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Silver Recyling - PLUS - The Great Gold Debate
(March 15, 2011) Early last week, gold reached another record high at $1444, while silver set new multi-decade price records as it continued its spectacular performance. By Friday, uncertainty caused both markets to fall, with silver experiencing a price swing of almost $2 on Friday 3/11.
Silver’s fix of $36.60 on March 5th was a new 31-year record, marking a ten-fold increase from the $3.58 silver fix on the same date in 1993. And retail investor interest is keeping pace with higher prices. US bullion sales of small convenient forms of what is often called the ‘poorman’s gold’ are strong. The US Mint’s production of silver Eagles has inexplicably dropped over the past few weeks, leading to premiums roughly a dollar higher than usual, while the Royal Canadian Mint is now about three weeks behind on their production of silver Maple Leafs. .999 silver medallions from private mints have also been squeezed, with subsequent delays.

On the other side of the US supply and demand equation, scrap silver continues to pour into refineries, causing delays in melting schedules as vast quantities of sterling flatware, hollowware, jewelry, commemorative medal sets, and obsolete coins are sold for ‘melt’ at today’s prices.

An amazing variety of silver items are coming into our store in Phoenix, their ultimate destination the melting pot. A customer in Florida sent us three sterling putter heads that he had had custom-made back in the day when silver was cheap and golf was his avocation. Local antique dealers continually bring us sterling household goods, flatware sets, trophies and small items that could not be retailed, but can be sold for fairly substantial sums for their silver value alone. Every day we buy at least one set of sterling tableware whose owner finally tired of polishing (one box holding an 18-place setting of sterling flatware brought over $4800). Not mention tea sets, serving trays, silver hip flasks from the days of Prohibition, baby cups, punch bowls, candelabras, bola ties from the Southwest, and lots of that clunky silver and turquoise jewelry that was all the rage during the 1970s.

But silver recycling doesn’t end there. Numismatic debris such as modern proof sets from African nations picturing long-deposed dictators are being torn from their lovely presentation cases and consigned for melt, joining tons of many of the more common commemorative coins that have been marketed over the past fifty years or so by the US mint and others the world over. Also, silver commemoratives from the Franklin Mint and other private mints, and lower-value antique US and world silver coins, are all meeting the same fate.

This vast recycling of silver is very reminiscent of the late 1970s and its surge in silver prices which peaked at over $40/ounce in January of 1980, when the Hunt brothers and their cohorts were attempting a corner in the white metal.

History tells us that effort came up short, and the debate continues as to exactly who were the villains and who were the victims in that era of hoarding, manipulating, and market interventions, both official and unofficial. Then, as now, higher silver prices brought long-forgotten treasures out of attics, basements, and safe deposit boxes, and these increased supplies meant that, ultimately, the Hunts and their cohorts were not going to be able to afford all the silver coming onto the market.

On the gold front, the US Mint has now released (and we have in stock) all sizes of gold Eagles dated 2011. Further, gold Buffaloes dated 2011 are being struck, and are scheduled to be released in March. We are currently taking orders for new Buffaloes for delivery later this month.

As our readers know, we are always drawn to articles in the financial and popular press when accompanied by big yellow pictures of gold bars. So the 3/14/11 Wall Street Journal caught our eye with a stack of gold ingots on the cover of its Wealth Adviser report, illustrating “The Case For and Against Gold.”

In this report, Janet Briaud, a certified financial planner at Briaud Financial Advisors, argues the buy side for gold. But since most of our readers are already familiar with gold’s positives (up 400% in ten years does it for us), we will highlight instead what seem to be the major points of the “Don’t Buy” side, as presented by Dr. Lewis J. Altfest, chief investment officer of Altfest Personal Wealth Management and associate professor of finance at Pace University.

Dr. Altfest’s case against gold starts with the argument that its performance versus the dollar is meaningless because gold is not really an investment at all:

“Fundamentally, the problem of gold as a portfolio investment is that it isn’t a real investment. Real investments are stocks, bonds, income-producing real estate and private businesses, all of which, except for bonds (which produce interest instead), produce profits. These are paid out as income in the form of dividends or are reinvested and grow. In contrast, bullion just sits there hoping to look attractive.”

We are trying to form a mental picture of gold that ‘sits’ and is ‘hoping to look attractive.’ Could it possibly be any more attractive than it has been over the past ten years, a time of rampant money creation and staggering deficits? Not in Dr. Altfest’s world, where things are pretty much ducky, and inflation is barely worth a mention:

“Economies are generally improving world-wide, and inflation, while of some difficulty in a few countries, is not currently a problem in the biggest one, the U.S., nor should it become a really serious problem in the future. No need to call in the gold troops here. In fact, I believe stocks will do well over the next several years.”

And if those rays of sunshine don’t convince you to forsake gold, then Dr. Altfest brings up the fact that most gold is not even mined in this country:

“There’s also ethics to consider. There don’t seem to be many benefits from gold production. Very little of the production takes place in the U.S. or is owned by U.S. companies, and this doesn’t help our unemployment problem.”

Not to slight Dr. Altfest’s patriotism, but we might remind him that increased employment is a good thing the world over. The more broadminded among us might even say that international companies can also be good investments.

Dr. Altfest also offers the traditional bugabears about gold ownership: safekeeping your gold bars with a third party costs money, gold coins also cost money, and gold mining shares fluctuate. And then he sets up a few straw men to knock down: For instance, did you think that gold would be useful for central banks wanting to boost their currency – no, he says that there isn’t enough gold. Or did you imagine the opposite - that countries may use gold to weaken their currency? Possibly, he allows, but not for long. Were you counting on poor countries to support the gold market? Don’t be silly, gold is too expensive for poor people.

Combine all those points with Dr. Altfelt’s initial confusion about exactly what an investment is, subsequent inflation denial, and conflation of ethics with ethnocentrism, and I think we can all agree that Ms Briaud’s argument for gold (which we promise to read, someday) wins this debate, hands down.


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