Railroads Are Getting Cheaper

Posted 02 Feb 2009

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.


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 which is why investing in gold is so important 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.


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 'Own Gold? 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 with a big four accounting firm and if he would hurry up and finish the article he is contemplating on TIPS I would quickly publish it [Update:  Please Steal From Us - A Lesson From TIPS].  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 $900 on 2 Feb 2009.  Gold has reached new all-time highs in various currencies including the A$, 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.


Sometimes I wonder how much simpler, clearer, logical and rational my writing could be so as not to be misunderstood.  Mr. Brochstein's ignorance on such a simple matter seems to reinforce the thesis that the more educated one has been by the 'court economists' and financial professionals the more severe their case of the Financial Insanity Virus.  Generally, the more letters behind their name, CFA, CFP, PhD, etc. the more advanced the infection.  But I do not intend to focus solely on Mr. Brochstein.  I argue ideas with clear, logical, rational assertions and not intellectually bankrupt ad hominem attacks.  I use Mr. Brochstein only as an example of a much larger problem.

Most economists are employed by large government funded institutions.  Still others work for large banks.  There is a status quo and they are not to disrupt it.

Politicians and their advisers are even attempting to repeal economic laws.  But economic reality is more than a brick wall.  Economic law is like the force of gravity itself; unseen except for its influence on every human action.  Economic forces pay no attention to charismatic leaders or their throngs of rabid followers.  Attempts to repeal economic law are futile.  Politicians, their Grima Wormtongue advisors, court economists and financial professionals, all infected with the Financial Insanity Virus, are being humbled before the market.

Let's face it: The stone-cold truth is... it is in the financial best interest of most finance professionals, court economists and other academics for you to remain clueless to basic economic law.  There is a strong conflict of interest between you and them.  If you want to retain your wealth instead of paying fees or losing it in the markets, then you have to take charge of your own education.

This epidemic of the Financial Insanity Virus is raging out of control.  The results of Mr. Brochstein and others like him would be funny if it were not so sad.  We are talking about retirements and pensions evaporating, family fortunes dissipating and behind the numbers are real people.  Let's hope they are sincerely ignorant and not just feigning.  But either way, I am not sure which is worse:  (1) gross negligence and malpractice by the ignorant vain 'professionals' or (2) maliciousness.  When doctors screw up like this they go to jail.  The end result is the same:  'the current mother of all crisis'.

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