Friday, November 21, 2008

Another Window Closes

I have advised a few people who have come to me for advice on how to purchase precious metals to use the Perth Mint program in Australia. This is one of the largest mints in the world, and I liked their program based on their low costs and their ability to store the metals outside of the country.

Today I found out that their window to purchase has now closed as they have suspended all orders for metals until January due to the overwhelming amount of orders taken over the past few weeks. They cannot keep pace with demand.

http://www.theaustralian.news.com.au/business/story/0,28124,24687337-643,00.html

1 ounce physical Silver Eagles averaged $27 an ounce today in the open market, while the paper COMEX price can still be purchased for $9.60 an ounce. At some point those prices must once again be equivalent. You can take your bets today on which way you'll think it will go.

In the headlines today you read about the credit card defaults soaring, auto loan defaults soaring, foreclosures soaring, and you're still hearing about the subprime loans getting worked through the system. All these things continue to destroy the major investment banks balance sheets.

In about six months, as the subprime loans and foreclosures have brought our nation to the brink of bankruptcy, the true atom bomb and possibly the final bomb will be dropped in neighborhoods across the country in the form of the Alt-A mortgage loans.

These loans were given not only to people with no credit, no income, no assets,(subprime) but they were also given to the mainstream, the prime buyers. They provided home owners a monthly choice of paying their (A) full payment, (B) paying interest only, or (C) paying less than the interest payments and having the remainder added on to the total principle every month.

You just checked A, B, or C every month and sent in your check. Which option do you think the majority of Americans chose? Well, we'll soon find out. Starting next year the first wave of interest rates resets will begin for the Alt-A loans and they'll continue all the way through the first quarter of 2011 like a never ending tsunami.

Imagine as homes are falling in value every month and begin to go under water that at the same time principle is being added onto the total amount owed. What is the likelihood that those people are going to continue making their payments on the underwater homes when their payments reset and they now have to pay principle AND interest on a larger principle AND a much higher interest rate.

It's going to be a disaster coming at the same time the cost of living is exploding, people are losing their jobs, stock prices are falling in true value, and home prices are collapsing in true value. I say "true value" because you will eventually see a rally in the nominal stock price due to the inflation currently being injected into the system. I would expect to see a few major bear market rallies in the stock market over the next few years that will be spectacular.

These will present tremendous selling opportunities for anyone still holding American stocks. These temporary and artificially inflated stock prices will not buy anyone any more goods, but they'll make people feel better when they look at their statements every month.

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