The stock closed at $26.63 on the Friday before that article's Monday morning publication. Silver Wheaton shares subsequently ran up as high as $47.60 - a nice run for those who heeded my "Buy" call.

The shares have since retrenched, and closed yesterday at $35.15. They were down 5% yesterday alone (though they remain well above my recommended price).

Given what's occurred in the silver market over the past week, I am now waiting until I see Silver Wheaton's earnings before I reiterate - or change - my call on this stock.

I would not be shocked if the company hedged some production. There was crazy volume lately - enough, in fact, to enable a commercial venture to sell into it.

I am going to listen to Silver Wheaton's management during the company's earnings call on Monday, and will report back to you shortly thereafter.

So make sure to tune into Money Morning early next week, when I promise to provide an update on the whole silver mania in general, and on Silver Wheaton specifically.

How Rising Food Prices Will Affect You & 6 Ways to Prepare

The rising price of gas isn’t the only necessity that’s been gouging our wallets recently. The price of food is now the highest it has been since 1974, and the world is starting to face what could turn into one of the worst food crises in decades.

While America has typically been the land of plenty, we’ll start to feel the burden along with other citizens all over the world. Though the situation looks bleak, there are things we can do to help.

But first, let’s look at what’s caused the increase in food prices to begin with.

Causes of Food Price Increases

1. La Niña and Weather-related Issues
A variety of weather problems have taken place around the world and have caused significant damage to crops:

  • Australia and Brazil have experienced some of their worst floods on record.
  • Russia and China experienced their worst drought in over 100 years. In the U.S., Texas and the Midwest are also experiencing the worst drought in almost 50 years. As a result, many countries that have typically been major exporters of food products have had to import food this year.
  • This is also the first time in years that Florida, Texas, and Mexico were all hit by a frost at the same time. These events have decimated the supply of wheat, corn, and many types of produce.
  • As the supplies of wheat have decreased, ranchers have had to respond by reducing their supply of cattle, which has caused an increase in the price of beef.

2. Use of Biofuels
A lot of corn is now being used to produce ethanol. This has further reduced the supply of corn, which is a key input in a variety of food products and is also an important food source for farm animals.

3. Increases in the Price of Oil
Oil is used in the processing of many food products. In additional, oil is used in the transportation of food. As a result, with oil price increases, the price of food increases as well.

4. Increase in Human Population
The world population continues to grow, and with that comes increased demand of various food products. As a result, this rising demand directly leads to higher prices.

5. Devaluation of the Dollar or Other World Securities
As the Federal Reserve continues to print money to improve the economy and finance its debt,inflation has taken a stranglehold and led to increased prices across the board. The devaluation of the U.S. dollar is especially harmful since many commodities are priced in U.S. dollars.

How Rising Food Prices Affect People Around the World

The increases in food prices have already taken effect and are not likely to improve in the near future. As of February 2011, the price of wheat has increased 83% and the price of corn has doubled since one year earlier. As feed becomes more expensive, the cost of beef products is expected to increase by almost 40%, leading to much higher prices for any meat eaters out there. With unemployment remaining at very high levels, these prices will serve to further put a dent in our wallets.

The situation is even more dire in poorer countries as many of their citizens spend about 80% of their income on basic food products. As a result, food price increases can be devastating to people in these countries, with an additional 44 million people already having been pushed into poverty. The food crisis has inspired riots in countries such as Egypt, Haiti, Tunisia, and Algeria.

fruits vegetables food prices

What We Can Do in Response to the Food Crisis

The food crisis may seem very depressing, but it is not the end of the world. There are a variety of things that we can do to respond to these events:

  1. Stock up on dry foods. It may be a good idea to purchase a lot of dry, nonperishable foods now, before prices increase significantly. Reducing food waste will also be essential to getting the most bang for your buck.
  2. Grow your own food. If you live in an area where you can grow your own food or raise small game, you may want to consider doing so. But even if you live in the city or the suburbs, you can still benefit from smaller efforts like growing a home garden. This will not only save you money, but will also contribute to a much healthier diet.
  3. Purchase futures. This may be a good time to invest in agricultural futures such as wheat and beef. As these crops increase in price, the value of these securities will inevitably follow.
  4. Hedge against inflation. Consider investing in TIPS or precious metals like gold and silver. Since these investments are protected against inflation, you will at least be able to partially offset the increase in food prices.
  5. Build your emergency fund. One of the most surefire ways to plan ahead is to build up your emergency fund. Start saving more now so that if you ever need to dig deeper into your savings, you won’t have to take on any debt. The last thing you want is to have to make major sacrifices that will hurt the quality of life for you and your family.
  6. Sales and coupons. Be aware of what foods are on sale when you shop so that you are not spending unnecessary money. Moreover, take advantage of those discount grocery coupons in your newspaper or coupon magazine to save a ton of money while shopping. Better yet, by utilizing extreme couponing, you can combine the two worlds of sales and couponing and save huge percentages off retail prices.

Final Word

Increases in food prices will continue to have a tremendous impact on our economy and our lives as consumers. While it is impossible to project just how long these increases will last and how deep of an effect they will have on the economy, we need to be prepared to protect ourselves against these heightened price levels.

Do you have any additional tips or strategies for fighting off higher food prices?

What Would Happen If China Sells U.S. Treasurys?

Neither the dollar nor the U.S. economy would collapse if China were to dump Treasury securities, since the Fed owns more of them, and also because the Chinese need to sock dollars somewhere, according to Fundmastery blogger Kurt Brouwer.

Oil Consumption Demand Destruction vs. Speculative Futures Positions

Commodities got smacked hard across the board on Thursday with silver and crude leading the way. Silver is now down close to 30% from the peak, and crude is down close to 13% from the peak four days ago. The rest of this post deals specifically with crude.

West Texas Intermediate Daily Chart

click on chart for sharper image

Discounting the civil war in Libya and Mideast disruption concerns in general, there is no fundamental reason for crude to be above $100.

Oil Consumption Demand Destruction

My friend Tim Wallace follows petroleum distillates usage closely. He is concerned over what demand destruction says about the economy. Tim writes ...

Hello Mish

Attached please find some charts on petroleum distillates demand. These are based off peak demand, which for the USA was Feb '07 to Jan '08. Those are the highest months of demand in our history. Demand has never approached those numbers again.

As you can see on the first chart, titled "Year-Over-Year vs. Peak", the months of January through May are measured against the peak years for 2008 to 2011. Note that except for April, this year is by far the biggest drop off peak in this depression. This May has begun with a significant drop off last year after a big rise off 2009.

Last May more than likely reflects the rebound on "shovel ready" paving projects that ate up a lot of distillates products. This May has begun with the first week showing scary down numbers! Needless to say we need to look again at the rest of the month, but this is the worst week of the year to date.

The second chart shows each month by year off the peak period. May is off to a rocky start. It will be very interesting to see how this May ends up.

The third chart shows how the historic petroleum distillates demand has trended since the early '90's. I learned back in the '70's in my days at Exxon that any demand growth of less than 0.8% showed a weak economy, anything less than 0.5% was recessionary as you can see in the recession of 2001/2002 on the chart.

Look at the numbers now and tell me where we are headed.

Oil Consumption Year-Over-Year vs. Peak

click on chart for sharper image

Oil Consumption Drop From Peak Usage

click on chart for sharper image

Oil Consumption Historical Growth vs. Peak

click on chart for sharper image

2010 Rebound in Oil Usage Collapses

For all the brouhaha over the "recovery" one cannot see it in oil usage. However, you can see it at the pump!

You can also see it in oil futures speculation.

Oil Futures Speculation

Here is a chart of oil futures Commitment of Traders courtesy ofSentimenTrader.

click on chart for sharper image

Annotations in blue on the chart are mine. Jason Goepfert at SentimenTrader was kind enough to allow me to post the chart.

Volume Spike on Mideast Disruption

Note that futures volume went through the roof earlier this year as shown by the blue oval.

For those not familiar with futures, for every long there is a short. Big Speculators (typically hedge funds, pension plans, etc), are long record numbers of futures.

The commercial traders have taken the other side of the bet. Rules of the game are simple: someone has to take the other side of the trade because for every long there is a short.

The commercial traders may be producers willing to sell into the spike or they may be market makers.

Expect Trade to Unwind

One certainly cannot use this information as a timing device, but it is interesting to see everyone plow into this "sure thing" trade right as demand has collapsed.

Unwinding this trade can easily collapse the price of oil and send the US dollar higher, and I think it will.

For more on the US dollar and currencies in general, please seeTrichet Backs off Rate Hikes; US Dollar Up Sharply; Currency Fundamentals

Mike "Mish" Shedlock

The Greek Debt Crisis Escalates: Is Greece Threatening To Leave The Euro?

Is he Greek debt crisis about to explode out of control? According to Der Spiegel, the government of Greece is considering leaving the Euro and reestablishing its own currency. If that happened, it would throw global financial markets into chaos and it might mean the end of the euro as a pan-European currency. But the Greek government has to do something about all of these debts. At this point Greece is literally drowning in debt. The yield on 10-year Greek bonds has now reached an astounding 15.51%. There is no way that is sustainable even for the short-term. Greece is rapidly going bankrupt. Even with absolutely brutal austerity measures in place, the debt just continues to explode. There are protests against the government almost daily and Greece is in a state of chaos. Unfortunately, because Greece is part of the euro they can't just start printing lots of money as a way to get out of this crisis. Now there are persistent rumors that Greece really is thinking about leaving the euro, and that could potentially mean big trouble for the world financial system.

It was a new article in Der Spiegel that brought these rumors to the forefront again. Der Spiegel says that it possesses secret Greek government documents that discuss plans to leave the euro. Der Spiegel also claims that a secret crisis meeting was held in Luxembourg on Friday night to discuss this crisis.

The following is a brief excerpt from the Der Spiegel article that caused the financial community in Europe to be in such an uproar today....

"The debt crisis in Greece has taken on a dramatic new twist. Sources with information about the government's actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone. The common currency area's finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night."

So was there such a meeting in Luxembourg on Friday night?

Well, it turns out that there was a meeting of a small group of European finance ministers. But according to German government spokesman Steffen Seibert, this meeting was planned well in advance and had nothing to do with Greece leaving the euro....

"There is a meeting of some finance ministers that has long been planned. Greece exiting the Eurozone is not on the agenda of that meeting, and it has never been."

So is Greece actually thinking about leaving the euro? All over Europe this notion is being denied.

Perhaps the strongest denial was issued by the Greek Finance Ministry....

"The report on an imminent Greek exit from the eurozone, as well as being untrue, has been written with incomprehensible levity despite the fact that this has been repeatedly denied by the Greek government, and the governments of other EU member states."

What was probably being discussed at this meeting of European finance ministers is a restructuring of Greek debt. This is something that Germany has apparently wanted for quite some time according to a recent article posted on Business Insider....

For weeks, German officials have been hinting that they want a Greek restructuring to happen. German economic advisor Lars Feld recently said that the restructuring should happen "sooner than later." He's previously also said "restructuring is the only road to take."

So what would a restructuring of this debt look like? A recent article on CNBC gives us some clues....

More importantly, tonight's finance ministers meeting might lay the groundwork for "extending the maturities" on those loans — giving Athens a little more oxygen until it probably ends up restructuring its $470 billion existing debt by either extending maturities or exchanging Greek bonds, at a discount, for EU-guaranteed bonds, Brady Bond-style from the 1980s.

What Germany does not want is for Greece to even think about leaving the euro. According to the article on Der Spiegel, German Finance Minister Wolfgang Schäuble is ready to play hardball with the Greeks. Der Spiegel says that a report has been prepared that would lay out for the Greeks the severe consequences of leaving the euro....

"It would lead to a considerable devaluation of the new (Greek) domestic currency against the euro," the paper states. According to German Finance Ministry estimates, the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt. Schäuble's staff have calculated that Greece's national deficit would rise to 200 percent of gross domestic product after such a devaluation. "A debt restructuring would be inevitable," his experts warn in the paper. In other words: Greece would go bankrupt.

Greece is really in a tough position. They are going to go bankrupt if they stay with the euro and they are going to go bankrupt if they leave the euro.

Meanwhile, the anti-government protests continue. The Greek people are not happy. The Greek economy is coming apart like a 20 dollar suit. Greece could end up being the spark that sets off a massive financial panic in Europe.

As I have written about previously, the European debt crisis is on the verge of spinning wildly out of control. It is not just Greece that is facing a horrific debt crisis. The financial problems in Europe literally span the entire continent.

A lot of Americans are obsessed with the death of the U.S. dollar, but the truth is that there is a strong possibility that the euro could end up collapsing before the dollar does.

Keep an eye on Europe. The European debt crisis could plunge the entire global financial system into chaos at any time. Things are not nearly as stable as they seem.

The Economist - 7 May 2011

The Economist - 7 May 2011
PDF | 104 pages | English | 56.1 MB

The Economist is a global weekly magazine written for those who share an uncommon interest in being well and broadly informed. Each issue explores the close links between domestic and international issues, business, politics, finance, current affairs, science, technology and the arts.

Why Silver Prices Dropped 30% in 3 Days

If you’ve been watching the silver market or have read anything we’ve published in the last week, then you’d know that silver is down over 30% in less than a week. What continues to push prices down? What’s happening to the silver market?

On Wednesday May 4th, the Chicago Mercantile Exchange, which operates the Comex division of the New York Mercantile Exchange, announced yet again that at the end of the business day on Thursday and Monday there would be two separate margin increases. This is the fourth announcement of its kind in thecourse of two weeks.

On Thursday, the “initial” margin required to open new speculative positions in the main 5,000-ounce silver-futures contracts will rise to $18,900 from $16,200, according to a notice released by the exchange.

Additionally, the “maintenance” margin forexiting speculative positions, as well as both initial and maintenance margins for hedger positions, will rise to $14,000 from $12,000. On Monday at the end of the business day, the initial speculative margin will rise again to $21,600.

The speculativemaintenance margin, as well as margins for hedgers, will againincrease to $16,000. To view the CME’s full statement click here.

In summary, this will require an investor with a $100,000minimum margin position to raise an additional $33,000 in capital tomaintain his position. This is the equivalent of a 33% rise in capitalrequired. Over the past two weeks the CME group has raised themargin requirements by 84%.

This means that if an investor has had$100,000 invested in silver contracts, he would now be required tohave $184,000 to hold those same contracts! So an investor has twooptions. First, he can find a way to raise the capital to stay in theposition or second, he can simply sell some of his position. In eithercase, you will at least see a slowing in the market and potentially afurther decline.

On a positive note, we are still seeing good long-term trends.We are continuing to see central banks around the world add gold totheir reserves. According to the IMF, Mexico bought 93.3 metric tonssince January, adding to holdings of about 6.9 tons. Back in Europe,Russia increased its reserves by 18.8 tons to 811.1 tons in March and Thailand also expanded its assets by 9.3 tons to 108.9 tons inthe same month.

This information points to emerging market’s desire to diversifyaway from the dollar in their reserves. With the dollar continuing tofall this week despite falling commodity prices, it is becomingincreasingly evident that the US does not currently have the resolveto puts its fiscal house in order. Until it does we will continue to seethe dollar decline in value and see long-term prospects for preciousmetals.

Is Home Ownership Overrated?

Getty Images

For generations of Americans, It's a Wonderful Life pretty much sums up the benefits of home ownership. George Bailey takes over his father's savings and loan in Bedford Falls, builds Bailey Park, an idyllic affordable-housing development, and issues mortgages. In the alternative universe where George never lived, there's no savings and loan or Bailey Park; the townspeople have fallen into debauchery as tenants of the usurious Henry Potter; and quaint Bedford Falls, now renamed Pottersville, is home to sleazy nightclubs and pawnshops.

Director Frank Capra's vision has dominated public policy ever since. Republicans and Democrats have competed to extol home ownership as a sound investment and source of moral virtue, stability and community.

Growing up in the small-town Midwest of the 1950s and '60s, I never questioned those precepts. In my family, mortgage payments were a sacred obligation. The idea of "throwing away money on rent," not to mention being beholden to the whims of a landlord, seemed anathema. The few neighborhoods where people rented were indeed shabby. After I moved to New York City, it took a decade of savings, but as soon as I had a down payment, I bought an apartment.

In the wake of the real estate bubble and collapse, all of these assumptions have been called into question—and in some cases, are under attack. Decades of policies designed to foster home ownership are being reexamined, from taxpayer support for the giant mortgage agencies to the tax deduction for mortgage interest. In light of this sea change, I decided to reapproach the sacred cow of home ownership with an open mind. Does it make sense financially? Does it promote social benefits?

In some cities, the past decade has been brutal for homeowners. In Atlanta average home prices this year are the same as they were in 2000—11 years ago—according to the Case-Shiller home-price index. Nationally, the rate of appreciation in housing seems likely to return to its long-term historical average, which is only slightly higher than the rate of inflation. Purely as an investment, residential real estate is never going to outperform the stock market or many other asset classes.

Nonetheless, home ownership has historically yielded other financial benefits. "Over 75 years the mortgage system is how the middle and lower-middle class accumulated capital," John Quigley, a professor of economics at the University of California at Berkeley, told me. "It was a system of forced savings rather than an investment per se. It was never intended to triple your money in three years."

For the most part, the system worked as intended, enabling Americans to accumulate wealth, put their children though college and retire comfortably. Returns were enhanced by the leverage provided by the mortgage—as long as housing prices rose. But as with any asset, leverage can also magnify losses. No one can borrow 80 percent of the price of a stock, yet that amount of leverage—and even more—became routine with real estate. In the wake of the housing collapse, that notion is being reexamined. "People have not ascribed enough of a risk premium to the leverage," says Christopher Mayer, professor of real estate at Columbia Business School.

Today, the answer to the question of whether a home is a good investment may well be "not always," according to Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA. Policies that increased home ownership created what Gabriel calls "transitory owners," who ended up suffering defaults, evictions, foreclosures and other financial disruptions. "Policy that creates only temporary home ownership is bad policy," Gabriel adds.

If the financial benefits of home ownership seem elusive in some circumstances, the social benefits are even more so. When it comes to promoting stability and other social benefits, nearly every economist I interviewed agreed that it's difficult if not impossible to separate home ownership from other variables that correlate with desirable environments, like affluence and levels of education.

The home ownership rate in France is 57 percent; in Germany, 46 percent; and in Switzerland, just 37 percent. By comparison, it's 67 percent in the U.S. Housing is only one variable, of course, but no one would argue that communities in France or Germany are less stable, less cohesive or more unkempt than those in the U.S. Zurich and other cities in pristine Switzerland are a far cry from Pottersville.

Once you question the notion that everyone should own a home, the policy implications are significant. As Mayer says, "Too much of current policy seems aimed at promoting consumption of housing—ever larger and more lavish homes—rather than ownership itself." All the economists I interviewed criticized the mortgage deduction as needlessly benefiting affluent taxpayers (most low-income taxpayers don't itemize, so they get no benefit). Most agreed it should be phased out, perhaps over 15 to 20 years to minimize the effect on housing prices.

But they also agreed that there's a place for some government support for home ownership, primarily as a way to promote savings. Warren Buffett, who has lived for more than 50 years in a home that cost him $31,500, made a resonant comment on this issue in his latest letter to shareholders of Berkshire Hathaway: "Our country's social goal should not be to put families into the house of their dreams, but rather, to put them into a house they can afford."

The Silver Bull: Despite This Week's Sell-Off, We See Higher Prices Ahead

After watching silver's wild and relentless climb since last August, some high-profile investors have started taking profits. That's caused silver prices to correct about 20%, down from $48.70 to $39.05 intraday yesterday (Wednesday).

Does that mean the silver bull market has peaked?

In a word: No.

Don't misunderstand: We could still see additional declines in the price of silver. After that, however, we can bank on the silver bull resuming for the very simple reason that we can identify the three specific factors that have caused silver prices to fall. And all three of those factors are as rational as they are finite.

Three Reasons the Silver Bull Stumbled

As Money Morning readers are well aware, I'm as much of a silver bull as anyone. But when I look at the 20% decline silver prices have experienced in the past several days, I can attribute the drop to the following three reasons:

  • Silver prices rose a long way in a very short time, making them vulnerable to downward pressure from other catalysts.
  • The exchange on which silver trades made it tougher for traders by boosting margin requirements several times starting last week.
  • And several high-profile investors have reportedly sold silver, exacerbating investor nervousness.

Let's look at each of the three.

Silver Prices: A Long Run in a Short Time

I'm more aware of this than anyone. I put a "Strong Buy" on silver for our readers back in late August when the white metal was trading at $19.40 an ounce. It was at $48.70 on Friday, meaning that investors who took this advice pocketed a profit of as much as 150% in just eight months.

Even after the sell-off, those readers are sitting on a double.

In a follow-up article that appeared last week, I warned that a near-term correction was possible, but noted that the long-term outlook for silver was highly bullish.

Whenever a financial asset makes such a stunning advance in such a short time, it is much more vulnerable to a correction or consolidation. So this isn't a surprise to me, and it isn't a worry.

Comex Raises Silver Margins - Again

The Comex division of the New York Mercantile Exchange - where silver futures are traded [(both of which are part of the CME Group Inc. (Nasdaq: (CME)] - on Monday decided to raise the margin requirements on silver by 12% (the increase went into effect the next day). That came on the heels of two previous increases - of 9% and 10%, respectively - that were implemented last week.

Last week's increases in the margin requirements for silver failed to quell the exuberant trading. But Tuesday's 12% increase may have done it.

You see, the precious metal gold is purchased and held predominantly by big institutional investors, investment funds and even central banks. But silver is actually dominated by individual investors. And when the exchange increased the requirements for trading silver-futures contracts, a number of those individual investors were forced to liquidate their holdings. Yet something, perhaps even more significant, also took place recently.

Smart Money Takes Profits, Reinvests

In recent days, a number of high-profile silver investors have sold the metal - further unsettling already worried individual investors holding silver.

The fact that the "well-heeled" were exiting silver "put fears in people's minds," Adam Klopfenstein, a senior market strategist with Lind-Waldockin Chicago, told The Wall Street Journal reported late Tuesday that such well-known investors as George Soros and John Burbank have been selling off their gold and silver holdings recently. Those sales have contributed to the recent price declines for these precious metals, and could threaten the nine-month rally gold and silver have experienced.

And Soros and Burbank weren't alone in their decision to sell. Eric Sprott, of Canada's Sprott Asset Management LP - which has a total of $8.5 billion under management, and which is also one of the biggest silver bulls -cashed in $35 million of his own Sprott Physical Silver Trust ETF (NYSEArca: PSLV).

It's likely this news hit the silver market, too, exacerbating the sell-off. Why would Sprott do this? Remember, he's a seasoned and astute investor.

In an interview with Toronto's Globe and Mail newspaper, Sprott explained that he's still very bullish on silver. He told the business daily that "Every dollar of money that was raised by selling shares of [the Trust] ... was reinvested in silver or silver equities."

What's more, PSLV was trading at a 16% premium to its net asset value (NAV). So right near an interim top, Sprott recognized the relative value (versus his own silver ETF) in both physical silver and silver equities.

The trade by this savvy investor - cashing in the overvalued to reinvest in the undervalued - is a perfect example of how the smart money behaves, and why the contrarian investor often comes out on top.

Sprott also indicated that he's not ditching his trust, and that he continues to own 25% of PSLV, allocated between his various investment funds and charity.

The Silver Bull Lives

Even though such investors as Soros, Burbank, and Sprott have sold silver and silver-related holdings, a number of other experts continue to favor gold and silver. We mention gold because silver remains the "yellow metal's" crazy cousin.

Hedge-fund legend John A. Paulson - who solidified his place in investing lore by shorting the subprime mortgage market -continues to believe in gold and silver.

And Paulson is far from being the only one. In a column published just yesterday, for example, Brett Arends, who writes for both MarketWatchand The Journal, made a highly compelling case that gold has yet to top out - and could actually " go vertical" from here. Arends made a compelling case, as did some of the institutional players he spoke to.

If gold were to skyrocket, silver would move as well. Other investorshave made similar prognostications. So my advice is to watch silver closely for signs of a bottom before taking a position. And then buckle up and enjoy the (wild) ride.

If you're looking to emulate Eric Sprott, of Canada's Sprott Asset Management LP, consider the Global X Silver Miners Exchange-Traded Fund (NYSE: SIL). As Sprott himself recognized, silver shares, which normally offer good leverage on the metal's price, have underperformed silver in its run up since late last summer.

This ETF is a great way to obtain instant diversification amongst a group of 25 silver miners, refiners, and explorers. Total expenses only run 0.65% and volume is a respectable 1 million shares of daily trading.
Before you make your move, closely watch silver for signs of a bottom. Then buckle up and wait for liftoff.