Editor's note: We have a small correction to make to last Friday's Digest. The recording of the Casey Conference we discussed is audio, not video. If you would like to learn more about the Casey Conference, click here.
After suffering its worst one-week drop since 1975, falling as much as 34% from a 30-year high of $49.845, silver's soaring again. The precious metal jumped nearly 6% to more than $37 an ounce.
As we previously stated, speculative funds fleeing the metal caused the rout. In Saturday's Wall Street Journal, senior writer Greg Zuckerman profiled a recent entrant to the silver market, 31-year-old David Zornetsky. Last week, David bought silver for the first time (at its highest price in 30 years). He was looking for a job and hoping to use his gains to finance a move to New York City and pay down student loans. "I had been hearing that silver could go up to $150 an ounce this year."
Instead of tripling, silver plunged from nearly $50 an ounce to $35.28 in five trading days. David's investment lost around 25%. "I don't understand," he said. "Silver is supposed to do very well this year."
When folks like David Zornetsky are buying silver, you shouldn't be. And what do I mean by "folks like David"? These are the proverbial "shoeshine boys." They're inexperienced investors who buy hype without any knowledge of the underlying asset. Folks like David are doomed to always buy at the top of a market. And even if that top is short-term, this hot money doesn't have the conviction to stay the course.
You can learn a few lessons from David. First, don't make an investment if you don't understand the risks. Second, if you can't afford to lose the money, don't invest it... "Don't bet the rent money."
Finally, we're long-term bullish on silver. But any asset can get overheated in the short-term. When everyone wants to buy an asset, you want to be cautious.
If David had studied the market, he would have seen several discouraging signs for the silver market. The most obvious sign was silver's meteoric rise. It climbed 165% between late August 2010 and last week. Gold was up 26% over the same time period. The Chicago Mercantile Exchange (CME) increased the margin requirement for silver by 84%, hoping to curb speculation.
Also, the silver-to-gold ratio collapsed. Before the down move, it took 32 ounces of silver to equal one ounce of gold. The ratio was near 68 in August 2010. Today, the ratio is around 40.
Over a three-week period last month, assets at six silver ETFs increased around $4 billion (more than 20%). And the Sprott Physical Silver Trust (PSLV) was trading at a 16% premium to its net asset value (meaning you were paying $1.16 for $1 of silver).
While David bought silver at the peak, some smarter money was waiting for a correction…
Kyle Bass, founder of Hayman Capital, loaded up on silver early last Friday. Bass is best known as one of the few hedge-fund managers who predicted the housing crash. He's already up a couple bucks an ounce on his silver trade.
Also, Eric Sprott, of Sprott Asset Management, took advantage of the dip in silver to launch a new fund, the Sprott Silver Bullion Fund. According to the prospectus, the fund is "the first mutual fund in Canada to invest primarily in unencumbered, fully allocated silver bullion."
Longtime Digest readers will recall our stance that inflation won't just drive up the nominal prices of commodities like silver and crude oil. It will also send the price of productive land much, much higher in the coming years. That's why we've encouraged readers to buy farmland in the past... and why we're attracted to cheap, income-producing apartments and single-family homes right now.
Editor in Chief Brian Hunt, an Iowa native, offers an update on how the productive land trend is playing out in the Midwest. Iowa is the largest corn-producing state in the nation.
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I talked with Mother Hunt yesterday. She reports a farm nearby sold for an "ungodly" price per acre a few weeks ago. Farmland tracking agencies report land prices have climbed 25% in the past year... which is the fastest rate of gain in more than three decades. Not coincidentally, gold has gained almost 25% in the past year. People are going wild for real assets. |
Steve Sjuggerud put his data-collection machines to work (which power our upcoming True Wealth Systems advisory) to display the huge rise in Iowa farmland. As you can see, it's a bull market... one we expect will turn into a bubble, powered by the Fed's easy-money programs.
While farmland could reach bubble proportions, like silver, we're long-term bullish. Dan Ferris discusses his favorite agricultural stock in the world in his June 2010 issue of Extreme Value. The stock Dan recommended owns the largest farm in Canada…
This farm does business cheaper than any of its competitors. It's virtually impossible for a competitor to assemble the vast land position this farm has, due to the complex nature of the agreements it made to get the land. And according to Dan, it will "revolutionize farming." Most farms are speculations on the price of the commodity they produce. But this one is more likely to produce a steadier profit margin, due its great size.
Last but not least, the finest single group of small-cap natural resources investors on the planet created this firm. When they place a bet this big, the odds are it'll turn out well for them and their investors.
If you believe we could experience food shortages, which we're already seeing across the globe, this is the stock you want to own. If you don't already subscribe to Extreme Value, you can sign up here...
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New 52-week highs (as of 5/6/11): NFJ Dividend, Interest, & Premium Strategy Fund (NFJ), Eli Lilly (LLY).
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May 9, 2011
Poor David... The signs of silver's collapse... Sprott's latest offering... Iowa farmland soaring... Dan's favorite agricultural stock... Were you 'taken?'...