Silver Mania

 

For years I’ve held 500 shares of ishares Silver trust (SLV) in my investment portfolio. During that time it usually hovered around $20 a share and did little else. I’m not sure why I held on to it. It never paid a dividend or provided any income. Perhaps I thought it would be a haven if all else went to hell.

But in the last 12 months things changed. I checked one day and found that last October, the share price had jumped to around $50, a gain of about 150%. I have always believed that when any asset goes up that far and that fast, it is time to sell and take profits. I don’t like to be greedy. So, I sold 400 shares and netted about $20,000. But for some reason I held on to 100 shares.

Incredibly, the price of metals like gold and silver continued to soar, and by January of 2026, my SLV shares had jumped to $105 per share. I sold my remaining shares at what now looks like a top and netted over $10,000. 

I don’t know who bought my shares that day. Millions of SLV shares were being traded every day in January. The volume indicates that major investment firms were involved. Many of these entities use sophisticated computer programs in decision making.

Then, weeks before the USA attacked Iranian military sites on February 28, gold and silver prices started to drop causing speculative buyers to take big losses. On March 24, SLV closed around $64 a share, down about 40% from the January high. That’s big money. Of course, the shares are still considerably higher than they were last March, but if you bought in January, you took a big loss.

I’m trying to understand what this precious metal mania meant for ordinary people. As the price of gold and silver soared, it obviously took more dollars to buy an ounce of each metal. That means that as gold and silver prices rose, the dollar weakened and had an inflationary effect. It just took more pieces of paper to buy an ounce of gold and silver, or anything else. Now that metal prices have dropped, does that mean the dollar is stronger, and will that impact inflation figures?

Unfortunately, I could find little information or interest in the movement of gold and silver prices in the pages of the Wall Street Journal, or various media outlets over the past year. So, I can only guess about what happened. I certainly don’t want to try to predict what will happen going forward.

Was it just a speculative mania or “bubble” that finally burst in January? Or perhaps the meteoric rise was caused by investors who feared that President Trump was not bluffing about Venezuela and Iran and who were seeking what is normally a safe haven for their money. 

Despite the rise in precious metal prices, inflation moderated and oil prices stayed relatively stable. Only after the attack on the Iranian military sites on February 28 did oil prices spike.  Even though energy prices are not included in official inflation figures, ordinary people are feeling the effect at the pump.

During the past year major stock indices continued to rise to record levels, and people would have seen substantial increases in their 401k and other investment accounts.  The Dow Jones Average and other market averages hit all-time highs in early February but began to drop a few weeks before the attack on Iran.

Everyone knows that real estate prices have risen over the past year. A quick check on Zillow indicates that my modest home has reached an all-time high value. But like most people, if my wife and I wanted to cash in, where would we go?

Most people don’t consider that their homes fluctuate in value like stocks and precious metals but maybe it doesn’t matter. At least we can live in our homes no matter what the value.

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Tariffs and Inflation

  

It seems clear, as opponents of President Trump’s tariff policy keep reminding us, that tariffs contribute to inflation. However, there are other factors that also have an impact on inflation. In particular, energy costs, which effect practically every aspect of the economy, have a major impact. Low energy costs help to keep inflation down, and high energy costs, lead to higher inflation.

Despite the tariffs imposed during President Trump’s first administration, there was practically no inflation from 2016 to 2020. Low energy costs must have contributed but the pandemic also was a factor in keeping inflation down. However, I have suspected that the tariffs imposed by President Trump during his first term might have contributed to the runaway inflation experienced during the Biden administration. Biden kept some of the Trump tariffs in place but drove up energy costs on behalf of the Green New Deal. Recall that almost the first thing President Biden did on taking office was to cancel the Keystone pipeline project.

Now in his second administration, President Trump has doubled down on tariffs, and at the same time he has acted to encouraged energy production. As a result, prices at the pump are well below those of the Biden years. So far, it seems that lower energy costs are offsetting the inflationary impact of the tariffs. 

So, why use tariffs in the first place? In a recent op-ed that appeared in the New York Times on August 7, Jamieson Greer, the current US trade administrator gave an extended explanation. He wrote:

The previous system rejected tariffs as a legitimate tool of public policy, meaning that the United States sacrificed tariff protection for critical manufacturing and other sectors. Over the past three decades, the United States slashed barriers to our markets to allow vast inflows of foreign goods, services, labor and capital.

At the same time, other countries kept their markets closed to our goods and deployed a suite of policies—such as subsidies, wage suppression, lax labor and environmental standards, regulatory distortions and currency manipulation to artificially boost exports to the United States. This approach made the United States and a handful of other economies the consumer of last resort for countries pursuing beggar-thy-neighbor economic policies. 

I think Jamieson makes a good point. I have often wondered why commentators who believe that tariffs are so bad for us never bother to explain why other countries think they are so good for them. It was amazing to see President Trump point to a chart showing how high the tariffs of our trading partners were compared to ours. 

Mr. Jamieson’s article helps to explain why my hometown in Connecticut is full of Korean, Japanese, and German cars, and why, when my wife and I travelled abroad, we never saw any American cars. Foreign countries use tariffs to protect their home industries from foreign competition. Even without tariffs, it would be hard for American auto manufacturers to compete against foreign rivals which have much lower production costs. Our salaries and benefits, from CEOs to janitors are the highest in the world. Our workplace and environmental regulations are also beyond compare. Our companies emit a fraction of the pollutants produced in China. Speaking of China, I doubt if there are any unions in the Peoples’ Republic.

Some may argue that in the past three decades the United States has achieved an incredibly high level of prosperity. The stock market is at an all-time high and business is booming. Consumers have gained by importing goods from abroad whose prices, even when you factor in transportation costs, are much less than those produced by American manufacturers. 

On the other hand, our national debt is $37 Trillion and rising. Interest on the debt alone comes close to our entire defense budget. Is this the cause or effect of our prosperity?

President Trump has repeatedly said that he is for “fair trade”, and so far, his trade deals have attempted to reduce the tariffs imposed by other countries in order to create trade balance. They are designed to stimulate American manufacturing.  Whether these tariffs work in the long run remains to be seen. 

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Inflation 2022

I got a real shock this week when I called my local oil company to set up my home heating oil pricing plan for the coming season. Every year it offers an option to set a price cap on deliveries for the coming year.  Under this option the price of home deliveries can not go higher than a set figure but can be lower if prices drop next winter.

 

Imagine my amazement when the company representative told me that I could lock in a maximum price of $6.50 per gallon.  That is an increase of $2.70 per gallon over the previous year’s price of $3.78, an increase of about 70%. In the previous year I had been able to lock in a price of $2.76 per gallon, largely due to the pandemic. In other words, if I use 1000 gallons per year, my maximum cost will be $6500 compared to last year’s cost of $3780. 

 

If you think that gas prices at the pump have skyrocketed, just wait till winter comes and you have to heat your home. One of the reasons I like to use oil is because I can set a maximum price and budget accordingly. If you use natural gas, you have no such option and will have to pay whatever the market demands throughout the winter. Of course, you can not use renewables like solar and wind to heat your home, even in sunny California. Electricity is an option but that has always been more expensive.

 

The  front page headline in today’s Wall Street Journal announced that “Inflation Hits Four-Decade High.” According to the Labor Department the consumer Price Index increased by 8.6% from May 2021 to May 2022. During the same period energy prices increased 34.6%, and groceries jumped 11.9%. an editorial indicated that eggs are up 32.2%, chicken 16.6%, milk 15.9%, and even soup was up by 13.9%. 

 

What has caused this record inflation? Treasury Secretary Janet Yellen has finally admitted that she and Federal Reserve Chairman, Powell, erred last year in dismissing the obvious inflation as “transitory.” But neither she or anyone else in the administration of President Biden will admit that any of their policies or actions were in any way responsible. The President, who never takes the blame for anything, points his finger at Vladimir Putin. He will never admit that his determined efforts to limit the supply of oil and natural gas has taken the country from energy independence under President Trump to the point where he has to beg Saudi Arabia, and Venezuela to ramp up their production of fossil fuels. 

 

Economists disagree over the causes of inflation, but there is obviously a monetary component. A substantial increase in the supply of any commodity, whether it is coffee or oil, will inevitably cause its price to drop. Why shouldn’t the value of our currency decline, if the government substantially increases the printing of money, especially if it is deeply in debt to begin with?

 

The stimulus checks we received during the pandemic put dollars in our pockets, but the dollars we received were obviously a factor in the inflation we are now experiencing. After all, the Federal government did not have the stimulus money in some kind of rainy-day account. It had to print and borrow. In a way, it is like those people who max out their credit card, and then use another one to pay it off.  Instead of looking to the Federal government to deal with inflation, we should realize that the government itself is largely the cause of rising prices.

 

The multi-Trillion spending packages that Democratic and Progressive politicians promote inevitably lead not only to higher taxes, but also to more inflation, the most severe tax of all since it does not distinguish between rich and poor. By now it is clear that only a small percentage of these stimulus packages went to infrastructure improvements. A large amount went to shoring up the almost bankrupt pension funds of Blue states whose Democratic politicians have based their careers on pandering to the demands of public service unions, their main source of political contributions. 

 

Ironically, injecting billions of dollars in these pension funds may have avoided bankruptcy but the resulting inflation will eventually erode the spending power of the actual pensions these retirees receive. Last year every person on a pension has seen the purchasing power of their pension check go down by 8.6%

 

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Inflation 2021

 

The other day my wife came home with some shocking news. She had been to the supermarket where she found that the price of Shredded Wheat,  the cereal that I have every day for breakfast, had risen to $4.00 a box. For as long as she could remember, it had been about $3.20 a box. The eighty-cent increase might not seem like much, but it is actually an increase of 25%.

 

What could have caused such a dramatic increase? The box and its contents have not changed. I don’t think that there has been a substantial increase  in demand that would cause the producer to jack up prices since Shredded Wheat  does not fly off the shelves like Cheerios.

 

Some think that supply issues might be the cause. Shipping and transportation tie-ups are in the headlines. Nevertheless, the increase in price of my favorite cereal would seem to be due to inflation. My wife tells me that everything has gone up in price in the supermarket.

 

Recent news items confirm my wife’s observations and indicate that inflation is indeed with us. Gasoline prices have risen sharply at the pump, and there is even talk that Social Security benefits will increase next year by about 6%. These increases are signs of inflation, but they are not the cause of inflation.

 

Another way to look at price inflation is to realize that it is not the value of particular products or services that has gone up, but that the value of the dollars we use to buy them has gone down. In the case of Shredded Wheat, it now takes four pieces of paper rather than three to buy a box.

 

Fifty-five years ago, we bought our first home in Fairfield for $20000. It was a modest home in a nice neighborhood. Eleven years later, the increasing size of our family led us to sell it for over  $60000, more than triple what we paid for it. Today, it is worth about $600000. The neighborhood is about the same, and even though succeeding owners have made some improvements; it is basically the same house.  The value of a dollar has so shrunk in the past 65 years that it now takes 600000 of them  rather than 20000 to own that home.

 

Economists disagree over the causes of inflation, but there is obviously a monetary component. A substantial increase in the supply of any commodity, whether it is coffee or oil, will inevitably cause its price to drop. Why shouldn’t the value of our currency decline, if the government substantially increases the printing of money, especially if it is deeply in debt to begin with?

 

The stimulus checks we received during the pandemic put dollars in our pockets, but the dollars we received were obviously a factor in the inflation we are now experiencing. After all, the Federal government did not have the stimulus money in some kind of rainy-day account. It had to print and borrow. In a way, it is like those people who max out their credit card, and then use another one to pay it off.  Instead of looking to the Federal government to deal with inflation, we should realize that our government  is largely the cause of rising prices.

 

The new multi-Trillion spending package that Democratic and Progressive politicians are trying to push through Congress will inevitably lead not only to higher taxes, but also to more inflation. Whatever the size of the final package, only a small percentage will go to real infrastructure improvements.

 

 A greater amount will certainly go to shoring up the almost bankrupt pension funds of Blue states whose Democratic politicians have based their careers on pandering to the demands of public service unions, their main source of political contributions. Injecting billions of dollars in these pension funds may avoid bankruptcy but the resulting inflation will eventually erode the spending power of the actual pensions these retirees receive. 

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Note: Here is assessment of inflation by Henry Hazlitt whose 1946 book, Economics in One Lesson, is a revered classic. It was revised and updated in 1979.

 

Inflation itself is a form or taxation, which usually bears hardest on those least able to pay. On the assumption that inflation affected everyone and everything evenly (which, we have seen, is never true), it would be tantamount to a flat sales tax of the same percentage on all commodities, with the rate as high on bread and milk as on diamonds and furs. Or it might be thought of as equivalent to a flat tax of the same percentage, without exemptions, on everyone’s income. It is a tax not only on every individuals expenditures, but on his savings account and life insurance. It is, in fact, a flat capital levy, without exemptions, in which the poor man pays as high a percentage as the rich man. (p. 176)