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Railroads Are Getting Cheaper (vs. Gold and Silver, at Any Rate)

February 03, 2009
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The primary purpose of these posts is to educate on monetary science and basic economic law and not to provide valuation opinions but occasionally I do. In my most recent post I gave some valuation opinions on real estate. This seems to have generated some discussion throughout the Interwebs but most of the assertions in these discussions are fairly ignorant of even the basics of monetary science.



I did receive a comment from a reader and good friend:

I have a question. You indicate that you would look to purchase real estate when prices reach 500-1000 oz of silver or 75-80 oz of gold. With metals prices where they are today, it would be whole lot cheaper to buy 1,000 oz of silver than 80 oz of gold. Does this make silver a better investment at today’s prices (assuming of course that the price manipulation game ends)? What do you think?

Despite this website’s name I receive many questions about silver. Perhaps it is all the traffic to RunToSilver.com being directed here.

My opinion is that silver is particularly cheap. The price of silver in gold confirms this. This is particularly related to silver’s hybrid status as a primarily industrial commodity and quasi-monetary metal.

While this topic could use a few posts for greater clarification, in summary because house prices, and all real estate both commercial and residential, will continue to fall in terms of gold and because silver will continue to rise in terms of gold therefore house prices will fall faster in terms of silver than in terms of gold.

The Cambridge House’s 2009 Phoenix Resource Investment Conference will be teaming up with the Silver Summit. This is a new show in Phoenix on February 20-21 will be much smaller than the usual Canadian shows. As I will be presenting and the environment should be fairly small I will most likely be able to address many of your questions. While I have not chosen or prepared my topic yet I suppose ‘Silver’s Role in The Great Credit Contraction’ will be as good as any.

RAILROADS

At the end of December in ‘Railroad Costs and Their Value‘ I wrote: ”Based on current performance and balance sheets and assuming no significantly material changes I would consider purchasing the railroads at the following prices: CSX (CSX) at .276gg, Burlington Northern Santa Fe (BNI) at 1.042gg, Norfolk Southern (NSC) at .544gg, Union Pacific (UNP) at .617gg, Canadian Pacific (CP) at .252gg, Canadian National Railway Company (CNI) at .235gg and Kansas City Southern (KSU) at .152gg.”

I think it would be good to consider an update:

Ticker 26 Dec 08 26 Dec 08 in gg Target 2 Feb 09 2 Feb 09 in gg % Change $ % Change gg
CSX 31.87 1.175gg 0.276gg 28.70 0.976gg (9.92)% (16.93)%
BNI 74.09 2.732gg 1.042gg 65.06 2.214gg (12.19)% (19.00)%
NSC 43.91 1.619gg 0.544gg 37.58 1.277gg (14.39)% (21.04)%
UNP 46.33 1.708gg 0.617gg 42.77 1.450gg (7.94)% (14.91)%
CP 32.00 1.180gg 0.252gg 30.26 1.027gg (5.66)% (12.80)%
CNI 35.39 1.305gg 0.235gg 34.56 1.175gg (2.32)% (9.95)%
KSU 18.17 0.670gg 0.152gg 18.10 0.615gg (0.44)% (8.14)%

It appears that over this short period of a mere month the general trend is continuing. The railroads are getting cheaper in gold and getting cheaper faster in silver. Of course, there will be fluctuations but I will not be surprised if my price targets are hit eventually within the next several years. For now the railroads are still fairly expensive.

The latest podcast was about using gold to perform mental calculations of value with a focus on the Down Jones Industrial Average. As the guest on the show said, gold does functions as a ‘secret decoder ring‘ to dissipate the derivative illusion.

USE OF GOLD FOR MENTAL CALCULATIONS OF VALUE

On my article ‘How the Treasury Bubble Will Burst and Why‘ at Seeking Alpha I received a comment from Alan Brochstein, CFA and fellow Gold Standard Contributor who provides analytical services for hire. He said, “Trace, sorry, but this makes absolutely no sense…” This is not surprising considering his 8 Dec 2008 article ‘OwnGold? Time to Fold‘ where he stated, “If you still are concerned about inflation, learn about Treasury Inflation Protection Securities (TIPS). Gold remains a sucker’s bet…”

I would stay away from TIPS. I have a friend and reader I went to accounting school with who is at KPMG and if he would hurry up and finish the article he is contemplating on TIPS I would quickly publish it. Bloomberg has reported that TIPS are showing quite the activity quoting Mark MacQueen, “When the Fed gets finished here they will have an inflation nightmare on their hands. There is a lot of downside in conservative government bonds.”

For comparison purposes on 8 Dec 2008 gold closed at $767.25 and is trading around $900 on 2 Feb 2008. Gold has reached new all-time highs in various currencies including the A$, Real, C$, Euro, Pound, Rupee, Mexican Peso, Ruble, Rand, etc. Unencumbered gold, silver, platinum and palladium are sovereign wealth. Those who own it never have to fold. When it comes to safe and liquid assets gold and silver are the penultimate.

Disclosures: Long physical gold and silver; no position in the railroads.

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