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The world is awash with US dollars looking for a home. China alone owns over 1 Trillion dollars in US Government debt and is talking of Reserve diversification including increasing its gold holdings. They have accumulated these currency reserves in what has been described as a massive “vendor financing scheme.” Japan, India and Russia are all operating similar schemes to transfer goods and services into precious metals via American debt. The list goes on.

The US Government has incurred more than US$50 Trillion (that’s fifty thousand billion or $50,000,000,000,000) of unfunded domestic liabilities, payable in the next 15 years in the form of social benefits promised to the Baby Boomers reaching retirement age. The US' current account deficit is annually over 700 Billion dollars, growing exponentially. The apparently endless War on Terror is costing billions per month and not one spending bill has been vetoed by the current President since he has taken office. US Debt is now greater than GDP for the first time in history. How can this debt be repaid? The US Government must increase taxes, reduce spending, rely on the benevolence of its creditors or continue printing more money. Surely, the USA does not intend to default on its debt twice in 40 years.

Gold is immune to inflation as it is a real, tangible, indestructible natural element, limited in supply and unable to be counterfeited. Gold is the purest form of money and a store of wealth without comparison. Alan Greenspan himself said as recently as 2002 that “Gold will always be the financial asset of last resort.” I am of the opinion that “last resort” has arrived.

The past decade has seen significant sales of physical gold by Western Central Banks, dramatically altering the supply-demand equation during this time period. Derivatives, gold leasing and forward selling exacerbate the issue, by bringing forward or front loading future supply. The underlying physical gold is now in other hands. The prospect of future official gold sales is minimal in my opinion, in fact I see a reversal of this phenomena going forward with at least one Euro zone Central Bank confirmed as a buyer last month. The political environment in central banks is resisting exposure to the risk of US dollars in favor of the stability of Gold. There are simply too many dollar holders looking to buy gold should any large chunks of metal be made available.

Conversely, global gold production is in serious decline with major producers such as South Africa, Australia, Canada and the USA all reporting significant production declines in recent years. There is less than 2600 tons of gold produced per annum with demand north of 4000 tons and rising. Global exploration has been muted over the past two decades due to low metal prices and lack of capital. Reserve replenishment will be difficult to achieve for the major mining houses without significant consolidation of the exploration sector.

The case for silver is even more robust than that for gold. The global stockpile of silver has been steadily consumed by the industry over the last 30 years at about $5 an ounce. The US Government had 5 Billion ounces in 1950, yet today it has none. Silver is essential in many industrial applications, including military and medical uses, yet in many cases the amount required is so small that even a $50 silver price would not impact the end product price. Supply is inelastic yet irretrievable industrial consumption continues to surge.

Furthermore, I see serious delivery problems in the physical silver market going forward that will create severe price dislocations to the upside. The Comex regulators have allowed paper claims of more than 10 times the available physical silver in present day transactions. No casino would allow bets of more than 10 times the value of the house. There are only a few pure silver plays available in the world. I expect unprecedented out performance from this sector in coming years. 

I expect that producers of precious metals, late stage mine developers and high caliber explorers will benefit greatly from the impending currency crisis and a flight from fiat. It would be prudent for investors to look elsewhere, beyond US Dollars, when choosing a store of wealth. Since every currency in the world is backed by nothing more than the consensus of confidence and a government’s ability to tax its citizens, I contend that gold and silver will inexorably appreciate against them all. Geopolitical and economic conditions could not be more favorable for precious metals. Numerous historical precedents suggest that we are experiencing the early stages of a multi-year bull market for all hard assets, with the purest and most enduring being Precious Metals. Economic Law will prevail.