The Time to Own Gold and Silver
Has Arrived
                                                    August 15, 2003

Despite two consecutive six-year closing highs for the Gold Bugs (Basket of Un-hedged Gold producers) Index (HUI), in the past week, the two-year gold bull market goes largely unnoticed by investors and the media. Instead investors and the media remain focused on promises of a cyclical recovery by the Fed, and an invisible and imaginary revival of the technology sector. Silver bullion recently made a three-year high, while the dollar index recently made a new four-year low. Gold made a seven-year high earlier this year, in February. These are indisputable facts that can be seen on any price chart of these indices and commodities.

Some of the key factors driving the gold bull market include:

1) The growing urgency for China to diversify reserves out of the dollar, (particularly with pressure growing for China to revalue it’s currency upward against the dollar).
2) Legalization for individuals to own gold personally in countries such as China.
3) Development of the Malaysian Gold Dinar, a new gold-backed currency, and increasing rejection of the US dollar in international exchange (note: Iraq’s switch to Euros in payment for oil since 1999).
4) Commitment to policies by the Federal Reserve which are friendly to Gold (as an example – Bernanke’s November 2002 comments regarding the printing press)
5) Gold stocks have a negative beta and, it will become increasingly apparent, that this fact alone makes the asset class an important part in a diversified portfolio. The fact, that total capitalization of gold stocks worldwide is only $80 billion, will make the asset class even more desirable as prices rise and bigger players are attracted to the area.
6) When Nixon signaled to the world by completely de-linking from gold that the printing presses could run unrestrained, gold went from $35 to $850 an ounce, reflecting the many years of paper currency printing to come. It has taken time, but the Fed has again lost all credibility regarding the dollar and we are in the very early stages of market recognition.

Gold production has been declining for the past few years while; silver is largely produced as a byproduct of other base metals. Substantially higher prices would need to be sustained to undertake the long process of building a mine in most cases. We believe silver is an even better bargain than gold as the US Government’s 60-year stockpile has now been depleted. The gold price to silver ratio exceeds 70 to 1. The ratio last bottomed at 16 to 1 in 1980 and has averaged between 12 and 15 to 1, over the past several thousand years. Some very savvy investors have taken enormous positions in silver over the past several years, including billionaires: Warren Buffet, Bill Gates, George Soros, and Larry Tisch.

The manipulated US, credit-based consumption, economy has been on a crash course for years, and has been consistent in one key area – an ongoing and long-standing misallocation of capital. Knowing full well the consumer is spent; the hope has been that the interest rate cuts and credit availability would somehow be re-directed toward capital spending. These attempts have been futile as business managements are reluctant to expand the capital base in the face of overcapacity, particularly for technology, which is operating at around a 62% rate.

The Fed has reached a point of desperate measures and has been successful in prolonging the eventual day of reckoning. It believes it can make Americans spend their savings, at the threat of making them worthless through inflation. It believes that foreigners now hold enough debt that they can now be considered partners, however unwilling, and will fall in line with the Fed’s plan to have them gobble ever larger chunks of US paper or suffer the consequences of their currencies appreciating, thereby imploding exports and their export-based economies. There is extreme risk of capital flight and a declining dollar.

A declining dollar would import inflation and result in higher long-term interest rates, upsetting the pillar of the US economic strength; home equity extraction and cheap easy credit, which has been used to continue addictive over-consumption. With record bankruptcies even at these very low interest rates, it is almost unfathomable what a 200 basis point rise in interest rates would result in. Money supply responds as if in decline because of a sharp drop in money velocity. While I have heard the excuse that, “we are No Japan”, I would respond that in my experience, the Japanese entered their deflationary period in much better shape to weather a long period of declining prices and little availability of credit due to their historically high savings rate. In our situation we are at the mercy of foreigners to the tune of $3 billion a day, and are not in control of our own destiny, ex the use of our military. It appears that with deficits as far as the eye can see, on the state, local, and federal levels we are in a very challenging spot. Gold should now rise against all currencies and is an insurance policy that all should own at this juncture.

We have come to a time when there are only two things standing in the way of an economic and financial collapse of the US and the dollar; the willingness of China to continue funding America’s runaway trade and budget deficits through its ballooning trade surplus, and the military might of the US. With election time approaching, there are increasingly, calls from US manufacturers and Asian competitors for China to revalue its currency upward against the dollar. When that time comes, which may not be far off, China's stash of dollars in its reserves are likely to be replaced in part by a substantial increase in gold. (China has already added 205 tonnes of gold since year-end 2001.)

In closing, we will end with quotes from two famous Americans, and one picture worth a thousand words:

“The Gold standard acted as a silent watchdog to prevent unlimited public spending…I can find no evidence to support a hope that our fiat paper money venture will fare better ultimately than such experiments in other lands. Because of our economic strength the paper money disease here may take many years to run its course…but we can be approaching the critical stage. When that day arrives, our political rulers will probably find that foreign war and ruthless regimentation is the cunning alternative to domestic strife.”

-Congressman Howard Buffet – (father of billionaire investor Warren Buffet)

“In absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard. A free society needs the rule of gold.”

-(Incredibly) – Alan Greenspan – 1966

The drafters of the constitution of the United States were well aware of how a government armed with legal tender powers could ravage the people’s liberty and prosperity. When Alexander Hamilton wrote the Coinage Act of 1792, he made into law the market definition of a dollar, as equaling 371.25 grains of silver. During the 20th century, the legal tender power enabled government to tell the people the dollar meant a piece of government–issued paper, backed by nothing except the promises of the government to maintain a stable value of currency.

Now, look at the following chart, and you, be the judge:
Has the government been diligent in keeping its obligation to maintain the value of the dollar?

Click on the chart below for a larger image:
Source of chart: The AIER Chart Book, published by American Institute for Economic Research in February 2001.

The policy levers being implemented by the Fed and the Government are reminiscent of those implemented by Germany in the early 1920’s. Look on the chart above to see the devastation caused by such measures.

Richard J. Greene