PRECIOUS METALS - For years now, I have presented a bullish case for all precious metals (especially gold and silver). And the recent spikes in these metals prove that my assessment has been correct.
It is my firm belief that we are living in a highly inflationary world where all the central banks are recklessly inflating the supply of money and credit. Without the presence of anything tangible backing the various currencies, there is no limit to the amount of "money" that can be created by simply making credit entries in bank accounts on computer screens. So, on one hand where you and I have to work very hard for our money, certain individuals in positions of power are able to manufacture the same money out of thin air, thereby diluting our purchasing power. Let there be no mistake, monetary inflation via debasement of currencies is pure robbery as it diminishes the standard of living for most people. In fact, I would argue that monetary inflation and credit growth are the reasons why, despite economic progress, most people today work much longer hours and most households rely on dual-incomes.
For sure, monetary inflation gives the illusion of wealth and it sure "feels" good to have more numbers in your bank account but is it really wealth? Again, I could easily make the case that access to more money due to debasement is not real wealth since everyone else is also becoming "wealthier" at the same time. If you are still not convinced, I suggest you visit Zimbabwe and ask the locals how rich and fortunate they are feeling as a result of Mr. Mugabe's hyper-inflationary policies! Without a doubt, they all have access to a ridiculous amount of Zimbabwean Dollars but the problem is that this "money" is not worth much. A few months ago, in a moment of true national pride, Zimbabwe issued a new bank-note worth 200,000 Zimbabwean Dollars but it only buys one kilo of sugar! Despite the money-printing efforts of Mr. Mugabe, the Zimbabwean economy is a total disaster with widespread poverty, social unrest and sky-high unemployment. So you can clearly see how monetary inflation never works in the long-term and ultimately destroys the purchasing power of money together with the lives of the unsuspecting public.
The reason I have mentioned the above is because I am concerned that the Federal Reserve is also going down the same path. Although, the official inflation rate in the US is nowhere near Zimbabwe's levels, the easy monetary policies of Mr. Greenspan and Mr. Bernanke are really starting to take a toll on the US currency. Since 2002, the US Dollar has lost over 50% of its purchasing power against European currencies and even more so against the commodity-producing nations. Unsurprisingly however, the world's reserve currency has lost the most against real money which cannot be created without hard-work and sweat - gold and silver.
Now, most people would glee with the fact that both gold and silver have risen by roughly 400% since the start of the precious metals bull-market. However, my take on the situation is that gold and silver have not changed at all (an ounce is still an ounce); but the reality is that the US Dollar itself has lost a considerable amount of purchasing power over the same period. Now, given what we have witnessed in Washington in the past few months, I have no doubt in my mind that the US establishment does not care about the health of its currency. And it looks increasingly likely that if required, Mr. Bernanke will send out personal cheques of US$100,000 to every American household in order to revive the economy. Now, this sort of action may jazz up the official economic data but I can assure you that it will be a national disaster for the average American. Ultimately, the US currency will plummet and Americans will be faced with sky-high consumer prices and inflation.
In the current environment, I have no hesitation in recommending precious metals as a long-term store of value. A few weeks ago in the Weekly Update sent out to subscribers of Money Matters, I advised taking profits in this sector and hope that my readers did. In the weeks ahead, I anticipate the correction to continue (Figure 1) and suggest that investors start buying precious metals in the summer months.
Figure 1: Silver in correction mode!
As a parting shot, I would like to add that Mr. Bernanke is the perfect gift for precious metals investors and as long as he has control of the monetary levers, gold and silver have a bright future.