One last thought about the expansion of the US money supply, and this has to do with interest rates. The Fed has announced that they intend to employ quantitative easing as one of their tools to alleviate the current economic crisis. As I’ve explained, this is basically the creation of money out of thin air. Recently the US Treasury Secretary was in China, and he was laughed at by students there when he tried to explain that the US was committed to following a responsible fiscal policy. Can you believe this? We all know how important it is in Oriental culture to show respect. There can be only two explanations for this apparent breach of etiquette. Either the students thought the Secretary was making a joke, therefore they laughed, or the statement was so preposterous and unbelievable that Mr. Geithner lost their respect immediately and there was no longer any social restraint to prevent them from laughing in the face of a fool.
The Fed has to walk a very fine line with their purchases of US Treasuries at auction. If they purchase too much, too often, then the world will see it as an unrestrained effort to debase the value of the dollar (by inflating the supply of money). To protect themselves they will probably begin to unload some of the trillions of dollars they hold in US Treasuries, causing the price of those bonds to drop (due to the expanding supply), which results in an increase in interest rates. Higher interest rates will destroy an already weak economy and inflation will begin to rise to very unpleasant levels. Does anyone remember the late 70’s or early 80’s? I do. I do not know whether this particular risk will materialize. If it does, then lots of other countries will suffer from this run on the bank, so to speak. So there is some pressure on the international community to avoid this situation. By the way, this is the “nuclear option” that the Chinese have hinted at in trade discussions with the US. It will be interesting to see how this unfolds. But it can very easily happen.
I urge you in the most strenuous way to make provision for the coming inflation. The usual path taken in anticipation of inflation is to purchase precious metals, such as gold or silver. Historically these metals have provided a good hedge against inflation, though for different reasons. Yes, both metals have in the past been used as money. I’ll have to admit that I don’t believe this is likely to be the case in the future. (This is only a realistic option for gold, and given the amount of metal available the price of an ounce would have to multiply several times over in order to supply the kind of liquidity that would be necessary.) Nevertheless, each metal has something to recommend it as an inflation hedge.
Let’s start with silver. This metal is primarily an industrial metal. It has some significant use in coinage and jewelry and investment. But the largest usage is for industrial purposes. Silver is practically unique in its physical properties and it is used in literally hundreds of industrial applications. Its relatively low cost, coupled with its unique properties, has made it a material of choice in all aspects of modern life. The driver for silver in the current environment will be its relative rarity. Not many people are aware of the fact that there is essentially no inventory of above ground silver. The governments of the world still hold inventories of gold, but nobody today is holding silver. And as we use silver in various industrial applications it essentially gets used up. Not that it disappears, but it gets rendered into a concentration that isn’t economically recoverable. At least, not at current prices.
The other feature of silver is that a large percentage of its mining is done as a consequence of going after some other metal, such as copper or zinc. There are few purely silver mines in the world. The recent economic slowdown has curtailed the mining of most base metals, since their prices have dropped. This has impacted the supply of silver, as well. So far we haven’t seen a supply issue because the industrial demand for silver has dropped along with everything else. At some point, however, the lack of silver supply from the mines will create a silver shortage that cannot be mitigated by an inventory of above ground silver, because there isn’t any. The nominal price of silver will take off to the moon. Silver is a very good hedge for the coming months.
Then there is gold. Gold is primarily an investment metal. It also has a significant usage in coins and jewelry. It has some industrial applications, but this is a minor part of the gold story. Virtually all the gold that has ever been mined over the course of human history is still above ground and recoverable. Gold has a long history of use as money. Governments around the world still hold sizeable amounts of gold in reserve. China has lately been adding significantly to their gold holdings. Let’s face it, gold is unique in its ability to attract the attention of men. They have always desired it and they will continue to desire it. It is pretty. It can be easily manipulated into all kinds of pretty and decorative and desirable forms and shapes. I don’t believe gold will ever lose its appeal. I can confidently state that because of this feature, gold will always have some intrinsic value. Men will always desire it and will be willing to trade goods and services for it. This is the very definition of money. When the inflationary tide finally hits, the price of gold will also fly. It might not fly as high, relatively speaking, as silver. But if you are holding any amount of gold you will not be disappointed. I urge you to consider holding some gold.
In the current environment I think it is a very low risk to purchase gold or silver. Yes, the price will fluctuate daily as a consequence of any number of things that hit the news. Forget about that high-frequency noise. Look at the longer term. If you buy an ounce of gold or silver for $X today it will very likely be worth about $X a year from now, assuming we don’t enter into the inevitable inflationary spiral by then. But the whole point of buying that ounce isn’t to sell it in a year. You must think instead that when you buy that ounce you do not intend to EVER sell it. Ownership of gold and silver is all about wealth preservation, not about short-term trading profits. Get that whole concept out of your brain. When you put your money down on the counter to purchase that quantity of metal you are going to take your metal and go home and bury it in the back yard (figuratively speaking). You will only take it out in the most dire of situations. But if you find yourself in that kind of dire situation you can believe me that you will be very, very glad that you have some precious metals to fall back to.
Think very hard about this.
The Fed has to walk a very fine line with their purchases of US Treasuries at auction. If they purchase too much, too often, then the world will see it as an unrestrained effort to debase the value of the dollar (by inflating the supply of money). To protect themselves they will probably begin to unload some of the trillions of dollars they hold in US Treasuries, causing the price of those bonds to drop (due to the expanding supply), which results in an increase in interest rates. Higher interest rates will destroy an already weak economy and inflation will begin to rise to very unpleasant levels. Does anyone remember the late 70’s or early 80’s? I do. I do not know whether this particular risk will materialize. If it does, then lots of other countries will suffer from this run on the bank, so to speak. So there is some pressure on the international community to avoid this situation. By the way, this is the “nuclear option” that the Chinese have hinted at in trade discussions with the US. It will be interesting to see how this unfolds. But it can very easily happen.
I urge you in the most strenuous way to make provision for the coming inflation. The usual path taken in anticipation of inflation is to purchase precious metals, such as gold or silver. Historically these metals have provided a good hedge against inflation, though for different reasons. Yes, both metals have in the past been used as money. I’ll have to admit that I don’t believe this is likely to be the case in the future. (This is only a realistic option for gold, and given the amount of metal available the price of an ounce would have to multiply several times over in order to supply the kind of liquidity that would be necessary.) Nevertheless, each metal has something to recommend it as an inflation hedge.
Let’s start with silver. This metal is primarily an industrial metal. It has some significant use in coinage and jewelry and investment. But the largest usage is for industrial purposes. Silver is practically unique in its physical properties and it is used in literally hundreds of industrial applications. Its relatively low cost, coupled with its unique properties, has made it a material of choice in all aspects of modern life. The driver for silver in the current environment will be its relative rarity. Not many people are aware of the fact that there is essentially no inventory of above ground silver. The governments of the world still hold inventories of gold, but nobody today is holding silver. And as we use silver in various industrial applications it essentially gets used up. Not that it disappears, but it gets rendered into a concentration that isn’t economically recoverable. At least, not at current prices.
The other feature of silver is that a large percentage of its mining is done as a consequence of going after some other metal, such as copper or zinc. There are few purely silver mines in the world. The recent economic slowdown has curtailed the mining of most base metals, since their prices have dropped. This has impacted the supply of silver, as well. So far we haven’t seen a supply issue because the industrial demand for silver has dropped along with everything else. At some point, however, the lack of silver supply from the mines will create a silver shortage that cannot be mitigated by an inventory of above ground silver, because there isn’t any. The nominal price of silver will take off to the moon. Silver is a very good hedge for the coming months.
Then there is gold. Gold is primarily an investment metal. It also has a significant usage in coins and jewelry. It has some industrial applications, but this is a minor part of the gold story. Virtually all the gold that has ever been mined over the course of human history is still above ground and recoverable. Gold has a long history of use as money. Governments around the world still hold sizeable amounts of gold in reserve. China has lately been adding significantly to their gold holdings. Let’s face it, gold is unique in its ability to attract the attention of men. They have always desired it and they will continue to desire it. It is pretty. It can be easily manipulated into all kinds of pretty and decorative and desirable forms and shapes. I don’t believe gold will ever lose its appeal. I can confidently state that because of this feature, gold will always have some intrinsic value. Men will always desire it and will be willing to trade goods and services for it. This is the very definition of money. When the inflationary tide finally hits, the price of gold will also fly. It might not fly as high, relatively speaking, as silver. But if you are holding any amount of gold you will not be disappointed. I urge you to consider holding some gold.
In the current environment I think it is a very low risk to purchase gold or silver. Yes, the price will fluctuate daily as a consequence of any number of things that hit the news. Forget about that high-frequency noise. Look at the longer term. If you buy an ounce of gold or silver for $X today it will very likely be worth about $X a year from now, assuming we don’t enter into the inevitable inflationary spiral by then. But the whole point of buying that ounce isn’t to sell it in a year. You must think instead that when you buy that ounce you do not intend to EVER sell it. Ownership of gold and silver is all about wealth preservation, not about short-term trading profits. Get that whole concept out of your brain. When you put your money down on the counter to purchase that quantity of metal you are going to take your metal and go home and bury it in the back yard (figuratively speaking). You will only take it out in the most dire of situations. But if you find yourself in that kind of dire situation you can believe me that you will be very, very glad that you have some precious metals to fall back to.
Think very hard about this.
By the way, this graph says volumes. I should just shut up and show you pictures in order to make my point. It is particularly interesting if you look at how things have gone since the creation of the Federal Reserve in 1913. Hmmm.
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