Investing in Gold & Silver During Inflation, Stagflation and Deflation?

In this piece we are looking at some critical fundamental features of precious metals that are rarely considered or accepted in the developed world markets. Expert investors like Warren Buffet look at inactive, buried gold with amazement, because he is focused on companies that produce things and earn money. And most of us wish we had his skill and money behind us.  

George Soros and the like invested in gold as an anti-deflationary measure. Most analysts appreciate the anti-inflationary value of gold and silver. The protection of gold and silver in stagflationary environments are a combination of both abilities.

But why are gold and silver capable of giving such protection in bad times as well as good times?

They have certain qualities that shine forward at times when other investments fail.  

The Limitations of Cash

In times of monetary stability and soundness, safely-stored cash never fails. Most consider cash in the bank to be the safest conservative investment, and in the distant past, the days of our grandfathers, this was largely true.

But that horrible word, inflation, came into being where prices kept on rising and cash saved would buy less-and-less. Interest rates compensated for this inflation, but then interest rates stopped rising. When interest rates did rise, it was at a slower pace than inflation. Cash lost its buying power as time went by. Bank charges would eat away any gains that might be made. At first inflation would occur one country at a time, and the exchange rate on those currencies fell, hurting international buying power even more. Today inflation is a global phenomenon.

Investors would have to move out of cash and into businesses or other investments that offset the cost of inflation.   This was not easy unless inflation happened while growth was vibrant. And this benefitted those middle classes that enjoyed such growth. The poor, whose income rises slower than inflation, feel the pinch.

Suddenly, booms turn into busts and businesses don’t do well. The value of businesses and its shares fall, losing investors money. Even self-managed businesses fall in value, putting rich people into bankruptcy. This is deflation, a monetary mood that causes values to shrink. In deflation the value of cash grows as prices fall.  

Those who believe they are skilled investors answer, sell, then cheaply buy back. We look at that timeless story of an investor who did that just before the Wall Street Crash. His friend did not do so well selling only when the fall was half way down. But our hero who sold at the top, overwhelmed by his own skill bought back in, when the fall was half way down. His friend did not buy back in, but stayed in cash. It’s not so easy!

Then you get a situation when the bust happened and all of the markets plummet because forced selling drives investors out. Interest rates fall to negative levels. If cycles are consistent, there should have followed a boom period. But growth was so anemic that stagnation set in. Businesses and the economy struggle to find small amounts of growth and some cut back, turning over at survival level.

Suddenly, something that shouldn’t happen in a downturn happened. It was inflation, driven by factors no government can control. It came from energy and food and became uncontrollable. This type of inflation is deflationary. Businesses covering expenses suddenly found their costs ate away at profits much the same as deflation and inflation would have done. This is ‘stagflation’, a climate where stress levels steadily eat away at sanity.  

Surely bills and bonds are a way out of the hole, as they pay an interest rate, while being almost like cash?
The trouble with this thinking is that interest rates have fallen so low that the bill and bond markets are so high as to be heading for a fall, far worse than any Wall Street Crash.

Next interest rates rise to stop negative interest rates from rising higher. Then the prices of fixed interest securities have to fall, while their yield rises. Investors rush to exit those markets the moment that happens.

Surely there is no escape from these three economic ailments?
Well, there is….

For a long time, our Asian friends have suffered through poverty, hard times, government corruption and mismanagement. They have found refuge in good times and bad times. They want financial security and their investments to last for more than one generation. Correctly invested, their savings provide financial security for many generations.

You would have thought that Europe in particular would have learned the same lessons with their history of currency collapses and wars.

Why Precious Metals?

Gold (and to a lesser extent, silver) is more than a barbarous relic from yesteryear. Its rising price is telling us that it is a very modern investment preference because

It is both cash and an asset.

In the long term, it outperforms cash because of these qualities…

• It has all the features that makes cash valuable, even capable of earning an income(when lent out).
  
• It is an enhanced version of cash, in that it is not subject to the vagaries of interest rates solely dictated by central banks and banks.
  
• It carries no national obligations. It does not rely on nations to supply collateral to honor payment. If you ask the Fed to honor the value of your dollar, they will simply exchange it for another. 
  
• It is not dependant on the creditworthiness of the nation issuing money.
  
• It has the same value in Mongolia as it has in the U.S. or Europe.  
  
• It is collateral in any transaction and of greater value than the price it can be exchanged at.
  
• It cannot be issued at will, with the intention of being withdrawn from the system later.
  
• It does not decline when an individual currency declines (and does not rise when that currency rises in value). It is a ‘counter to currencies’. 
  
• This century it has moved away from the control of the U.S. and Europe to global control. In the years to come, rising Asian demand will dwarf demand from the developed world, making it a fully internationally-valued asset again.
  
• In a deflating global economy (just as cash is a national protection) gold is better than cash even when local currencies are not deflating.
  
• In an inflating global economy, gold acts as an asset, when currencies are cheapening. There are no other currencies that are deemed as assets, like gold.
  
• In a stagflationary economic environment, gold acts both as cash and an asset.

How will Gold and Silver Behave in the Dark Days Ahead?

Private foreign demand for U.S. Treasuries slips

By Steven C. Johnson

NEW YORK | Wed Jun 15, 2011 10:53am EDT

(Reuters) - Foreigners stepped up buying of long-dated U.S. securities in April for the first time in five months but demand for U.S. government debt declined, U.S. Treasury Department data showed on Wednesday.

The United States attracted a net long-term capital inflow of $30.6 billion in April, up from a $24 billion inflow the prior month, the data showed. That was the first monthly increase in net foreign buying since November.

Foreigners bought Treasuries in April but the total net inflow fell by $3.4 billion to $23.3 billion, the fifth consecutive monthly decline. The slide was driven by private foreign investors, who turned their backs on Treasuries in April and sold a net $751 million.

Some analysts said reduced private demand for Treasuries may reflect concern over U.S. public finances. The U.S. government budget gap is expected to hit $1.4 trillion this year and stay in the trillion-dollar range for several years.

"Growing concern over the U.S. fiscal deficit appears to be causing foreign investors to sell long-dated U.S. Treasuries and buy shorter-dated securities and deposits," said BNY Mellon strategist Michael Woolfolk.

In April ratings agency Standard & Poor's put a negative outlook on the United States' top-notch credit rating and warned there is at least a one-in-three chance it could cut the rating if lawmakers cannot agree on a way to reduce the deficit.

The White House and Congress are at odds over how to do that. Congress needs to raise the government's legal borrowing limit by August and Republican leaders have threatened not to increase it unless the Obama administration agrees to deep spending cuts.

CENTRAL BANK STILL BUYING TREASURIES

Official foreign investors, including central banks, made up for the lack of private Treasury demand and bought a net $24.4 billion in April, their biggest monthly total in 2011.

That interrupted a recent trend in which private investors have been steadier buyers of U.S. government notes and bonds than official ones.

China, the largest foreign U.S. creditor, increased its overall Treasury holdings by $7.6 billion to $1.153 trillion.

Including short-dated assets such as Treasury bills, foreigners bought a net of $68.2 billion in April, the data showed. That was down from an upwardly revised $127.1 billion inflow in March.

Low U.S. interest rates also increased the appeal of equities, with foreigners snapping up a net $17.8 billion in April. Of that inflow, $16.6 billion came from private buyers.

U.S. investors bought a net $12.9 billion in foreign equities. "Amid a continued rally in risky assets this year, U.S. investors have been increasingly moving money overseas in search of higher yields," Woolfolk said.

How to Profit from the End of the Dollar

Here is a five year chart comparing the Dollar ETF (NYSE: UUP) to the Gold ETF (NYSE: GLD).

As you can see, gold and the dollar move opposite each other.

The world's largest economy, the U.S. of A., has been systematically destroying the value of the dollar for the past several years. This is done through creating money.

The several bumps up have been due to “flights of safety”, where investors pull their money out of falling assets such as Greek bonds and put them in the dollar (short term Treasuries) until they can figure out where they should put it.

But all the while the value of the dollar erodes like a sandcastle with an incoming tide.

Would I Lie to You, Honey?

Treasuries have been considered the safest -- and most liquid -- investments in the world since the dollar replaced the pound sterling after the first world war.

But all good things come to an end. The U.S. is currently the world’s largest creator of debt. It has $14.2 trillion of debt outstanding, while marketable Treasuries total $9.7 trillion. And it must continue to sell $1.4 trillion in debt per year to pay for ongoing deficits.

Central banks and other overseas investors own $4.48 trillion, or 46% of marketable debt.

And they are getting almost no return for buying this debt. According to Bloomberg, the three, six and twelve month Treasuries yield zero. The two-year yields 0.5% and the thirty year yields 4.375%. For comparison, risky Greek three-month bonds now pay 22%.

Why would you lend the U.S. Government money for no return? Would you lend them money for thirty years for a return that will be wiped out due to inflation?

Inflation is already above 4% and heading higher. Unfunded debt to pay off the baby boomer retirement is over $100 trillion. Obamacare will add to it. We are in three wars and have bases in over 150 countries. Growth is anemic, unemployment remains high and housing continues to fall.

In the face of this slow motion catastrophe, the U.S. Congress bickers about who twittered a picture of his penis to whom.

Bill Gross is Out

Bill Gross is the billionaire founder and co-chief investment officer of Pimco. He has been saying for months that U.S. Treasuries are unattractive because yields don’t offer enough compensation for the risk of inflation and U.S. policies will hurt investors. He sold $28 billion of U.S. government bonds this year.

For the record, Mr. Gross beat 98% of competitors in the last five years according to data compiled by Bloomberg.

The largest buyer of Treasuries (85% of all U.S. debt issued since November) has been the Federal Reserve though QE II. This program ends on June 30^th. Other large buyers are Japan, China, Saudi Arabia and Qatar.

Who will take up the slack?

China has already sold its holding of U.S. short-term debt and is warning Congress about default. Recently, Li Daokul, a Chinese central bank advisor, warned:

"If a default happens, the Chinese government should have a consultation with the U.S. government. China can promise that we will not sell our holdings of U.S. debt, but the United States must also promise that you will not hurt our interests by guaranteeing the safety of our investment... I really worry about the risks of a U.S. debt default, which I think may lead to a decline in the dollar's value." Source: Businessinsider.

It's hard to imagine that China will take up the debt slack from the U.S. Fed.

Japan currently has more debt per GDP than any other country at 225%. They just got hit with a major catastrophe. It's hard to imagine they will pick up the slack.

This leaves the oil kingdoms. Together these countries hold about $210 billion in treasuries. There is no way they could purchase an additional $1.2 trillion over the next year even if they wanted to. Nor is there any logical reason they would risk so much money given such a low return. And the inevitability of a default.

For the record, a default doesn't have to be a big declaration of “We're not paying. Go eat dirt.” It can be done through inflation. Over 30 years a price inflation of 10% a year would destroy 94% of the purchasing power of a 30 year bond.

Default can also happen through a falling currency. And at least one Chinese credit agency says the U.S. has already defaulted.

According to AFP, Guan Jianzhong, president of Dagong Global Credit Rating Co. Ltd., reportedly told state media the United States has already defaulted by letting the U.S. dollar weaken. "In our opinion, the United States has already been defaulting," Guan said.

Bill Gross (mentioned above) agrees, "Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates."

But again, who would buy U.S. Treasuries at no yield with rising inflation? Not me, that's for sure.

How to Profit

There are a number of ways to beat coming inflation and the stronger dollar. You could take out the biggest loan you could get at today's low interest rates and buy the most rental properties you can find. Inflation has historically driven up rentals.

You could buy Canada, Brazil or Australia, each of which have been moving up on the commodity boom. But if China crashes, the commodity boom will end quickly.

Or you can buy gold, which rises during chaos.

Buy Gold

Say what you want about the metal, but it is one of the few assets that is still going up.

Sincerely,

 

Christian DeHaemer
Editor, Wealth Daily

Rob McEwen - Once $3,000 Falls Gold will Launch Like a Rocket

With the gold and silver markets still experiencing turbulence and the US dollar attempting to stabilize, today King World News interviewed one of the great company builders, Rob McEwen former CEO of Goldcorp and current Chairman & CEO of US Gold.  When asked how he arrived at his gold target McEwen responded,“Looking at economic history and the cycles before, the $5,000 number is a fairly easy number to get to if you look at the last cycle where gold went from about $40 an ounce in 1970 to $800 in 1980.  So, you had a twenty-fold move, and the low point for us recently was $250 back in 2001, and if you applied the same twenty-fold you arrive at $5,000.” 

Rob McEwen continues:

“You have more people in the market today than you had in 1980.  They are better connected by the internet and other communication means, and crowd psychology is going to play a bigger role.  We’re seeing the paper currencies suffering a loss of confidence and people are looking for a place to go, and when we move from that 1% invested in gold, to 3 or 4 or 5%, the slope for the price of gold is going to be exponential and racing.”

When asked when he sees that mania in the metals beginning to take place McEwen stated, “Gold and silver will have to go through a couple of price points because they are basically a barometer of the economic confidence.  I think when gold goes through $2,000 you’ll see a surge and I think that will happen around the end of this year.  And then you are going to have that again, once it (gold) cuts through $2,700 to $3,000, and then I think it’s launching like a rocket, like the shuttle.”

When asked how this cycle will play out McEwen had this to say, “If we follow the course of history, we’re going to see the value of the dollar, in terms of its purchasing power, further reduced.  Our cost of living is going to go up and that’s not good for anyone.  So we need to find ways to protect ourselves, and historically gold, silver have been one of those areas that have protected large parts of financial assets when you have monetary systems being debased by governments that are eager to try to ward off the creditors.

The QE3 is going to happen and there will be a QE4 and probably a QE5.  We’re looking at unprecedented amounts of monetary stimulation occurring not only on this side of the Atlantic, but over in Europe and it has been to stave off a collapse.  There has been tremendous loss of value, but we haven’t seen a big jump in employment and we haven’t seen a large jump in capital investments and that’s what we need to see.  

We need to more jobs created and this money isn’t doing that.  So, that’s where you go back to the government saying, ‘well, we can’t stop right now because the job is not done.’   But for every one of your listeners, while this job is being done they have to go out and protect their assets against what’s happening.”

Silver Prices, Gold Prices, & Silver Dollar Values Positively Will Benefit From Global Catastrophes

Gold & Silver prices will profit vastly from global disasters, inflation, the worthless US dollar, & the doubtful values of US Treasuries. Watch for huge increases in the prices for silver & gold. Silver dollar values seem like great investment...


Jun 11, 2011 – It is likely to take quite a few weeks or perhaps months to get the complete effect of the disaster in Japan. The initial surge in volatility will probably pave the way for particular opportunities in precious metals and beyond. Any momentum coming from a restored interest in commodities as the country rebuilds will carry whatever trading is not boosted by fears of the complete score of the disaster. It may not occur right away, but the world’s third largest economic climate will renew itself like a phoenix and until then there is huge demand possible in these markets. Perhaps not an increase in jewelry buying or anything that might be deemed a frivolity, but investment decision demand and supply creating ahead of the demand renewal might add a great deal of support to these market segments and much more. 

The S&P index is in a plummeting trend and just lately tested another level of support. It’s ugly and could easily get much uglier. It’s now lost all it’s gains for the year and is today negative. The main message I would like to get across today is that no one knows what is occurring for sure in regards to the nuclear plants in Japan and as a result you should go into capital preservation approach. 

In the last 12 months Japanese stock index lost 191 points but recall that the Bank of Japan has injected $688.3 billion into their marketplaces over the previous three days. The US is only inserting $600 billion over months, not days in the form of their QE2 programs. That amount of money was inserted and still the marketplaces were obliterated and are down sturdily still even with yesterday's healing. The fact is buyers aren’t presently there, other than newly injected support funds, but selling has subsided for now at least. http://silver-dollar-values.net has all the details for a precious metals investing decision. 

The initial driver for investment in commodities is prone to come following this round of sell-offs that seems more liquidity based than basic in nature. It seems as though the sparks to this flight from stocks and commodities was arranged as investors searched for cash. Nevertheless, a shift is most likely just around the corner as the traditional haven status of markets like gold will take hold. To bolster this move, it's also feasible that the reconstructing of Japan could hold more possible for another bull run in commodities, especially precious metals. 

The so-called commodity super-cycle was already underway, supported by the urbanization of nations like China and India. That additional consumption and commodity demand was only weakly fulfilled by increased yields and production for certain commodities. Sure, economic slowdowns may have put a stop in some of these market segments, but where that bearish argument dead ends, a bullish argument for the investment side of the exact same commodities picks up.  

Investors who were uncertain about the future of some stocks and some currencies sought an alternative asset in gold and bonds as a means of possible asset preservation. Does that dry up when disaster strikes? Perhaps initially it will, but there is a long road ahead for Japan and the world markets. While certain things like oil and perhaps even precious metals will have a neutral to negative demand in the devastated nation, the potential gains in consumption on the path to recovery and after have historically balanced that picture. 

Now is an appropriate time to invest in precious metals by buying gold and silver to protect your wealth. I prefer to hold silver coins and gold coins myself for safety. Gold and Silver prices are still relatively inexpensive today.

Look For Gold Prices To Increase Substantially Due To Much Larger Chinese Planned Demand

China intends to double its efforts to facilitate long term trade of gold and inspire foreign traders to make investments in the gold mining business. Do you realize that it's time for you to step up to the plate and buy gold now?

PRLog (Press Release) – Jun 12, 2011 – Based on a current statement in the China Daily by Chairman Cheng Fumin of the China Gold Association, China intends to double its efforts to facilitate long term trade of gold and inspire foreign traders to make investments in the gold mining business. One of the leading gold coin industries in the U.S. continues to be viewing China for years and advises intelligent traders to make investments in gold now prior to the price raises due to higher foreign investment interest. Go tohttp://www.silverdollar.cc for more profitable silver and gold tips. 

China’s need for gold continues to be on the constant increase in current years. China’s elevated need for gold bullion, gold exploration as well as increasing jewelry product sales is driving up the cost of gold, and traders should take notice right now while the prices are nonetheless fairly inexpensive. 

China is presently the world’s 3rd biggest gold customer and fourth biggest gold producer yet suffers from a long-term source shortage due to restricted natural reserves and inadequate manufacturing facilities. China plans to make investments seriously in up-to-date technologies to mine its domestic gold sources.

China’s gold marketplace is now firmly tied towards the worldwide gold marketplace. It ought to not shock anybody to determine China’s domestic gold prices improve in line using the increasing worldwide price of gold. If anybody is thinking about investing in gold, now will be the ideal time simply because prices are forecasted to increase by over eighteen % in the next two years. I would not be shocked to see gold top $2,000. 

Gold analysts using the Industrial and Commercial Bank of China declare that China’s domestic gold prices will additionally rise right after a flood of new money in to the Shanghai Gold Exchange (SGE). To safeguard in opposition to the gloomy backdrop of stocks and securities around the Chinese mainland as well as rocketing gold prices globally, the gold trade is anticipated to turn out to be an essential investment choice for the Chinese people as well as businesses. 

A total of 604.61 metric tons of spot items of gold changed hands in the Shanghai Gold Exchange this past year, rating China the first in the globe when it comes to yearly gold transaction volume, based on the China Gold Association. 

China created 340.876 metric tons of gold in 2010, staying as the world's biggest gold production nation for the fourth straight year. 

International need for gold totaled 2,778.6 metric tons in 2010, including 783.4 metric tons coming from India, 571.51 metric tons coming from China and 180.9 metric tons through the United States. Do you see that it's time for you to step up to the plate and buy gold now?

Gold Price Will Surge As China Is Getting Ready For A Massive Dollar Failure By Purchasing Gold

Just as you are in a position to determine from this, gold prices & silver prices will keep on increasing rapidly over the following months. Precious metals have a lot of room to rise. Now is really a great time to buy gold & buy silver

PRLog (Press Release) – Jun 11, 2011 – China is making ready plans for the ultimate extinction of the U.S. dollar. Li Lianzhong, a senior economist within the ruling Chinese Communist Celebration, directly attacked the dollar lately. Li’s message is easy: China ought to buy more gold simply because the dollar is poised for a further fall. Li also said that China ought to use much more of its $1.95 trillion in foreign reserves to buy energy resource assets. Visithttp://silver-dollar-values.com for more profitable silver and gold tips. Li asked the very valid question, “Should we buy gold or U.S. Treasuries? The U.S. is printing dollars on a massive scale, and in view of that trend, based on the laws of economics, there's no doubt that the dollar will fall. So gold should be a much better choice.” There's no doubt in our minds that China - the largest holder of US Treasuries with nearly $900 billion really worth of bonds at the end of September, 2010 - is moving to decrease its exposure towards the buck.
China has revealed it had increased its holdings of gold to over 1,200 tons coming from 600 tons since 2003. Data cited December, 2010 by China’s state-run Xinhua news agency showed that China imported 209.7 metric tons of gold within the first ten months of 2010, a fivefold increase compared with the exact same period last year.

The main thing is China has been our banker giving credit by purchasing our Treasuries and financing our way of life and our Dollar dominance for a very long time. Those days are over. And who will purchase our debt now? Why of course, the Federal Reserve will. That’s right, the Fed will invent cash out of thin air to purchase and support our exponential debt requirements. And that’s a one-way ticket to huge inflation and/or hyperinflation. Visit http://silver-dollar-values.com/Selling-Gold/ for more profitable silver and gold tips.

The Largest Monetary Players Are Purchasing A Lot of Gold

The planet's wealthiest individuals have responded to economic worries by buying gold by the bar -- and sometimes by the ton -- and by moving assets out of the monetary system, bankers catering towards the very rich have reported. Fears of a double-dip downturn have boosted the hunger for physical bullion as well as for mining company shares as well as exchange-traded funds, UBS executive Josef Stadler told the Reuters Global Private Banking Summit. "They do not only buy ETFs or futures; they buy physical gold," said Stadler, who operates the Swiss bank's services for clients with assets of a minimum of $50 million to invest.

UBS is advocating top-tier clients hold 7-10 percent of their assets in precious metals like gold that is on course for its tenth consecutive year. "We had a clear instance of a couple purchasing over a ton of gold ... and carrying it to another place," Stadler said. At current prices, that shipment would be worth about $42 million.

Julius Baer's chief investment officer for Asia can also be recommending that wealthy investors park some of their assets in gold as a defensive stance following a chain of lackluster U.S. information and amid concerns about currency weakness. "I see gold as an insurance coverage," Van Anantha-Nageswaran said. "I suggest ten % as minimum in portfolios and anything more than that to be used for trading purposes, to respond to short-term over-bought or over-sold signals." Visit http://silver-dollar-values.net for more profitable silver and gold tips.

This is an ideal illustration of an age-old idea: When paper is dying, you getaway into “money insurance” and simply wait out the storm. It is as easy, simple, and intuitive as that. Gold is history’s eternal and safest form of money.

Emerging marketplace countries are quietly buying gold aggressively. In the past 12 months, Russia, China, and India moved part of their Western currency reserves into bullion. The shift was substantial enough to push gold prices greater even as equity marketplaces settled down. This year’s gold rush is a result primarily of buying pressure from emerging market banks, not worried retirees purchasing coins. So why is this essential? The long term of the international economic climate is in the East. Instead of multiple-trillion dollar debts, China, Russia, and India have currency reserves. These governments are slowly moving their reserves from fiat currencies such as the dollar to much more stable stores of worth like gold. This is really a clear sign that confidence is waning within the US government’s ability to pay off debt. They're, in essence, shorting the US economy and discovering other stores of worth besides the dollar.

Is the larger image coming into just a little much more focus now? There is nothing unusual or surprising about this. It is the perfectly natural result of a doomed fully fiat currency system. As soon as all restraint has been suspended for cash creation you have pre-determined the ending result because you’ve let loose unlimited credit, which means unlimited debt. And you wind up with a Ponzi scheme of ever-increasing debt to pay for prior obligations and interest. That's why fiat currencies have a 100% failure rate. They spiral out of control as each generation of debt must be bigger to satisfy the previous generation of principal as well as interest payments. As you can figure out from the above, gold prices and silver prices will plow ahead on rising quickly over the next months. This day is a great time to purchase gold and purchase silver for protection for you assets.