That’s the best set of instructions for buying anything and selling anything, be it stocks, real estate, antiques, or what have you. How do you know when the price of anything is low or high? I haven’t the slightest idea, so if you thought this column was going to be a revelation, it isn’t. Rather, I am going to try to explain why metals (and other things) go up in price and go down as well.
There are two basic reasons. (1) Supply and demand, and (2) What is happening in the markets. # 2 is sort of related to #1. As an example, a piece in the Journal (Wall Street) of a couple of months ago, reported “A Discovery of a huge trove in Mozambique.” A new mine that seems to be full of rubies. Prices will go down, because of a new supply of rubies will possibly flood the market. If it isn’t a fake mine that is, which reminds of a fake that happened in the 1920’s, when a shady character offered, “A copper engraving of Abraham Lincoln, suitable for framing, for the low price of $1.” The people who sent in their dollar got a new shiny copper penny. (Pennies made before 1982 are real copper and are worth three cents.) In the late 1800’s, Sarah Rachel Leverson offered “Jordan water from the river Jordan itself,” for a buck or two. It came from her kitchen faucet. Currently on TV, one of the biggest metals advertisers says that you can get “$2,000 worth of silver free.” You do know what the initials “BS” stand for don’t you?
If a new, cheap source of anything scarce, such as gold or silver, were discovered, the price of gold and silver would go down, since the market would be over-supplied with the physical metals. No new sources have been discovered of course, and believe me, exploration goes on constantly in Colorado. When I owned the Grand Imperial Hotel in Silverton, back in the 1970’s, a couple rented a deluxe room and told everyone that they had bought the “Buffalo Boy” mine. They indeed had bought it, along with a fake geologist’s assurance that there was still a huge amount of gold in it. We called them the “Buffalo Girl and the Buffalo Boy.” She had been a TV star, and I have no idea where he got his dough, but they spent lavishly…to my approval of course. The Buffalo Boy had been worked out close to 75 years earlier, the tram line was a wreck, and the whole thing came to a screeching halt when the truth came out a month or so later. The Buffalo Boy and the Buffalo Girl left town, midst the guffaws of experienced miners, who were in great abundance in Silverton.
We must include paper gold and paper silver into the examination of high and low prices. In the futures markets, one can speculate (gamble) on the future prices of just about everything. If you want to bet that the price of gold or silver will go up, you can ‘go long’ on a distant month, or if you bet the prices will go down, you can ‘go short’ on a distant month of a gold or silver futures contract or contracts. Futures contracts will have many hundreds or thousands of ounces of the metal. You are betting on the future price of a metal in huge numbers of ounces. If you bet correctly, you can make a lot of money, and if you miss your bet, you can lose a lot too. The gold and silver in the contracts do not exist. They are paper gold and paper silver.
What happens is this. The futures markets go up, everyone is optimistic and buys ‘long’contracts. The more people buy, the higher it goes, till it reaches a point when people say, “It’s gone high enough, I’m going to sell my contracts.” This starts a chain reaction, and many people sell, thereby flooding the markets with paper gold and silver. This drives the prices of physical gold and silver down or up, depending on the state of futures contracts. When thousands of ounces of paper silver and gold contracts are bought and sold, this affects the physical prices in actual lock step. When ‘everyone is selling, prices go down, and when everyone is buying, prices go up.’ Not real gold or silver, but paper gold and silver in futures contracts. “By low and sell high,” will indeed work, if you’re smart enough to predict the future, but I’m not, and I think that anyone who thinks they can predict the future of anything, is a liar.
In the great bust of 2008, real estate prices tumbled as homes went into foreclosure. Jobs were lost by the millions, and mortgage payments were unable to be met. At a certain point, lots of people bet that real estate would go up, and not go down further. In Las Vegas as well as other municipalities, homes were dirt cheap. Lots of people invested, and held on. Many got rich, and many didn’t, because they bought too high or couldn’t wait long enough. It took over 7 years for real estate to minimally recover. That’s a long time. Buy a foreclosed home, maintain it, try to rent it, pay taxes and insurance? Not me.
Gambling is what ‘buy low and sell high’ is. A new source of rubies, gold or silver will make prices go up, but what if the publicity is ‘fake news?’ What if the mine is a dud? Suppose you guess wrong about future prices, as I did about 50 years ago when I bet with a futures contract, that silver would never go below a certain price. I lost, it cost me a lot, and I never tried it again. I gamble with my two slot machines. Both are 1945 Mills machines, and work well. I put nickels and dimes in them, and win or lose, they’re my machines, and if I lose, my money is still inside!
No more political columns, as they do no good and change nothing. We are in the precious metals business, so my columns will be about economics from now on. – Don Stott