For such a wonderful year for precious metals investors, the final calendar quarter left little to celebrate. Just as people now take for granted that their phones will also take pictures, play music, and surf the internet, many investors have come to expect gold and silver to move up in a straight line.
In fact, in a recent CNBC interview one analyst claimed that gold's recent correction proves that it is not really a safe haven. In truth, such a statement merely proves how little some analysts know about markets.
However much the fundamentals may be on your side, there are always mitigating factors that affect price movement. In the case of gold and silver, the temporary resurgence of the dollar versus other fiat currencies alternatives has been the dominant factor - but even that isn't the whole story.
STAMPEDE OUT OF EUROS
The critical factor that has been in play the past few months has been the European debt crisis going critical. I have said all along that the US is in worse shape than the EU overall because the EU has less will and capacity to resolve - or even temporarily paper over - its problems. The flip side is that, absent the massive stimulus the US has received, Europe has been forced to deal with its sovereign debt problems first.
Global investors have been spooked since the credit crunch of 2008. That means they are more likely to follow the herd rather than stick to the fundamentals. It takes a certain firmness of character to watch your investments sell off by double digits and not have a moment of self-doubt.
So, what we're seeing is big moves into and out of asset classes. But what is important to understand about these circumstances is not the scale of the moves but the direction of the trend.
Right now, the dollar is riding high. But it's still down over 30% over the last decade as measured by the generous US Dollar Index. Gold, by contrast, is up over 350% in that period. Of course, past performance does not guarantee future results, but the fundamentals have not changed. It's worth remembering that mainstream analysts chose the dollar over gold in almost every report over the last 10 years, based on a blind faith in the power of the US government to centrally plan the American economy. The market proved them wrong.
Once again, the mainstream narrative is that the real danger is in Europe and therefore the US offers a safe haven. This has caused a stampede out of euros and into dollars. But as we've seen over the last few years, the euro and dollar can decline simultaneously - and will continue to do so as more and more investors realize that the real safe haven is gold.
SHOOTING STRAIGHT UP
There is a reason assets don't move up in a straight line. Besides varying liquidity needs and risk appetites of investors, there are also built-in mechanisms to flush speculators out of a skyrocketing market.
As silver approached $50 this past April, the COMEX raised margin requirements for futures contracts on the metal, thereby pushing many speculators out of the market. While this practice presumably prevents speculators from overusing leverage, it also has the effect of crushing the short-term price of the metal. Both gold and silver have been subject to increased margin requirements this past year.
While we can now rest assured that future price increases are driven more by long-term investment than short-term speculation, it is not without costs. Speculators serve to reduce volatility in a market by buying in anticipation of future scarcity and vice versa. So, pushing out the speculators may increase volatility in the future. However, it's my feeling that in truth no gains have been lost at all - they have merely been postponed.
IS THIS THE TOP?
In order to determine whether the recent sideways movement of gold and silver is cause for concern, let's look at what lies ahead for 2012.
It is clear from 2011 that the new Tea Party members of Congress are not strong enough to stop the fiscal bleeding, and with the Occupy Wall Street movement in full swing, President Obama doesn't have a lot of room to compromise. Washington has been reduced to short-term measures to "pay" its bills, and the bills are mounting faster than ever.
Meanwhile, Ben Bernanke's Federal Reserve seems intent on pushing all the boundaries of monetary policy. In its most recent ploy, the Fed has engaged in a covert bailout of Europe through the use of currency swaps. From an investment perspective, this goes to show how deluded dollar investors are - they're buying into a currency that is being printed for any and all comers. This news should have caused the dollar to tank and gold and the euro to rise, but again, the fear trade is overriding all other considerations.
2012 should see more trouble from Europe, and therefore potentially more dollar buying. This might even be the year we see a few members exit the euro. However, there is no way to know how the euro will react in the short-term to such events, as such scenarios may already be priced into the market. In any event, long-term, the eurozone will be stronger without its weaker members. If they cannot mend their profligate ways, better to force them out now than compromise the solvency of the stronger members.
For smart investors, dollar strength caused by euro fears is simply an opportunity to buy contra-dollar assets on the cheap. Yes, I believe sub-$30 silver and sub-$1600 gold are still cheap for what's ahead. And with 2012 forecasts of $2,200 by Morgan Stanley, $2,050 by UBS, and $2,000 by Barclays, it appears I'm not alone.
Peter Schiff is CEO and Chief Global Strategist of Euro Pacific Precious Metals, a gold and silver coin and bullion dealer offering honest products at competitive prices.
If you would like more information about Euro Pacific Precious Metals, click here or go to our website, www.europacmetals.com. For the fastest service, call 1-888-GOLD-160.
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.
Overall, this bodes well for our investments and for our country. If gold and silver are successfully re-monetized, our children may know a rate of economic growth not seen since our great-grandparents were in their prime. And prices may never return to today's levels again.
In the world of precious metals, silver spends a lot of time in the shadow of its big brother gold. Gold, with its high price-to-weight and distinctive yellow tint, has always occupied a special place in the human psyche. To many people across many ages, gold is simply the ultimate form of money - and, as a long-term, stable store of value for one's personal wealth, I agree it's hard to beat.
However, rare circumstances are aligning today that I believe will make silver the true champion of this bull run.
WHAT'S DRIVING PRECIOUS METALS?
Gold and silver are both benefitting from a perfect storm in the sector.
Dollar devaluation means that much of the 'gains' we see are really just losses by people holding dollars. In other words, if your dollars lose 50% of their value, it's going to take twice as many of them to buy the same ounce of gold.
But the rally is based on more than simple inflation. Precious metals are regaining their role as the ultimate reserve asset. That means many, many more people are buying and holding these metals than at any time in the last thirty years.
Another factor is the rise of emerging markets and decline of developed markets. As billions of poor Asians, Africans, and South Americans lift themselves out of poverty by embracing the free market, the US is plunging itself into poverty by rejecting it. This means there are a mind-boggling number of new customers for jewelry, savings, and industrial products that require precious metals - and that we are becoming less and less able to outbid them for these resources with our dollars.
SILVER'S DRIVING FASTER
If the world were going to hell in a hand-basket, then I would expect gold to outperform silver. However, it is only the developed economies that are on the rocks - and only the US that faces true catastrophe. Thus, we have seen silver outperform gold for the last eight years.
The market is telling us that while uncertainty reigns supreme, the global economy will prosper in the years ahead. While gold most effectively insures the investor against economic devastation, silver offers both a shield against monetary turmoil and exposure to market growth.
THE KEY: INDUSTRIAL DEMAND
This is because silver is both a precious metal and an industrial metal. Gold is mostly precious, copper is mostly industrial, but silver strikes a fine balance between the two. And it seems as if this moment in history is perfectly suited to this balance. We are facing not only the prospect of the collapse of the international monetary order, but also the largest industrialization process the world has ever seen.
While in a past era, wood, steel, or oil would have been the most critical commodity, today silver is used in everything we hold dear: iPhones, flat-screen TVs, batteries, solar panels, etc. Asia - the new heart of the global economy - is accumulating gold, but they're consuming silver. That makes both metals good bets, but likely gives silver the edge.
It's safe to say the future depends on a steady supply of silver. This burgeoning demand is reflected in the latest figures: global demand for silver is about 890 million ounces a year, while global mine production is about 720 million ounces a year. We're actually consuming scrap to make up the difference. And unlike gold, which tends to remain in a recoverable state as coins or jewelry, a large quantity of silver is ending up in trash dumps - where it is essentially lost forever.
As long as the emerging markets continue to trend toward freer markets, and consumers the world over continue to demand computers, electronics, and green tech, silver should only become more scarce - and thus more valuable. I think these assumptions are pretty safe to make.
CAN THE WORLD THRIVE EX-US?
Of course, if everyone agreed with me, silver would already be worth hundreds of dollars an ounce and there wouldn't be any profit to be made on the trade. Fortunately, there are a couple of bogeymen in the financial media scaring the majority of investors away from silver so far.
First, some analysts still believe - bless their hearts - that the US is really going to pull through this time into a sustainable recovery. After being duped by dot-coms and then housing, they are all aboard the Treasury Express back to Bubbletown. Unfortunately, as in the previous two cases, the current low interest rate environment is merely masking an underlying economy that is vastly more rotten than it was even a decade ago. The unemployment rate is a key signal that this time, Bernanke's magic medicine won't work.
A second cohort sees that the US is doomed, but still thinks we will drag the rest of the world down with us. This is the school that holds that despite our persistent current account deficits and monumental external debt, the world economy "needs" the US consumer to drive growth. As I alluded to in my book, How An Economy Grows And Why It Crashes, this is like a plantation master claiming his slaves need him around to consume the fruits of their labor, or else they wouldn't have anything to do. Well, the results are in: after an initial panic rush into dollar-based assets, emerging markets are back at full sprint while the US is still limping along.
SILVER IN A DOLLAR COLLAPSE
Just like a Hollywood celebrity, we in the US spent our time at the top of the world - and soon let our status get to our heads. And like a celebrity, our adoring fans the world over will be quick to forget us as we fall from the limelight and deal with our powerful addiction to partying and cheap money. To survive the next decade in America, you are going to want an asset that is in demand globally, but is also free from counterparty risk here at home.
I recently did an interview with a group that is making a film about living in America in the year 2019. The premise is that inflation is rampant, the economy is in shambles, and groups are springing up that do all their trading in silver rounds. While I think their timeline is quite generous, this is a fairly accurate picture of what lies ahead.
Not only does silver appreciate while sitting in your safe due to overseas demand, but it also comes in units that are ideal for use as a common trade unit. Two or three ounces of silver can buy you groceries for a week. By contrast, just try to eat an ounce of gold's worth of vegetables before they spoil. There are fractional gold coins and bars, but they carry very high markups.
None of us have had to think about these things in our lifetimes, but it is not abnormal in history. Soon, understanding precious metals will be as much a survival skill as knowing how to change a car tire.
THE GOLDEN RATIO
I always say that every investor should have at least 5-10% of his portfolio in physical precious metals. Of that, the proportion allocated to gold vs. silver depends mainly on risk tolerance. Silver tends to be more volatile than gold, so silver investors must have the discipline not to liquidate their stash at the first sign of a correction.
I generally advise a ratio of 2:1 gold-to-silver in the average portfolio. More aggressive investors can push it to 1.5:1 or beyond.
Year-to-date, silver is up 5 percentage points more than gold, and I expect that trend to continue. It's important to understand that in this fast-changing world, silver is no longer runner-up.
Nothing discussed on the show is an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investing strategy. All securities involve varying amounts of risk, and their values will fluctuate, and the fluctuation of foreign currency exchange rates will also impact your investment returns if measured in U.S. Dollars. Dividend yields change as stock prices change, and companies may change or cancel dividend payments in the future. Investments may increase or decrease in value and you may lose money. International investing may not be suitable for all investors.
