Hi-Ho, Silver!

Silver is at historic lows when compared to everything else – and when something is at historical lows, then there is only one way for the price to move: Up. The Mogambo explores…

The economy is not growing, and is instead showing definite signs of severe debt-related stress. Consumer spending is down, even as health care, housing and taxes go up.

From a business investment standpoint, it is really ugly out there, which means risky, which means you will probably stand a better chance of making money by sending the cash to me, in a plain envelope, addressed to "Resident," and then waiting by the phone for me to call and tell you how much money you made.

Now, I hang my head in shame and admit I have no idea what to do about all of this. Fortunately, Dr. Richebächer does. He says, "We expect shocking economic weakness. All asset prices, depending on carry trade, are in danger, including bonds." So sell ’em all, unless you want to be sitting on something dangerous.

So, what do you buy instead? Marc Faber, who writes the famous Gloom, Doom and Boom Report, says that commodities of all kinds have surged here in the last couple of years, except, notably, grains. "In fact," he says, "grains are at a 200-year low vis-à-vis oil." At this, your Super Sensitive Mogambo Investing Senses (SSMIS) should have sprung to full alert, ("Beep! Beep! Beep!") when you heard that something that everyone needs is at a 20-year low against something else that everyone needs, too.

Apparently, Dr. Faber has a well-developed SSMIS himself, and will not benefit from the Mogambo Super Sensitive Investing Sense Home-Training Kit as he instantly intuits, "As a long-term investor I would also consider buying some agricultural commodities."

The Upside of Silver: Nothing Like Precious Metals

Well, if you have ever tried to trade commodities or store soybeans in your garage, you know what a hassle it is. And you already know what a lazy little creep I am, so doing that much work is really, really, really out of character for me. No, what I want to do is buy something now, when prices are low, store it away somewhere that has no commissions to be paid, no account maintenance fees, no inactivity fees, and in short, there is nothing for me to do and nobody is taking so much as a damned dime from me for any reason, less they get a dose of old Doctor Twelve-Gauge for their trouble.

And nothing fits the bill like precious metals…I suppose any metals: Copper, Molybdenum, Uranium. You name it, especially gold and silver (doubly especially silver). I bring this up especially because I was just at the Silver Summit in Wallace, Idaho, at the kind invitation of David Bond, who will probably lose his job because of it. I spent a delightful time ranting and raving, and meeting a lot of really nice people, and trying in vain to play boogie-woogie music on the fiddle behind the talented Steve Dore on piano and embarrassing myself in more ways than one. As a result of this sudden explosion of sensory overload, I am now even more convinced that the upside potential of silver, as a percentage, is staggering, and almost guaranteed to happen.

Secondly, I am convinced that I like being around people who understand the importance of owning precious metals, since they do not introduce me as, "Uncle Mogambo, who is a gold bug and a real first-class lunatic, so don’t stand so close to him or you might catch his cooties or get his drool all over your nice shirt."

But this is not about my cooties, dammit! It’s about silver! I mean, the stuff is selling at just over seven lousy dollars per freaking ounce! When gold is selling at over $460! Most of the gold ever mined is still around. Most of the silver ever mined is all gone, and demand is higher than supply for the zillionth month in a row. And while gold has few uses beyond wealth preservation and jewelry, silver has myriad industrial applications.

The Upside of Silver: Historical Ratios

Well, just between you and me, and don’t let this get around, but to be entirely truthful, all of that is so much blah blah blah to me. What impresses me most of all is the historical ratios of silver to other things, like gold, oil, food, or anything else you can get data on. In every case, and I am talking Every Freaking Case As Far As I Can Tell (EFCAFAICT), in all of history, silver is at historic lows when compared to everything else. And when something is at historical lows, then there is only one way for the price to move: Up.

OK, but it is knowing the historical ranges of these ratios that tells you how high silver might go, right? Right! So, because you are so smart and thus you are my little teacher’s pet, you immediately raise your hand with a question. With a beneficent smile of loving indulgence beaming in my Mogambo face, I point to you, and you say, in that delightful way that you have, "How high has silver gotten, your worshipful Mogambo-ness?"

Well, my little grasshopper, you will be surprised to know that there have been times when silver traded at a premium to gold. So, if this were one of those times, silver would be at over $470 per ounce. It is selling for about $7 right now. So dividing 7 into 470, which is probably easy for you, but difficult for me because I am so stupid (audience shouts "How stupid, Mogambo?") that I have to get out the instructions to turn the damned calculator on. I figure that the answer is, I hope, around 67. Your investment, if you bought silver now and the price rose to more than gold right now, would have a return of 6,700%! I have heard of lots often-bagger investment, but a potential 67-bagger? Wow! Truly rare!

So, the upside of silver is so high that it boggles the mind that you can, right now, today, this very minute, get up off of your fat backside, grunting and complaining about your aching back, and simply walk over to a phone or a computer and buy all the silver you want at a lousy seven bucks and change per ounce! As Mike Maloney of Gold & Silver, Inc. put it, silver is "stupid cheap!" I immediately translated that as an insult to The Mogambo, who is both stupid and cheap, but when he calmed me down and soothingly explained it a dozen times or so, I finally understood it to mean that if you are not buying silver on the cheap, then you are stupid. Being stupid, of course, I was not buying silver. But after learning that I could appear to be smart by buying silver, I got a little.

Well, unfortunately, nobody was fooled for a minute. But a few people did agree that because I was buying silver, I appeared to be slightly less stupid than I really am, but still, unfortunately, stupid, which, being stupid, I did not understand. I still have the silver, and so should you, whether or not you are stupid. And if you think that you are not stupid, then I will rudely point out that you are obviously reading the stupid Mogambo Guru, and that doesn’t say very much for you or your stupid choice of reading material.


The Mogambo Guru
for The Daily Reckoning

October 03, 2005

The Mogambo Sez: Things are worse than you think. Much worse. They are so bad that Alan Greenspan went on TV to say that because of Shumpeter’s notion of "creative destruction," wildcat finance masquerading as "creative financing" and the Fed’s constant monetary stimulus, that nothing bad will ever happen to the economy again, ever, since these are signs of "resiliency" and "flexibility." Hahahaha!

Lesson? Buy gold and silver every time the price goes down by a little bit, because this ridiculous Greenspan thing is one of the Seven Signs of the Apocalypse. Trust me on this one.

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter, an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications.

Two things caught our eye this morning.

"HOUSE PRICES SLUMP," says a cover from last week’s Daily Express. English property prices have been drifting downward for several months. So far, the slippage has been modest. Few people are fearful; most expect a gentle decline, followed by a rebound.

A real estate agent in Maryland noted last week, too, that the market had "gone soft" there all of a sudden. But for the moment, no one seems very worried about it.

As near as we can tell, investors are still panicking into real estate. If they’re afraid at all, it is fear of missing an opportunity that drives them on.

We notice, too, that some of the biggest stocks on Wall Street have taken huge beatings. Fannie Mae has lost half its capital value…Microsoft, too. Wal-Mart, once at $70, is now down to $43. But are stock market investors fearful? Are mutual fund investors worried about getting wiped out?

No…not yet. The Dow is still well over 10,000. Stock buyers are still taking up shares at more than 20 times earnings. If they are worried or disappointed with stocks, they move into real estate, where returns have been bigger and surer.

If they were really concerned, they’d buy gold. And yes, somebody is buying gold. The price has risen nicely in the last few years. An ounce now trades at $470 or so, a 17-year high.

Which brings us to Conrad de Aenlle’s article in the International Herald Tribune. "Like generals fighting the last war," he says, advisors are urging their clients to buy gold. We don’t know exactly what war or what generals Aenlle refers to. The struggle for the last five years or so has been only to get as much in real estate assets…in the hottest areas…as possible. Any general who fought that war by loading up on gold would probably get latrine duty. Yet, Aenlle thinks gold’s bull market has reached a peak.

"There have been few occasions in modern times when buying and holding it, instead of owning stocks, was a good idea. And those instances only occurred when gold was lurking on the edge of town, not parading down investment’s Main Street to public adoration."

Again, the man must be watching a different parade. The clowns we see are still buying houses and stocks – not gold. The price of the yellow metal, while at a 17-year high in nominal terms, is still far below the $850 price it hit in 1979 dollars, and even further below its inflation-adjusted high of about $1500 (in 2005 dollars).

In 1980 you could have bought every stock on the Dow for a single ounce of gold. Today, you will need 22 ounces. And in 1980, you could have bought a typical suburban house for only less than 200 ounces of gold. Today, if you want to exchange gold for a house you’d better have about 700 ounces, or about 2,000 ounces if you are in California.

No, gold has not yet gotten into the parade. It is still on the wrong side of town…still putting on its funny hats.

And now, the news from our currency counselor…


Chuck Butler, reporting from the EverBank trading desk in St. Louis:

"Today, we’ll see the color of the ISM manufacturing index for September. It is expected to come in around 52, which obviously is just above the 50 level. This is the line of demarcation between expansion and contraction."


Bill Bonner, back in London with more opinions…

*** "This has been a great month," our fearless Editor-in-Chief, Addison Wiggin, said this morning.

That may be the understatement of the year. Our Agora Financial Reserve kicked off with a bang and a ridiculously low price. Don’t worry if you missed out – a new offer will be forthcoming after we’ve had a chance to let the dust settle and assess the success of the Charter Membership…just not at that same price.

*** We returned from Argentina at the end of last week. Meanwhile, the family had decamped from our temporary headquarters into a small house that we rented. The rate was extravagant: about $2,800 per week. Elizabeth told us she could find nothing suitable for less. "If you want to live in London," she explained, "you have to be willing to pay for it."

So, we arrived expecting a palace. Instead, we found ourselves in front of a garage door. Checking the address, we realized we were in the right place. Yes, the house is a converted coach house. We now have breakfast where the previous tenant changed his oil.

*** This morning, we awoke early. Uncharacteristically and unflatteringly, we were worrying about money.

A man believes what he has to believe when he has to believe it, we keep saying. When he has no money, he believes that it is perfectly OK to live in the poor part of town and drive a used car. When he is flush, he believes that living in the poor part of town is no longer good enough for him. He has to find ways to get rid of his money, so he comes to believe that he should go out to dinner more often, buy a nicer automobile and up-grade his life.

There is no law that says he has to believe these things. A few people are able to resist. Warren Buffett, for example, lives in the same modest house in Omaha he bought many years. But Buffett’s wife, now deceased, left for San Francisco and the lure of good works. Buffett stayed in Omaha with his housekeeper.

Your editor is skeptical about the value of money. He can take it or leave it, he tells himself. But he has a large family whose members are often less skeptical than he. And his very indifference to money seems to work against frugality.

"Since it makes no difference to you," says another member of the family, "we might as well spend."

Little by little the expenses build up. We have three children in college. Now, we must maintain residences in two of the most expensive cities in the world. We earn far more than we did 10 years ago; still, we find ourselves saving as little today as we did then. The rest of the money is used up…here, there, and everywhere.

We bring this up not to complain or lament, but to illustrate two points. First, no matter how much you make…it is very easy for costs to rise to meet, and even exceed, your income. Second, no matter how relaxed you are about it, there comes a moment, usually in the dark of night, when a nagging fear creeps upon you, like a sewer rate on a gutter bum, and you decide you must straighten up.

*** "Hurricane’s damage to oil rigs unprecedented," says an A.P. headline.

A friend of ours in the oil business adds:

"I have some good news and some bad news. The bad news is that Rita passed directly over our production in Panola County, Texas. Panola County is on the border with Louisiana. Our pipeline company shut down the pipeline last Friday and our wells had to be shut in as a result.

"The good news is that we did not have any damage and the Thomas well was returned to production yesterday and the Chadwick and Keeling wells will be returned to production today.

The current price for natural gas is $14.33, the highest in history. Unbelievable."

*** We are still thinking about Argentina. Here in London, a decent steak dinner with wine costs at least $40. In Buenos Aires, it was barely $5. Here in London, we pay $10,000 a month to live in a tarted-up garage. In Buenos Aires, we could live in a luxury apartment overlooking one of the city’s finest boulevards for only $1,500 a month. Here in London, a typical apartment in South Kensington will cost you $2 million. Out in the wilds of Argentina, that amount of money will buy you a half-dozen houses, and enough land to put down all of London…and more.

Everything regresses to the mean: Sell London. Buy Buenos Aires.

The Daily Reckoning