by Peter Schiff

Imagine a day when you go to buy a quart of milk, ask the price, and the cashier says, “that’ll be a tenth ounce silver.” As the US dollar’s decline accelerates, several efforts around the country are trying to make this vision a reality.

Historically, paying for items in silver or gold was actually quite common. We happen to live in an unusual time and place where generations have grown up trading exclusively in paper. While my parents still used dimes made of silver, we have now gone several decades with no precious metals in any of our official coinage. But this system of money by government fiat is unsustainable.

While the practice of bartering precious metals directly for goods and services has continued on a small-scale over the last few decades, the 2000s saw the beginning of organized efforts to revive gold and silver as money.

THE LIBERTY DOLLAR

One such effort was spearheaded by an eccentric mintmaster from Hawaii named Bernard Von Nothaus. He called his project the Liberty Dollar, and it centered on privately minted gold and silver rounds as well as deposit certificates for precious metals held in his firm’s vaults.

I had many reservations about how the project was implemented – coins were minted with a fixed US dollar amount at which they were supposed to circulate, the dollar amount was well above the spot price of the metal, and authorized “distributors” were allowed to pocket the difference (which often resulted in buyers paying far higher prices for their gold than what they would have paid had they simply bought, say, Canadian Maple Leafs instead) – but I believe Nothaus’ idea was a good one, even if the product was over-priced. Tellingly, despite the obvious flaws, public participation grew steadily from 1998 until 2007, when federal agents raided the Liberty Dollar’s offices on trumped-up charges of counterfeiting.

Really, they were charging him with competing with the US dollar’s monopoly privileges by offering a better product. It’s important to note that the case against Nothaus was built around his coins looking similar to official US coinage (though no one actually mistook Liberty Dollars for US currency), and not around encouraging people to use precious metals as circulating money.

DIGITAL GOLD

Next came a crop of internet-based currencies backed by gold and silver. Most prominent among them are eGold and GoldMoney. Both were designed to allow customers to open online accounts that were valued in, and backed by, gold and silver bullion.

eGold was perhaps the better known of the two until it, too, was shut down by the US government on charges of money laundering. eGold was positioned more as an online payment system than a means of holding bullion. Due to the anonymous nature of the transactions – it was akin to spending cash – the authorities alleged that it was being used by criminal enterprises to funnel illegal funds. But mostly it was being used by regular people to begin saving and trading in money that holds its value. eGold had a transparent system of annual audits and live transaction screening by any user to keep the system honest. It, too, was growing robustly, and was putting up strong competition against PayPal until the authorities intervened.

GoldMoney, founded by my friend James Turk, has remained in operation by keeping its principal operations overseas and by cooperating fully with onerous US financial regulations. It offers similar services to eGold, but with an emphasis on long-term storage. GoldMoney improves upon traditional storage by locating offshore, offering real-time online account access, and providing extra liquidity. These services do come at a cost, however. Still, over the course of the last decade, GoldMoney has swelled to over $2 billion in assets. Clearly, many people want to trade gold and silver over US dollars.

Digital gold is a niche service, but I think the public’s rapid embrace of these projects – none older than ten years – shows that investors are viewing gold and silver as more than mere commodities, but once again seeing them as money. This could signal a paradigm shift back to tradition, which is good news for any precious metals holder.

STRAIGHT UP BARTER

While digital currencies are neat, in practical terms, nothing beats the resilience of traditional barter of bullion for goods and services. If you actually own the physical gold and silver that you intend to save or trade, then you can be sure it will be there until you’re ready to sell. You don’t have to trust anyone except yourself.

In that vein, several efforts have popped up around the country to simply get people trading gold and silver rather than dollars. Since the transactions involved are usually small, such as buying lunch at a local diner, silver is typically the metal of choice.

There are several hotspots for this sort of activity.

Philadelphia has one group, DelValley Silver, that has fostered a local barter market there by encouraging merchants to accept silver coins in addition to dollars. DelValley is also a silver dealer, but they sell privately minted rounds, which can be harder to liquidate than well-known coins like the American Gold Eagle and Canadian Maple Leaf.

Meanwhile, in New Hampshire, many merchants associated with the Free State Project have begun accepting gold and silver at their businesses. Innovation abounds here and the practice of encasing small amounts of silver in laminated cards seems to be the most successful.

Shire Silver encloses silver and gold wire in their cards and measures them in terms of grams. It’s much easier to trade a flat, plastic card containing a gram of silver than to carry around a 1 oz coin. However, even their website will admit that the premium on such a small amount of silver makes it less than ideal for investment purposes. Of course, when you’re ready to barter, they’ll be happy to take your 1 oz rounds in return for some Shire Silver. And that Shire Silver is being accepted by more and more merchants across New Hampshire and beyond.

Another variation, from a group based in Phoenix, Arizona, encloses a pre-1965 US dime inside the laminated card. Before ’65, every dime contained 90% silver, making them worth about $2.50 each in today’s debased dollars. That’s why you won’t find any pre-’65 dimes in your change from the grocery store. However, one fellow had the clever idea of putting them in these cards so they could trade at their silver value without getting mixed in with the worthless dimes we carry around today. The same group even created a free iPhone app that translates US dollar prices into various amounts of silver (more info here).

While I’ll still be selling regular old bullion coins and bars at Euro Pacific Precious Metals, because these are the best way to invest in physical precious metals, I am energized by these efforts. The great thing about holding and bartering physical precious metals is that there is no central company running the operations, like with the digital gold currencies, and therefore there’s no single person the government can go after.

(My new offshore bank, Euro Pacific Bank, Ltd., will soon be offering Visa-branded debit cards back by individual holdings of gold or silver. Euro Pacific Bank customers will be able to purchase gold from the bank, have it stored, and then access their holdings directly using their Visa cards to either make purchases though merchants or withdraw cash from banks and ATMs. Unfortunately, due to the reasons described above, I cannot offer this service to US customers. For more information about my offshore brokerage and banking companies, please visit www.europacintl.com.)

THE WRITING IS ON THE WALL

Besides these grassroots efforts at building barter communities, I’m seeing a cultural shift in favor of precious metals. Utah recently passed a law establishing gold and silver as legal tender and abolishing state capital gains taxes on their appreciation. I was interviewed for a new animated film called Silver Circle that features a rebel group in the near future which mints silver coins in defiance of an even more aggressive Federal Reserve. More and more people are starting to watch the gold price as often as they watch the Dow.

Peter Schiff is CEO of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known coins at competitive prices. To learn about our products and policies, please visit www.europacmetals.com or call us at (888) GOLD-160.

by John Browne, Senior Market Strategist at Euro Pacific Capital

This week, in the second in a series of less-than-impressive press conferences, Fed Chairman Ben Bernanke offered market observers little hope that any additional quantitative easing programs are on the horizon. The Chairman continues to cling to the position that the economy is improving (with the recent “soft patch” attributable to external forces) to the extent that additional Fed support will be unnecessary. Left unsaid was any guidance as to who the Chairman believes will buy the massive amounts of Treasury debt formerly swallowed up by the QE II program?

The logical conclusion is that Bernanke believes that there will be massive private sector demand for U.S. Treasury securities. If so, how long can it be expected to last? If the economy improves, as Bernanke expects, would it not be logical to assume that private investors would direct capital to more promising sectors than ultra low yielding U.S. sovereign debt? Clearly something does not add up. Judging by the Chairman’s halting delivery and sheepish demeanor, it appears as if he knows his position is untenable.

We have argued repeatedly that the inflation created by the unprecedented Fed monetary expansion remains hidden beneath the larger deflationary forces of a major recession. When banks inevitably start more aggressively pushing their Fed-supplied funds out to the broader economy through increased lending will the full inflationary impact of quantitative easing be felt.

If the Fed were true to its word, and could hold in abeyance any additional quantitative easing programs, inflationary concerns would justifiably drop and precious metal prices should be expected to dip. Given that many market participants are giving credence to these intentions, this very well may happen in the short term.

However, we do not believe that we have seen the last of QE. In fact we see the launching of the next monetary juggernaut as a nearly foregone conclusion. It is very likely that if the economy fails to improve as Bernanke anticipates he will reflexively reach again into his monetary bag of tricks. Nothing he has said has ruled out another round. If the door remains open, we should assume he will use it if the going once again gets rough.

For now however, the global winds may strengthen Bernanke’s hand. New and troubling developments in the long running Greek debt crisis have unleashed a knee jerk “flight to quality.” Investors have purchased U.S. dollars, giving it unexpected and to some extent unwarranted strength. More significant demand for U.S. Treasuries pushed yields down to fresh lows for the year.

Today, one-month bills earn only 0.01 percent. Five-year Treasuries yield only 1.48 percent, ten-year less than 2.9. These historically low yields are killing living standards of retired and middle-income investors who rely heavily on interest generated from bonds. Although the returns are minimal, these securities are nevertheless dangerous. They are backed by a government that has over $100 trillion of unfunded debt, whose published Treasury debt is forecast to reach 70 percent of GDP by year end, and which has embraced currency debasement as a national economic policy. When market perceptions focus more intently on these risks, and when the more meaningful returns offered by other asset classes become irresistible, private demand for Treasuries will evaporate.

But there is no logical scenario that will allow the status quo to persist. If the economy improves, inflation will flare and risk assets will become more attractive. This will reduce demand for Treasuries, and cause interest rates to rise, thereby impelling the Fed to launch more QE in a single handed effort to keep U.S. interest rates low. On the other hand, if the economy continues to deteriorate more, QE will be “needed” to keep the current recession from becoming a depression.

Either way, those betting that a Fed retreat from intervention will push up the dollar over the long term, or spell the end to surging inflation expectations, will likely be disappointed.

by John Browne, Senior Market Strategist at Euro Pacific Capital

This week saw the type of downside volatility in the precious metals market that will be remembered for years to come. For those of us who have been long gold, and silver in particular, the memories will not be pleasant. While many had been expecting a pullback in silver, when the violence did come it was nevertheless shocking. Silver shed one third of its value in less than one week. And while gold was pulled down by the general sell off in all commodities (oil, copper, coffee, etc.) the yellow metal shed only 6.5% during the carnage. Those mild losses should remind us that  gold is not just another commodity, but has monetary qualities that tend to smooth out volatility. But will silver survive the vicious downturn?

First, despite all the valid reasons that, in an era of perpetual quantitative easing, silver had become an attractive asset class, it had become clear in recent days that it was overbought. Leading up to April 28, the price of silver rose by more than 150 per cent in U.S. dollar terms over the prior year. On Wall Street momentum always attracts momentum, and as a result, the ascent accelerated in April, with silver rising 31 per cent from April 1 to April 28.

A “hot” commodity tends to attract leveraged speculators. As a result, the rise became more technical than fundamental. Its recent sell off should be viewed on the same terms.

After an exponential rise, supercharged by leveraged speculators, silver was bound to attract the attention of short sellers. In addition, silver speculation became more expensive as the Chicago Mercantile Exchange raised the margin requirement for buying silver futures five times in just one week! Factoring in all of these increases, the last of which becomes effective this coming Monday, the cost of owning silver futures contracts will have increased a staggering 84 per cent from the beginning of May. The rationale behind these moves requires serious inquiry…which I will leave to more informed columnists. But the results were predictably dramatic, as many leveraged players were forced to liquidate.

In addition to these technical catalysts, other factors contributed to the decline this week. Facing pressure from domestic exporters who complain about an overly strong euro, there are signs that the ECB is losing its commitment to vigilance against inflation. This has led to speculation that the U.S. dollar could strengthen for the remainder of the year. This could adversely affect the price of precious metals. In addition, with private sector unemployment rising in the United States, there is a risk that the U.S. economy could be entering a second, or double dip recession. This would lower the risks of overt inflation and dampen the industrial demand for silver.

But as far as long term fundamentals are concerned, the case for precious metals remains intact. First, as long as the Federal Reserve and other central banks around the world continue to treat fiat currencies as monopoly money, investors will be seeking alternative currencies as a hedge against inflation. But until bank lending to consumers and businesses increases dramatically, the dangers of hyperinflation will remain largely hidden from the broad swath of investors. As a result, silver’s upward price movements will be vulnerable to panic selling.

But from my perspective the biggest driver in purchases of silver and gold is likely a fear of a meltdown of the dollar and a collapse in the financial system. There are few signs that these fears have abated with the selloff in silver. The U.S. dollar is still standing close to a 3-year low against the dollar index. If more rumors spread that the dollar may lose its reserve status, the greenback could plummet. It is perhaps this perceived risk that has provided the majority of the force behind increases in precious metals over the past year. It is important to remember that the fundamental strength of metals attracted the speculators, but speculators did not create the bull market. It is my feeling that it will endure without them.

While a threatened recession and a stronger dollar should deflect inflation expectations in the short-term, the longer-term risk of a debt crisis spreading into a currency crisis remains. Indeed, the risks of a currency crisis are increasing. For investors who share this view, and who can tolerate the volatility, the reduced prices of silver may be attractive.

by Peter Schiff, CEO of Euro Pacific Precious Metals and author of the hit economic parable How an Economy Grows and Why It Crashes

I have worked on Wall Street my entire life, and one thing I’ve learned is that large institutional investors, like pension funds and endowments, rarely veer from the herd. They manage too much of other people’s money to stick their necks out alone – if their investments go bad, at least they can point to everyone else who fared just as poorly.

For this reason, these funds are often lagging in their perception of crucial market changes – changes such as a doomed currency. While many of us are buying precious metals to hedge against the collapse of the dollar, gold and silver have been taboo investments on Wall Street for years. Fund managers are taught that gold is a “barbarous relic” – much better to stick with government bonds and blue-chip stocks. That’s what everyone else is doing.

But there are early signs that the herd is changing direction.

THE CURRENCY THAT CAN’T BE PRINTED

In a remarkably under-reported story, the University of Texas’ endowment fund – the second largest in the country, after Harvard’s – added about half of a billion dollars worth of gold to its portfolio just this month, on top of the half-billion it purchased several months prior.

The university’s endowment now owns a staggering 6,643 bars of bullion (664,300 ounces), which have already appreciated by over $40 million since mid-April when the bars were delivered to a dedicated HSBC-owned vault in New York City. Not a bad start.

Kyle Bass, the well-known Hayman Capital hedge fund manager and UT endowment board member, advised the university on the purchase. He stated his reasoning plainly: “Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services? I look at gold as just another currency that they can’t print any more of.”

Apparently, the university agrees that sitting on a pile of fiat paper is an act of faith not befitting a prudent and enlightened institution.

AN INSTITUTIONAL AWAKENING

The purchase is certainly causing a few heads to turn.

Now that a major endowment has taken this step, other fund managers are going to be emboldened to follow through on their gut instincts. These are smart guys, after all; they are aware that although their funds may be posting nominal gains, they are losing much more in purchasing power. I’m sure many have privately bought precious metals, but now they have cover to do so professionally.

Perhaps the most interesting part of UT’s billion-dollar repudiation of Fed Chairman Bernanke and his printing press, however, is that the fund demanded physical delivery of the bullion. While more commonplace in Europe, this is truly unprecedented for a stateside institution.

The delivery of physical bullion has at least two important implications. The first is that UT perceives gold to be a long-term strategy for wealth preservation, as opposed to a short-term speculation. The second is that UT must be somewhat concerned about the stability of financial markets in general, so it wants to own physical gold safely stored in a vault, as opposed to owning paper claims, shares of gold funds, or other instruments with counterparty risk.

HUGE RAMIFICATIONS

I have long recommended that investors hold at least 5-10% of their portfolios in physical precious metals. UT’s $1 billion position represents roughly 5% of its $20 billion endowment, so they have reached my minimum recommendation – but likely have more buying to do.

As endowment after endowment decides to sell billions of Bernanke’s dollars and diversify into gold, what might this do to the gold price? If these colossal funds start getting the idea that holding 5% of their portfolio in gold is more conservative and intelligent than holding the current average of 1%, what will this mean for gold demand? The answer is obvious and the ramifications huge.

ONE SMALL STEP FOR INSTITUTIONS, ONE GIANT LEAP FOR GOLD

If US university endowments were to increase their gold positions from the current average of 1% to an average of 5% of their portfolios, it would equal $20 billion, or roughly 400 metric tons of gold at today’s spot price. This is significantly more than the entire yearly gold production of China, the world’s largest producer.

Beyond endowments, private foundations in the US, with 2010 assets totaling nearly $600b, would similarly require nearly 600 metric tons of gold if they sought to hold 5% of their assets in the metal – almost twice China’s yearly production.

And again, these are just US endowments and foundations; there’s a whole world of demand beyond the borders – and we can’t forget sovereign wealth funds (SFWs).

The largest SWF in the world, Abu Dhabi Investment Authority, has assets worth over $600b alone. The second and third largest funds, Norway and Saudi Arabia, together constitute roughly a trillion dollars in assets.

GETTING IN BEFORE THE HERD

The point here is simple: the total investable funds around the world are immense relative to the size of the gold market. It’s not hard to perceive what a simple move from 1% to 5% of the average institutional portfolio would do to the price of gold, and this why the University of Texas’ bullion delivery is so important – it’s a vivid indication that such a move is now taking place.

Gold remains widely neglected among the big-money players, but it’s clear that they’re beginning to come to terms with the US dollar’s terrible prospects. After all, while fund managers don’t want to veer from the herd, they also don’t want to follow the herd off a cliff.

The University of Texas, with its billion-dollar stash of physical gold, is one institution that has finally seen the cliff. The physical delivery of this purchase exemplifies the severity of the threat that UT’s endowment board perceives.

The average investor should recognize that there is little time left to purchase precious metals before substantial new demand drives the price of gold higher. A very small percentage change in large institutional investment is all that’s required for massive gold price increases.

I believe we are on the cusp of a smart-money gold rush. It will drive gold to a record in real terms, even before retail investors join in. Though you may have missed the last decade of gains, there is still a chance to buy in before the stampede.

Despite loud huzzahs from a variety of boosters who proclaimed that Chairman Bernanke spoke with gravitas and wisdom at the first ever Federal Reserve press conference, the wider investing public clearly saw the performance as unconvincing. During and immediately after the proceedings the prices of gold and silver rose strongly to new highs as the U.S. dollar plummeted. The affair seemed to solidify the understanding that Bernanke and his cohorts have no intention whatsoever to reverse the current trend of inflation and a weakening dollar.

With all the preliminaries swept away, it appears that the great dollar slide that we have long feared will not be interrupted. In the last year alone, the dollar has fallen 25 per cent against the Swiss Franc, (the gold standard of fiat currencies) – with one quarter of that decline coming since the beginning of April alone. Against gold itself (the gold standard of all forms of money), the decline has been even worse, 31 per cent so far this year, and 8 per cent this month.

Ominously, the dollar index (the broadest measure of dollar strength) is just a percentage point or two above the all time lows that it set before the financial panic of 2008 sent spooked investors into the apparent safety of America’s deep and liquid Treasury market. It appears that spell has now been fully broken.

Bernanke’s press conference was heralded as a chance for the press to ask penetrating and unscripted questions to the Chairman. However, only a handful of reporters were selected and they were limited to single questions. As any lawyer will tell you, usually it is not a single question, but a line of questioning that tends to tease out the truth.

In addition, it is no accident that Bernanke called upon reporters who were likely to tread lightly upon him, including the reliably supportive Steve Liesman of CNBC. One intrepid Financial Times reporter even asked the Chairman how the investing public can be persuaded to give up their irrational fear of inflation!  Given the supportive environment it was easy for Bernanke to appear commanding and reassuring while skirting the key issue of latent inflation.

Clearly however, Chairman Bernanke still was worried about the slow pace of the U.S. recovery. Claiming substantial success for his QE1 and 2, he left the door at least partially open for a QE3. Perhaps this, more than anything, tipped his hand to the anti-inflation hawks. Most probably, they continue to believe that the Fed will assist the Administration in its bid to inflate out of recession by means of political life support rather than genuine consumer demand. Many investors now accept that the government’s plan involved debasing the U.S. dollar to erode the massive and profligate debts of the U.S. Treasury.

Key to the reasoning of Bernanke and his FOMC are balancing the rates of inflation and unemployment in pursuit of the Fed’s dual mandate of securing sound money and employment. Somewhere along the way, although never proclaimed officially, the Fed decided that its “mandate” compels them to maintain inflation at a minimum of 2 per cent annually.  With Bernanke citing the official inflation rate at 1.3 percent, the conclusion is easily made that the Fed sees no reasons to step on the brakes.

At the same time he expressed sympathy for those American householders who are experiencing inflation at least in double digits for oil and food. This means that, in terms of real money, all investors in bank deposits are being robbed of some 8 per cent each year. This hidden transfer of wealth from the private to the public sector and their banks is just part of the massive general and stealthy transfer of wealth from the private sector.

In 1994, in response to political pressure the formula used to calculate unemployment figures was changed. It is my belief that the current methodology understates the true number of unemployed. Most notably this was achieved by excluding those unemployed over the long-term. Although knowing this better than anyone, Bernanke expressed concern about the level of long-term unemployment. However, in claiming to show the efficacy of his recent policies he continued to quote the 8.8 per cent unemployment figures that exclude such workers. If he had included them the real level would be some 16.2 percent.

While the stock markets welcomed the fact that Bernanke intends to continue his covert inflationary policies, the currency, gold and silver markets were not fooled and gave Bernanke a resounding thumbs down.

by John Browne, Senior Market Strategist at Euro Pacific Capital

As a result of active “demonetization” efforts by the IMF and its member central banks, gold and silver have experienced the type of volatility that has given conservative investors reasons not to perceive the metals as dependable cash alternatives. Instead gold and silver have become known as the asset class to hold as a hedge against inflation.

However, during the 1990′s, when inflation was in general much higher than it has been since the turn of the millennium, gold and silver prices drifted lower and stagnated. However, since 2000, gold and silver have risen by over 400 and 700 percent respectively. Remarkably, this has occurred over a time frame during which, by most accounts, low inflation has prevailed.  How can this be explained?

In 1944 when the U.S. dollar was considered ‘as good as gold,’ it was made the international reserve currency. This unique status is the reason that Fed Chairman Ben Bernanke was recently able to say that, “The U.S. Government has a technology, called the printing press that allows it to produce as many dollars at it wishes at essentially no cost.”

Today, with the Federal Reserve treating the greenback as a never ending lottery ticket for deficit spending politicians, many investors feel the U.S. dollar is good for nothing. As a result there is an increasing international pressure to remove the U.S. dollar’s reserve status. Given that there is no widely accepted alternative to the dollar (the euro has many problems of its own), this is creating fears of an international currency crisis, which has fueled interest in precious metals. So metal prices have risen even with low inflation expectations.

In order to paper over the effects of the financial collapse, central banks around the world are printing as fast as their presses can manage. But unlike prior periods of monetary inflation (like the 1970′s), some major powers (China) are withdrawing liquidity. In addition, emerging market manufacturers are holding down prices even as currencies lose value. This may explain the strong performance of metals despite seemingly manageable inflation. But if higher prices emerge into the light of day (as they already have in commodities), currency uncertainty combined with high inflation should intensify the market for precious metals. The question then becomes how to play the market.

Gold has always been the reserve asset of choice for central banks and major private investors. But now, as smaller investors become aware that paper dollars are under threat, many are looking towards silver. Taken in aggregate, these smaller investors have enormous buying power. Through ETF’s and mining stocks they are not bound by government restrictions on holding precious metals in retirement funds. In contrast to gold, central banks do not hold much silver. They are therefore less able to push down the price of silver by dumping inventory when rising metal prices undermine currency confidence.

Indeed, so far this year, silver is up nearly 50% while gold is up only about 6%. Given these figures, investors may be forgiven if they feel that the big move in silver may be over. Technical analysis may provide comfort.

According to the U.S. geological survey silver is about 17.5 times more abundant than gold in the earth’s crust. This ratio has long been appreciated by civilizations throughout history. Thus, in 1792 the newly formed U.S. Congress passed the First Coinage Act, which legally set the valuation ratio of gold/silver at 15 (it was raised to 16 in 1834). In the early 1990′s, with silver out of favor with investors, the ratio approached 100. At the beginning of this century gold stood at some $250 an ounce and silver at $4, putting the ratio at about 62. Today, with gold at around $1,500 an ounce and silver at $45, the ratio has closed to around 33. But this is still far higher than the ratio seen in the late 1980′s (silver’s last mega spike), and if far higher than the natural proportions of gold and silver would suggest.

The demand for physical silver also remains strong, which supports the market for spot silver. Smaller investors may find gold too expensive at $1,461 an ounce, but may be nevertheless prepared to buy several ounces of silver for much less. Potentially, this ‘poor man’s gold’  market may help drive silver prices far faster than gold.

by John Browne, Senior Market Strategist at Euro Pacific Capital

It is rare in recent history for precious metals to appreciate in parallel with the broader stock market. Yet, this has been the case in the two years since the stock market began crawling out of the wreckage of the 2008 financial crisis. Although metals have vastly outperformed US equities over that time frame, it is noteworthy that stocks have gone up at all. Since January 2, 2009, the S&P 500 stock index is up just about 50%. Over the same time, gold is up 68% and silver is up a staggering 267%. With rising interest rates, oil at over $100 a barrel, and the recovery running out of steam, many investors are wisely asking if the markets are set for a sharp pullback. Given the correlation that we have seen across asset classes, some are making the seemingly logical conclusion that metal prices are vulnerable.

The results of 2008 loom large in many calculations. In the second half of that year, when the extent of the financial catastrophe emerged into the light of day, the S&P 500 dropped some 31%. At the same time, gold dropped by more than 7% and silver almost 39%. Recent volatility in the shares of gold and silver mining stocks reveal that the fear of such reversals may be a growing concern among investors.

But one example does not a rule make, especially the example of a panic rush into dollars and US Treasuries. Wise long-term investors make decisions based upon fundamentals, and those for precious metals remain strong.

Throughout history, precious metals, especially gold, have been seen as a store of wealth and a hedge against inflation. But the assumption that gold is always negatively correlated with the stock market is incorrect. Rather, gold is negatively correlated with stability. For all intents and purposes, gold is equivalent to cash in a portfolio. In that role, it competes with the major fiat currencies.

Gold’s rise has thus been driven by cash demand on two fronts.

First, while US savers have been pushed into the stock market in search of yield for a couple decades, the underlying value of the US dollar has deteriorated. This has driven more investors to allocate the cash portion of their portfolios to precious metals, even while the S&P rises. Both of these dynamics are motivated by the Fed’s low interest rate policies since the early 1980s.

But a policy that causes precious metals and the stock market to correlate on the upside will cause them to diverge on the downside. As the Fed is forced to tighten interest rates, stocks will take the brunt of slowing economic activity. Still, we don’t expect the Fed to be able to tighten to the level that real interest rates rise, i.e. bank interest pays more than the rate of inflation, because this could cause the federal government to default on its debts and further harm the teetering housing market. In an environment of negative real interest rates, gold should continue to rise.

The second front driving cash demand is the explosive growth of Asian markets. Traditionally, certain cultures, such as in India and China, have favored gold and silver as both a display and as a store of wealth. As wealth has been accumulated fast in these countries, their demand for gold has increased greatly. In addition, their central banks and those of other nations, such as Russia, also have been massive buyers of gold in recent months. This trend is a continued bullish indicator for precious metals regardless of how the US markets perform.

How might these two factors ultimately benefit gold and silver?

There is a growing realization that recent economic growth has been financed by huge Federal Reserve subsidies. This has built up bullish momentum in the metals market that should continue until real interest rates turn positive. And even if interest rates do rise (which could be a negative for metals) prices of existing Treasuries will fall. Investors selling at a loss may turn to precious metals as an alternate safe haven.

Meanwhile, important international interest rates are already rising, including in such key economies as China, Australia and in the EU. These moves should channel the inflationary impact of QE and artificially low U.S. interest rates back into the dollar, thereby exerting upward pressure on the dollar prices of precious metals.

However, what may be the single greatest upward price pressure is the increasing fear of a debt crisis leading to a currency collapse. It is important to recognize that, at $1,470 an ounce, gold stands at only some 61 percent of the present value of its 1980 all-time high of $850, which, adjusted for inflation, is some $2,400 an ounce. Given the frail state of the US economy today, the chance of a local collapse is much higher than in 1980, when America was the world’s largest creditor – instead of its largest debtor.

Therefore, it appears that, despite some volatility, the price of precious metals could be set for a continued rise, and the stock market for a steep fall. Indeed, if inflation materializes at rates equal to those of 1980, a gold price above $2,400 looks feasible. Should it be accompanied by increased fears of a debt crisis and a threat of collapse in the US dollar, far higher prices could be in store.

by Peter Schiff, CEO of Euro Pacific Precious Metals and author of the hit economic parable How an Economy Grows and Why It Crashes.

While gold and silver coins are nice to look at, and there’s a certain sense of independence one gets from owning them, most purchasers buy physical precious metals with the goal of eventually spending them.

Peter Schiff is CEO of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known coins at competitive prices. To learn about our products and policies, please visit www.europacmetals.com or call us at (888) GOLD-160.

by John Browne, Senior Market Strategist at Euro Pacific Capital

Earlier this month, J.P. Morgan made an important announcement that received scant coverage in the media: the bank would now accept gold as collateral for loans. The move appears to have been well-timed, for in the ensuing weeks, the price of gold and silver climbed steeply, based largely on political turmoil in the Middle East. But why should Morgan’s decision be of interest to anyone outside the bank?

It can be argued that J.P. Morgan is the world’s premier major bank. As such, its decision to accept gold as collateral offers a rare glimpse into the very private financial decision-making of some of the largest and most sophisticated investors in the world, whether governments, corporations, or wealthy individuals.

By reopening its former gold vaults in New York, as well as new facilities in Far Eastern financial centers – which cater to investors who typically have larger gold reserves than Western counterparts – Morgan is telling the world that gold is gaining greater traction as a medium of exchange.

Given that a bank continually looks to provide services that its clients demand, the move suggests that a strategy has taken hold among the highest echelon of investors based on core holdings of precious metals.

Readers of this column know that Euro Pacific has long advised that defensive, long-term investors allocate a portion of their portfolios to precious metals. The reasons could not be more fundamental. Major central banks are in the midst of a campaign of prolonged currency debasement that transfers wealth from prudent individuals to socialist governments with massive debts. To help avoid this hidden tax is to hold savings in something other than fiat currencies.

Apparently, some important Morgan clients agree, and, as a result, many have assembled huge positions in gold – often counted in tons, not ounces. Given the size of these otherwise idle positions, it was perhaps only a matter of time before some holders looked to employ their gold as collateral for cash loans. It is logical to assume that some of the loan proceeds are being used to purchase attractive assets with good yields and upside potential. There is little evidence that holding gold as collateral causes any anxiety to risk managers at J.P. Morgan. Indeed, given the current monetary drift, a vault full of gold should offer far greater confidence than a vault full of paper.

For years, we have forecast stagflation, or a combination of serious inflation and economic depression, for the US. We have described how massive central bank cash infusions have created the conditions for runaway inflation. While the cash injections may have averted a corrective depression in the short-run, they have left a staggering debt cost for future generations.

In the meantime, the world continues to resist cooperation with the Fed’s best laid plans. Flash revolutions in the Middle East threaten to disrupt world oil supplies and send gasoline prices higher. There is great concern that higher energy prices will sap what little vitality there is in the developed economies. Any renewed erosion of consumer confidence could herald a double-dip into depression, even the hint of which would convince Western governments to flood the world once again with more massive injections of paper.

This cycle can only end in catastrophe. Morgan’s embrace of gold is a solution for survival. The strategy is one that our readers know well.

by Peter Schiff, CEO of Euro Pacific Precious Metals and author of the hit economic fable How an Economy Grows and Why It Crashes

Last month, I addressed the hype around gold confiscation, and debunked the myth that collectible or numismatic coins would offer effective protection. But there is another sales pitch that many dealers will use while trying to “up sell” you to numismatics. They may argue that on investment merits alone, numismatics are a better bet. While this may be a more rational line of thinking than the typical confiscation con, it is bad advice for investors hoping to protect their assets in an economic slump.

THINK LIKE A PRO, NOT A SCHMO

I have long urged investors to keep 5-10% of their portfolios in physical precious metals, and add even more exposure when appropriate through the Perth Mint certificate program and mining stocks. This advice, far outside of the Wall Street mainstream, stems from my view of the kind of crisis we are approaching.

Many people assume that the crash I wrote about in the original “Crash Proof” was the credit crunch of October ’08. They are mistaken. Though I did accurately forecast the economic events of 2008, my ultimate prediction was that these events would set into motion a larger crash to follow. That crash, the one I have been warning about for a decade, is a collapse of the international dollar standard.

This is the crisis for which the smart money is already preparing. The People’s Bank of China, Reserve Bank of India, Goldman Sachs, Barclays Capital, John Paulson, Jim Rogers, and countless other big names are all protecting themselves from a global monetary breakdown by buying gold. But are they doing it with numismatics? Among the big players, the answer is universally no.

NUMISMATICS ARE LIKE STAMPS, NOT STOCKS

The reason a numismatic coin can sell for double, triple, or even many multiples of the value of the metal it contains is that a collector values the rarity and/or beauty of the coin. As an investment, it is on par with a stamp or a baseball card. Some people do make money flipping these items, but it is usually an experienced broker who can buy at a steep discount and sell at a large markup – either to a collector who takes pleasure in owning the item but does not expect to profit from it, or to a naive investor who thinks he can make money selling it on to a collector (or a greater fool).

LIES, DAMNED LIES, AND STATISTICS

This salesman might have a chart showing the performance of “rare/collectible/numismatic coins” against “regular/bullion coins.” Of course, the chart shows the numismatics performing much better. But these graphs inevitably track particular rare coins which are cherry-picked with the benefit of hindsight. For every one rare coin that outperforms, there could be ten that severely underperform. Only afterward would you know which coin you should have bought.

Finally, the comparisons often omit the dealer’s high markups and markdowns that would more than wipe out the alleged profits for retail investors.

BULLION GOLD IS MONEY

By contrast, bullion gold is more than an investment. It something you own so you can trade locally for the stuff you need – food, clothes, a roof over your head – even if the other guy isn’t a coin enthusiast. In other words, it is money. One of the characteristics that makes gold money is its uniformity – meaning each coin is the same as every other coin of the same weight. Diamonds, which are not uniform because they vary in clarity, color, etc., are not money. Numismatic coins, which vary in rarity, condition, date of issue, etc., are also not money.

THE WORST TIME FOR NUMISMATICS IS NOW

If we enter into depression conditions, numismatics may actually drop in value while the gold price rises. As I mentioned above, numismatic coins depend on the demand of collectors. Collectors are folks with plenty of discretionary income. When inflation is eating away savings and the economy is contracting, who are these mystery millionaires that are going to buy your stash of St. Gaudens Double Eagles? Chances are any collectors will also be liquidating their collections as they lose their jobs and their investments go south.

Sure, the coins’ gold content will provide a ‘floor’ to their value that stamps and baseball cards don’t have, but the gold value is typically only a fraction of the retail price of a numismatic coin. If you pay twice the bullion value to buy a rare coin, bullion could double in value and you still might not be able to sell your coin for a profit. If you buy a regular bullion coin, the gold price only has to rise the amount of the markup above spot before you profit.

DON’T BUY FOOL’S GOLD

In short: the idea of numismatic coins as investments should be put to rest, once and for all.

Gold is a commodity. Bullion coins are pre-measured units of this commodity, stamped with a design as a quick signal of authenticity. Gold is also history’s most reliable form of money, which makes it a good commodity to own when the world’s paper money system is in upheaval.

But just like buying an Armani suit is not an investment in wool, numismatics are not an investment in gold. The only people who should be buying numismatics are those who appreciate the coins for their aesthetic value and take pleasure in owning them, not those hoping to preserve their wealth.

Gold still has a long bull market ahead of it. It’s not too late for Americans to dump their dollar for a real store of value. The key is to find a trustworthy dealer with fair markups – and avoid dealers with teaser prices on the bullion coins you want and aggressive pitches for numismatics you should avoid.

Peter Schiff is CEO of Euro Pacific Precious Metals. Having spent years encouraging his brokerage clients to buy physical gold, he grew concerned about the growing number of unscrupulous dealers that tried to “up-sell” customers to rare or collectible coins with high markups. Peter Schiff’s gold coin buying philosophy is to buy for the coin’s metal value, not its claimed “numismatic” value. He decided to open his own firm to sell investment-grade bullion products at competitive prices. Euro Pacific only sells reputable, well-known coins that trade on the open market, such as American Gold Eagles, Canadian Maple Leafs, and Australian Kangaroos. To find out more, please visit www.europacmetals.com or call us at (888) GOLD-160.

Warren Buffett recently remarked that you can’t value gold like an oil company or farmland, so we should forget gold and buy equities. But he misses the point! Gold doesn’t produce value because it is value; in other words, gold is money.

It’s sad to see Mr. Buffett go to the dark side. But, as I’m about to show, he’s losing company when it comes to his views on gold.

It’s difficult to fathom why a professional money manager – someone who looks at markets all day long and tries to make money for his clients – doesn’t see the in-your-face arguments for buying precious metals. It’s borderline irresponsible. You may think that’s a strong statement, but I ask: what would you do if you were responsible for investing other people’s money and found yourself in the following investment environment:

• The US government had printed more money in the past two years than at any other time in world history. Then, they printed more.

• Government spending exceeded revenues by obscene margins, and, in the most recent year, the US ran a budget deficit of $1.4 trillion.

• Interest rates were at 40-year lows.

• Runaway entitlements and social discord remained unresolved in many major European countries.

• Raising taxes and cutting spending to reduce the debt burden were politically untenable, leaving inflation the easy and likely solution.

• The economy was weak and showed signs of weakening further.

• Financial markets were tenuous, and the stock market as a whole was vulnerable.

• Gold, in spite of being the #1 performing asset of the past decade, was roughly $1,000 below its 1980 inflation-adjusted high. Silver was even further undervalued.

What asset would be a wise and time-tested holding for this kind of environment? Think about it: gold is designed exactly for these kinds of circumstances. Any casual glance at history will bear this out. So, yes, “irresponsible” comes to mind when you’re handling other people’s money and ignoring the very asset that is ideal for the current economic and monetary climate.

There are others, however, who “get it.” And they make my list of the Twelve Gold Bugs of 2010:

1) Peter Thiel, Clarium Capital Management. At the end of the second quarter, Clarium had no gold holdings. But that changed in Q3: the firm put $11.4 million into GLD, buying about 100,000 shares.

2) Julian Robertson, Tiger Management. With no prior gold exposure, the chairman of Tiger invested a whopping $247 million in GLD in Q3, buying about 2 million shares.

3) Chris Shumway, Shumway Capital. His first-ever gold purchase occurred in Q3 when he put over a quarter-billion dollars into GLD – more than 2.1 million shares.

4) Dan Loeb, Third Point. The firm made its first gold purchase last quarter, putting $15 million into GLD, about 115,000 shares.

5) Steve Cohen, SAC Capital. Already invested in GLD and four gold mining companies, the firm placed over $9 million in four new gold stocks last quarter.

6) Highbridge Capital Management. With seven gold companies already in the fund, Highbridge recently put $11.4 million into two more gold stocks.

7) Howard Marks, Oaktree Capital. The firm increased their investment in two gold companies by an additional $6 million.

John Paulson, Paulson & Co. If you don’t know the name, Paulson made a fortune betting against the housing market and financial companies in 2008. Now, his single largest holding is gold. His fund also has large positions in seven gold mining companies. Mr. Paulson believes in gold so much that he started his own gold fund earlier this year, investing a quarter-billion dollars of his own money.

9) Russia. The Central Bank of the Russian Federation has been steadily buying gold since Fall 2007. They added 600,000 ounces of gold to their official reserves this October, with year-to-date purchases now totaling 4.6 million ounces. Russian’s gold reserves now stand at 24.9 million ounces – breaking into the top ten globally.

10) China. The Chinese government doesn’t publicly disclose what they’re doing with their reserves, so how can I put them on the list? Because their announcement last year revealed they had been buying gold all along and had increased their gold reserves by 75%; because it’s widely believed the country is currently buying all of its own gold production; because government officials have publicly encouraged their citizens to buy gold and silver; because the country has disposable income growth of 15%, but gold demand growth of 26%; because China’s commerce minister recently stated, “Doubtlessly, if the yuan is set to become an international currency like the dollar or euro, China has to get a huge gold reserve to support it, and a reserve of 1,054 tonnes is far from being enough.” I could go on, but it’s clear that the Giant from the East is extremely bullish on the yellow metal.

11) Doug Casey, Casey Research. A longtime gold bug, Doug insists a mania still lies ahead since the common man has not jumped on board. As you may know, my boss is heavily invested in small mining exploration companies and said earlier this year that he expects to see a life-changing rally in them. It’s perfectly normal for the juniors to cyclically run up 1,000%, he says, with the leaders increasing 10,000%.

12) Peter Schiff, Euro Pacific Capital. Peter believes in gold so much that earlier this year, he started his own bullion dealership. We always caution our readers to watch out for the dealer that starts pushing numismatic coins, but what I like about Peter’s Euro Pacific Precious Metals is that they only sell bullion, and only at reasonable prices. In addition to miners and ETFs, I believe investors should allocate at least one-tenth of their net worth into physical gold (and silver), and Peter has created a reliable way for average investors to do so. Also, starting a bullion dealership when gold is already selling for four figures means Peter thinks the gold bull market has a long way to go.

None of the individuals on this list think the gold price is too high. They’re buying for the future, to both protect and grow assets. They don’t believe economies are as stable as reported, and they recognize the implications of a world floating on fiat currencies. They also believe governments’ attempts to “fix” the problems will not only fail, but make fiscal conditions worse.

As for me, I think quantitative easing will “work” – I think the Fed will meet their goal of inflation, but that it will spiral out of control for the reasons I outlined above. They are neither omniscient nor omnipotent, as they try to claim, and this situation will quickly snowball.

Printing money, as the Fed is relentlessly doing, is not just supportive for gold, it makes owning the metal a requirement for the foreseeable future. This reckless pursuit of dollar abuse will have disastrous consequences. It will destroy the US dollar, weaken the US economy, and cripple the US government’s influence in the world. Gold is your #1 protection against those inevitabilities.

I hope that this Christmas, you’ll become a gold bug, too.

by Peter Schiff

If you’ve spent enough time in the gold community, you might be under the impression that the most imminent threat to the average American isn’t terrorism or unemployment, but rather gold confiscation. Starting with the fact that FDR confiscated gold during the last Great Depression, and continuing to the quite accurate forecast that we are headed into an even Greater Depression, unscrupulous coin dealers have been pushing investors to buy expensive “numismatic” or “collectible” coins that they claim would be protected from government seizure. The only problems are that the original motive for confiscation no longer applies and the “protection” offered by major coin dealers wouldn’t actually help you keep your gold.

THE TYRANT’S ORDER

In 1933, President Roosevelt issued Executive Order 6102, prohibiting the private holding of gold and requiring US citizens to turn over their gold bullion or face a $10,000 fine ($167,700 in today’s dollars) or 10 years imprisonment.

Gold coin and gold certificates in an amount not exceeding in the aggregate $100 [about 5 troy ounces at that time] belonging to any one person; and gold coins having a recognized special value to collectors of rare and unusual coins.

CALL THE MYTHBUSTERS

The reality is that almost all coins sold as “numismatic” or “collectible” by our competitors are really quite ordinary coins sold at high mark-ups to make these dealers extra profits. If we were in 1933, these coins would absolutely not fall under the definition of “rare and unusual.”

WHY WAS GOLD CONFISCATED?

In 1933, when Roosevelt issued his infamous order, the United States was still on a gold standard, meaning every 20.67 paper dollars could have been “redeemed by the bearer on demand” for a troy ounce of gold. Since Roosevelt had many public works projects to finance and also may have wanted to quietly lower real wages to drive employment, he confiscated gold and then devalued the exchange rate to $35/oz (at this point, the only people who could “exchange” were foreign governments). Thus, Americans instantly saw a 40% drop in value for the dollars they held, and the government’s profit was sequestered in something called the Exchange Stabilization Fund, which could be used by the President at whim without Congressional approval. Pretty nifty trick, huh?

It’s important to note that confiscation was necessary to Roosevelt’s plan because we were under a gold standard. Gold at that time was widely held throughout the population. If Roosevelt had devalued the dollar without confiscation, then whatever savings Americans held in gold would have been immune from this hidden tax. Furthermore, many Americans likely would have redeemed whatever paper dollars they held in fear of another devaluation. This could have wrecked the dollar’s viability as a currency.

These rationales no longer apply. In the aftermath of Roosevelt and Nixon’s dismantling of the gold standard, gold is no longer currency. Most Americans hold their savings in dollars and it is the only legal tender (which means it must be accepted in payment of all debts). Thus, President Obama and his buddy Bernanke don’t need to confiscate gold to devalue the dollar and finance excessive spending. In fact, the Fed has more than doubled the monetary base since the financial crisis started.

WHAT, ME WORRY?

The only reason to fear confiscation is in the case that the federal government is in default and needs the gold in order to pay off its creditors. But if it comes to Washington simply stealing our assets at whim, then why would gold be the only target? At that point, real estate, stock and bond certificates, and vehicles would be much easier to seize. Gold has been prized throughout history for its high value-to-weight, making it easy to conceal and trade under tough political conditions. Consider: you could store enough gold to care for a small family for six months (approx. 9 ounces) on the inside of a belt buckle.

Remember, if Washington chooses the confiscation route, we’re talking about a situation of pure pandemonium. When governments begin abrogating property rights in that fashion, the entire market mechanism ceases to function. We saw this in the Great Depression as Hoover and then Roosevelt relentlessly attacked private property and contracts.

Even in the heat of Roosevelt’s confiscation scheme, government troops did not break into people’s homes. The singular (failed) prosecution under the order took place when a New York lawyer tried to withdraw 5,000 troy ounces from Chase Bank. Ironically, all the gold actually collected by the Treasury was willfully surrendered in a wave of misguided patriotism, while many “law-breakers” simply kept their gold – which is why some old coins escaped the Treasury’s furnaces and are still around today.

SHOP SMART

As a matter of business ethics and fair dealing to our customers, I decided early on that Euro Pacific Precious Metals would not offer numismatic coins. To put it simply, I think they are a poor investment option.

Peter Schiff is CEO of Euro Pacific Precious Metals. Having spent years encouraging his brokerage clients to buy physical gold, he grew concerned about the growing number of unscrupulous dealers that tried to “up-sell” customers to rare or collectible coins with high markups. Peter Schiff’s gold coin buying philosophy is to buy for the coin’s metal value, not its claimed “numismatic” value. He decided to open his own firm to sell investment-grade bullion products at competitive prices. Euro Pacific only sells reputable, well-known coins that trade on the open market, such as American Gold Eagles, Canadian Maple Leafs, and Australian Kangaroos. To find out more, please visit www.europacmetals.com or call us at (888) GOLD-160.