Silver superspikes: dollar-bullish, and they don’t last

First, the 25-year monthly chart:

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Here’s a chart that goes back further but only goes up to 2010 (I couldn’t figure out how to get barchart.com to draw me the whole thing, but you can just use your imagination – the line just goes straight up from $30 to $45):

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Gold’s march upwards has been much more orderly, but silver is a thin market and prone to spikes. These things are tough to short, and to attempt to do so you should wait for a pause and use a stop above the highs, but even with a stop a fast market like this could spike dollars in minutes or seconds and close you out at a big loss only to reverse. This chart doesn’t show the action that happened intraday one day in Jan 1980 when silver traded over $50 very briefly.  No reason why it couldn’t spike to $70 next week only to crash and languish at a new normal of $10-20 for the next two decades.

It is safer in a way to buy puts than to short SLV or sell futures, since your risk is defined – you can only lose what you put up. The July 35-strike puts on SLV were going for less than 60 cents on Wednesday, and will get cheaper every day until silver falls. June 35s are under 40 cents and will decay faster but pay off better in a crash. At any rate, I’d take a disciplined approach and figure on losing my premium at least once, buying higher strikes if the spike continues upwards. Losing the first premium or two would be acceptible if a later position pays off 10:1.

Take another look at this long-term dollar chart. We had a major bottom in 1980 just as everyone was panicking into precious metals.  Silver spikes are apparently another symptom of extremely negative dollar sentiment, so should be considered bullish for the currency.

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BTW, though gold’s price and action is much more sensible, the silver spike is very bad for gold as well – it may just have doomed its bull market. The metals have more than adjusted for the inflation of the last 30 years and the money printing of the last 3. It would make sense for their run to end soon and for them to settle into some middle ground. That doesn’t mean gold can’t touch 2500 and silver can’t hit 100 – it’s just that these moves are too fast and too high relative to their historic multiples to other assets, so these prices will not last.

Long-term gold charts (first one is a few weeks old – the second is current but doesn’t go back as far):

2011 Dividend tax increase cuts real value of S&P500 by 30%.

The S&P 500 is currently yielding about $25.50 per share annually, about 2.3% at today’s level. Sub-3% yields are a characteristic of the bubble years. Before the 1990s an index yield under 3% was very skimpy, hardly justifying the risk of capital loss. Reduced marginal taxation of 15% (with 0% and 5% rates for low-earners) on qualified dividends (meaning on shares held more than 1 year) helped somewhat to justify lower yields, though in the rapid-turnover casino environment after 1995 dividends have hardly mattered to a stock’s performance.

Presuming that the aftermath of the credit bubble has brought a secular value restoration phase (Jim Grant’s term) and growth is missing or anemic, dividends should take greater precedence in investors’ minds. The aging of the developed world should also play a role as retirees opt for safety and income. In this environment, the denominator in the yield equation, share prices, would be expected to adjust downward regardless of any change in tax policy.

To make matters worse, when dividends are subjected again in 2011 to 39.6% federal taxation, prices would have to fall by roughly 30% to offer the same yield, assuming constant dividends. The S&P’s $25.50 yield nets $21.67 this year for a real yield of 2.0%, but to get the same net yield next year either the payout would have to increase to a record $36 or the index would have to fall to 780 (the after-tax net on $25.50 is $15.40 at 39.6%). Although forgotten lately, the stock market’s fundamental value is derived from expected income, so taxation cuts right to the bottom of any valuation estimate.

Dividend payouts remain at the same depressed levels of late 2008 and early 2009, even as earnings have regained lost ground. If and when sales take another turn downward, perhaps aided by cuts in state and local government wages and further layoffs by small businesses, margins and dividends may again come under pressure. With the 10-year treasury bond yielding over 3.25%, where’s the margin of safety in stocks? The 5-year note even yields as about much as stocks, and unlike stock dividends, treasury yields aren’t subject to state-level taxation in the US.

As of today, there are actually some remarkably good yields available from blue-chip stocks such as utilities, consumer staples and tobacco companies. Here’s a list, updated frequently. I’d keep an eye on a few of these. If stocks fall to a level where the after-tax yield looks attractive, I’d be interested in picking up a basket of these for the long-haul. At that point in the cycle the ones with low debt will be among the safest financial instruments you could ever find, since there are productive assets backing that equity — even better if you spread out the political risk across the world.

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Editorial here: Why raise these taxes (or have them at all), when the revenue derived from them is a tiny portion of the federal ledger and their imposition in all liklihood costs the government (let alone the well-being of the nation) multiples more than they generate, due to lost investment. The government blows the money — it goes down the welfare/warfare rat hole, subsidizing the worst elements at home and abroad.

So why do it? Because the people who make such decisions are either ignorant and idealogically driven (a few, such as Ivy-indoctrinated DC functionaries and academics) or just don’t give a damn about the welfare of the country (the majority). They believe that punitive taxation helps them keep office (it just sounds good to tax the “rich”), and as the balance of the western workforce shifts more and more from production to leaching as government and society age, this is ever more the case.