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Reddit people trying to run up the price of silver

Posted by John T. Reed on

So many of the Reddit pump-and-dump children decided to drive the price of silver up.

I talk about bitcoin and stock picking because they are too large to ignore, but I have not studied bitcoin and will not—for the same reason I do not study Leprechans.

I HAVE studied the stock and bond market a lot, but to learn lessons I could apply to real estate investment, not to invest in bonds (Agh! They are the road to hell in hyperinflation.) or stocks (we have index funds). The different categories of investments have made varying amounts of progress in the different aspects of investing. For example, the securities markets are far better at analyzing and managing risk than real estate markets are.

But when it comes to silver, I have studied it extensively, own it, and have written about it a lot.

It is too expensive. It has been too expensive most of the time since 2006.

I only buy junk silver and only recommend junk silver. Junk silver is the dopey name someone dreamed up for US dime, quarter, and half-dollar coins minted before 1965.

According to yesterday’s WSJ, junk silver was selling for 21.506 times face value. As recently as March 18, 2020, it was selling for 8.97 time face value. When that happened, I told you guys to buy and tried to buy myself. All my dealers were out.

Is there a “right” price for silver. I think so. I say that price is the long-term average real price. Real means adjusted for inflation. That long-term average is around $15.35 per troy ounce. Yesterday it was $29.42.

The highest ever real price was $102 in 1980 when the Hunt brothers tried to corner the market. That was anomalous.

They were sort of like the Reddit followers of 1980, although old enough to know better. The COMEX that handled the silver market changed the rules such that the Hunt brothers silver position was crushed and the guys who changed the rules made money when they bet against them before they changed the rules.

The $15.35 average may be too high because of that unusual attempt to corner the market.

Robert Kiyosaki and a couple of other “experts” have been touting silver in TV commercials. He’s an idiot. Will those guys now take credit for having predicted yesterday’s run-up in silver prices? Probably. But they did not foresee Reddit and Gamestop and did not foresee some Reddit guy saying, “Hey, let’s do this to silver, now.”

I have pointed out that junk silver is a great barter item in hyperinflation. See my web article that has been up for years: https://www.johntreed.com/blogs/john-t-reed-s-hyperinflation-deflation-blog/60940227-disadvantages-of-gold-as-an-inflation-hedge?_pos=1&_sid=add1db994&_ss=r .

It is durable, convenient denominations, easily verified, etc. My book How to Protect Your Life Savings from Hyperinflation & Depression discusses silver and has a chapter on barter including a list of the characteristics of the best barter items.

https://www.johntreed.com/collections/john-t-reed-s-book-on-hyperinflation-and-depression/products/how-to-protect-your-life-savings-from-hyperinflation-and-depression .

The Reddit children are not just buying junk silver. They are also buying ingots and other forms of silver.
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No. No. No. Those have to be assayed. Silver in the form of pre-1965 US coins that were 90% silver does not need to be assayed. That is why junk silver sells for a bit of a premium. Pay the premium.

I oppose trying to use silver as a hedge via derivatives. I think derivatives are too new and untested. One reader said the have been around since 2000 or so. That is too new. Plus they were tested in the subprime crisis and flunked the test.

I also do not like options. They are complicated and temporary. Just buy and take delivery of the junk silver. Simple. Simple is good.

But today, and generally since May 2006, silver has been too expensive. Many people believe gold is a great investment NO MATTER WHAT PRICE YOU PAY FOR IT! I read a book on it by a gold “expert” and he literally said no price for gold is ever too high.

That is an idiotic notion on its face. If you bought gold on January, 1980, you have been underwater—lost money every day since. $2,269 was the price then in today’s dollars. The actual price yesterday was $1,863.90.

The thing to buy, except they stopped selling them because of covid 19, is currently-circulating US nickels and pennies. I used to buy $100 a week. Then they stopped selling them at the banks. The price-to-face-value ratio of pennies and nickels is 1.

You can see the melt value of any coin at coinflation.com. The best coins to buy are those with the highest melt-value-to-price ratio. At present, a post-1982 US penny has a ratio of 66%; a nickel, 103%; and a pre-1983 penny, 233%.

But like I said, banks currently refuse to sell them. They ration them to actual brick-and-mortar merchants who use them for change. They are expected to come back as covid 19 wanes. If so, I will return to buying currently-circulating nickels then.

Forever stamps are still available and not overpriced, but there you have to worry about whether the USPS will renege on their promise to deliver a first-class letter for one of them.

So should you buy silver?

AT WHAT PRICE?

Below $15.50 an ounce? Yes.

An ounce is 28.3495 grams. A junk silver 1964 Kennedy half dollar has 90% x 12.5 grams or 11.25 grams. So 28.3495 ÷ 11.25 = 2.52 Kennedy half dollars = one ounce of silver.

So the junk silver face value multiplier equivalent to the long-term average real price price of $15.35 is about 11. In other words, you are not overpaying if you pay $15.35 an ounce or 11 times face value. Yesterday’s price of 21.5 time face value was about double the long-term average price.

Should you sell your silver? Yes. Sell high.

But when I considered that, I could not find a better place to put the money.

Buying nickels would work if you could buy them. They are guaranteed not to fall below 5¢ in face value even if they fall below 5¢ in melt value. Junk silver coins CAN fall in melt value and regression toward the mean say that the average FUTURE price of silver will be the same as the average PAST value of silver.

So if you pay 21.5 times face for junk silver today, it will likely fall to 11 times face average in the future. If you pay 1 times face for nickels, their melt value may rise, but their face value cannot fall BY LAW.

To this day, if you walk into the federal reserve bank and try to convert a US $20 gold piece (one ounce coin) minted in the 1920s to paper currency, they will give you a $20 bill. They will probably also tell you you’re nuts to make that conversion. But the point is they would also have done that during the Great Depression when deflation lowered the melt value of BELOW its face value.

In other words, current nickels can go up in melt value, but they cannot go down in value because their face value is the floor and also your purchase price. Silver coins CAN go down in melt value and their face value is way below that.

Another point that many investors screw up: Silver and gold are useful barter items in hyperinflation not because they are silver and gold or even because they are precious metals. They are useful barter items because they are commodities.

One of my readers dismissed all mention of nickels saying he called them “sludge.” That is childish nonsense. Nickel is a hedge against inflation because it is a commodity. Ditto gold and silver. A coin dealer once told me he disregarded all metals priced by the pound rather than the ounce.

Again, I guess that makes him one of the cool kids, but my goal is not being cool, it is owning assets that do not become worthless like currency does in hyperinflation. No commodity is dollar-denominated therefore all commodities are hedges against hyperinflation. The problem with precious metals is at present they are overpriced. Base metals in U.S. coins are NOT currently overpriced. So if you are not buying “sludge” that is priced “by the pound,” you are screwing yourself out of purchasing power.


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