Silver to go up in value based on demand

I just wanted to touch on something really quickly.  A lot of people are worried about investing in silver because the common thought is it is too high at $40 per ounce.  Many people think it has almost peaked.  I think those people are wrong, and here is why...

1. Historically, silver has had around a 16:1 ratio with gold - Right now it is about 46:1 ratio.  With those numbers, silver is undervalued in relation to gold.
2. On average, the world is only mining 6-7 times more silver then gold out of the earth.  On that basis alone, supply/demand market forces will even out the values over time.
3. The main reason silver is going to increase is DEMAND.  Silver and gold have been coined as legal tender since the ancient times.  While silver has always been used in manufacturing, it has never been used like it will be in the future.  Many don't know this, but silver is the "metal of choice" in manufacturing solar panels.  Silver is the best metallic conductor of electricity we have - better then copper.  It is just not as commonly used in wires because of how expensive it is.  

We are living in a perfect time for silver investing.  For one, it can be used as a hedge to the devaluation of the US Dollar.  And for two, with the increased demand in electrical efficiency, silver will be used more and more in electrical manufacturing, increasing its demand on the manufacturing platform.  

We live in a weird time.  Many think it is crazy that silver may close the gap between gold that greatly, but I really think it is going to happen.  Afterall, how many people ever thought gold would be worth more then platinum?  Last week gold eclipsed the value of platinum for a short period of time.  Now they are about even.  A couple years ago gold was about 25-30% the value of platinum.  For all you jewlrey fans, now would probably be the time to buy platinum jewlrey if you want it.....there has never been a time when you can get a platinum ring at the same price as a gold ring.  Just food for thought.

Til next time....

Another round of QE?

Yesterday Ben Bernanke testified before congress on the state of the United States economy.  Here is a video I think everyone should see.  It will give you an idea of what Bernanke thinks of the US dollar and show that he has no concept what he is doing with our countries monetary policy.





Those who know me know that I have been a big proponent of gold and silver for the past 18 months or so.  Peter Schiff likes to say, "if gold is soaring, Ben Bernanke is probably speaking somewhere".  Ironically, yesterday Bernanke testified before congress and gold went up $42/oz and at this moment still sits at $1588/oz.  That same day, silver was up $1.72/oz or 7%! 

There is a false sense of security in the stock markets.  Across our country people breathe a collective sigh of relief when Bernanke mentions another round of Quantitative easing.  Yesterday, for example the markets were up over 1%.  If you looked through the media, you would see headlines like, "Market surges on increased consumer confidence".  Read that article and you see that American citizens as a whole don't understand what is going on with the devaluation of the US Dollar.  While the markets were up over 1% on the day, the US Dollar lost 2% of it's value to a basket of major worldwide currencies.  Therefore, there was no gain.  If anything there was a loss.

Save America Part 1: Reforming the tax code

In the recent release of S&P’s statement that the United States credit rating may be reduced in the coming years, I have decided to look into some issues and compile some information that might be of use to the masses.  We are living in very tough times.  Until the past year I had never considered myself a very political person.  I guess I was just like most people in this country – I just didn’t care enough to do anything about it because I didn’t see how bad things were….nor did I want to.  It was much easier living in my little happy bubble where nothing was wrong.  Well, I have come to the realization that there is a lot wrong in this world right now – and most of it starts right here in the United States.

As I have watched the news and read the newspapers over the past couple of months, it has been interesting to watch the republicans and democrats ‘battle’ over what we are going to do with our runaway National Debt problem. As I am typing, the US National Debt stands at $14.31 trillion.  As it stands, we are on pace to have an estimated $1.65 trillion budget deficit this year alone.  The question is, what do we do about it?

Democrats and republicans have fundamental differences on how this problem should be tackled.  We are now in an extremely tough spot as a country because of our irresponsible spending over the past decade.  Congress has consistently kicked the proverbial can down the road and not addressed the spending issue for too long.  During that time, the problem has grown so rapidly and out of control, what would have once been manageable to control can only now be reigned in with drastic cuts.

The sad, unfortunate truth is someone is going to suffer.  The reality is all of us will suffer on some level because of the fiscal irresponsibility.  There is no pain free way out of our current situation.

Paul Ryan, a Republican congressman from Wisconsin has proposed a budget with $6.2 trillion in budget cuts over the next 10 years.  Included in this bill are drastic changes to Medicare, tax cuts and repealing the Obama Care program.  Democrats are outraged at this plan because they say it is irresponsible to take away all of those benefits and entitlements. 

I wanted to touch on a couple points that I find most people are not aware of and compare the Democratic vs. Republican views.  You tell me which perspective makes more sense to get us out of our current debt crisis given the facts.  I will also add a couple suggestions at the end of each issue based on the research I have done on that topic.

Taxes:  

Democrats believe we need to raise taxes on the rich to keep spending.  This includes raising the tax rates on all millionaires (anybody making $215k per year) who are already paying 50% while 47% of Americans pay no taxes at all once they receive their refunds every year.  Not to mention, in this current situation even if we rose the taxes every rich person pays by 50% we still have a $500 billion budget deficit.

Republicans believe in a more equal tax.  Yes, that means tax cuts for the rich.  However, the Republican perspective is if you don’t tax successful entrepreneurs and corporations to the max that will leave more money to promote job growth and production.  Let me give an example.  Lets say there is a company that profits $1 billion on the year.  If you tax them 50% of that the government makes $500 million in tax revenue.  However, if you eliminate corporate taxes altogether that allows that corporation to use the $500 million to hire 10,000 workers at $50,000 per year.  In addition, those 10,000 workers lead to higher production rates and more revenue across the board.

Here is the math on the republican tax cut scenario:

While the government loses $500 million in tax revenue by eliminating corporate taxes, the following happens

1.     Assuming a 25% tax is paid, they now earn $125 million in tax revenue from the 10,000 workers the corporation was able to use.

2.     10,000 unemployed people with college degrees now have jobs, so the unemployment rate goes down.  Right now you are able to receive unemployment benefits for up to 2 years.  People who qualify for these jobs receive $425 per week in unemployment benefits.  That is a savings of $221 million the government does not need to pay into unemployment benefits. 

Add those two points together and the government has already made up for $346 or 70% of the tax revenue lost by cutting the corporate tax.

My suggestions: 

I believe everyone should pay their fair share.  The system we use allows too many deductions and manipulation, which in turn adds an additional expense of increasing the size of the IRS employee base to audit and govern the tax payers necessary in the current code.  However, I think we need to consider a couple of things while discussing our current tax code and national budget:

a.     The median household income in the United States in 2009 was $50,221.    

b.     Total income earned in the US in 2007 (most recent figures available on wikipedia) was $7.723 trillion.

c.      US total budget is $3.82 trillion – almost 50% of what is earned by its total population.

d.     Even if you increased income taxes alone we still do not achieve a budget surplus which is where we need to be considering the national debt.

e.     When considering the national debt, consider the Federal Funds Rate is currently 0%.  When that number goes up to historical norms (3-5%) interest payments alone will cripple our country. 

f.      If S&P downgrades our AAA credit rating as a nation, interest rates will rise on everything.

While Obama says it is irresponsible to cut entitlement and benefit programs, I feel it is irresponsible to have the country live on a budget that is 50% of its gross income – especially considering the government is paying 0% interest on all its loans.  However, we are where we are and we need to deal with the situation at hand.  Here are some suggestions:

1.     Implement a flat tax based on tax bracket. 

a.     If your household income in less then $75k you pay 17%

                                               i.     72% of households in the US earn less then $75k

b.     If your household income is $75-150k you pay 25%.

                                               i.     20% of households in US earn $75-150k

c.      If your household income is $150-250k you pay 30%

                                               i.     6% of households in US earn $150k+

Implementing this sort of tax revenue system would create $1.52 trillion in tax revenue for the government. 

2.     Create a Federal Online Sales Tax:

a.     There was a total of $141 billion in online sales last year (http://www.census.gov/econ/estats/). 

b.     Creating a 5% tax on those sales would raise $7 billion in tax revenue

3.     Charge a 0.50% property tax on everyone in the country.

a.     Aggregate values of all residential real estate in the United States are $20 trillion

b.     Charging a 0.50% property tax would generate $100 billion in tax revenue

4.     Tax new car sales.

a.     On new car sales only, charge a 1% tax.

                                               i.     I can’t find the statistics for aggregate national auto sales, but I would venture to guess it is in the $50 billion range.

1.     Those estimates would generate $500 million in tax revenue

Total Tax Revenue Earned:

1.     Income Tax:  $1.52 Trillion

2.     Online Retail Sales Tax:  $7 Billion

3.     National Property Tax:  $100 Billion

4.     Auto Tax:  $500 Million

Total Tax revenue earned:  $1.625 Trillion which is where we are right now, but with a much more fair and economically balanced tax code.

Another option would be to simply add a 1% Federal Tax on anything that counts towards the GDP.   In 2009 our GDP was $14.119 Trillion, which would have raised $141 billion in tax revenue.  Add that to the $1.52 trillion in income tax revenue and you have total tax revenues of $1.661 trillion. 

The later of the 2 options makes the most sense.  After all, if everyone is so concerned what the dept to GDP ratio is, why don’t we have Federal taxes on all GDP expenses?  In addition, flat taxes are the only fair way to operate as a country.  A sliding flat tax code promotes an area where everyone is contributing to society.  However, adding in a tax on all expenditures taxes the rich more as they will inevitably purchase more goods, have higher energy bills on their homes, etc…  While you are not taxing the rich more with an income tax per se, you are creating more of a luxury tax, which would create an environment of fiscal soundness and savings so our country can get back to a strong economic foundation.   

The other part of the flat tax rate that I like is that it’s transparent.  You pay based on what you make.  No deductions, no working the system.  If we were to change to a flat tax system, the 47% of Americans that actually paid 0% in taxes last year, would actually contribute and help reach towards our national debt.  I think even in the short term to tackle our debt problem we could hike upper-income tax rates to the 50-60% tax rate to help tackle our debt as we slowly get our out of control governmental spending in order.  However, to do such would require a sliding scale system require fiscal responsibility, planning and discipline.  We all have to take this National Debt problem on together or the country as we know it will disappear.  The rich can’t take on the debt alone…there simply isn’t enough money.