Silver’s Time to Shine, New Unemployment High, The New (Airborne) Silk Road and More!

by Addison Wiggin & Ian Mathias

  • Gold takes another aim at $1,000… but is silver the better bet?
  • Unemployment rate hits 26-year high… Bill Gross on adapting a “new normal” portfolio
  • Chris Mayer with an emerging pattern of trade, connecting China, the Middle East and Africa
  • Plus, why are students still gobbling up debt? Readers sound off

 

  Here we go again: Gold $1,000… take 5… action!

Gold bugs and speculators of the world are on the edges of their seats. With gold stopping $3 short of $1,000 yesterday, will this be the one that sticks? Are the days of three-digit gold prices about to be a thing of the past?

Your guess is as good as ours.

Scanning through the pages of our plethora of investment advisories, not one of our editors has issued any sell recommendations on the shiny metal — save Alan Knuckman, who just helped Resource Trader Alert readers bag a quick 214% gain with a well timed gold call spread. His readers still own a $1,000/$1,050 call spread, thus it’s safe to say all our analysts are holding on for the ride.

  “Long term, gold and silver prices are going higher,” Byron King summarizes. “Really, where else can they go? Lower? With the current monetary madness that’s infecting the world’s central bankers?

“Precious metals prices won’t fall very far unless governments worldwide stop spending funds they don’t have. (OK, China is spending money it DOES have. Everybody else? No way.) Will governments stop spending? Doubtful. So with excess spending, we’ll see the accompanying monetary expansion from the central banks. That’ll give us more inflation. And the only effective defense against inflation is gold and silver.”

  Silver in particular has been perking our interest lately. With gold near $1,000 and the precious metals buzz revived, we dug up some silver charts this morning… and liked what we saw. Check it out:

So if you believe silver to be a store of value as legitimate as gold, it looks like there’s more potential short-term upside for “poor man’s gold.” While gold is just a breath from all-time highs, an ounce of silver goes for $16 today, about 23% below its 2008 high of $21. Sellers will say this is because of silver’s industrial capacity — which has been beaten bloody by the credit crunch. Buyers, like Byron and most of us, say we’re heading into an inflationary period so great that this will be rendered somewhat irrelevant.

What’s more, the gold/silver ratio is both in a state of decline while still higher than typical… another bullish argument for silver:

The gold-to-silver ratio has spent most of 2009 in a downtrend, meaning the price of silver has been rising faster this year than the price of gold. Just this morning, it hit 59, a 2009 low. During the high inflation of the ’70s, the ratio stayed below 50. Back in gold standard days, it was hardly 15.

So silver is undervalued compared to gold, and it has some momentum on its side? We’ve heard worse odds. If you’re in agreement — or even interested — you should check out Byron King’s latest report on investing in silver, right here.

  One last note on precious metals: The dollar is way stronger today than it was in March 2008, when gold and silver hit historic highs. The dollar index goes for 78.5, well above its low around 71 in 2008. The index is actually around break-even for the week… testament to just how bold precious metal buyers are becoming.

  “With both gold and oil prices percolating, the Canadian dollar gets to get in the game!” says Chuck Butler of The Daily Pfennig fame. “The loonie is so dependent on commodity prices, but especially those of oil and gold. So if this rise of oil and gold becomes a trend, I think you could look for loonies to make a run at parity again… but only if the rise in prices of oil and gold become a trend.”

  After faltering a bit earlier this week, oil is holding steady today around $67 a barrel.

  The government’s official unemployment rate jumped from 9.4% to a 26-year high of 9.7% in August, the Labor Department announced this morning.

(It’s always hard to take these monthly jobs reports all that seriously, but this one is particularly tough not to blow off after Atlanta Fed Chief Lockhart admitted last week that the real unemployment rate is closer to 16%.)

Nevertheless, the government claims the U.S. economy shed 216,000 jobs last month. While that would be a grotesque loss under normal employment conditions, August was actually the best month for jobs in a year. Icing on the market’s cake — the Street was anticipating a 230,000 loss.

But as usual, the drama’s in the details. We still spy some dark clouds in the monthly jobs report:

  • Nearly 7 million people have lost their job since the start of 2008. A total of 15 million are officially unemployed
  • Temp agencies, usually the first to hire when recovery begins, cut 6,500 jobs.
  • After shrinking two months in a row, the number of “underemployed workers” rose 278,000, to 9.1 million. (That’s what the government calls people forced into part-time work because they can’t find a full-time gig.)
  • “Marginally attached workers” – the unemployed who has simply given up looking for work but still want a job – now exceed 2.3 million.

Put the officially unemployed, the “underemployed” and the “marginally attached” together and you get what the government calls the U6 measure of unemployment. That number, which is likely what Lockhart was referring to last week, jumped a whole half a percentage point in August, to 16.8%.

  The market responded to today’s jobs number with a small gain. The Dow and S&P opened up about 0.3%. The Dow has ended the day higher on every jobs report Friday since February, no matter how grim the news might be. So we dare not expect much different today.

  “There’s been a significant break in that growth pattern, because of delevering, deglobalization and reregulation,” notes bond legend Bill Gross in his latest monthly missive. “All of those three in combination, to us at PIMCO, means that if you are a child of the bull market, it’s time to grow up and become a chastened adult; it’s time to recognize that things have changed and that they will continue to change for the next — yes, the next 10 years and maybe even the next 20 years. We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins, as they do in Japan (to be a little ghoulish), starts saving to the grave…

“The successful investor during this transition will be one with common sense and, importantly, the powers of intuition, observation and the willingness to accept uncertain outcomes. As of now, PIMCO observes that the highest probabilities favor the following strategic conclusions:

  • Global policy rates will remain low for extended periods of time
  • The extent and duration of quantitative easing, term financing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories, both domestically and globally
  • Investors should continue to anticipate and, if necessary, shake hands with government policies, utilizing leverage and/or guarantees to their benefit
  • Asia and Asian-connected economies (Australia, Brazil) will dominate future global growth
  • The dollar is vulnerable on a long-term basis.”

  “There are some interesting new patterns of air trade emerging,” notes Chris Mayer with your investment opportunity of today.

“Dubai, for instance, is at work on what will be the world’s largest airport. Emirates Airline, its chief airline, will grow its passenger fleet 14% and its cargo capacity by 17% this year, despite the global slowdown. Emirates plans new routes and is increasing the number of flights on old ones. Over the last five years, the airline has grown 20% annually.

“Booming trade with Asia has created demand for increased flights. Whereas in 2000, there were only seven flights connecting the United Arab Emirates to China, today there are over 60 such flights.

“Its fastest growing market is Africa, which has grown 17% in the last 12 months as Arab investors and businessmen flock to the continent. Emirates recently added a second daily flight to Lagos, Nigeria. It’s opening new services from Dubai to Durban in South Africa, including 14 tonnes of cargo capacity.

“And look at China. China plans to build some 97 new airports by 2020, and will expand older airports. This will cost more than $64 billion. The country has only 147 airports today. So that’s a 66% increase.

“We are living amid massive changes in air transportation. The order book of the industry also reflects this. The world’s airline fleet will double over the next 20 years. There are over 24,000 new aircraft deliveries on tap — an order book worth nearly $3 trillion. Passenger and freight demand will nearly triple.

“There are some great investment opportunities that spin out of this — and not in the airlines themselves, or even necessarily in the aircraft manufacturers. And while running an airport is a great business, there are few options for investors. I think the greatest opportunity for investors lies in the specialty materials used to make the new planes.”

Which specialty materials? Which companies? Only Chris’ Capital & Crisis readers know. Join their ranks here.

  “If you want to see why so many kids need to go into debt in order to get through college,” a reader writes, commenting on yesterday’s 5, “take a look at my tuition article. It has a comparison of the University of Texas’ tuition and budget between CPI-adjusted values from 1960 to today. It shows that the real cost of tuition has increased 10 times faster than inflation. It also shows that schools are playing games with selectively giving out grants so that the ‘rich’ get soaked. If UT is playing these games, I am sure most other universities are doing it as well.”

The 5: We’ve taken similar looks at the costs of higher education, with similar findings. It’s hard to find any other common good or service that has inflated at such a rate… unless you pay for college in gold.

 

  “What did you expect?” quips another reader. “These are the children of spendthrift baby boomers, after all. Like parent, like offspring.

“Their heads are up their own a@#es, obviously… oblivious to the changing environment that is accelerating around them. However, to be fair, getting into debt for one’s own education is not too bad a strategy, provided if one can get a job using those trained skills afterward. In my opinion, this is a BIG ‘IF’ in this environment, and in the environment we’re heading to. Keep up the great work.”

The 5: Thanks.

Though we have to note even their spendthrift parents have pulled back on credit and upped their savings this year. As we mentioned yesterday, it’s shocking to see student debt pop 25% during all this so-called deleveraging. It’s hard to put a price on a quality education, but if we were 21 today and forced to choose, we’d rather be a journeyman in good financial health than an English lit major 50 grand in the hole.

Enjoy the three-day weekend,

Ian Mathias

The 5 Min. Forecast

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