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Gold in the Crosshairs
Posted by Peter Schiff on 04/15/2013 at 2:04 PM

In the opening years of the last decade, most mainstream investors sat on the sidelines while "tin hat" goldbugs rode the bull market from below $300 to just over $1,000 per ounce. But following the 2008 financial crisis, when gold held up better than stocks during the decline and made new record highs long before the Dow Jones fully recovered, Wall Street finally sat up and took notice. The new devotees helped to push gold to nearly $1,900 by September of 2011. For the next year and a half it held relatively steady, trading mostly between $1,500 and $1,800 as more mainstream investors caught the fever. But now it appears that the brief love affair is at an end. It was really only a flirtation as the two were never a good match in the first place. Gold's new suitors never understood the fundamental case for gold and now they are turning their affection back to their true love: U.S. equities.

This is creating a brutal season for gold investors. The metal is in the midst of its largest pull back in nearly five years, and as the selling has gathered momentum powerful Wall Street voices as diverse as Goldman Sachs and George Soros have declared the end of its nearly fifteen year run of dominance.  

The story line put out by most of these analysts is that gold shined as a safe haven during the Great Recession, but its allure has evaporated with the recent "improvements" in the global economy, particularly in the United States. Ironically, this ignores the fact that gold actually performed better in the years leading up to the 2008 financial crisis than it did during or following the crisis. That may be because the inflationary monetary policy that fueled the housing bubble also powered gold.  Deflation fears led to gold's 35% decline in 2008, but once the Fed reopened the monetary spigots gold rallied to new highs. But in 2008 gold fell in concert with nearly every other asset class. This time, it's falling while other assets are rising. The negative spotlight makes the current decline potentially more meaningful.   

Neither the new round of Keynesian expansion in Japan nor the recent fallout from the Cypriot solvency crisis produced gold rallies. Bears cite these failures as the signs that the bull is dead. The latest warning bell came late last week when the Bank of Cyprus announced that it would be selling its gold reserves in order to raise the cash to pay its debts. Concerns quickly spread that other heavily indebted Mediterranean countries with large gold reserves like Greece, Portugal, Italy and Spain would follow suit. The tidal wave of selling would be expected to be the coup de grace for gold's glory years. While this neat narrative may be sufficient to convince the financial media that an historic shift is underway, wiser minds will see more nuance.   

While the vast majority of economists see gold as the "barbarous relic" described by Keynes, the sentiment has not stopped many central bankers from holding huge quantities as currency reserves. It is a curious phenomenon that the countries with the most daunting debt problems have the highest percentage of gold in their foreign exchange reserves. Many of these countries were formerly prosperous, and at various points in their histories had gold-backed currencies that required large reserves. These legacy assets now account for the bulk of their reserve wealth. 

The United Stated leads the pack with both the largest amount of gold in reserve (8,133 tons) and one of the highest percentages (76%). Other heavily indebted developed countries are not far behind: Italy has 2,450 tons and 72% of reserves, France has 2,435 tons and 71% reserves, Portugal has 382 tons and 90% reserves, and Greece has 112 tons and 82% reserves. Tiny Cyprus, whose travails are creating global ripples, has just 14 tons (58% of reserves). 

In contrast, the quickly developing emerging market economies are conspicuous for very small gold reserves, particularly in comparison to their much larger reserves of foreign currencies. Many of these countries have generated large amounts of U.S. dollar reserves as a result of ongoing trade surpluses. While China has more than 1,000 tons of gold, the cache only represents 2% of their enormous foreign exchange coffers.  Even gold loving India has just 10%. Neither Russia, Taiwan, Thailand, Singapore, Mexico, South Korea, Indonesia, Malaysia, Saudi Arabia, nor Brazil has more than 10% (with most having far less than 5%). Bankers and political leaders in all of these countries, particularly India and China, have lamented publicly about the very high percentage of U.S. dollars in their reserves, and have even spoken fondly about the reliability and importance of gold.  

The heavy debtors in the Eurozone have few pleasant options to deal with their insolvency. As illustrated by Cyprus, the choices may come down to painful austerity or raiding supposedly sacred bank deposits. The sale of gold reserves may provide a much more palatable option for politicians. After all, do voters really care how much gold sits in national vaults? For now at least, international central bank gold agreements limit the amount of gold that they can sell in a given year. But as these sovereign debt crises deepen for countries like Italy and Portugal, many justly question how long these paper agreements will keep the selling pressure at bay.

While I believe that they may indeed succumb to the temptation, such moves may not be disruptive, or even negative for gold. Large divestitures by some countries may lead to corresponding accumulations cash rich, but gold poor, creditor nations like India, China, Russia, and Indonesia.  Such transactions would likely take place through private, direct, and tightly communicated sales. As a result, they would be far less disruptive than would be the case were they to occur in relatively thinly traded public markets as many now fear. 

Such a transfer in gold holdings would be the logical result of the drift of the global economy over the past half century. Despite its current disfavor, gold is real wealth. Governments and bankers know this. As the emerging economies gain wealth, and the developed countries dissipate wealth through welfare-state debt accumulation, it is inevitable that the gold follows. It's not a question of if, but when.  

While nations buying gold will pay for their purchases with dollars, the sellers will not re-invest the proceeds into Treasuries. Dollars raised through gold sales will be converted to local currency and used to repay debt. This will put downward pressure on both the U.S. dollar and Treasuries. In addition, emerging market central bankers will be more likely to hold onto gold for the long-term, thereby providing a bullish impact on the market. In essence, such a shift would flush out the weak hands who don't have the resources to protect their wealth in favor of stronger hands that do.   

Creditor nations that buy gold cheap from bankrupt nations forced to sell at distressed prices will see the value of their reserves swell, thereby gaining the independence and confidence they need to finally break their reliance on the U.S. dollar as their principal reserve asset. When the reign of "king dollar" finally comes to a belated end, let's hope all the gold we allegedly have stored in Fort Knox is actually there. We're going to need every ounce of it.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show. 

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Tags:  goldprecious metals
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The Fed's Tightening Pipe Dream
Posted by Peter Schiff on 03/01/2013 at 1:46 PM
Testifying before the US Senate this past Tuesday, Fed Chairman Ben Bernanke made an extraordinary claim about its bloated balance sheet: "We could exit without ever selling by letting it run off." What Bernanke means here is that the Fed could simply hold its Treasuries and agency bonds until they mature, at which point the government would then be forced to pay the Fed back the principal amount. Through this process, the Fed's unprecedented and inflationary position will be gradually and placidly unwound. 

Growing rumors last month of a potential "tightening" of monetary policy - seemingly confirmed by the Fed minutes released on Feb. 20th - have spooked the precious metals markets, leading to a 5.8% correction in gold and 10.2% in silver.

However, these fears are preposterous on two counts.

First, the Fed just spent the past year and a half extending the maturities of its entire portfolio. That was the entire purpose of Operation Twist. The average maturity of the entire portfolio is now over 10 years. That means any wind-down using the strategy Bernanke outlined would play out over the course of decades - not months or years. 

Fortunately for hard asset investors, it is unlikely to play out at all. 

The second reason these fears are unfounded is that there is no exit strategy. Listening to Bernanke's testimony, it was clear that here was a man simply speculating about when an exit might be undertaken - or perhaps ifit would ever be taken. Senator Corker from Tennessee accused Bernanke during the hearing of being "the biggest dove since World War II." "I think it's something you're rather proud of," the Senator continued. The Chairman's response to the charge of recklessly endangering the nation's currency? "In some respects, I am." 

The Fed Chairman has been talking about tightening for some time. In 2010, he said, "As the expansion matures, the Federal Reserve will need to begin to tighten monetary conditions to prevent the development of inflationary pressures."

Back then, the same mainstream analysts were predicting recovery and a reversal of quantitative easing (QE). Instead, we have subsequently seen QE2, Operation Twist, and now QE3 to eternity.

While these mainstream commentators are at best guessing as to why or when the Fed might reverse course, I understand that it is extremely unlikely to do so for the foreseeable future. In fact, I've bet my net worth on it.

There is no exit strategy because the results of the Fed withdrawing its artificial support would be disastrous for the US Treasury and in the short-term, the US economy. 

The Fed is expected to buy nearly 90% of new Treasury bonds in 2013, according to Bloomberg. This is a tremendous subsidy that has kept 10-year Treasury yields below 1.95% on average this year so far. Last year, with 10-year yields averaging 1.8%, the Treasury spent $360 billion on interest payments alone. That represented nearly 10% of all expenditures.

Let's assume a Fed tightening causes these rates to triple - not unreasonable for a government facing over 100% debt-to-GDP. If these rates triple by 2015, and another $2 trillion or so is added to the debt, then interest would make up over 30% of annual federal expenditures. Just interest. Then, there are principal repayments, Medicare/Medicaid, Social Security, the Armed Forces, and all the other entitlements for which the Treasury is responsible. Is Washington going to default on our creditors, our seniors, or our men and women in uniform?

I believe these assumptions are still rosy compared to what might actually happen if the Fed were to withdraw support. As I outlined in my January Gold Letter, the US sovereign debt market is a house of cards in which the Fed, foreign creditors, and domestic investors each play a part. If the Fed were to signal that creditors might face haircuts, then the reaction could be swift to the downside. If rates went above 10%, as they have in Greece, then over half of the federal budget would be committed to interest payments alone.

But that's not all. Higher interest rates would cause the shaky housing market to take another nosedive. Few Americans are in a position to buy a $300K house at 10+% interest. Rather, prices would have to decline to levels affordable for cash buyers and those willing and able to take out high-interest mortgages. That might mean another 50% decline or more, in real terms.

With housing taking a second bath, we can expect the banks not to be far behind. That sector remains bloated and dependent on various subsidies from the Fed. With loan rates higher than their customers can afford, banks would fail at a rate higher than 2007-8. This would trigger another round of bailouts from the Treasury; but without Fed assistance, where will the funds come from?

If there isn't a bailout, the major money-center banks would collapse, crippling Wall Street's reputation as the global financial center. The US dollar's reserve status might then be abandoned once and for all.

Quickly, one can see how the Fed's money-printing is the mask holding this charade together.

To see in real time what happens when the mask is pulled off, look to the Mediterranean. Greece has seen the Golden Dawn neo-nazi party win 7% of seats in the last two elections. Italy, meanwhile, just saw a comedian with no political background grab 25% of its parliament in a satirical candidacy. Street protests, unemployment, and other signs of instability are rampant. The protestors are not learning a tough lesson about the consequences of profligate spending; instead, they're simply angry that the money has stopped flowing.

No one in Washington - not least Ben Bernanke - has any intention of setting off a similar episode in the US. Yet, that's exactly what a tightening of monetary policy would do. So, at least as long as the CPI numbers can be fudged to make inflation appear "contained," the Fed is going to keep filling the punch bowl. 

Returning to the latest Fed minutes that have hard asset investors so upset, it is telling that while there was some discussion of the dangers of money-printing, only one of twelve governors actually voted against continuing current policies. With no concrete actions being taken and an overwhelming majority still in favor of current policies, it seems gold bears are making much ado about nothing.

As investors realize this, they will once again put their pedals to the precious metals.

Peter Schiff is CEO ofEuro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices. 

Click here for a free subscription to Peter Schiff's Gold Letter, a monthly newsletter featuring the latest gold and silver market analysis from Peter Schiff, Casey Research, and other leading experts. 

And now, investors can stay up-to-the-minute on precious metals news and Peter's latest thoughts by visiting Peter Schiff's Official Gold Blog.



Tags:  Ben Bernankefederal reserveprecious metalsQE
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Waist Deep in the Big Muddy
Posted by Peter Schiff on 01/27/2012 at 1:51 PM

With its announcement this week that it will keep interest rates near zero until at least late 2014, the Federal Reserve has put another large crack into the foundations underlying the US dollar. In a misguided attempt to provide clarity and transparency, Ben Bernanke has instead laid out a simple road map for economists and investors to follow. The signposts are easily understood: the Fed will stop at nothing in pursuing its goals of creating phantom GDP growth, holding down unemployment, propping up stock and housing prices, and monetizing government debt. To do so, it will continue to pursue a policy of negative interest rates, while ignoring the collateral damage of unsustainable debt, virulent inflation, misallocated resources and credit, suffering yield-dependent retirees, and a devalued U.S. currency.  

 

Not surprisingly, precious metals and foreign currencies rallied strongly on the news - with gold up more than 4.3% and the Dollar Index down nearly 1.6% in the days following the announcement. The Dollar Index is now down more than 3.5% from its highs in mid-January.

 

In coming to the momentous decision to extend the Fed's prior low-rate promises by another 18 months, Bernanke and his cohorts relied on a somber view of the economy that is at odds with the sunnier view presented the night before by President Obama in his State of the Union address. To justify holding rates so low for so long, the Fed is choosing to ignore the fact that CPI inflation is currently running north of 3%. Instead, it has conveniently chosen to look at a hand-picked alternative measure, the chain-weighted core PCE, which comes in just a shade below the Fed's arbitrary 2% target. How convenient.

 

After some changes in key membership at the Federal Reserve's policy-setting Open Markets Committee, in which a few long-time hawks were put out to pasture, the Fed has now established itself at the extreme dovish end of the policy spectrum. Among other central banks around the world, it may now be outflanked only by some very profligate ones in South America and sub-Saharan Africa. Unfortunately, the FOMC has its hands on the wheel of the world's reserve currency, and therefore its decisions may lead the planet into financial chaos as long as other nations are content to follow the Fed farther and farther into a swamp of liquidity. To paraphrase Pete Seeger's protest of the escalation of the war in Vietnam, "we are waist deep in the Big Muddy and the damn fool yells 'press on.'"

 

The only bright side of the announcement is that it provides precious-metal and foreign-equity investors a fairly good sense that they are on the right side of history. In order to keep rates low, especially at the long end of the yield curve where it matters most, the Fed must continually print money to buy U.S. Treasuries. This will likely push more investors into gold and away from dollar-denominated assets.

 

As a testament to their own faith in themselves to forecast economic conditions, 6 of the 17 voting FOMC members indicated that they would have preferred to keep rates close to zero at least through 2015. Some even had the audacity to prefer no change until 2016! This comes from the body that couldn't predict the 2008 financial crisis, even while it stared at them from point-blank range. To look into a completely uncertain future and determine that negative interest rates can persist for another four years without igniting inflation is to me the height of economic insanity. Sadly, the inmates have the keys to the institution.

 

The lunacy persists in the rest of the government as well, with Congress and the White House still failing to address our nation's long-term debt issues. The Fed's commitment gives these politicians a "Get Out of Jail Free" card to continue avoiding responsibility. The deficits will be monetized, so no real efforts need be made to cut spending or raise taxes on middle-class Americans. Central to these plans is the assumption that the rest of the world will happily park their savings in U.S. dollars forever. If the latest announcement does not disabuse the world of this notion, I don't know what will.

    

As long as interest rates remain far below the rate of inflation, the U.S. economy will fail to equitably restructure itself for a lasting recovery. As a secondary effect, U.S. savers will likely continue to suffer from a lack of yield and a weakening currency.  In the end, the collapse of the U.S. economy will be that much more spectacular due to the great lengths we have gone to postpone it.  


Tags:  Ben Bernankedollarfedinterest ratesprecious metals
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WAS 2011 THE END OF THE GOLD RUSH?
Posted by Peter Schiff on 01/04/2012 at 4:28 PM

For such a wonderful year for precious metals investors, the final calendar quarter left little to celebrate. Just as people now take for granted that their phones will also take pictures, play music, and surf the internet, many investors have come to expect gold and silver to move up in a straight line.

In fact, in a recent CNBC interview one analyst claimed that gold's recent correction proves that it is not really a safe haven. In truth, such a statement merely proves how little some analysts know about markets.

However much the fundamentals may be on your side, there are always mitigating factors that affect price movement. In the case of gold and silver, the temporary resurgence of the dollar versus other fiat currencies alternatives has been the dominant factor - but even that isn't the whole story.

STAMPEDE OUT OF EUROS

The critical factor that has been in play the past few months has been the European debt crisis going critical. I have said all along that the US is in worse shape than the EU overall because the EU has less will and capacity to resolve - or even temporarily paper over - its problems. The flip side is that, absent the massive stimulus the US has received, Europe has been forced to deal with its sovereign debt problems first.

Global investors have been spooked since the credit crunch of 2008. That means they are more likely to follow the herd rather than stick to the fundamentals. It takes a certain firmness of character to watch your investments sell off by double digits and not have a moment of self-doubt.

So, what we're seeing is big moves into and out of asset classes. But what is important to understand about these circumstances is not the scale of the moves but the direction of the trend.

Right now, the dollar is riding high. But it's still down over 30% over the last decade as measured by the generous US Dollar Index. Gold, by contrast, is up over 350% in that period. Of course, past performance does not guarantee future results, but the fundamentals have not changed. It's worth remembering that mainstream analysts chose the dollar over gold in almost every report over the last 10 years, based on a blind faith in the power of the US government to centrally plan the American economy. The market proved them wrong.

Once again, the mainstream narrative is that the real danger is in Europe and therefore the US offers a safe haven. This has caused a stampede out of euros and into dollars. But as we've seen over the last few years, the euro and dollar can decline simultaneously - and will continue to do so as more and more investors realize that the real safe haven is gold.

SHOOTING STRAIGHT UP

There is a reason assets don't move up in a straight line. Besides varying liquidity needs and risk appetites of investors, there are also built-in mechanisms to flush speculators out of a skyrocketing market.

As silver approached $50 this past April, the COMEX raised margin requirements for futures contracts on the metal, thereby pushing many speculators out of the market. While this practice presumably prevents speculators from overusing leverage, it also has the effect of crushing the short-term price of the metal. Both gold and silver have been subject to increased margin requirements this past year.

While we can now rest assured that future price increases are driven more by long-term investment than short-term speculation, it is not without costs. Speculators serve to reduce volatility in a market by buying in anticipation of future scarcity and vice versa. So, pushing out the speculators may increase volatility in the future. However, it's my feeling that in truth no gains have been lost at all - they have merely been postponed.

IS THIS THE TOP?

In order to determine whether the recent sideways movement of gold and silver is cause for concern, let's look at what lies ahead for 2012.

It is clear from 2011 that the new Tea Party members of Congress are not strong enough to stop the fiscal bleeding, and with the Occupy Wall Street movement in full swing, President Obama doesn't have a lot of room to compromise. Washington has been reduced to short-term measures to "pay" its bills, and the bills are mounting faster than ever.

Meanwhile, Ben Bernanke's Federal Reserve seems intent on pushing all the boundaries of monetary policy. In its most recent ploy, the Fed has engaged in a covert bailout of Europe through the use of currency swaps. From an investment perspective, this goes to show how deluded dollar investors are - they're buying into a currency that is being printed for any and all comers. This news should have caused the dollar to tank and gold and the euro to rise, but again, the fear trade is overriding all other considerations.

2012 should see more trouble from Europe, and therefore potentially more dollar buying. This might even be the year we see a few members exit the euro. However, there is no way to know how the euro will react in the short-term to such events, as such scenarios may already be priced into the market. In any event, long-term, the eurozone will be stronger without its weaker members. If they cannot mend their profligate ways, better to force them out now than compromise the solvency of the stronger members.

For smart investors, dollar strength caused by euro fears is simply an opportunity to buy contra-dollar assets on the cheap. Yes, I believe sub-$30 silver and sub-$1600 gold are still cheap for what's ahead. And with 2012 forecasts of $2,200 by Morgan Stanley, $2,050 by UBS, and $2,000 by Barclays, it appears I'm not alone.

Peter Schiff is CEO and Chief Global Strategist of Euro Pacific Precious Metals, a gold and silver coin and bullion dealer offering honest products at competitive prices.  

 

If you would like more information about Euro Pacific Precious Metals, click here or go to our website, www.europacmetals.com. For the fastest service, call 1-888-GOLD-160


Tags:  currencydollareurogoldprecious metalssilver
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SILVER OUTWEIGHS GOLD
Posted by Peter Schiff on 03/02/2011 at 10:01 AM
In the world of precious metals, silver spends a lot of time in the shadow of its big brother gold.
Gold, with its high price-to-weight and distinctive yellow tint, has always occupied a special place in the human psyche. To many people across many ages, gold is simply the ultimate form of money - and, as a long-term, stable store of value for one's personal wealth, I agree it's hard to beat.

However, rare circumstances are aligning today that I believe will make silver the true champion of this bull run.


WHAT'S DRIVING PRECIOUS METALS?

Gold and silver are both benefitting from a perfect storm in the sector.

Dollar devaluation means that much of the 'gains' we see are really just losses by people holding dollars. In other words, if your dollars lose 50% of their value, it's going to take twice as many of them to buy the same ounce of gold.

But the rally is based on more than simple inflation. Precious metals are regaining their role as the ultimate reserve asset. That means many, many more people are buying and holding these metals than at any time in the last thirty years.

Another factor is the rise of emerging markets and decline of developed markets. As billions of poor Asians, Africans, and South Americans lift themselves out of poverty by embracing the free market, the US is plunging itself into poverty by rejecting it. This means there are a mind-boggling number of new customers for jewelry, savings, and industrial products that require precious metals - and that we are becoming less and less able to outbid them for these resources with our dollars.


SILVER'S DRIVING FASTER

If the world were going to hell in a hand-basket, then I would expect gold to outperform silver. However, it is only the developed economies that are on the rocks - and only the US that faces true catastrophe. Thus, we have seen silver outperform gold for the last eight years.

The market is telling us that while uncertainty reigns supreme, the global economy will prosper in the years ahead. While gold most effectively insures the investor against economic devastation, silver offers both a shield against monetary turmoil and exposure to market growth.


THE KEY: INDUSTRIAL DEMAND

This is because silver is both a precious metal and an industrial metal. Gold is mostly precious, copper is mostly industrial, but silver strikes a fine balance between the two. And it seems as if this moment in history is perfectly suited to this balance. We are facing not only the prospect of the collapse of the international monetary order, but also the largest industrialization process the world has ever seen.

While in a past era, wood, steel, or oil would have been the most critical commodity, today silver is used in everything we hold dear: iPhones, flat-screen TVs, batteries, solar panels, etc. Asia - the new heart of the global economy - is accumulating gold, but they're consuming silver. That makes both metals good bets, but likely gives silver the edge.

It's safe to say the future depends on a steady supply of silver. This burgeoning demand is reflected in the latest figures: global demand for silver is about 890 million ounces a year, while global mine production is about 720 million ounces a year. We're actually consuming scrap to make up the difference. And unlike gold, which tends to remain in a recoverable state as coins or jewelry, a large quantity of silver is ending up in trash dumps - where it is essentially lost forever.

As long as the emerging markets continue to trend toward freer markets, and consumers the world over continue to demand computers, electronics, and green tech, silver should only become more scarce - and thus more valuable. I think these assumptions are pretty safe to make.


CAN THE WORLD THRIVE EX-US?

Of course, if everyone agreed with me, silver would already be worth hundreds of dollars an ounce and there wouldn't be any profit to be made on the trade. Fortunately, there are a couple of bogeymen in the financial media scaring the majority of investors away from silver so far.

First, some analysts still believe - bless their hearts - that the US is really going to pull through this time into a sustainable recovery. After being duped by dot-coms and then housing, they are all aboard the Treasury Express back to Bubbletown. Unfortunately, as in the previous two cases, the current low interest rate environment is merely masking an underlying economy that is vastly more rotten than it was even a decade ago. The unemployment rate is a key signal that this time, Bernanke's magic medicine won't work.

A second cohort sees that the US is doomed, but still thinks we will drag the rest of the world down with us. This is the school that holds that despite our persistent current account deficits and monumental external debt, the world economy "needs" the US consumer to drive growth. As I alluded to in my book, How An Economy Grows And Why It Crashes, this is like a plantation master claiming his slaves need him around to consume the fruits of their labor, or else they wouldn't have anything to do. Well, the results are in: after an initial panic rush into dollar-based assets, emerging markets are back at full sprint while the US is still limping along.


SILVER IN A DOLLAR COLLAPSE

Just like a Hollywood celebrity, we in the US spent our time at the top of the world - and soon let our status get to our heads. And like a celebrity, our adoring fans the world over will be quick to forget us as we fall from the limelight and deal with our powerful addiction to partying and cheap money. To survive the next decade in America, you are going to want an asset that is in demand globally, but is also free from counterparty risk here at home.

I recently did an interview with a group that is making a film about living in America in the year 2019. The premise is that inflation is rampant, the economy is in shambles, and groups are springing up that do all their trading in silver rounds. While I think their timeline is quite generous, this is a fairly accurate picture of what lies ahead.

Not only does silver appreciate while sitting in your safe due to overseas demand, but it also comes in units that are ideal for use as a common trade unit. Two or three ounces of silver can buy you groceries for a week. By contrast, just try to eat an ounce of gold's worth of vegetables before they spoil. There are fractional gold coins and bars, but they carry very high markups.

None of us have had to think about these things in our lifetimes, but it is not abnormal in history. Soon, understanding precious metals will be as much a survival skill as knowing how to change a car tire.


THE GOLDEN RATIO

I always say that every investor should have at least 5-10% of his portfolio in physical precious metals. Of that, the proportion allocated to gold vs. silver depends mainly on risk tolerance. Silver tends to be more volatile than gold, so silver investors must have the discipline not to liquidate their stash at the first sign of a correction.

I generally advise a ratio of 2:1 gold-to-silver in the average portfolio. More aggressive investors can push it to 1.5:1 or beyond.

Year-to-date, silver is up 5 percentage points more than gold, and I expect that trend to continue. It's important to understand that in this fast-changing world, silver is no longer runner-up.


Tags:  goldprecious metalssilver
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