Dear Reader,

Recently, I predicted that the Federal Reserve would start using words to slightly strengthen the U.S. dollar. Trichet at the ECB has utilized the same tactic to give the dollar a beating. The euro’s situation has improved in no way, but his promises of higher rates have buoyed the currency.

With the Federal Reserve’s new plan to hold four press briefings per year, the first part of my prediction came true. The Fed will use words as a part of its toolbox. However, the second part of my prediction hadn’t come true until this week…

In the March 22 edition of the Daily Dispatch, I pointed out,

If the dollar weakens to the $1.45 and $1.50 range, I wouldn’t be surprised to see Bernanke discussing inflation concerns and the possibility of higher rates. His sincerity should be highly questioned, but such an action would likely be enough for the dollar to regain a little ground.

In the March 28 edition, I noted the following:

Now we’ll have to see if the second part of my prediction is correct. I think that he’ll focus heavily on inflation with some promise of a future rate hike.

Let me share yesterday afternoon’s headline from Bloomberg, “Bernanke Says Fed Must Monitor Inflation ‘Extremely Closely.’” Let’s see what the article says,

Federal Reserve Chairman Ben S. Bernanke said policy makers must watch inflation “extremely closely” for evidence that rising commodity costs are having more than a temporary impact on consumer prices.

“So long as inflation expectations remain stable and well anchored” and the rise in commodity prices slows, as he’s forecasting, then “the increase in inflation will be transitory,” Bernanke said yesterday in response to audience questions after a speech in Stone Mountain, Georgia.

“We have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability,” he said.

The dollar rose against the euro and yen after the comments….

As I noted in my first piece on this subject, Bernanke will almost appear to have seen the light. He’s actually acknowledging that commodity prices may be a problem. If they become a further problem, he’s promising to maintain price stability, i.e., raise rates.

So far so good on the predictions, but this one came a bit early. Well, the dollar was close to my target range at the time of these comments, between $1.42 and $1.43. However, I thought that Bernanke would wait for the April 27 press briefing to make comments on inflation. He’s already started, but I think there’s still more to come.

Before we get to the rest of the issue, remember the Fed said that the four annual press briefings won’t attempt to move the market. Even with these few comments in Georgia, Bernanke slightly moved the dollar. If Bernanke doesn’t want to move the market, he should just keep his mouth shut. Do you really think he will make it through a whole press briefing without doing more of the same? I doubt it.

First, Jeff Clark will discuss the state of silver. Can silver go higher from here or is it overbought? Then Kevin Brekke will discuss the migration and state tax rates. Finally, I’ll have a short comment on China’s rate hike.

Silver Is Getting Too Popular… Right?

Jeff Clark, BIG GOLD

It’s no secret that the silver market is red hot. As I write, silver American Eagles and Canadian Maple Leafs are sold out at their respective mints. Buying in India has gone through the roof, especially noteworthy among a people with a strong historical preference for gold. Demand in China continues unabated. Silver stocks have screamed upward.

So, as an investor looking to maximize my profit, I have a natural question: is the silver trade getting too crowded, meaning we’re near the top? Have the masses finally joined the party such that we should consider exiting? After all, it’s not a profit until you take it, and you definitely want to sell near the top.

There are several ways to measure how crowded the silver market might be. I prefer to look strictly at the big picture and not get caught up in the weeds. This means I’m looking for signs of market exhaustion or the masses rushing in. Nothing says “peak” more than an investment everyone is buying.

So how crowded are silver investments right now? Let’s first look at the ETFs.

At $35 silver, all exchange-traded funds backed by the metal amount to $20.7 billion. You can see how this compares to some popular stocks. All silver ETFs combined are less than a quarter of the market cap of McDonald’s. They’re about 10% of GE, a company that still hasn’t recovered from the ’08 meltdown. Exxon Mobil is more than 20 times bigger. And this isn’t even apples-to-apples, as I’m comparing the entire silver ETF market to a few individual stocks.

This is even more interesting when you consider that it’s the ETFs where most of the public – especially those that are new to the market – first invest in silver. So while the metal has doubled in the past seven months, total investment in the funds is still far beneath many popular blue-chip stocks.

Okay, maybe all this money is instead going into silver mining stocks. How does the market cap of the silver industry compare to other industries?

While you fetch your magnifying glass, I’ll tell you thatthe market cap of the silver industry is $73.1 billion. It barely registers when compared to a number of other industries I picked mostly at random. The dying newspaper industry is over 26 times bigger. Drug manufacturers are 213 times larger. Heck, even the gold market is 19 times greater. And here’s the fun one: the market cap of the entire silver market, with all its record-setting prices and stock-screaming highs, represents just one-third of one percent of the oil and gas industry.

To be fair, there are a number of sectors that are smaller than silver. Radio broadcasters ($43.2B), video stores ($10.9B), and sporting goods stores ($2.5B) have puny market caps, too. But then again, who's buying DVDs or baseball mitts to protect their wealth from a coming inflation?

Silver hardly resembles the picture of an investment that is too crowded.

I’m not saying one should rush to buy silver right now. After all, it has doubled in seven months. Unless this is the beginning of the mania, prudence would certainly be called for at this juncture. The price will always ebb and flow in a bull market, and an ebb is overdue.

The question, of course, is from what price level it occurs. What if a correction doesn’t ensue until, say, a month from now, and the price falls back to… where it is now? I remember some articles in January that insisted silver would fall to as low as $22, and, well, they’re still waiting and have in the meantime missed out on some huge gains. For silver to fall back to $22 now would require a 40% drop; not impossible, but I wouldn’t hold my breath.

Fixating on market timing takes your focus off the ultimate goal. In my opinion, instead of worrying about what will happen next week or even next month, focus on how many ounces you have, and then buy at regular intervals until you reach your desired allocation. This has the added benefit of smoothing out your cost basis. And don’t forget to buy more as your assets and income increase.

This is a market where you'll want to be well ahead of the pack. Someday in the not-too-distant future, average investors will be tripping over themselves to join in. That will make the market caps of our silver investments look more like some of the others in the charts above. And that will do wonderful things to our portfolio.

I think owning no silver in this bull market would be a mistake.