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Why Precious Metals?


Precious Metals have been the ultimate store of wealth, currency of international exchange, and sound money in its purest form for over 5000 years.


G'day. What disappointment I've suffered these last few days! No, not the fact that metals have copped a few uppercuts and look like having a nice pullback for those looking to enter the Precious Metals realm. Rather, it's that the launch of my new fund has been delayed 'til April 1 due to documentation issues. Bugger it. Another month of sitting on the sidelines doesn't impress me but I reckon it may be a blessing in disguise, especially for my investors.

I will be running around somewhat in the next month but should have more to contribute as most of my time consuming documentation/legal/accounting etc. is done - now to raise some serious capital!! I guess I'll be in NYC very soon. Any ideas?

Onto my thoughts for today...

Gold looks likely to see $635 again at first glance with a test back to 610 not out of the question before we steam our way through the $720 level by the end of summer. Silver looks likely to see $12.60 again too. Note from my article on September 27, 2006 that we missed out by 20 cents on getting the new high in time- "Silver has strong support in the physical markets sub $11 and I reckon the downside is limited to $10. $15-22 on a serious spew. I dunno what would force such a "tiger" but hey, I'm just flagging the levels on my radar. Overheard at MIM3: 'Air, water, then silver' – strike a medal for whoever said that. I'm looking for $12 in early October and a new high during the first quarter of 2007."

It is said there is only one LAW of economics- Supply and Demand- the rest is just theory.

Precious Metals (primarily Gold and Silver) have been the ultimate store of wealth, currency of international exchange, and sound money in its purest form for over 5000 years. Gold was the Reserve Currency of the Global Financial system until President Nixon defaulted on US International financial obligations and removed gold as backing of the US Dollar. Since 1971 the world has operated under a Fiat Currency regime where money is issued at will. In 1971 an ounce of gold cost $35 yet today it is $630 for that same ounce, a devaluation of the dollar versus Gold by over 90%. Pity those who stored their wealth in US "paper" dollars rather than precious metals.

"Gold that never changes… that is eternally and universally accepted" – Charles De Gaulle 1968.

Heavy emphasis is placed on economic and financial history in formulating my investment rationale. The 1965-1980 period in which gold rose by over 2500% is a case in point. The London Gold Pool, the Vietnam war and massive deficit spending tell a tale familiar to many observers today. Today's economic environment dwarfs the preconditions of past massive movements. More paper dollars chasing limited metal supply must send prices higher. The law of supply and demand will always prevail, eventually.

The underlying premise of my investment strategy is that there has been a rebalancing of the excessive monetary and fiscal "liquidity injections" into the US economy over the past 20 years. Subsequently, liquidity will eventually flow into sound money: gold and silver. Precious metals are presently denominated in US Dollars so the US dollar must devalue against gold and silver - there can be no other logical conclusion. Every fiat currency in human history has failed disastrously: from Kublai Khan in the 1400's; to John Law's French fiasco in the 1700's; the infamous hyperinflation of Weimar Germany in the last century; and recently the South American currency meltdown. Inflation is by definition wealth destructive, yet today we have Central Bankers creating inflation through their monetary policy with a stated target of 3%. The gap between 'official' CPI and 'experienced' inflation has lead to dramatic asset devaluation in real terms. For official statistics and public prognostications to declare that "inflation is muted" is ridiculous to the point of deceit.

Former Federal Reserve Chairman Alan Greenspan himself wrote in 1966 in his essential essay Gold and Economic Freedom:

"The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit… In the 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 'hidden' 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."

Yet under Greenspan's stewardship, the US Federal Reserve affected the greatest increase in debt via expansive monetary policy and easy credit that the world has ever seen, more than the combined legacies of every other Fed Chairman combined. The USA has fallen from the world's largest creditor in 1970 to the world's largest debtor in just 30 years. This profligate expansion of the money supply brought us the Tech Bubble of the late 1990's, the current property and equity bubble, and the massive unsustainable debtloads being carried by government and consumers globally.

As France was destroyed by Fiat currency inflation in the 1700's, Voltaire declared - "Paper money will always return to its intrinsic value. Nothing." Today's US Dollar is no exception to this rule. While monetary aggregates have exploded in the past decade, creating a credit bubble and monetary inflation of historic proportions, the Federal Reserve has recently eliminated reporting of its monetary operations. However, nothing can be more transparent than Precious Metals - you either have it or you don't.

Recently appointed Federal Reserve Chairman Ben Bernanke said in 2002 that "The US Government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US Dollars as it wishes at essentially no cost" and that he is prepared to "throw dollars out of helicopters to fight deflation." In the current monetary environment such a historically ignorant statement appears irresponsible at best, and dangerous to wealth preservation at the very least. There can be no "strong dollar," as asserted by Treasury Secretaries Rubin, Snow and others, while ever there is no fundamental backing to such dollars. All that remains is a shrinking tax base to cover ever-increasing government expenditures and debt, and an unsubstantiated confidence that it will not fail.

"Deficits don't matter"- says Dick Cheney, the Vice President of the USA. I beg to differ. Deficits ultimately destroy the currency of any country that does not address them. Paul Volcker in 2006 said "The circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot...I don't know of any country that has managed to consume and invest 6% more than it produces for long." He was chairman of the U.S. Federal Reserve from 1979-1987, when gold hit $850 an ounce, which is equivalent to $2300 per ounce in today's money. One cannot print and borrow one's way to prosperity - a historical fact that cannot be denied.

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