Hello, Sir Charles – I have a couple questions for you:

• How can someone on a tight budget best get invested in silver and/or gold?  I don't have a lot of savings, but I do not want to see them destroyed by more and more "quantitative easing".
• Seeing that I'd practically have to spend $2000 to get one ounce of gold, would silver be a better way to go?  I know it's price is high too, but maybe more manageable for someone who isn't starting with a large initial investment.
• I've seen some things where you don't get actual silver or gold in your possession, but a certificate (or something like that) instead.  Are these plans liable to leave investors defrauded or to have the actual metal confiscated by the government?

I know you may have better things to do than answer basic questions like these, so thank you in advance for your time and advice.  If you know of a site or blog that can answer these types of questions, please send me a link.

Thanks again!

Mark Cloney

Here is my reply:

Hi Mark,

Thanks for visiting Priced in Gold.

Re: Salaries – I do track production wages and the minimum wage in gold, as well as per capita disposable income – and they are all UGLY, probably comparable to Great Depression levels, though my datasets don't go quite that far back.  If you have some old paystubs or tax returns, it's pretty easy to figure out your own income history – just divide each value by the price of gold on that date.  Go to the London Bullion Market Association gold fixings page to find the gold price on any date after 1967; before that use $35/oz and you'll be pretty close.

As to how to safeguard your savings using gold and silver, don't worry about the price in USD.  Just buy what you can afford, as often as you can.  Small gold bullion coins (like 1/10 oz and 1/4 oz Eagles, Maple Leafs and Krugerrands) are quite affordable.  The only drawback is that they command a higher premium over their gold content than 1 oz coins, but this is usually recaptured when you go to sell them, so it's not as bad as you might think.

Steer clear of anything collectable or numismatic, unless you are truly a collector and know what you're doing.

Silver also tends to have a larger premium, and it is more bulky to store, but it should work better for smaller "barter type" transactions in a SHTF scenario, especially the pre-1965 "junk" silver dimes and quarters.  But silver is also much more volatile due to it's strong industrial importance, which will tend to pull it down in times of recession.  Beyond some barter coins, I tend to see silver as a speculative investment rather than as savings.

Platinum is another metal than can be a good speculation.  As of early 2012, it is trading below parity with gold, a rare circumstance.  I have been buying a little of it to take advantage of that spread.  If the economy really tanks big time, platinum and silver could go much lower.  But eventually, I think platinum will return to a premium over gold.  Silver might go much higher, but then again, it might not… I think it is a lot more of a gamble, but could have a larger payoff.  So it is strictly for speculation, not for savings.  Since silver was demonetized, it has been subject to several bubbles, as you can see in it's long term chart.  If silver does rise rapidly (perhaps to 1.5 grams/oz – almost triple today's price) the trick will be to get out quickly to the safety of gold before it crashes again.

The key is that the price of gold never changes.  It is the value of the fiat currencies used to "price" it that change.  Gold is not an "investment" that will make you rich.  It is the best form of cash, and will hold it's value, no matter what kind of monetary insanity the Fed and the rest of the central banks indulge in.  Once your savings are in physical gold, in your possession, you have no counter-party risk… only risk of physical theft, which needs to be considered carefully.  Diversification in your storage plan is a good idea – maybe a home safe, some midnight gardening, an overseas storage box, etc.

Paper certificate programs have always bothered me for the reasons you suggest.  As another form of diversified holding, they make some sense, but I wouldn't make them the main event.  For instance I like and use Goldmoney.com, but not as my primary form of gold ownership.  Same goes for ETFs like GLD, PHYS, etc.  Great for trading (shorting the USD) but I don't consider them part of my savings plan.

I hope this is helpful!

Cheers,

Sir Charles

The first, called "Gold coin shortage likely to become chronic" by Michael J. Kosares, outlines the reasons why gold bullion coins have been so hard to find at reasonable premiums, and why these forces will probably keep premiums high in the future as well. BTW, Michael's book, The ABCs of Gold Investing: How to Protect and Build Your Wealth With Gold is well worth reading if you are new to buying gold.

The second article was written by the editors of BIG GOLD at Casey Research and published in Dr. Steve Sjuggerud's excellent (and free) Daily Wealth email. Its title, "What You Need to Know About Storing Physical Gold" says it all.

Take advantage of gold's recent pullback (aka the US Dollar's recent strength) to add to your stock of cash that clanks – and keep your investments growing in their gold value!

Charles

PS: Dan Ferris, editor of Extreme Value, a newsletter I recommended to you in Gold101, scored big points with me in his weekly update today. Dan is a dyed-in-the-wool value investor, and his portfolio contains only excellent companies that are trading at great prices. But today he told his subscribers to sell several of his portfolio picks – including some long-time favorites and some very recent recommendations. Why did he do this? Because his honest opinion is that the stock market has further to fall, and having cash on hand will be key to taking advantage of the values that will be available in the future. He is keeping the strongest of his stocks, especially those he calls "World Dominators", and is buying some outstanding gold-related companies. This had to be a hard letter for him to write, but I think he's doing the right thing, and I applaud him for it. Follow his lead: take a hard look at what's in your portfolio, and don't be afraid to sell the weakest things in it, whether at a loss or a profit. Concentrate on strength and building your cash position for buying when things turn around.

Remember that gold is a form of cash, not an investment. It doesn't grow in value, create new jobs, earn profits, or generate income for you. It is simply a currency that no government can counterfeit or debase. You should hold it as a way to reduce the volatility of your portfolio, or for long term saving. Don't imagine that owning gold will make you rich: If gold doubles in price due to massive creation of fiat currency, most of the other things you need to buy will eventually double in price as well. Gold can preserve your wealth, but not really grow it. For that you need real investments and prudent speculations.

Gold is the King of Cash!

From safest to riskiest:

1) Physical bullion coins and bars – your main risk is physical security. You need a safe place to keep it where it won't be stolen. Bank safe deposit boxes are great – unless the bank is closed. In-home safes and backyard burial are some of the alternatives. Pros: no counter-party risk, it's in your own control. Cons: hard to find at decent a price these days. Track the spot price at Kitco's 24 hr Live Gold. My favorite way to buy is through my local coin dealer, Beaverton Coin and Stamp. I suggest you look in the yellow pages and make the acquaintance of your local coin shop; they can be very helpful, and may be the best place to sell your gold when the time comes to convert your savings in to local currency. Another dealer I have used for years, always with very good results is Camino Coins.

2) Goldmoney.com – stores your gold (and silver) in insured third-party vaults in London or Zurich, and allow you to buy and sell via wire transfer, very quickly and easily. This is a great service, very easy to set up and use, perfect for savings. Pros: Very low markup, low storage fees, very safe storage, online access to funds. Cons: no way to get the gold in your hands except to sell the Goldmoney and use the funds to purchase physical gold. It is one of the best forms of "paper gold", but not quite the same as real gold in your pocket.

3) The Gold ETF, symbol "GLD": This is a stock that you can buy and sell in your brokerage account. The fund's managers try to make the value of each share be the same as 1/10 ounce of gold. There are also options on it , as with many stocks. Pros: a great tool for trading and speculating. Quick and easy to buy and sell. Cons: it is a stock, not really gold itself. Brokerages, dealers, stock exchanges, and many other counter-parties all have to perform in order for you to realize value from this security. Best used for shorter term trades in times when the markets are functioning well.

The next two categories are really speculations, not cash positions. Used prudently, they can increase the gold value of your investments. Used carelessly, they can destroy your savings. Proceed with caution:

4) Numismatic gold coins – these are really collectible antiques, with gold playing only a minor role in their value. They can be a great speculation, but like gold stocks they can rise and fall much faster than gold itself. There are some that are available for close to bullion prices; these are attractive because they offer a numismatic "kicker" to the gold value. Circulated common date US gold coins were in this category until recently; now they are hard to find at reasonable prices. On the other hand, almost all rare gold coins are now trading at premiums to gold that are very low compared to historical averages, and many offer good values; but they are still mostly "premium" and only a little "gold". Do not buy numismatics unless you know what you are doing or have expert assistance. My favorite expert is Van Simmons, president of David Hall Rare Coins.

5) Gold stocks: These are companies that explore for and mine gold and other metals, finance gold mining and receive royalties from gold production. Very risky! Many are just "holes in the ground surrounded by liars". Some are excellent speculations that can rise much faster than gold itself (and fall faster, as well). Some generate very nice income streams. You need good research to find the best plays and avoid the deathtraps. The dean of resource investing is Rick Rule of Global Resource Investments. Highly recommended. Newsletters that have performed well for me in the past (for many investments, not just gold stocks) include Brent Cook's Exploration Insights, Agora Financial's Options Hotline, Stansberry and Associates' Extreme Value, True Wealth and Short Report letters. Doug Casey has several excellent newsletters including Big Gold.

I hope this is helpful!

Charles

When someone talks about the price of gold in some currency like US Dollars, they are talking about the exchange rate between two currencies – gold and dollars. It makes just as much sense to talk about the price of the dollar in gold as it does to talk about the price of gold in dollars. It all depends on which currency is central to your thinking. For most of my life, I've lived in the United States, and used US Dollars to purchase groceries, keep my accounts, and so on. But when I lived in England, I used Pounds to buy my groceries, and keep my accounts. When building a boat in New Zealand, I had accounts in NZ Dollars, paid for the boat's construction in NZ Dollars and paid bills and expenses in NZ Dollars while visiting there. Same for my visits to Japan, Germany, Mexico, Tahiti, and so on. Still, as I traveled, I always related the value of the local currency back to my "home currency", the US Dollar. "How much is that in dollars?", I would ask myself. When I had the answer, I could assess the price and decide "Wow, cheese is a real bargain!" or "Sheesh! Gasoline is really expensive here!".

But to think of the US Dollar as "the center of the monetary universe" with all other currencies circling around it is silly. When friends of mine from England visit the US, they are doing just the opposite of what I did when visiting them – they are relating all the US Dollar prices they see back to their "home currency", the Pound Sterling.

I have now come to realize that we are all travelers… moving through space around the globe and through time as well. As we move to new places and new times we find people using new forms of local money. Sometimes these moneys have the same name, but very different values. Dollars in the US or New Zealand or Hong Kong or Australia or Zimbabwe do not have the same value as one another. And one US Dollar in 2008 does not have the same value that one US Dollar had in 2003.

Gold is a money that is recognized around the world, throughout all of history, and changes value very gradually over time. To my mind, this makes it the perfect money in which to value all the others. The perfect "home currency" to relate local prices back to, to determine whether things are cheap or dear.

In today's world of "floating exchange rates", the market sets the price of one currency in terms of another. Traders buying Japanese Yen with US Dollars, selling New Zealand Dollars for British Pounds, buying Swiss Francs with Euros, and so on, agree on how much they will pay for each transaction made. These transactions are posted electronically and become the bid and ask prices that guide other buyers and sellers, and are called the "spot prices" of currencies. Traders are also buying and selling currencies for delivery in the future, months or even years from now. The prices they set are based on the spot price, but also figure in estimates of future changes in value due to inflation, interest rates, expected demand and other factors.

Bonds are another form of currency exchange – you will be getting your principal back 2, 5, 10, 20 or more years in the future, and receiving a fixed "rental" (the interest) every so often until then. Although the currency lent and repaid have the same name, they are really two different currencies because of the intervening time. For example you might buy the bond with 2008 US Dollars, receive an interest payment in 2010 US Dollars and finally be repaid the principal in 2018 US Dollars. Although bonds are said to have no "exchange risk", many of the other factors that drive currency futures prices also drive bond prices… especially interest rates and inflation expectations. No one will pay $1000 for a bond earning 3% if a new bond with the same maturity and risk profile can be purchased for $1000 that will pay 12%. And if one expects the money returned at maturity to be worth less than the money being used to buy the bond (due to inflation) then one will insist on a higher interest rate… or pay less up front than will be returned at maturity. If a new issue is priced too high (by setting its interest rate too low) there will be no buyers. So traders also set the price of bonds, which is another way to say that they set interest rates.

Of course, the expected future value of a currency can be higher as well as lower. When people expect their money to buy more in the future, they tend to put off purchases because they expect a better deal to come along later. This activity is called saving. The monetary effect is called deflation, because the amount of money chasing after the goods available is declining, making each unit of money more valuable as time goes by.

As I write this, the "Credit Crisis" and recession being experienced around the world is making the US Dollar more valuable. Banks, hedge funds, traders, investors, governments, home owners (in fact, nearly everyone) have borrowed large sums of money to leverage their investments and increase their rate of return. Although this practice is very profitable in good times, it quickly reverses its effect and multiplies the magnitude of losses when the value of the underlying assets declines. When losses get large enough, they can cause individuals and firms to go bankrupt, leading to still more losses for those who were doing business with them. In attempting to reduce this leverage, and thus reduce the rate of losses, firms and individuals are scrambling to get dollars to repay those loans. They sell whatever they can to raise the money. This selling of assets and buying of dollars pushes the value of the dollar higher with respect to almost everything – stocks, real estate, oil, gasoline, steel, copper, even gold.

In investing, it is common to borrow an asset, like a shares of a stock or a large amount of a commodity like copper or silver, and then sell it, anticipating that the price of the asset will fall, and it can be bought back cheaper in the future when it needs to be returned to the original owner. This is called "short selling". It is legal, and can be quite profitable. It improves functioning of markets by making available commodities that would otherwise site idle in warehouses, and enables more accurate pricing of stocks and commodities.

When a large number of traders have short positions in an asset, and the price of the asset goes up too much, those traders are looking at large losses, and some will decide to exit their positions by buying back the asset they had sold, paying a higher price, and taking the loss. This buying pushes the price even higher, causing more traders to decide to buy back the lent asset, and this can become a vicious circle, shooting the value up much higher than is warranted on fundamentals alone. This is called a "short squeeze". Eventually, the sellers who must get out have completed their buying, and the "gravity" of fundamental value reasserts itself. The asset price that spiked higher so rapidly now falls back, often just as fast or even faster than it rose during the squeeze.

If one thinks of money as a commodity, it makes sense that buying a stock (or a house) using leverage is a form of dollar short selling. Just like the silver trader who borrows silver and sells it for US Dollars is "short silver" (he is also "long the dollar" since he lots of that in his account) a house buyer with a mortgage has borrowed US Dollars and traded them for a house; she is "short the dollar" and "long real estate". The same can be said of stocks bought on margin – the trader is short the dollar and long stocks.

And just like any other commodity, the dollar is subject to short squeezes. When, let's say, stocks begin falling in value and many players in the market are short dollars and long stocks, they will be experiencing losses, and if those losses get large enough, they will need to "cover their short" by selling other assets to buy back the borrowed dollars. Note that this has nothing to do with the fundamentals of the dollar as a currency – how sound it is, how large the trade and current account deficits are, how fast the printing presses are running, nor does it matter how sound the assets they are selling are. The dollar short sellers need to get out NOW, and they will do whatever it takes to get out. It should also be clear that lending them more dollars is not an answer to their problem… they have already borrowed too much. They need to reduce, not increase, the size of their dollar short position.

And like all short squeezes, at some point the players who need to repay their dollars have done so, or have gone bankrupt trying. Now fundamentals reassert themselves, and the "overbought" dollar falls while the "oversold" stocks and commodities rise, each according to it's underlying value. Prices oscillate around for a while until balance is restored and the next cycle can begin.

Of course in the real world, there are many other processes going on at the same time. Uncertainty about true asset values, uncertainty about the soundness of trading partners, outright fraud, changes in production and demand, government and central bank policy changes and so on all play a role in determining the evolution of the overall economy.

How can we tell a dollar short squeeze during an inflationary period from a true deflation?

In both cases, the purchasing power of dollars is increasing, but the psychology is very different. In inflationary times, people look at a falling price and think, "Wow! I better scoop up that bargain now; it probably won't last long." In deflationary times they think, "No point in buying today, I'll wait until I really need it; it will probably be cheaper then."

I just experienced this at the local gas station. US gas prices in dollars have been falling since July, and are now about one half what they were then. In gold, they peaked in September, but have also fallen sharply. As I was driving by the station I saw a new lower price at the pump. My tank was half-full. In a deflationary mind-set, I would have reasoned that as I still had half a tank, I might as well wait for a few days to fill up, since the price would probably be lower than it is now, and by hanging on to the money I would be earning interest on it and gaining value. But that was not my reasoning… my reaction was to rush in and fill up quick at this great price while I still could. That is inflationary thinking.

True deflationary thinking takes time to develop. People have to experience falling prices for so long, that future low prices become their expectation. For almost 70 years prices have generally trended up as more and more money has been created.

Will the current "crisis" keep prices falling long enough to reverse that thinking?

It is hard to say for sure, but the fundamentals do not seem to be changing; if anything, they are deteriorating. Bailouts and stimulus programs are ballooning deficits and central banks are doing everything in their power to flood the system with liquidity. Let's look at what that means: the central banks (like the Federal Reserve) are selling dollars to the traders and banking houses who are desperate to reduce their dollar short positions. They are buying all sorts of assets, much of it the "financial toxic waste" that got the investment banks and hedge funds into this bad position in the first place. So now the Fed is shorting the dollar on a massive scale, taking the other side of the de-leveraging trade. But they have a huge advantage over other traders in the marketplace: they can never run out of dollars. No matter how big their losses get, they can always stay in the game. Or can they?

Where do they get the dollars they are supplying to the market? Most of them are borrowed from foreign governments that run trade surpluses, but ultimately, they will create them out of thin air if that's what it takes. And foreign governments and other large lenders will be increasingly nervous as they look at the central bank's balance sheet and see dwindling tax receipts and mostly junk bonds, non-performing mortgages, stock of failing or failed companies, and so on, as the primary source of future repayment. Of course they will get their money back eventually, but if the central bank just prints it up, its purchasing power in 5, 10 or 30 years will be only a small fraction of the value they are lending now. When they truly realize that, the game is over. When the central banks can no longer borrow, they will begin to print money in earnest. Then, it will be like the cartoon coyote running off the cliff: everything is going fine until he looks down and sees nothing but the canyon floor, far below him, and suddenly everything is not fine, gravity reasserts itself, and he is falling out of control, to eventually disappear in a puff of dust as he hits the ground. In economics, this is known as hyper-inflation. Think of Zimbabwe. Think of million-dollar bills, printed on one side only because it's too costly to print on both sides. Think of needing a wad of these to buy a single gallon of gas, or a gallon of milk, or a burger and fries.

But it will still take about the same amount of gold to buy a gallon of gas, or a meal, as it does today. Perhaps, if there is a massive flight to the safety of gold, gold's price may be pushed up compared to most other things, and it may take even less gold to buy a gallon of gas then it has historically, at least for a time, until things settle down again.

At the moment, it is quite profitable to speculate by buying and holding dollars and other fiat currencies. No one knows how high they will go, or how long it will take before they begin to fall again. But it is a speculation in a highly volatile commodity that has terrible fundamentals and is undergoing a powerful short squeeze. It is playing with fire, and it will take both luck and skill to make a profit and keep it.

Gold on the other hand is just a sound money. Holding it will not make you rich, but will keep you from getting poor. It will not build anything, employ anyone, or pay any interest. But it will retain its value. It is true cash that can be traded for enough local currency to buy what you need any place at any time.

If you have experienced large paper losses in your securities portfolio, be sure to evaluate those losses in terms of gold. Remember that the rising dollar may make your losses look bigger than they really are. Be sure to honor your stops: exit positions to preserve your capital, don't go on hoping they will recover. Look at each position and ask, "If I had the cash, would I buy this today, knowing everything I know about the security, the economy, and my own risk preferences?" If the answer is "yes", then keep the position; otherwise close it out, whether at a loss or a profit.

Take advantage of the dollar's rise to accumulate solid assets like gold (your cash position) and stock in the world's best companies, to buy debt-free real estate and to diversify yourself internationally. Invest in yourself. Learn a new skill or a new language. Travel. Improve your health. Exercise. Meditate. Start a business that can be profitable on a small scale without needing to take on debt, one that can exploit the market gaps that will be left as large old-line companies burdened with debt and union contracts go under. Or start an information publishing business to share what you've learned with others and help them weather the storm, prosper and become happier and healthier.

The bottom line is that health and happiness come first. Spend time with your family! Time is a tricky asset… as we grow older, we have less and less of it, and each second becomes more precious. Spend it wisely. Never confuse happiness with financial success. And never confuse your dollar net worth with your true wealth as measured in gold.

The big claim is that after peaking in 2000, incomes fell, bottoming in 2003, and have now climbed back to make new highs in 2006.

The author examines IRS data showing average Adjusted Gross Income and Wages and Salaries as reported on US tax returns. The numbers quoted are a bit confusing – some are adjusted to 2006 dollars, some are totals and some are averages. But one thing is clear to me: stated in gold, Adjusted Gross Incomes in 2006 are down about 50% from their 2000 levels, about where they were in 1995. Wages and Salaries, stated in gold, are also down about 50% from their peak in 2000.

I'm not sure how useful this data is, as Adjusted Gross Income is merely a number used for calculating taxes, and is subject to all kinds of exclusions, deductions, and so on, that relate solely to the complexities of the tax code. I prefer to watch the Per Capita Disposable Income, a number reported monthly that shows on average, the money available after taxes for consumption, investing and saving. This number also fell about 50% from 2000 to 2006, and has continued to fall since then. It is currently about where it was in the late 1980s.

People do have more dollars to spend… but those dollars are worth much less. Don't be fooled! Make sure your income and net worth are rising when measured in gold.

Even though I missed only a few of the general sessions, I can't wait to get my hands on the recordings to go through them again for profitable ideas, and to clarify in my own mind the arguments, pro and con, on issues that will be key to my investment decisions in the coming months.

One of those "out in the hallway" discussions got me to thinking about wages, valued in gold… and I put together a chart of wages (average hourly earnings of US production workers, as tabulated by the BLS in series CES0500000008, to be precise) to see what they've been doing.

I was shocked to see that since January 1964, a total of 534 months, there have been only 36 months in which wages were lower than they are today – mainly in the period from 1979-1981. The most recent period when they were this low was early in 1988, 20 years ago. Since then they have seen a high of 1.75 grams/hour in April of 2001, before falling back to their current level of 0.6 grams/hour in July of 2008.

I thought it would be fun to take a look at how things have changed over that 20 year period in terms of gold prices, many of which can be found in the charts section of this web site. Here is a summary:

1) Although wages are about the same, per capita disposable income is up 9%. I suspect this is due to many factors, including lower tax rates, changes in government "benefits", more dual earner households and smaller families. It could also be influenced by the proportion of "production" jobs in the economy. In any event, this is a modest increase for 20 years!

2) First class postage is down 6%, one of the few things I could find that was down!

3) Stocks were a mixed bag. The Dow Jones Industrials are around 400 now, up from about 125 in 1988 – a rise of 220%, even after their spectacular fall from the 1999 high of 1,400. What a roller-coaster ride! On the other hand, Japanese stocks as measured by the Nikkei 225 Index were much stronger in 1988, and have fallen from 12 to 4.5 – a drop of 63%. I plan to do a more detailed comparison of these markets in a future post.

4) Home prices, as measured by the Case-Shiller CSXR Index, are up about 33%, even after falling more than 50% over the last three years.

5) Commodities are up strongly: silver up 29%, gasoline up 89%, copper up 98%, crude oil up 275%, and wheat up a whopping 347%.

The US government's own debt is also a huge and growing problem. While in 1988 it was a "mere" 2.6 trillion USD, today it is over 9.4 trillion USD, up 262%. If this debt had to be settled in gold, that would require 308,376 tonnes of gold today, up from 204,000 back in 1988. It's a good thing that this debt is denominated in US Dollars that can be created out of nothing with the press of a few computer keys! There are only 8,133 tonnes of gold in the US reserves (even this figure is disputed, as it has not been physically audited for decades.) And to put the size of this debt in perspective, all the gold ever mined, since the beginning of time, is estimated at about 150,000 tonnes – that's less than half of the current US Federal debt.

But these figures, as grotesque and gargantuan as they are, are just the officially acknowledged tip of the iceberg. They don't include off-budget borrowing, consumer borrowing, or the real elephants in the room, the ones no one in polite society wants to talk about – the "unfunded liabilities" and future entitlements of social security, medicare, and related programs. While current taxes are generating enough cash to cover these at the moment, due to changing demographics they are growing at a rate that cannot be met simply by new tax increases. Unless changes are made, their costs will overwhelm even the ability of our printing presses to pay for them!

How did we get to this point? What can we do about it?

At the Vancouver Symposium there was a showing of a new documentary film called I.O.U.S.A. that addresses many of these points via fascinating interviews with Pete Peterson, Warren Buffett, former Comptroller General of the United States David Walker, and other luminaries. It's a wonderful film, well made, very thought-provoking, and highly recommended.

Most people have little grasp of what is happening with their money. Most have no idea what is heading down the tracks toward them financially. If you have family and friends in this situation, I urge you to take them to see this movie. It is fun, fast paced and informative. They may be shocked, but they won't be bored!

There will be a special "one day only" premier showing of the film all over the USA on Thursday, August 21st. I'm going, along with many of my friends who weren't able to see it in Vancouver. You can get details, watch a trailer and check out the special offer Agora Financial is making to those who pre-purchase tickets, as well.

I hope you will join me!

The first part of this interview covered Paul van Eeden's background and laid out his views on gold, inflation and interest rates. In this final segment, we'll discuss what to do about this situation – how to translate this view of the world into investment action.

Paul has been working hard on a more accurate model for the money supply that will give investors a clearer picture of what's coming in terms of inflation and interest rates. The best way to get access to this information is to subscribe to his newsletter – something I strongly recommend.

As I write this, there are still a few seats left for the 2008 Agora Financial Investment Symposium, to be held in Vancouver, BC from July 22 to 25. Paul and I will be there along with the legendary Jim Rogers, Rick Rule, Bill Bonner, Doug Casey and a boatload of other excellent speakers. If you will be attending, be sure to drop me an email or leave a message on the Priced In Gold Hotline at 888-868-5656, and we'll see what we can work out for a get-together. Keep an eye out for my pith helmet!

Last year, in July of 2007, I attended the Agora Financial investment Symposium in Vancouver, BC. There were a lot of excellent speakers and sessions covering all aspects of investment, with quite a bit of emphasis on natural resources and a strong international flavor. One of the speakers who impressed me the most was Paul van Edeen. On my return home I subscribed to his newsletter – which has since become one of my favorites.

Last month I had an opportunity to interview Paul on the phone, and I picked up some great investment ideas and tidbits of investing wisdom that I am excited to pass along to you.

Because of it's length, I'm breaking the interview up into two podcasts. The first will cover Paul's background and lay out his views on gold, inflation and interest rates. In the second, we'll discuss what to do about this situation – how to translate this view of the world into profitable investment action.

I heartily recommend Paul's newsletter, and would love to see you at the upcoming 2008 Agora Financial Investment Symposium, to be held in Vancouver, BC from July 22 to 25. Paul and I will be there along with the legendary Jim Rogers, Rick Rule, Bill Bonner and a boatload of other excellent speakers. If you will be attending, be sure to drop me an email or leave a message on the Priced In Gold Hotline at 888-868-5656, and we'll see what we can work out for a get-together. Just watch for my pith helmet!

One of my favorite quotes from his Senate presentation:

“Whereas the prices of oil and wheat measured in dollars have soared over the course of this decade, they have, on the other hand, been remarkably stable when measured in terms of gold — gold having been the foundation of the world’s monetary system until 1971. It is, therefore, reasonable to conclude not that we are a experiencing a commodities bubble, but, rather, the end of what might usefully be termed a ‘currency bubble.’”

And from the Hard Asset talk, this wonderful idea:

So how could gold make a revival as a sort of international money? Well, we don't actually need a government run gold standard anymore. There are already private gold banks. They've been growing for some time. Their growth has roughly charted the decline of the dollar. People buy digital shares in gold. Gold is held in vaults by these banks, and you buy digital claims on them, just like when you buy a stock today you don't have a physical certificate. You have a digital representation of that stock.

If we all owned digital shares in gold, and we were able to move money from our accounts between us, and we were able to walk around with smart cards carrying representations of this digital gold, we'd be able to travel around the world, and to transact with one another. Think about it. You would go into a café in Sao Paolo, and you would order your cappuccino, and you would pay with a smart card that would debit your account for some flake of gold. And since people have always had confidence in gold as a long-term store of value, there's no reason why it couldn't play that role.

Dr. Steil also comments on why gold is a better monetary choice than a basket of currencies or commodities:

The problem with a basket is I think it's too abstract for people to connect with as a long-term standard of value. In other words, a basket is probably going to have to be run by some sort of institution, and people will probably over time lose faith in the institution.

The reason why I suggest that digital gold may have more attraction for people is because a system based on one commodity with unique monetary properties like gold does not have to be run by an institution. You can have a competitive market developing around gold as an international monetary standard. So that's the reason I think gold would probably make a better money than a commodity basket that would have to be managed by some large institution.

He points out that while the US Dollar may not be doomed in the immediate future, the dilemma described in 1960 by economist Robert Triffin remains unsolved today: if a national currency operates as the international currency, this currency must be supplied to the world by running either large balance of payment deficits, or large current account deficits. But when we do that, people eventually lose confidence in this currency because it can be printed without limit.

So far the US has pushed its deficits higher than many economists of the 1980s thought possible – past 3%, then 5% and recently 7%. But at some point, people will say "enough is enough. We don't trust your management of the dollar any more." And as Dr. Steil says, "that's a very dangerous situation to be in."

These are quite remarkable discussions of the US Dollar, gold, Federal Reserve policy and the future of money. I strongly recommend that you read through them, study the included charts and think about the implications for your investments.

Silver has historically been both a monetary metal and an industrial metal. Prior to 1872, the prices of both gold and silver were heavily supported by governments worldwide for monetary reasons. Silver has now lost most of it's monetary use and is almost exclusively industrial, unlike gold, which has most of it's above ground supply sitting in the vaults of governments, banks and individuals in the form of bars and coins.

Silver consumption is skyrocketing due to worldwide demand for consumer electronics and power, communications and computing infrastructure, although much of the silver "consumed" in industrial usage is eventually recovered through recycling. On the supply side, most silver production is a side-effect of mining other industrial metals such as copper, zinc and lead. These factors give silver a complex supply-demand picture, and a relatively volatile price when measured in gold, at least since 1872.

It certainly looks like silver is at the low end of it's range at the moment, and headed up. Looking at the "tops" in 1872, 1919 and 1968 it would be tempting to project another top between 2015 and 2020, somewhere north of 1.5 grams per ounce – a potential return of 140% over a 10 year period, given the current silver price of .628 grams.

Stocks are certainly much more volatile, as you can see in the chart of the Dow Jones Industrials. This means the opportunity for larger gains, but also the risk of larger losses. Using similar cyclic logic on the DJIA, seeing bottoms at 1932 and 1980, and tops at 1929, 1966 and 1999, it is again tempting to project the next bottom between 2010 and 2020 somewhere south of 100 grams, with the next top possibly around 2,200 grams but probably not occurring until 2032 or later. With the Dow currently around 370, these would be huge swings – down 75% and back up over 2000%!

Since 1991, silver is up about 80% from .346 to .628 grams per ounce. Over that same period, the Dow is up from about 214 to 370 grams – around 70%. But during those years, the stock index rocketed to 1,400 before falling back to 370. Looking forward, I see support at around 300, 150 and 50. That's a long way down.

For the next 5 to 10 years, I'd much rather be long silver than large cap stocks!

PS – One more thing I neglected to mention… companies can and do go bankrupt. That means their stock can become worthless, wiping out your investment entirely. Zip. Nada. Zilch. Goose-egg.

Even silver mining stocks can and do go belly-up. Physical silver cannot. It will always be one of the highest conductivity metals (both in terms of electricity and heat), it will always take an extremely high polish, and make beautiful jewelry. Its value in gold may rise and fall according to supply and demand, and be influenced by the availability of other alloys and the discovery of other uses, but it will never go to zero. Something to keep in mind in the perilous times ahead.