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Posted by Peter Schiff on 04/02/2014 at 2:48 PM
So far, 2014 has been a paradoxical year for gold. Many investors aren't even aware that it has rallied almost 8%. On the rare occasion that the financial media mentions the yellow metal, it is only in the context of comparing the recent rise to last year's decline.

In spite of this overwhelming negative sentiment, gold is experiencing a stealth rally as one of the best performing assets of the year. Let's look at some important metrics of the most under-valued sector in this market.

Speculations Reversed

So many investors want to believe that last year was the death knell for the yellow metal that they've stop paying attention to the technical metrics responsible for driving the price down. These metrics have already started to reverse. 

Last year, technical speculators - and everyday investors trading behind them - influenced gold's price more than anything else. Notably, 2013 was the first year since their creation in 2003 that gold exchange-traded funds (ETFs) experienced a net outflow of their gold holdings. This played a pivotal role in driving down both the gold price and investor expectations for the yellow metal.

Gold ETFs sold off their holdings by a whopping 881 metric tons last year. GLD, the largest fund, sold 550 of those tonnes on its own. This was influenced by, and then compounded, the effects of extremely bearish gold futures speculators, whose large net-short positions were responsible for some landmark drops in the gold price throughout the year. As is typical with markets, negative sentiment became a self-fulfilling prophecy.

For the previous decade up until last year, physical gold demand had driven the gold bull market. However, ETFs have over this time accumulated a greater and greater share of the market. Thus, last year's sudden ETF sell-off was enough to drive total global gold demand down 15% year-over-year. Even 28% growth in bar and coin demand - resulting in record-breaking total demand - couldn't counter the market's bearish turn. But ETFs are getting back in the game. GLD started adding to its holdings again in February, the first increase since December 2012. And by mid-March, COMEX gold futures contracts had the most net-long positions since November 2012.

Gold Versus Equities

Why are ETF and futures traders reversing their previously bearish positions?

Prices are up in every area of the gold sector. GLD and COMEX futures are both up more than 6% this year. GDX, one of the broadest gold-mining ETFs, is up more than 12%. Even with a sell-off in the last week of March, physical gold was up almost 8% in the first quarter.

Meanwhile, the general stock market is barely performing at all. The S&P 500 and the NASDAQ are up barely 2% YTD, while the Dow is down.

Most importantly, when measured in terms of gold, the Dow has actually started to drop significantly. At the end of March, the Dow was about 12.5 times the gold price. This is already a 9% decline since December. For the majority of the last 100 years, the Dow has traded far below this level.


To get back to its historical average, either the Dow is going to have to drop significantly or gold will have to skyrocket. I believe it will be a combination of both.

Overpriced and Under-Earning

Anyone who really buys the story of economic recovery is likely riding a wave of irrational exuberance after a year in which the major indices hit record high after record high. They don't express the slightest concern that the stock market is already in dangerous bubble territory.

However, one of the most important metrics of stock market valuation completely contradicts this.

The Shiller Price/Earnings Ratio (Shiller P/E) is well-respected for helping analysts like me identify one of the most over-valued markets in history - the dot-com bubble. This metric gauges the return on investment for someone buying into the broader stock market. A higher ratio indicates investors are paying more for shares of companies that are earning less; therefore, they are receiving less value.

At the end of March, the Shiller P/E stood at 25.60 - almost 55% higher than the historical average of 16.5. As you can see in the chart below, the only previous times the ratio has breached 25 were during the 1929 stock craze, the dot-com bubble, and just before the '08 financial crash.

I would not want to be anywhere near an investment with such poor yield.



Don't Look Back

Investors often make the mistake of investing in the last trade, the same way that governments always fight the last war. After a year in which stocks brought in about a 30% return while gold was pummeled, nobody wants to be the first one to jump back into hard assets.

But fortunes are often made by ignoring the popular trend and buying underpriced assets when nobody else sees their value. Sometimes this is a risky maneuver, but in the case of today's gold market, it's as close as we can get to a sure thing.

It's hard to predict what will trigger the next collapse of stocks, but gold is already on the road to new highs. Janet Yellen is gearing up to unleash a new torrent of freshly printed dollars onto global markets. I'd recommend building your ark well in advance.

Peter Schiff is Chairman of Euro Pacific Precious Metals.

If you would like more information about Euro Pacific Precious Metals, click here. For the fastest service, call 1-888-GOLD-160.


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Posted by Peter Schiff on 03/06/2014 at 6:28 PM
Before Bear Stearns and Lehman collapsed, the market for physical gold was limited to a relatively small group of investors who understood the havoc inflation was wreaking on our savings and the US markets. As the financial crisis took hold, a flood of new and inexperienced buyers entered the market, creating an opportunity for unscrupulous metals dealers to swindle their way to massive profits. This is what drove me to launch my very own gold dealer, Euro Pacific Precious Metals, to provide a safe alternative for those who were taking my advice to diversify into sound money. In our first year of business, I released Classic Gold Scams and How to Avoid Getting Ripped Off, a free report that has saved countless investors from losing their shirts. 

Fast forward several years and the markets look like a film on repeat. We are once again building toward a massive financial crisis - one that will make 2008 seem like the good old days. Unfortunately, the majority of investors are once again playing the US markets and shunning gold. I encourage my readers to consider diversifying into precious metals now, while the market is still distracted. To this end, and in preparation for the inevitable mad rush when conventional investors again flock to safety, I have updated and re-released my Classic Gold Scams report to help newcomers learn how to buy gold and silver the right way.

The Bait-and-Switch

The majority of precious metals scams revolve around a core tactic: the bait-and-switch.

First, the company lures you in with the promise of a good deal on a product you're genuinely interested in buying. Once they have you on the line, a fast-talking broker will try to convince you that a different product is a better match for your needs. This new product into which they've "switched" you is almost always a rip-off.

In the precious metals world, this usually involves an over-priced numismatic or "collectible" coin. The salesman will explain that the unique qualities of this coin make it even more valuable than its metal content. "Why just buy gold, when you could buy a piece of history?" Or so the argument goes.

The entire bait-and-switch technique is designed to confuse you. The dealer preys on your insecurities by making you feel like you don't have enough knowledge to make a choice for yourself.

Keep Gold Simple

Let me share a secret that these scammers don't want you to know: gold is gold is gold.

The majority of savvy investors like you and I are buying gold and silver as a hedge against inflation and the collapse of the US dollar. It doesn't matter what form our gold takes, as long as it is pure, easily recognized, and authentic.

Sure, there may be rare, historic coins for which well-educated collectors will pay good money. But you need a firm understanding of these coins' unique traits to correctly assess their value. Without this understanding, it is virtually impossible to select the proper coins to add to your collection or get a fair price when it is time to sell. For most of us, such coins are way beyond our expertise and carry far too much risk.

All we need to protect our wealth is pure gold bullion. Fortunately, the market for bullion is very simple and easy to understand. A complete list of common gold products is included in the Classic Gold Scams report.

That's the only secret to beating the bait-and-switch scammers: know exactly which product you're interested in buying ahead of time - and stick to your guns.

The Price Protection Racket

When gold started falling from its highs in 2011, an old-time scam re-emerged: the price protection racket. This tactic is extremely popular with some of the largest gold dealers out there.

In this scam, the dealer guarantees that if the price of gold falls within a certain timeframe, the investor can buy at the lower price. Usually the price protection lasts for about a week after placing your order.

On the surface, price protection sounds great. Who wouldn't want to be able to avoid short-term market fluctuations when buying precious metals?

Of course, there's a catch. These price protection programs rarely apply to the common bullion coins that carry the lowest premiums. Invariably, these schemes are only applied to overpriced numismatics or collectors' edition coins. That's the only way dealers can afford to offer such a sweet deal. The margins are already huge on collectors' coins, so allowing buyers to adjust their purchase price has a negligible effect on the dealer's bottom line.

What's more, the price protection program often includes an additional fee on top of the purchase price. This builds in an additional cushion to make sure the dealer always comes out ahead.

At the end of the day, price protection is just a scare tactic aimed at investors too concerned with short-term volatility. This fear actually reveals that they're buying gold for all the wrong reasons.

Buy Gold for Gold

The right reason for most investors to buy gold is as a long-term hedge against inflation and financial instability.

Gold is humanity's oldest form of money and wealth preservation. A hundred years ago, a gold coin could buy you a custom tailored suit. The same is true today. The purchasing power of gold remains relatively constant over the long-term.

On the other hand, fiat money has historically always failed. The US dollar has not been backed by gold since 1971, which means it has lasted more than four decades as a purely fiat currency. The history of great empires suggests that its time is almost up.

Each of the Federal Reserve's announcements of another program of money-printing brings that crash - which I have termed the "Real Crash" - closer to fruition.

Remember, if the US economy were really recovering, the Fed's manipulative policies would not be necessary. Also, gold wouldn't be seeing the dramatic recovery it has thus far enjoyed in 2014. It's up 13% since its December lows!

There's Still Time

If you missed out on the great gold rush of the '00s, don't let the next opportunity pass you by. I believe gold's bull market has a long way to run, and now is a great time to establish holdings or add to existing holdings.

But be aware that for most investors, the physical gold market is completely new and foreign. That has created an environment in which unscrupulous dealers are thriving. Before you buy, read my recently updated Classic Gold Scams report to learn how to tell a deal from a swindle. There is no need to learn these lessons the hard way, or to let fear of the unknown keep you from safeguarding your family's savings for future generations. 

Peter Schiff is Chairman of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices. 

Click here for a free subscription to Peter Schiff's Gold Letter, a monthly newsletter featuring the latest gold and silver market analysis from Peter Schiff, Casey Research, and other leading experts. 

And now, investors can stay up-to-the-minute on precious metals news and Peter's latest thoughts by visiting Peter Schiff's Official Gold Blog.



Tags:  gold
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Posted by Peter Schiff on 02/06/2014 at 10:06 AM

Gold is the simplest of financial assets - you either own it or you don't. Yet, at the same time, gold is also among the most private of assets. Once an individual locks his or her safe, that gold effectively disappears from the market at large. Unlike bank deposits or stocks, there is no way to tally the total amount of gold held by individual investors.

I like to call this concept "dark gold." This is the real, broader gold market that exists below the surface-level transactions on the major exchanges. It's impossible to know precisely how much dark gold exists around the world, but we do know that it is enough to render "official" gold holdings insignificant. That's why I don't buy and sell gold based on the decisions of John Paulson, or even J.P. Morgan Chase. It is a long-term investment that requires a deep understanding of the nature of money - and how little Wall Street's media circus really matters.

Observing Dark Gold

Think of dark gold like dark matter. Dark matter is a mysterious substance that scientists hypothesize is an essential building block of our universe. All we know is that the universe is a certain size and that a huge amount of its mass is unobservable - this is what we've come to call dark matter.

We haven't yet looked directly at dark matter. We can only observe phenomena that suggest there is a substance we aren't seeing and can't quite measure.

Likewise, dark gold is an essential building block of global financial stability. But the extremely private nature that makes it so valuable also makes it nearly impossible to directly observe.

But every now and then, we get a glimpse into the hidden undercurrents of dark gold. In the past year, the Federal Reserve slipped up in a big way and momentarily poked a hole that we can peek through to see what's happening with some of the largest stores of dark gold in the world.

Gib Mir Mein Gold!

A year ago, the big news was that the Bundesbank, Germany's central bank, would begin the process of repatriating a portion of its foreign gold reserves, including 300 metric tons stored at the New York Federal Reserve Bank. 

The controversy really started in late 2012, when Germany simply wanted to audit its gold reserves at the Fed. They were denied this access, so the Germans switched their approach. If they weren't allowed visitation with their holdings, they would instead demand full custody. In response, the Fed said it would oblige - within seven years!

As of the end of 2013, a Bundesbank spokesman reported that only 5 tons had been transported from New York to Germany so far, leaving the repatriation far behind schedule.

"But wait," some might argue, "the repatriation process might be delayed, but we know the gold is there. Central bank holdings constitute the most visible gold in the world. These institutions report their holdings to the world regularly. The gold at the Fed isn't dark gold at all!"

If this is a true and certain fact, then why was the Bundesbank denied a third-party audit of its gold in the Fed's vaults? The closest we've seen was an internal audit by the US Treasury last year. Of course, the US government holds the sovereign privilege of answering to no one but itself, but that hardly makes for reassuring statistics on which to base one's investments.

Golden Distractions

The truth is that we have no clue of the official gold reserves of any central bank in the world. All the Fed has to do to convince me otherwise is let an outside party into its vaults and count the gold. They've shown lots of paper; now show us the money!

It is very simple to count bars of gold where they exist. And it is clearly moral (and generally good business) to return assets that are held in trust when the creditor demands them. The Fed's reluctance on both counts suggests that there is more to this story than meets the eye.

Fortunately, the veracity of the Fed's claimed gold holdings has little bearing on the long-term precious metals investor. It's the same with gold futures contracts and the daily spot price. These have no effect on whether or not you have a chest of real money buried in your backyard.

So why is it important that intelligent investors do keep some gold "buried" in their possession? Germany's repatriation scandal begins to answer this question. The maneuverings of the New York Fed are like the patter and flourish of a magician - it distracts you from the real trick being played.

Or, in this case, where the most impressive piles of dark gold reside.

China Going For Gold

I'd bet that Western central banks are very pleased that the media has latched onto the dustup between Germany and the Fed. It means they are paying much less attention to the massive unreported stores of gold that many observers believe China has been accumulating, and which could have dire repercussions for the US dollar reserve system.

China last reported its gold reserves in 2009, clocking in at 1,054 metric tons. In the official rankings, this makes China's reserves the sixth largest in the world. Germany comes in second with 3,387 metric tons (or so they hope), and all nations trail the United States' claimed 8,133 metric tons.

Many speculate that China's reserves have grown far beyond its official number in the past five years. However, the People's Bank of China (PBOC) is playing its cards close to its chest.

Last year, a deputy governor of the PBOC tried to convince the world that its reserves have not changed much since 2009. He explained that the Chinese government is keeping a limit on its gold reserves, because "if the Chinese government were to buy too much gold, gold prices would surge, a scenario that will hurt Chinese consumers."

But a quick look at the numbers coming from the Chinese government shows that they just don't add up. 

China is the largest producer of gold in the world, pulling an estimated 437 metric tons of gold from the earth in 2013 - way more than runner-up Australia, with only 259 metric tons.

On top of this, China imported far more gold than any other country in the world in 2013. Via Hong Kong alone, China imported 1,158 metric tons of gold last year - a more than 107% increase from 2012.

This gold is not leaving the country in large quantities. Sure, China is the biggest exporter of gold jewelry to the Western world, but the value of these trinkets is negligible compared to the thousands of tons of bullion they are creating and importing.

Jim Rickards has estimated that China has probably added at least 1,000 metric tons to its reserves every year since 2010, meaning it has well over 4,000 metric tons today.

This is a conservative estimate. Wikileaks documents claim that China actually imported more than 2,000 metric tons from Hong Kong in 2011 alone.

If this is the case, when China does finally reveal how much gold it's holding, it will leap from the sixth largest reserves in the world to the second, easily surpassing Germany in a single bound. 

They might even give the US a run for its money.

Out From Under

It's no longer a secret that China would prefer a "de-Americanized world." Whether it's the PBOC or average Chinese consumers hoarding all this dark gold, the effects will be the same when China decides it is fed up with the funny-money central banking system long dominated by the US dollar.

It certainly seems like the East is preparing for this endgame. Several new physical gold vaults have opened in Singapore in the past year, Moscow recently launched a spot gold exchange, and Dubai is planning a new spot gold contract for this year. Let's not forget that the Hong Kong Exchange bought the London Metals Exchange in 2012, and there have been rumblings of physically moving it to Hong Kong.

If China were to initiate a gold-backed currency attractive to international trade partners, its government and citizens are poised to become extremely wealthy and powerful overnight. Americans, on the other hand...

Are You Afraid of the Dark?

Some investors avoid the gold market because of its innate unofficial nature. But in a time when governments are in a race to tax anything that moves and inflate anything that prints, gold's privacy becomes the difference between preserving wealth or facing destitution.

I challenge my readers to worry less about the short-term movements in the gold futures market, or even which central bank has what holdings. Understand that gold is a deep, global market that has witnessed the rise and fall of countless empires. Your decision is simple: you either own it, or you don't.

Peter Schiff is Chairman ofEuro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices. 

Click here for a free subscription to Peter Schiff's Gold Letter, a monthly newsletter featuring the latest gold and silver market analysis from Peter Schiff, Casey Research, and other leading experts. 

And now, investors can stay up-to-the-minute on precious metals news and Peter's latest thoughts by visiting Peter Schiff's Official Gold Blog.



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The Long And The Short Of Gold Investing
Posted by Peter Schiff on 01/02/2014 at 10:43 AM

There are two types of gold investors: those trying to make money on short-term market timing and those looking for long-term asset preservation. It was the fear-driven trading of the former that helped gold break $1900 in 2011, and for good reason - stormy markets steer investors to safe havens.

But gold's fortune has shifted in the past two years, and finishing 2013 down 28% seems to have sealed its fate - at least in the eyes of the short-term speculators. In reality, the same forces that are stabilizing stocks and suppressing gold are also the fundamental reasons long-term investors have been buying gold since the turn of the new millennium. The so-called recovery we're now experiencing is just a lull in a storm that hasn't yet abated. 

Losing Touch With Reality

From the fiscal cliff at the beginning of the year to the budget stalemate and government shutdown in the fall, the US was not exactly a model of financial stability in 2013. Yet with each of these stories, the markets shrugged off any large dips and went on to reach record high after record high. The stock market exceeded most expectations - the S&P and Dow rallied 29.6% and 26.5% respectively, with the volatility index staying remarkably low.

The official explanation for this market behavior is that the economy really is improving. A growing GDP and improving jobless rate are the leading economic indicators that support this conclusion. 

However, the real reason behind 2013's stability in spite of mixed economic news was the extremely accommodating Federal Reserve policy. Markets have become hyper-aware of this Bernanke Put over the course of the year.

Compare the markets' taper tantrums earlier in the year to their reaction to the Fed's December announcement of "taper-lite."

In both June and August, with the mere talk of tapering, the S&P and Dow tumbled. The assumption was that when the Fed started tapering their Quantitative Easing (QE) program, interest rates would also start to rise. Overvalued stocks plunged in preparation for a higher interest rate environment.

However, this December, when the Fed set an official January date for tapering, these indices did not drop as they had before, but immediately jumped to new highs. Why the different reaction to essentially the same news?

Because the Fed's December announcement was not the same.

Normal No Longer Means Healthy

The key element of Bernanke's "taper-lite" was not the $10 billion-per-month cut to QE, but the explicit commitment to maintain low interest rates for the foreseeable future. Bernanke basically guaranteed the fed funds rate would remain near 0% for at least a couple more years.

This commitment to artificially suppressed interest rates ruins the charade that the economy is getting healthier. Why on earth does a healthy economy need the support of free money?

The short-term data may appear good on its face, but people are waking up to the bigger picture of this so-called recovery - namely that it isn't a recovery at all.

It's well-recognized now that most new jobs are low-wage, low-skilled placements. Often these are part-time or temporary retail or restaurant positions. This may be why both median income and the percentage of the population employed remain well below pre-crisis levels. The jobless rate has only improved because people have simply given up trying to find employment.

Meanwhile, the latest data from the Bureau of Economic Analysis shows that in the last months of 2013, personal spending rose more than personal income, while the savings rate dropped. In other words, we're back to digging the hole that caused the Panic of '08.

This is one of the longest and slowest recoveries the US has ever experienced, but the mantra of Wall Street maintains that all is well because the stock market is up. We're supposedly returning to normal.

The truth is that "normal" no longer means "healthy" when it comes to the economic stability of the United States. It really means that we are back to where we were prior to the Panic of '08. 

Selective Memory

Only a short-term mindset could ignore the parallels between our economy today and ten years ago. Heading into 2004, the headlines sounded almost identical to today's, with talk of an improving economy that still suffered from less-than-optimal employment numbers.

More importantly, it was in 2003 that Alan Greenspan cut the fed funds rate to 1% - the lowest it had been for more than 40 years.

We all know how that story ended. Most economists agree that the interest rate policy of Greenspan's Fed spurred the irresponsible lending practices and speculation that drove the US into a housing crash and then a financial meltdown.

Yet here we are again, with the fed funds rate at record low levels. Nothing has changed in ten years - the supposed recovery we're experiencing now is simply a product of this endless cheap money.

A Sober Analysis

In times like these, long-term gold investors feel like the designated drivers in the corner of a frat party. It might seem like we're missing the fun, but we must remember that we're playing a different game than the short-term speculators.

 Our drunken friends have had some cheap thrills in 2013, but this stock market growth rests on an unstable foundation of artificial stimulus and cheap money. We are more interested in waking up without a hangover, a wrecked car, or worse. The longer interest rates remain suppressed, the crazier markets will behave when rates rise. And if Greenspan's one year at 1% rates helped trigger the crash we saw in '08, imagine imagine what three years and counting of Bernanke's/Yellen's 0% rates portends for the next crash.

Peter Schiff is Chairman ofEuro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices. 

Click here for a free subscription to Peter Schiff's Gold Letter, a monthly newsletter featuring the latest gold and silver market analysis from Peter Schiff, Casey Research, and other leading experts. 

And now, investors can stay up-to-the-minute on precious metals news and Peter's latest thoughts by visiting Peter Schiff's Official Gold Blog.



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The Eastern Lust For Gold
Posted by Peter Schiff on 12/04/2013 at 10:23 AM
Having replaced savings with debt on both the national and individual levels, I think it's well past time for Westerners to take a few lessons from our creditors in the East. Many Americans consider gold a "barbarous relic," but in Asia, the yellow metal remains the bedrock of individual savings plans. This means that either greater than half of the world's population are barbarians, or they've held onto an important tradition that our culture has forgotten.

A Culture of Gold

One of the most important elements of Eastern gold demand is that it is not limited to educated investors or the higher classes, as often seems to be the case in the West. Throughout Asia, no matter one's social status, precious metals are the first assets people choose to protect their wealth. There is not even a glimmer of doubt about the enduring value of hard money.

A recent Bloomberg article quotes a Chinese woman, "I don't know anything about the stock market and I don't have enough money to buy property, so I figured gold is the safest choice."

Some might write off this philosophy as naïve, but her logic is founded in centuries of tradition, borne of hard-won experience. The same goes in India and across South Asia, where gold is an essential part of local religious customs. From wedding dowries to temple offerings, gold carries a caché in Asia that most Westerners can't fathom.

Consider the US as a comparison. Here, newlyweds are more likely to receive a house full of fancy appliances than any assets that might form the foundation of long-term financial independence.

After a couple of generations of US-dollar dominance, Americans have become lazy with our wealth. While we exploit our economic power by going into debt for fancy cars, big-screen TVs, and expensive smart phones, our creditors are steadily stockpiling gold.

A River of Gold from West to East

Asia's love affair with gold became worldwide news when the price of the yellow metal dropped last April. Asian consumers saw the price drop as a fortunate buying opportunity, and metals dealers were swamped with orders for both bullion and jewelry. Premiums skyrocketed across the continent, but this did not slow demand.

With all this demand, shouldn't gold's global spot price have continued rising? Unfortunately, many Westerners were selling into the Eastern demand. In fact, the stagnant spot price concealed a historic transfer of real wealth.

The rising price of gold over the past decade had lured many Western investors into the paper gold market through precious metals exchange-traded funds (ETFs). To ETF investors intent on fast growth rather than long-term capital preservation, the recent drop in price was viewed as a sell signal, not an opportunity.

By the end of September, gold ETFs had sold off about 700 metric tons of physical gold - more than half of it in just the second quarter. The World Gold Council reports that the majority of these outflows have been absorbed by Asian demand.

However, Western selling was enough to keep the global spot price from recovering. Instead of more capital flowing into gold, it was the gold itself which was flowing from Western financial institutions to Eastern households.

The latest data shows that consumer demand for physical gold in the first three quarters of 2013 hit a historical record of 2,896.5 metric tons. 90% of the year-over-year increase in this demand came from Asia and the Middle East.

Meanwhile, Americans have been distracted by one record high after another in the domestic stock market.

Governments Intervene

When reporting on Asian gold demand, the Western media tends to focus on nations like India, which has practically declared war against gold buyers this year in a misguided attempt to curb its trade deficit.

The Indian government raised tariffs on the metal to a record 10%, and now requires importers to re-export 20% of their gold. India's central bank even went as far as asking temples around the country to divulge how much gold they were storing, though many refused.

Thailand and Vietnam have taken similar steps to subdue their populations' gold demand, even though the primary outcome has been to increase gold smuggling.

These governments' measures have received the most attention because they fit nicely into the Western narrative that gold is an old-fashioned asset that does more harm than good in modern economies. But the truth is that the only ones harmed by gold are Western governments!

China Rising

Last month, China officially surpassed India as the world's largest consumer of gold. Unlike New Delhi, Beijing is encouraging its citizens' gold lust by easing restrictions on the gold trade. The People's Bank of China (PBOC) is preparing to expand the number of businesses allowed to import and export gold on a large scale. It has also increased the amount of tax-free gold citizens are allowed to bring into the country.

Meanwhile, China is finally pulling away from the US dollar. A month after China's government news agency called for a "de-Americanized world," a deputy governor at the PBOC said, "It's no longer in China's favor to accumulate foreign-exchange reserves."

Simply put, China is planning to wind down its own stimulus program of buying US dollars, and instead allow the value of the yuan to appreciate. In preparation for this shift, China has been diversifying its foreign exchange reserves into gold. The PBOC has not released official numbers on its gold reserves since 2009, but experts have begun to speculate that its current holdings are far larger than previously estimated.

A Rude Awakening

This is the time when the West realizes that its great reservoir of wealth has run dry, as the gold has all flowed East.

When China stops buying US Treasuries, the Fed will remain the only major buyer of US debt. This will drive interest rates up, thereby sticking the US government with obligations it cannot possibly fulfill. Ultimately, this will be the death knell for the dollar, as the Fed will be forced to significantly expand its QE program to assume the role as Treasury-buyer of last resort.

Mom-and-pop gold buyers throughout the East probably do not understand all the subtleties of the foreign exchange markets, but an undying appreciation for gold is built into their culture. Make no mistake: the East is the engine of the 21st century global economy - and it is riding on rails of gold.

This holiday season, consider breaking with our recent Western tradition of giving gifts of no enduring value. Instead, take the opportunity to turn some of your paper dollars into gifts that will still have value when your kids are grown.

Peter Schiff is Chairman of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices. 

Click here for a free subscription to Peter Schiff's Gold Letter, a monthly newsletter featuring the latest gold and silver market analysis from Peter Schiff, Casey Research, and other leading experts. 

And now, investors can stay up-to-the-minute on precious metals news and Peter's latest thoughts by visiting Peter Schiff's Official Gold Blog.



Tags:  Chinafederal reservegold
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A Green Light for Gold?
Posted by Peter Schiff on 10/21/2013 at 7:34 PM

It is rare that investors are given a road map. It is rarer still that the vast majority of those who get it are unable to understand the clear signs and directions it contains. When this happens the few who can actually read the map find themselves in an enviable position. Such is currently the case with gold and gold-related investments. 

The common wisdom on Wall Street is that gold has seen the moment of its greatness flicker. This confidence has been fueled by three beliefs:  A) the Fed will soon begin trimming its monthly purchases of Treasury and Mortgage Backed Securities (commonly called the "taper"), B) the growing strength of the U.S. economy is creating investment opportunities that will cause people to dump defensive assets like gold, and C) the renewed confidence in the U.S. economy will shore up the dollar and severely diminish gold's allure as a safe haven. All three of these assumptions are false. (Our new edition of the Global Investor Newsletter explores how the attraction never dimmed in India).  

Recent developments suggest the opposite, that: A) the Fed has no exit strategy and is more likely to expand its QE program than diminish it, B) the U. S. economy is stuck in below-trend growth and possibly headed for another recession C) America's refusal to deal with its fiscal problems will undermine international faith in the dollar.

Parallel confusion can be found in Wall Street's reaction to the debt ceiling drama (for more on this see my prior commentary on the Debt Ceiling Delusions). Many had concluded that the danger was that Congress would fail to raise the ceiling. But the real peril was that it would be raised without any mitigating effort to get in front of our debt problems. Of course, that is just what happened.

These errors can be seen most clearly in the gold market. Last week, Goldman Sachs, the 800-pound gorilla of Wall Street, issued a research report that many read as gold's obituary.The report declared that any kind of agreement in Washington that would forestall an immediate debt default, and defuse the crisis, would be a "slam dunk sell" for gold. Given that most people never believed Congress would really force the issue, the Goldman final note to its report initiated a panic selling in gold. Of course, just as I stated on numerous radio and television appearances in the day or so following the Goldman report, the "smartest guys in the room" turned out to be wrong. As soon as Congress agreed to kick the can, gold futures climbed $40 in one day.

Experts also warned that the dollar would decline if the debt ceiling was not raised. But when it was raised (actually it was suspended completely until February 2014) the dollar immediately sold off to a 8 ½ month low against the euro. Ironically many feared that failing to raise the debt ceiling would threaten the dollar's role as the world's reserve currency. In reality, it's the continued lifting of that ceiling that is undermining its credibility.

The markets were similarly wrong-footed last month when the "The Taper That Wasn't" caught everyone by surprise. The shock stemmed from Wall Street's belief in the Fed's false bravado and the conclusions of mainstream economists that the economy was improving. I countered by saying that the signs of improvement (most notably rising stock and real estate prices) were simply the direct results of the QE itself and that a removal of the QE would stop the "recovery" dead in its tracks. Despite the Fed surprise, most people still believe that it is itching to pull the taper trigger and that it will do so at its earliest opportunity (although many now concede that it may have to wait until this political mess is resolved). In contrast, I believe we are now stuck in a trap of infinite QE (which is the theme of my Newsletterissued last week).

The reality is that Washington has now committed itself to a policy of permanent debt increase and QE infinity that can only possibly end in one way: a currency crisis. While the dollar's status as reserve currency, and America's position as both the world's largest economy and its largest debtor, will create a difficult and unpredictable path towards that destination, the ultimate arrival can't be doubted. The fact that few investors are drawing these conclusions has allowed gold, and precious metal mining stocks, to remain close to multi year lows, even while these recent developments should be signaling otherwise. This creates an opportunity.

Gold moved from $300 to $1,800 not because investors believed the government would hold the line on debt, but because they believed that the U.S. fiscal position would get progressively worse. That is what happened this week. By deciding to once again kick the can down the road, Washington did not avoid a debt crisis. They simply delayed it. That is why I tried to inform investors that gold should rally if the debt limit were raised.Instead most investors put their faith in Goldman Sachs. 

Investors should be concluding that America will never deal with its fiscal problems on its own terms. In fact, since we have now redefined the problem as the debt ceiling, rather than the debt itself, all efforts to solve the real problem may be cast aside. It now falls on our nation's creditors to provide the badly needed financial discipline that our own elected leaders lack the courage to face. That discipline will take the form of a dollar crisis, which will morph into a sovereign debt crisis. This would send U.S. consumer prices soaring, push the economy deeper into recession, and exert massive upward pressure on U.S. interest rates. At that point the Fed will have a very difficult decision to make: vastly expand QE to buy up all the bonds that the world is trying to unload (which could crash the dollar), or to allow bonds to fall and interest rates to soar (thereby crashing the economy instead).

The hard choices that our leaders have just avoided will have to be made someday under far more burdensome circumstances. It will have to choose which promises to keep and which to break. Much of the government will be shut down, this time for real. If the Fed does the wrong thing and expands QE to keep rates low, the ensuing dollar collapse will be even more damaging to our economy and our creditors. Sure, none of the promises will be technically broken, but they will be rendered meaningless, as the bills will be paid with nearly worthless money. 

In fact, the Chinese may finally be getting the message. Late last week, as the debt ceiling farce gathered steam in Washington, China's state-run news agency issued perhaps its most dire warning to date on the subject: "it is perhaps a good time for the befuddled world to start considering building a de-Americanized world." Sometimes maps can be very easy to read. If the dollar is doomed, gold should rise. 

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show. 

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Tags:  debt ceilingdollargold
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Off To The Races
Posted by Peter Schiff on 09/03/2013 at 6:00 PM
Summer is traditionally a slow season for precious metals, but this summer started with a rout. In the last week of June, gold and silver hit 2-year lows of $1,192 and $18.61 respectively.

Fortunately, after staggering along the lows, the precious metals are off to the races once more - with gold rallying more than 18% and silver 31%. This remarkable performance continues even in the face of the Fed's sustained tapering threats.

The exhaustion of short-sellers paired with insatiable global physical demand has positioned gold for an exciting conclusion to a volatile year.

Back to the Futures

In last month's Gold Letter, I explored the likelihood of a dramatic short squeeze in the gold futures market. With record short positions facing a rising gold price, I anticipated that short sellers would have to cover their bets by buying back the contracts they sold short, and in so doing, drive the yellow metal higher.

While a full-scale short squeeze has yet to develop, speculators have abandoned their record short positions in gold. In each of the first three weeks of August, futures speculators increased their net-long positions, and by August 20th, money management accounts had grown their net-long positions to the highest since February. The futures market reversed course so much that by the third week of the month, gross short positions were at their lowest since April.

That's quite a turnaround during a season usually ruled by the bears. Just as I forecast, this about-face in the futures market was likely a big factor in gold's resurgence.

However, even more important than the action in the futures market is the sustained demand for physical gold worldwide.

Staggering Physical Demand

As Western investors flip-flop on whether or not gold remains a good buy, Eastern and emerging market investors have jumped on these low prices as an unprecedented buying opportunity. At this point, the data supporting physical precious metals demand is so great that it's easier to just list a few highlights from the second quarter of 2013:
    • 53% more bullion was purchased worldwide this quarter than in 2012 year-over-year (YoY).
    • Demand for gold jewelry worldwide grew 37% YoY.
    • Global coin and bar demand hit a quarterly record of more than 500 metric tons.
  • For the 10th consecutive quarter, global central banks increased their net gold reserves.
These figures should come as no surprise to anyone who has been following the economies of developing nations. The Indian rupee hit a record low in the last week of August, and South American countries are experiencing tragically high inflation. In particular, the foundering Brazilian currency has hit a four-year low on the back of an official inflation rate of 6.15%.

Maybe these facts are part of the reason short positions are unraveling, or perhaps it was the news of record foreign selling of US Treasuries in June, totaling $40.8 billion.

Treasuries aren't the only US asset being dumped - the Indian, Indonesian, and South African central banks have all been selling dollar reserves this summer as well.

False Headwinds

The biggest headwinds countering robust physical demand are the ridiculous narrative of economic recovery and the Federal Reserve's threats to begin tapering its quantitative easing program. I'm astounded that after so many years, the financial media continues to swallow this story hook, line, and sinker.

The media conveniently ignores the data that undermines the government's talk of recovery. For instance, orders for durable goods in July plummeted 7.3%, the largest drop since August of 2012. Durable goods are the manufactured products that last for at least three years - like airplanes, cars, and refrigerators - which are considered a good measure of prosperity.

Rather than come to terms with this disturbing trend, the media focuses on supposedly improving employment statistics. These only make sense if you ignore the fact that part-time jobs are increasing while full-time positions are disappearing. Not to mention the under-reported inflation statistics and overinflated headline GDP I debunk in another recent commentary.

Waving around these artificial statistics, the "experts" anticipate that the Fed has every reason to begin tapering this very month. And that fact is supposed to be extremely bearish for gold.

A Win-Win for Gold

What media analysts are missing is that gold stands to benefit no matter what the Fed does.

If quantitative easing continues - which is where I'm placing my bets - then inflation will continue to rise and investors will need hard assets as a safe haven.

Even if the Fed does taper before year-end, the ensuing carnage in the bond market will cripple the housing market and the broader economy, forcing the Fed to reverse course. An about-face on tapering will cause the Fed to lose face with the markets, as the fragility of the phony recover will finally be laid bare.

Western economies balance precariously on global confidence in the dollar. But the dollar is now structured like a Ponzi scheme - investor confidence is being abused to print dollars to paper over economic problems, thus perpetuating investor confidence. Just as with Bernie Madoff, once the new outside money stops coming in - and it is slowing right now - the whole scheme will collapse spectacularly.

Gold has a very strong outlook as it heads toward the last quarter of the year. Physical demand is traditionally very good in the fall season, which will bolster the already astounding demand statistics for 2013.

More importantly, the economic balancing act supported by misplaced trust in the dollar is beginning to lose its footing. Before long, the current bargain prices of physical precious metals will be remembered like a long-lost dream. Those who refuse to join the race will be left in the dust.

Peter Schiff is Chairman of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices. 

Click here for a free subscription to Peter Schiff's Gold Letter, a monthly newsletter featuring the latest gold and silver market analysis from Peter Schiff, Casey Research, and other leading experts. 

And now, investors can stay up-to-the-minute on precious metals news and Peter's latest thoughts by visiting Peter Schiff's Official Gold Blog.



Tags:  goldsilvertreasuries
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What Doesn't Kill Gold Makes It Stronger
Posted by Peter Schiff on 08/06/2013 at 9:47 AM

I've been emphasizing for months that the current correction in the gold price is a result of speculative money fleeing the market and not any reflection of gold's long-term fundamentals. Unfortunately, there is so much money to be made (and lost) by day trading that my cautions have once again fallen on deaf ears.

Well, it looks like the so-called "technicals" are starting to support my theory, and so this month I'm going to depart from my typical discussion of market fundamentals and take a look at the COMEX gold futures market. It turns out that the same paper markets that helped drive the price of gold down are beginning to run into the hard reality of physical gold demand; their reversal may push gold to new highs.

Reading the Futures

The world of futures contracts is often confusing for ordinary investors. It is mainly the domain of institutions seeking to hedge and professional speculators. I do not recommend passive investors get involved in futures trading, but it is helpful to understand how these financial instruments affect gold's spot price.

In its most basic form, a gold futures contract is an agreement to buy a set amount of gold at the current spot price with delivery guaranteed at a future date. The attractive part is that you don't need to pay the full price up front. You can put a down payment on 100 ounces of gold today, knowing that you will only have to complete the payment when the contract comes due. If the price of gold rises in the intervening time, you've made a nice profit, because you end up paying today's price for a product that is worth more in the future. Of course, the person who sold you the contract takes a loss for the same reason. The person buying the contract is said to be "long" gold, while the seller is "short."

One of the reasons gold futures are so risky is because of the sheer quantity of gold that transactions represent. When you buy a single COMEX gold futures contract, you gain control - and responsibility for - 100 troy ounces of the yellow metal. So when the gold futures market was said to have made "big moves" this last April, that was an understatement - on April 12th, it opened with a sell off of 100 tons of gold!

It gets worse. Traders often leverage (borrow cash) to buy futures contracts, with the down payment they supply known as the "maintenance margin." The minimum maintenance margin for a single futures contract is only $8,800. If spot gold is at $1,300, then a trader can gain control of $130,000 worth of gold with less than 7% down! Depending on a combination of luck and experience, this massive leveraging can lead to either amazing profits or devastating losses.

Let's walk through an example, keeping in mind that my figures are very simplified, because a futures contract is not exactly equal to 100 times the current gold spot price. Most of the time, futures prices are a little higher than spot gold.

Say gold is at $1,300, which means a COMEX gold futures contract gives the investor control of about $130,000 worth of gold. A trader buys a contract with only a $8,800 margin. If the price of gold goes up to $1,500, the futures contract is now worth $150,000. The trader can now sell that contract and pocket the difference. He just netted about $20,000 with only $8,800 in seed money. If the trader had simply bought $8,800 worth of physical gold, he would have only earned about $1,350 in the same time period. It is not hard to see how futures trading can seem exciting and profitable on its face.

But what if the price of gold goes down in this scenario? The more the price of gold drops below the contract price of $1,300, the more the investor will be required to add to his margin to maintain the same ratio of down payment to loan value. This is required as assurance that he will not abandon the contract. In the worst case scenario, the trader cannot put up the additional funds and the entire position is liquidated by his broker.

So far, this example is of a trader "going long" with a futures contract. It can be risky, but the potential losses of a long futures trader are nothing compared to the losses someone shorting the market might experience.

Consider the same scenario above, except this time the trader has a short contract. He is desperately betting that the price of gold will drop enough for him cover his short position (buy back the contract he sold) at a lower price. After all, he can not hold the contract to maturity, as he does not actually own any physical gold, and thus would not be able to deliver to the buyer.

The key difference between long and short traders is that shorts are forced to add to margin when the price of gold goes up. Unlike a drop in the price gold, which can only go so low, there is theoretically no limit to how high the price of gold can rise. Someone betting on gold's demise with short futures contracts when gold enters a big bull market can be completely devastated by their margin calls.

It's risky enough leveraging into a deal as aggressively as futures traders do, but if traders don't understand the fundamentals of the asset underlying the contract (in this case, actual physical gold), they can get into a lot of trouble and in turn distort the price of the commodity they are trading. This is precisely what is happening now.

The Short Squeeze

When gold began its price drop in April, we saw a rush of paper gold flee the market, including record-high ETF outflows. Major money managers and hedge funds began selling their gold positions, issuing lower and lower forecasts for the year-end gold price. All of this became a major signal for futures traders to short gold.

The selling feeds on itself as the traders seek to cut their losses, or retain some of the paper profits the earned on the way up. Sometimes the selling is fueled by "stop sell orders," which are orders on the books that are automatically triggered when prices decline to a specific level, in many cases just below key technical support levels. Stops generally become market sell orders as they are hit, accelerating the decline and thereby triggering even more stops as prices fall lower. Some stops represent long positions being covered; others represent new short positions being established.

This ongoing shorting of gold builds a cycle that feeds on itself. The shorts see others fleeing the market and so continue to short. Meanwhile, the fund managers see the net-short positions increasing and so they continue to sell gold.

This cycle continued right up until gold's rebound - in July, the gold net-short positions reached record highs.

When gold began to rebound last month, a massive number of shorts were left exposed and many still remain exposed. Gold shorts are stuck holding the losing bet on an asset that is going to do the opposite of what they anticipated.

If the price rally continues, these traders will feel increasing pressure to unwind their shorts before their losses become catastrophic. This "short squeeze," as it is known in finance, will reverse the vicious cycle and could send gold dramatically higher than when the correction started.

An Unbalanced Ecosystem

To understand this short squeeze, imagine a brand new predator entering a pristine natural ecosystem. The newly introduced predator finds a smorgasbord of prey that have never learned to outrun, outsmart, or avoid this particular predator. Before long, the predator becomes "invasive" and begins to devastate the natural population of its easily-captured food source. Thriving on the newfound resources, the population of the invasive predator surges to new highs - until the prey population collapses.

This is akin to what has happened with gold shorts in the past three months. The more the price of gold (the prey) was driven down, the more gold speculators (invasive species) entered the market to profit from this trend, which only served to drive the price down further.

However, as in a natural ecosystem, this relationship is unsustainable. Eventually there are so many predators that they run out of enough prey to share. This forces the predators to starvation, and eventually the population drops to a sustainable level while the prey manage to grow back to a natural equilibrium.

The overwhelming problems for the shorts is that the gold they sold on the way down will not likely be for sale on the way up. My guess is that the buyers who previously stepped up to the plate were not short-term traders like the speculators who sold. These were buyers who bought gold to own it, not to trade it. For these buyers, like foreign central banks, the gold they bought is not for sale at any price (at least not a price the speculators can afford to pay). The buyers over the past few months have been lying in wait for this opportunity for years.

The result of this price decline is that gold has moved from weak hands to strong. In addition, the weakness in the price of gold has caused gold miners to shut mines, reduce capital expenditures, and limit exploration/development. So gold that was once on the market will be gone, and future supply coming from new production will be diminished. So when the market turns around, how will the shorts cover? Where will the gold they need to buy come from? When traders want back into the ETFs, where will the ETFs get the physical gold they need to buy? How much higher will prices have to rise to bring that supply back onto the market? I really have no answers to these questions, but it sure will be fun for the longs, and painful for the shorts, to find out.

What you and I can really hope for is that this massive short-squeeze becomes the impetus to focus the market back on gold's fundamentals and begins to drive the yellow metal back toward its previous highs. If I'm right that gold is still grossly undervalued, then this might be the beginning of the biggest rally we've yet seen.

Peter Schiff is Chairman ofEuro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices. 

Click here for a free subscription to Peter Schiff's Gold Letter, a monthly newsletter featuring the latest gold and silver market analysis from Peter Schiff, Casey Research, and other leading experts. 

And now, investors can stay up-to-the-minute on precious metals news and Peter's latest thoughts by visiting Peter Schiff's Official Gold Blog.



Tags:  economygold
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The Fiat-Free Festival
Posted by Mike Finger on 07/10/2013 at 4:54 PM

June marks the beginning of summer - a season of beach vacations, garden bounties, and general disinterest in the market. It is well-known that precious metals and other commodities typically face malaise at this time of year as speculators unwind their trades and potential buyers spend their spare cash on hotel rooms and recreation.

But in recent years, June has come to mark a time of great rejoicing for those of us most passionate about a sound money economy. Two weeks ago, many of us returned from what can only be described as the largest face-to-face alternative currency economy in the world. The Porcupine Freedom Festival just celebrated its tenth year, dubbed "PorcFest X," with record attendance and alt-currency activity.

PorcFest is a production of the Free State Project, an effort to get 20,000 liberty activists to concentrate in New Hampshire in order to achieve their motto of "Liberty In Our Lifetime." The festival started as a way to introduce people to the state and persuade them to move (as I did two years ago), but it has quickly grown to become a mecca of the what Jeffrey Tucker of Laissez Faire Books called the "bohemian bourgeoisie."

Apart from the right to carry a sidearm, there is likely no other issue more important to this crowd than monetary freedom. And in this crowd, they practice what they preach. At PorcFest, everything from festival tickets to gourmet food to custom clothing to film screenings can be purchased with silver or gold.

The most commonly circulated precious metals are fractional silver coins, such as the Mercury dimes you might find in a bag of junk silver or similar-weight rounds from a private mint. As precious metals barter has expanded outside the hardcore sound money community, junk silver bags have actually gone into short supply. That is why Euro Pacific Precious Metals will soon be announcing the release of our own Silver Barter Bags, filled with fractional silver rounds from top-grade private mints.

The festival has a vendor area called "Agora Valley" where these silver rounds traded freely. "Agora" refers to "agorism," a philosophy of freely trading goods and sound money without submitting to government taxation and regulation. Products on offer included cold-brew lattés from fresh-ground beans, pasture-raised burgers, Ron Paul campaign souvenirs, bitcoins, fresh-squeezed juices & vegan fare, consignment goods from a pop-up flea market, comic books, wood furniture, breakfast burritos, handmade jewelry, and a spectrum of goods and services.

Gold obviously appears less often in this context because most purchases are less than the ~$125 spot price of a 1/10 oz of gold, the smallest unit commonly traded. As Peter Schiff has emphasized numerous times in his Gold Letter and elsewhere, gold is primarily for saving and silver for spending. However, that is not to say gold didn't make an appearance. Thursday night, there was a competition called The Agorist Pitch - like Shark Tank, in which entrepreneurs compete for funding. First prize was a full ounce of gold! Needless to say, the competition was intense.

Finally, it's worth noting that the festival itself actually created a trading silver currency that was liquid for the week. The privately minted rounds (pictured below) were sold and bought back at the same price, so attendees could spend them at vendors and the vendors could turn them in for dollars if they wished. Only one person sold back his silver. After all, when you spend silver or gold, you're not only paying your tab, you're actually giving the recipient an investment that requires no further action on their part! It's a win-win, which is what trading on the free market is supposed to be.

Overall, PorcFest X was a wondrous week full of people that believe in sound money, personal liberty, and free trade. Of course, Team Schiff was there in full force. Andrew Schiff, Director of Marketing/Communications at Euro Pacific Capital, played mandolin by the campfire. The Peter Schiff Show's Paul Maresca piloted the massive tour bus some attendees affectionately dubbed the "Schiffmobile." And Peter himself was on hand to partake in the sound money economy and provide a warm introduction to two-term Governor of New Mexico and Libertarian presidential candidate Gary Johnson.

For those of us who spend our career anticipating a post-dollar economy, PorcFest was living proof that the world will go on. Gold and silver have always been money, with only the past few generations taking a bizarre turn into worthless paper currency. It is astounding how quickly people adapt to trading directly with precious metal coins. And that is fortunate, because we are now in an era in which users of paper currency are losing their purchasing power - fast. I encourage all of you to take a page from the PorcFest playbook and start forming barter communities where you live. Each step into the stable precious metals economy is one step further away from the crumbling US dollar.

Mike Finger is Director of Marketing Communications at Euro Pacific Precious Metals and Editor of Peter Schiff's Gold Letter. He has been involved with Euro Pacific Precious Metals from its founding in early 2010. A student of philosophy, politics, and economics from an early age, Mike is driven by Euro Pacific's mission of helping investors diversify out of fiat money and its derivatives.

This article first appeared in the July 2013 edition of Peter Schiff's Gold Letter, a monthly newsletter featuring original contributions from Peter Schiff, Casey Research, and other leading experts in the gold market. Click here for your free monthly subscription. To learn more about Peter Schiff's gold & silver dealer, visit www.europacmetals.com.



Tags:  Free State Projectgoldsilver
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The Golden Cycle
Posted by Peter Schiff on 07/01/2013 at 10:43 AM

The New York Times had the definitive take on the vicious sell off in gold. To summarize one of their articles:

Two years ago gold bugs ran wild as the price of gold rose nearly six times. But since cresting two years ago it has steadily declined, almost by half, putting the gold bugs in flight.  The most recent advisory from a leading Wall Street firm suggests that the price will continue to drift downward, and may ultimately settle 40% below current levels.

The rout says a lot about consumer confidence in the worldwide recovery. The sharply reduced rates of inflation combined with resurgence of other, more economically productive investments, such as stocks, real estate, and bank savings have combined to eliminate gold's allure.

Although the American economy has reduced its rapid rate of recovery, it is still on a firm expansionary course. The fear that dominated two years ago has largely vanished, replaced by a recovery that has turned the gold speculators' dreams into a nightmare.

This analysis provides a good representation of the current conventional wisdom. The only twist here is that the article from which this summary is derived appeared in the August 29, 1976 edition of The New York Times. At that time gold was preparing to embark on an historic rally that would push it up more than 700% a little over three years later. Is it possible that the history is about to repeat itself?

At the time The Times article was written gold had fallen to $103 per ounce, a decline of nearly 50% from the roughly $200 it had sold for in the closing days of 1974. The $200 price had capped a furious three-year rally that began in August of 1971 when President Nixon "temporarily" closed the gold window and allowed gold to float freely. Prior to that decision gold had been fixed at $35 per ounce for nearly two generations. That initial three year 450% rally had validated the forecasts of the "gold bugs" who had predicted a rapid rise in gold prices should the dollar's link to gold be severed. The accuracy of these formerly marginalized analysts proved to be a bitter pill for the mainstream voices in Washington and Wall Street who, for reasons of power, politics and profit, were anxious to confine the "barbarous relic" to the dustbin of history. Incredulous as it may seem now, with gold still priced at $35 per ounce, official forecasts of both the Secretary of the Treasury and the Chairman of the Federal Reserve were that demonetizing gold would undermine its value, and that its price would actually fall as a result.

Of course government experts could not have been more wrong. Once uncoupled from the dollar, gold's initial ascent in the early 1970's was fueled by the highest inflation in generations and the deteriorating health of the U.S. economy that had been ravaged by the "guns and butter" policies of the 1960's. But the American economy stabilized during the mid-years of the 1970's and both inflation and unemployment fell. When gold reversed course in 1975 the voices of traditional power elite could not contain their glee. When the gold price approached $100 per ounce, a nearly 50% decline, the obituaries came fast and furious. Everyone assumed that the gold mania would never return.

Although the writer of The Times piece did not yet know it, the bottom for gold had been established four days before his article was published. Few realized at the time that the real economic pain of the 1970's had (to paraphrase The Carpenters 1970's hit) "Only Just Begun". When inflation and recession came back with a vengeance in the late 1970's, gold took off (to quote another 1970's gem), like a skyrocket in flight. By January 1980, gold topped out at $850 an ounce. The second leg of the rally proved to be bigger than the first.

The parallel between the 1970s and the current period are even more striking when you look closely at the numbers. For example, from 1971 to 1974 gold prices rose by 458% from $35 to $195.25, which was then followed by a two-year correction of nearly 50%. This reduced total gains to just under 200%. The current bull market that began back in 2000 took a bit longer to evolve, but the percentage gains are very similar. (We should allow for a more compressed time frame in the 1970s because of the sudden untethering of gold after decades of restraint.) From its 1999 low to its 2011 peak, gold rose by about 650% from $253 to $1895 per ounce, followed by a two year correction of approximately 37%, down to around $1190 per ounce. The pullback has reduced the total rally to about 370%. The mainstream is saying now, as they did then, that the pullback has invalidated fears that rising U. S. budget deficits, overly accommodative monetary policy, and a weakening economy will combine to bring down the dollar and ignite inflation. But 1976 was not the end of the game. In all likelihood, 2013 will not be either.

The biggest difference between then and now is that until 1975 ordinary Americans were barred by law from buying and owning gold. About the only route available to participate in the earlier stage of the precious metal rally was by hording silver dimes, quarters and half dollars minted prior to 1965. My father indulged in this process himself by sifting through his change, the cash registers of any merchant who would allow him (exchanging new non-silver coins and bills for silver), and by sifting out silver coins from rolls he bought from banks. It was a time-consuming process, and most of his friends and family members thought he was crazy. After all, he had $10,000 worth of pocket change earning no interest.But the $10,000 face value worth of those coins he collected had a melt value of over $350,000 when silver hit its peak.

By the mid 1970's none of the problems that initially led to the recession in the early years of the decade had been solved. Contrary to the claims of the "experts" things got much worse in the years ahead. It took the much deeper recession of the late 1970's and early 1980's, which at the time was the worst economic down-turn since the great Depression, to finally purge the economy of all the excesses. The lower marginal tax rates and cuts in regulation implemented by President Reagan and tight money under Volcker helped get the economy back on track and create investment opportunities that drew money away from gold. As a result gold fell hard during the early 1980's. But even after the declines, gold maintained levels for the next 20 years that were three to four times as high as the 1976 lows.

Although the economy improved in the 1980's, the cure was not complete. Government spending, budget and trade deficits continued to take a heavy toll. The U.S. was transformed from the world's largest creditor to its largest debtor. When the time came to face the music in 2001, the Fed kept the party going by opening the monetary spigots. Then when decades of monetary excess finally came to a head in 2008, the Fed open up its monetary spigots even wider, flooding the economy with even more cheap money.

Unfortunately just like 1976, a true economic recovery is not just around the corner. More likely we are in the eye of an economic storm that will blow much harder than the stagflation winds of the Jimmy Carter years. And once again the establishment is using the decline it the price of gold to validate its misguided policies and discredit its critics. But none of the problems that led me and other modern day gold bugs to buy gold ten years ago have been solved. In fact, monetary and fiscal policies have actually made them much worse. The sad truth is that as bad as things were back in 1976, they are much worse now. Whether as a nation we will be able to rise to the occasion, and actually finish the job that Ronald Reagan and Paul Volcker started remains to be seen. But I am confident that the price of gold will rise much higher, and that its final ascent will be that much more spectacular the longer we continue on our current policy path. Don't believe the mainstream. Just as before, they will likely be wrong again. 

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show. 

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday! 

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