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Gold and Silver Will Keep Going Up as Currencies Are Debased

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Whether the US defaults or not, physical gold and silver, ETFs, and mining companies will prove long-term winners.

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If Congress reaches an agreement and the debt ceiling is raised, gold and silver will go up. If there is no agreement and there is a default, gold and silver will go up but in a parabolic move. Either way gold and silver will continue to rise as the US and European economies continue to debase their currencies by the printing of fiat paper money to try to pay off their debt with paper of a lesser value. Indeed, the West has gone so far as to not even bother to print fiat money into paper, instead creating new vehicles like gold and silver derivative products that are nothing more than digital bytes traded across international borders.

As Gerald Loeb taught us, it is human nature to open your 401K and see more dollars than there were last month and feel that all is well. What Gerald Loeb also taught us, however, is that we should not be fooled by how many dollars we have but instead determine the true value of the dollars we have.

As I have often written, "the market will do what it has always done: misdirect, confuse, and confound." Last week I was feeling confused and confounded. Then on Sunday morning it occurred to me that the partisan bickering being played out in Congress over the debt ceiling is nothing more than a well orchestrated charade by both parties to prepare the masses for what will be a an eventual default on our credit rating. I must admit that I never connected the dots but I now firmly believe this thesis is right. The die has been cast. The ship has already sailed. We can only work to protect ourselves and our families from the eventual tsunami that will wipe out those who have not positioned themselves properly in precious metals.

I remember well back in the '60s being in kindergarten and doing drills by hiding under our desks to protect us from a nuclear bomb as the two superpowers, the US and the USSR, played a Cold War game of chicken with nuclear arms. It is laughable now when I think of a six-year-old hiding under a desk to save himself from a nuclear Armageddon.

Those days are long gone, and now the nuclear arms race has been replaced with a new war. This war is now being played on a different battlefield as the East and the West race to accumulate physical gold and physical silver reserves. Those of you who read me on a regular basis already know that I have been a gold and silver bug for 50 years. I think that while it is prudent to hold physical gold and silver, it is also dangerous as it is not unprecedented for governments to confiscate gold and silver holdings while they write you a bogus check for what they perceive is the true value of the metals. We only need to look back to Executive Order 6102 on April 5, 1933, to see it can happen in our country.

There are those who would say they have buried their treasure in secret hiding places and have a little treasure map for their family to use if they need to find it. While this seems like a sensible idea and I do advocate the holding of physical gold and silver, if the government has satellites that can see into the Earth's crust to locate deposits of ores and precious metals, what makes you think it will not be able to use this technology to find your buried treasure? And you'd be amazed what you will say when you are staring down the barrel of a gun.

So this raises the question, how do we hold gold and silver? While there are reports that the gold (GLD) and silver (SLV) ETFs do not actually hold the physical assets their paper represents, I feel these rumors are a bit overdone and we are not close to that nightmare yet. If it makes you feel safer I would recommend that you hold the Sprott gold (PHYS) and silver (PSLV) funds, whose metals are held by the Canadian Mint and which conduct a physical audit on a yearly basis. The downside to these holdings is that there is a premium of 18% for silver and about a 5% premium for gold, but you can choose at any time to take possession of the physical assets, so for the premium you are paying you can feel comforted knowing that it is not a shell game and you really do own a piece of the underlying asset.

Another way to invest in gold and silver is to hold the underlying mining companies that have lagged the physical asset. I have holdings in Barrick (ABX) and Goldcorp (GG) and would recommend a position in these companies on any pullback. They are the cream of the crop in gold and silver mining companies. If your timeframe is a little longer (2015), I would also recommend US Gold (UXG), which will soon be McEwen Mining. I urge all readers to Google US Gold and CEO Rob McEwen. McEwen is one of the brightest CEOs in precious metals, and the truth is that if Rob McEwen were CEO of a company that sold ice pops to Eskimos I would probably invest in it.

The stock has run up to an intraday high of $7.15 in the last week and closed on Friday at $6.90. I would be a buyer under $7.00 as this will be a long-term winner, but if you invest in this you must do so knowing that the payday will be in 2015. Another stock that has a high probability of doing well is Novagold (NG). The flagship project of this company is the Donlin Creek project, which it sold a 50% stake of to Barrick for $127 million. Novagold has agreed to repay Barrick $63.5 million dollars once the mine comes into production, which could be as soon as the end of 2011. While this stock closed Friday at $10.24, the fundamentals of the company support a buy at $9 or below. If it does not pull back to this level, the risk to reward ratio is too high.

So while my long-term thesis is the timely accumulation of Gold and Silver, I recommend that you choose any of the vehicles above.

Before wrapping up, I want to address some reports from the media that gold at $1,600 an ounce and silver having reached a high of $50 an ounce are in a bubble. I will go on record right now and say that this is nonsense. A bubble is not determined by price. A bubble is created by a run-up that is not supported by fundamentals. I remember back in 2000 during the dot-com tulip mania hearing a radio ad for a company called Seashells.com. It said just go to its website and purchase seashells. This was madness. I immediately called my broker and told her to dump my tech portfolio. What ensued was a very heated discussion that ended with my threat of pulling all my accounts from her company and filing charges with the SEC. She sold my tech portfolio while the Nasdaq was at 4,700, and several months later I watched as it cratered to 3,600 and in 2003 around 1,500.

That was a bubble. There was no fundamental reason for these companies to be trading at the levels they were. It was sheer irrational exuberance. The prices of gold and silver based on the debasement of currencies are in my opinion very cheap. I will go on record right now and say that by 2015 gold will be $5,000 an ounce and silver will be $125 an ounce, and I have had some very smart people tell me that my projections are too low. What is and will continue to drive the prices of gold and silver up is the continued debasement of currencies as debtor governments look for ways to pay off debts with paper of lesser value. My recommendation is to keep buying physical gold and silver and to keep trading ETFs and mining companies.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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