It's been quite a year for silver: right up there with 2008 in terms of volatility and pain for speculators, both long and short. As far as I’m concerned, this volatility had little to do with actual physical movements of metal. Instead it had to do with a paper market that, to use the words of First Majestic Silver’s Keith Neumeyer, “lacks integrity” (a classy understatement if ever there were one). You might be wondering where the paper price of silver is heading. Will it go to 20 dollars? Will to go to 10? Will it to go 5? Will it go all the way back to its price of 26 cents in the early 1930s? (in the private market). Well, you might want to know, but as for me, I could care less. Allow me to explain why.
Anyone involved in silver, it seems to me, needs to understand why others have been buying silver these past several years. Silver is a hedge against the inflation tax (or negative real interest rates—meaning the loss of purchasing power for paper cash), and silver is an item for barter that has stood the test of time. In other words, it is real money that can’t be diluted or conjured out of thin air. Physical silver is monetary insurance. It goes right along with the supplies of water, food, fuel, or other necessities that people like me who live in earthquake zones are supposed to have, but often never have enough of. Buying silver does not mean you think the world is going to end. It simply means that you have sized up certain risks around you, and are taking some small steps to try to prudently manage your savings, and possibly give yourself peace of mind when you sleep at night.
And peace of mind may be the most valuable commodity of all these days, after yet another revelation that our financial system leaves a lot to be desired (one more great understatement for the year). What has disturbed my never-too-deep sleep now? Well probably something that has troubled some of my fellow worry warts out there: the MF Global fiasco.
There are many responses one could have to the revelation that MF Global stole customer funds (something that is not supposed to happen, no matter how bankrupt the company). For me, the revelation that client accounts were co-mingled and subsequently vaporized by over-levered trading was not only disappointing. No, instead it simply confirmed in me a bias to lean toward realism (some would say negativity) when thinking about my economic future. In other words, just when you think things can’t worse, they do.
MF Global, Plausible Deniability, and Systemic Amnesia
But what bothers me more, relates to how conventional media play or spin this story—they seem to want to consider MF Global some sort of one-off event. It looks as though many in the marketplace want to hope for the best, they want to believe that Corzine was just incompetent, they want to ignore people who were stopped out of trades that ended up costing them money, perhaps because commodity speculators are all rich anyway, right? These investors should have had their money in a bank, or even a safer brokerage firm, because we all know that MF Global was just a poorly run company anyway. It had been in trouble for a while, it was a huge risk, people should have understood that sometimes your brokerage account just goes bye-bye temporarily, but don’t worry, you’ll get something back in a few months (right?). We all know that other brokerage firms or banks are better than MF Global and would never hurt their clients either out of malice or negligence...
In short, I sense a desire to want to forget about MF Global, to just kind of walk-on-by, and chalk it up to the normal risks associated with our “capitalist” economic system.
But I don't want to forget.
Amnesia Creates the License to Fleece
Forgetting, or encouraging people to just move on is a useful, manipulative tool of anyone in the position of crafting public opinion, whether in finance, media, or government (not to mention academia—I conveniently “forgot” about that one). Or, it may just be a way for humans to cope when they don’t want to dwell on painful things, things that imply there are all sorts of monsters beneath the floorboards that are just too scary to acknowledge. But, to repeat, I don’t want to forget. Not about MF Global, and not about several other things I have witnessed or experienced when it comes to finance these past several years.
I don’t want to forget the fraud associated with the dot.com bubble; I don’t want to forget Enron-style accounting practices; I don’t want to forget about subprime mortgage fraud; I don’t want to forget how few bigwigs went to jail as a result of that fraud; I don’t want to forget the lie that derivatives will make markets more safe (thanks, Alan Greenspan!); I don’t want to forget the B.S. that home prices never drop that much (that one came from Dr. Bernanke); I don’t want to forget about high frequency trading; I don’t want to forget about frontrunning; I don’t want to forget about sell-side desks touting “buy the dips” (in stocks) without doing their homework; I don’t want to forget about lawsuits over people’s gold and silver not being stored for them; I don’t want to forget about Bernie Madoff’s Ponzi scheme; I don’t want to forget about useless regulators who did nothing about that 70 billion dollar Ponzi scheme; I don’t want to forget about inside-the-beltway, “the public be damned cronyism”; I don’t want to forget about supposed “green shoots” and “jobless recoveries”; I don’t want to forget about stagnant real wages for 80% of Americans over the last 10 years; I don’t want to forget about lying government-sponsored statistics that claim we are seeing “deflation” or “disinflation” when the price of oil is still over 90 dollars a barrel and when education costs a gazillion dollars a year (soon to be the real price if the printing presses fire up).
I don’t want to forget about all of the protestors this year around the world (as misguided as some were) who felt it was important to do the one moral act we all can do as human beings, no matter how futile it may be: tell the truth. The truth about leaders who are nothing of the sort, the truth about a system that serves its own, and the truth about money and markets: namely, that there is always a patsy, always a mark, and they usually are not the people like Jon Corzine.
Please take a moment to think what you are being told to forget about when it comes to money, finance or something else important to you. Take a moment to remind me if I have forgotten something about money or finance that I should not want to forget about. I suppose you could even put listening to historians who moonlight as wanna-be financial analysts as something you might want to forget about—but you have read this far.
Silver Scarcity and Paper Games
I think the act of remembering all of the stupid illegal [insert expletives of choice] from the past 10 years will also make you remember why people buy silver. Silver, the investment whose math does not add up in a crisis. Even at 1.7 billion ounces (the new revised figure for both silver coins and bullion), the number of people who can have even one 715 ounce bag of silver (or bullion equivalent) is less than 2.5 million people on planet earth. This bag, although heavy, fits in a shoebox (its just hard to carry that way). 715 ounces is not really a lot of silver, and it only costs about 20,000 dollars. For those who are savers out there—yes, they do exist—20,000 dollars is not that much money, especially if you are trying to insure a six or seven or eight figure net worth. And so there would be many people who would try to get more than 715 ounces, but for everyone who does that, there is that much less silver for someone else to get their hands on. There would be much less for any ETF or other trust to own. There would also be less silver for any government that decided to restock its supply of silver bullion. So I would bet that the real number of people who can own a shoebox of silver in physical form is well below 1 million people in the world, perhaps as low as 500,000. The reason the silver price has been moving higher (at least in part) is due to this basic mathematical problem—there is not enough monetary insurance to go around. Period.
The Bull Market in Survival
I also really want to make clear that there is, at the end of the day, a bull market in survivalism. Although we are in the minority, there seems to be a sizeable number of relatively ordinary people like me who are not willing to forget, or who are starting to ask questions about the “what if’s” in this crazy world of ours. What if there is a protracted bank holiday? What if assets are frozen a la Argentina eleven years ago? What if brokerage accounts can’t be accessed for several days, weeks, or months? (Talk to an MF Global customer.) What if supply lines to grocery stores are disrupted? What if the cost of basic necessities goes up 20, or 50, or 1000 percent in a year, or in a day? This is not a case of being chicken little—it is a case of thinking, or living as an adult who is able to face the music, and who wants to stop living in la-la land.
Perhaps it is a case of illusions being shattered, or things you once thought of as true simply not being so. Things change, they go snap, what one generation viewed as true the next discards as a quaint fantasy. The truth that the system will always be there doesn’t feel so true to many of us anymore, but this fact does not have to mean that your world has ended.
The emphasis on survival also has little to do with “making” money, unless you count preserving your purchasing power against collapsing paper assets as making money. There are various forms of insurance for people, and I’m not just talking about precious metals. Make sure you have things you can eat, things you can drink, or land or livestock before putting any money into gold or silver. You should think for yourself regarding what “survival” means. As I’ve written elsewhere, survivalism is also a mental state, or even a state of the soul. I think sometimes a lot of survavlists do what they do because they are trying to reorder their own lives, trying to give concrete expression to the old idea that the only thing you can control is yourself. I bet this is also part of the motivation behind movements ranging from the Tea Party to Occupy Wall Street; more than trying to take over the system, in many ways these people are just trying to find common ground with like-minded people so as to better cope with the unpleasantness of the brave new world they confront on a daily basis. For me, this is actually a hopeful sign. It may mean that people are finally starting to get real. This at least, is one sign for hope during what might be a rough Holiday Season for many.