On Precious Metals

By George Miller, November 18, 2009

 

So, I haven’t written much about this lately– too busy making money and fighting 666 in D.C. :-).   But there has has been a lot more interest in the topic, as people watch in horror while the bailouts, incredible government spending and deficits spiral upward, Obama, his Czars and Congress attempt to “Transform” the nation, taking apart what formerly worked and substituting questionable alternatives– and they wonder how they will be able to protect themselves, families and property.

 

The U.S. Constitution calls out gold as money and assigns the U.S. Treasury to coin money. How far off that prudent track we have gotten! Increasingly worthless paper debt now masquerades as money and Uncle Sam has outsourced “money” to the Federal Reserve, a private, for profit company that does not seem to have our best interests at heart. Monetary policy is further degraded by pressure from spendthrift Congresspersons of bipartisan origins and corrupt business lobbies.  When you hold a Federal Reserve note in your hand, you are holding DEBT, not money. It is merely a promise to pay paper, backed by talk, guns, endless borrowing and printing presses, resulting in inflation without end. Candy bars that were a nickel when I was young are now $1 or more. Gasoline that was .23/gallon then is now over $3, was nearly $5 not long ago and will be higher.  My boyhood home on Long Island, NY,  purchased in 1953 for $7500, was over $300,000 last time I looked.

 

So, what’s an investor to do?

 

In answer to some of your recent questions about precious metals, here’s my best shot, although I am hardly a precious metals guru.  You should track www.24hgold.com and Jim Willie’s Hat Trick Letter www.goldenjackasss.com for far more authoritative advice.  I monitor many other resources, but those would be an excellent start.  I’d recommend goldseek.com also, but almost everything there and more is already in 24hgold.com. Ted Butler and Jason Hommel are smart silver specialists who bring additional perspective. www.gata.org provides information on PM market intervention.

 

Gold (silver too) is going up and up and up,  because fiat currencies are going down and down. Don’t be fooled by exchange rates and hype implying that some currencies are going “up.”  It’s just that some, like our almighty dollar, are going down faster.  It’s not so much that gold is rising, as most other currencies are falling.

 

Gold prices are also going up because they were suppressed for a long time, having down trended pretty much from 1980-2000, thanks to Paul Volcker’s highly successful, but painful, renovation efforts and persistent, successful price suppression.  His successors continued only the latter.

 

Our “leaders” seem to be doing the best that they can to wreck the dollar and the economy, so gold buying has extended beyond the requirements of hedging inflation, to extend to disaster protection, along with making up for the long, probably illegal price suppression.  The economy is still very weak and by no means in “recovery.”

 

Some say that the Fed, banks and politicians actually now WANT a devaluation of the dollar to help pay for their welfare state and bailouts. So much for the puppets Geithner and Bernanke’s “Strong Dollar” statements.

 

In spite of this, there is still enormous precious metals shorting in place and the constant threat of central bank gold sell-offs, although those would seem quite stupid, in retrospect, in a rising gold market.

 

Strong international forces are very angry about the U.S. fraud and mismanagement in NY, DC, CT and Charlotte, NC and are now taking steps to protect themselves by buying gold, dumping the dollar and eventually replacing it with some new currency. The so called IMF “drawing rights” consist of a “basket of currencies,” which can include gold, Euros, Yen and even dollars and pounds, for comic relief and because that’s mostly what’s out there now.  Some countries have already announced deals denominated in something other than dollars. The Fed has been buying some of its own Treasuries, due to lower demand.

 

So, should you buy precious metals at today’s high prices?  Well, obviously, they’re not as great a bargain as they were at $700 gold and $9 silver only a year ago and history has proven that they can fluctuate wildly, but there appears to be some significant upside. I have heard estimates ranging from $1500 to $20,000 in gold and $20-$250 for silver.  Before you get hyperventilated about the upside, consider that such a doomsday prediction was based upon a hyperinflation scenario, so it really wouldn’t be truly worth 17x as much as today’s value (as opposed to price) if that was to occur.  But it would put you way ahead of holding dollars, treasuries and bonds, if that transpired.

 

That brings us to inflation vs. deflation.  Let me again caution you that I am no guru, but even most of the professed gurus do not appear to know what they are talking about, although I have been identifying some that make more sense than others and are influencing my thinking.  The true definition of “inflation” is an increase in the money supply. But keep in mind that there are different definitions of money supply and they keep changing as more new instruments and Wall St tricks are developed and the rules keep changing.

 

By almost anyone’s definition, an enormous amount of “money,” in the form of Federal Reserve Notes, in paper or electronic form, have been created out of thin air in the last two years (it is correctly pointed out that this is actually debt, not money, an important distinction). It is the largest such expansion in human history. Other mini-me countries have also spewed out quite a lot.  Countering this is the huge capital destruction of deleveraging.  The real estate crash has resulted in asset depreciation of real estate, most equities and bonds– in fact it is the greatest asset deflation in history.  many economies have shrunken in real terms, although govt. mouthpieces claim GDP is growing. Shadowstats.com thinks otherwise about that and other statistics, such as inflation, unemployment and credit, all of which are headed in disastrous directions.

 

Say what you want about inflation, but when I go into stores, most prices are far higher than they were a few years ago, package sizes are often smaller and quality often lower.  My utility bills are all up– all, even natural gas, which has dropped by 2/3, while my monthly bill has risen.  Yes, houses are back to 2003 prices, from their hype-inflated 2005 prices and super-jumbo plasma screen TV’s are cheaper than ever.

 

A rising stock market, in the face of falling fundamentals, is also a sign of inflation.

 

Knowledgeable people speculate that if gold backing, or even partial gold backing, was to be restored to currencies, it would also push the gold price up significantly. Gold only accounts for a tiny percentage (or none)  of reserves for most, but not all countries’ currencies. The U.S. supposedly has 8200 tons of gold, which is worth less than $300 billion at today’s prices, compared to trillions of dollars floating around in the system.  Keep in mind that our gold hasn’t been really audited since 1954 and it is said that much of it is gone or encumbered.  If the truth gets out, that would be quite bullish for gold and bearish for the dollar.  That might be already getting factored into the gold price, at least somewhat.  There is also the news that some naked shorts have defaulted on gold delivery, offering up to 25% premiums to settle instead in dollars. Add further the stories of counterfeit gold bars, filled with tungsten, or otherwise not meeting delivery purity standards and you have the mother of all bonanzas.

 

Silver is a different and more complex story, beyond the scope of this humble posting. Suffice to say that it is a heavily-used industrial metal and is only beginning to return to being  a major investment metal as well.  Most silver mined is a co-product of base metals, so a plunging economy greatly constrains the supply and vice-versa.  Although it is more plentiful than gold in the ground, silver stocks are at a historical low, since demand outstrips supply.  Until recently, prices hardly justified recovery.

 

Even now, both gold and silver prices are far below their inflation adjusted highs of 1980, although those were superspikes, due to Jimmy Carter, many years of liberal spending/mismanagement, etc. It’s back the future now, on steroids, under Obama, Pelosi, Reed, Frank, Schumer, Dodd, Bernanke, Geithner, nightmarish “Czars” and a corrupt Wall St.

 

So, my take is that gold/silver can not only provide an inflation hedge, but also provide real additional gains from the disaster premium and catch-up effects.

 

On the matter of metal vs. ETF’s, vs. funds vs. equities:

 

- Metal has no counterparties, but is a little less liquid and there is the storage problem. But, everyone should have some and everyone would wish for more if things become unglued.

 

- ETF’s are easy to trade and have lower premiums, but some may not have all they say they do and could be subject to manipulation, restrictions or even confiscation. They are a counterparty, not a hard asset, although most claim to be backed by metal.

 

- Funds vary wildly in quality, portfolio, investment philosophy and fees. I have had none since the Fidelity PM fund.  However, I have the Central Canadian Fund, and GTU, which are really more like ETF’s.

 

- Equities have far more upside, due to price leverage to gold, but also have huge downside, as was proven in the 2008 crash.  As gold dropped from 1030 to under 700, gold stocks swooned. Silver did worse. However, that unearthed some huge opportunities.  For example, Hecla dropped from 13 down to about 1. I was fortunate to buy thousands at a little over 1 and it is now well over 5.  Many good gold and silver stocks have risen at least 3X from November 2008 lows, some much more.  There are also many really bad PM companies that will never mine more than investors’ money.

 

I stayed out of options and warrants on this round, mainly because the stocks were so cheap that they were just as good as warrants.

 

As for the oft heard remark that you can’t eat gold, I reply that you can’t eat dollars either. 

 

As for  the remark that you can’t buy groceries with gold, that is coming, but you can already do that via the extra step of first selling it for a huge dollar profit, or for whatever currency is in vogue when you get around to selling it.

 

As far as gold being a “barbaric relic,” is it more barbaric than a currency ( I won’t dignify the dollar by calling it “money”) which is actually debt? Or, one that can survive only by printing geometrically ever-increasing amounts of it and enslaving citizens with eternal debt?  Is it more barbaric than a “currency” that depreciated 96% since the last Central Bank was founded, impoverishing untold millions and eroding the lifetime, even multi-generational efforts to build wealth? Is it more barbaric than a confiscatory tax regimen that steals the illusory profits of inflation “gain?”

 

May you sleep better with your precious metals investments!

 

By the way, one of my favorite precious metals funds is expanding again. They (CEF and GTU) are said to be the safer ones:

http://www.marketwire.com/press-release/Central-Fund-Of-Canada-Limited-TSX-CEF.A-1077787.html

 

www.Goldmoney.com is also a unique alternative for real rainy day real money.

 

Regards,
George Miller
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