Gold just hit an all-time high of $1,045 and the dollar is coming under considerable pressure as China, Russia and other nations are calling for a new reserve currency. Rumors are swirling around that several countries are secretly planning to off-load their dollar reserves and begin settling international transactions in another currency. With the United States pushing towards a $2 Trillion annual deficit and doubling the money supply in a single year, there is legitimate cause for concern.
The Problem – Why Should You Care?
If you are holding U.S. dollars in a savings account, CD or money-market fund, you are slowly losing what you have saved or inherited and within a few short years could lose the bulk of what is remaining. It is being done in such a way that most people don’t notice. The hidden tax of inflation has been robbing you for quite some time and the pace and severity of this theft is increasing rapidly. If I sound alarmist, it is with intention.
The United States government is bankrupt, not just morally but financially as well. The only option left to keep things afloat is to print enormous amounts of money out of thin air. The 2009 budget deficit is estimated to be around $2 TRILLION and the national debt is now reaching towards $12 TRILLION. Add in unfunded liabilities for Medicare and Social Security and the government owes about $120 TRILLION, yet brings in only about $2 trillion each year in revenue. This is like owing $200,000 on a house and making $3,640 per year at your job! You will never be able to pay it off.
It took nearly 200-years for the money supply to go from $0 to $800 billion, but in just the past year it is estimated to have more than doubled! This level of monetary expansion is absolutely insane, unsustainable and without historic precedence.
The dollar has lost over 30% of its value in the past 7 years. That means if you held $100,000 in a savings account, you would now only be able to buy $70,000 worth of goods and services with it. You might still see the number “$100,000” on your statement, but because the government and Fed have been printing so much money, the value of all of those dollars has been declining rapidly and this drop in value is about to accelerate at breakneck speed. We could even witness a dollar collapse, in which case you will be lucky if your dollars maintain 10 or 20% of their current value. This means that everything that you have saved or worked hard for in life could quickly disappear if your wealth is stored in dollars. Those that purchased a home in the past 6-8 years already have a taste of how quickly this can happen. But you have a good job, so new money will keep flowing in right?
Maybe not. Unemployment in the United States is now officially reported at 10%. In California it is over 12%. These numbers are bad enough, but they are significantly under-reporting the true unemployment picture. You see, the government no longer counts those that have given up looking for a job because they are discouraged and couldn’t find work. It also doesn’t count those working a few hours per week, even though they want a full-time job. So the true statistic, as reported by Shadow Stats, is closer to 20%! 1 in 5 people in America do not have a full-time job. We are witnessing Depression-era unemployment. They can talk about how the stock market and economy are rebounding until they are blue in the face, but if people can’t find work and don’t have money to buy things, there is no recovery. In fact, the stock market is actually crashing (measured in anything but dollars). So, with the threat of unemployment, making sure that your savings and investments will be there to fall back on is becoming increasingly important.
The History – How Did This Happen?
Our money used to be backed by gold. It stated this right on the top of the bill and you could go to the bank and trade in dollars for gold or silver at anytime. This is what gave dollars value. But when greedy politicians wanted to spend more than they had, usually to finance wars, they took the dollar off the gold standard. This allowed the government to print as much as they wanted without needing to worry about having enough gold to back it up. As a consequence, the printing press has been running at full speed and our dollars are now backed by nothing but the faith in the U.S. government. You know, those honest guys in Washington that are always looking out for the needs of their constituents? Our money is backed by their promise that it is worth something and the willingness of other nations to continue accepting it. This willingness is currently being put to the test. Feel secure? Read more about fiat currencies here.
The concept of using paper as money is relatively new in history, whereas gold and silver have been used as money for as long as humans began trading. Gold has and will always retain its value because it is scarce, divisible, indestructible, hard to extract from the ground, attractive to the eye, extremely industrious and in limited supply (brief history of gold). Fiat currencies have come and gone and this brief period of being able to just print money out of thin air whenever the government needs it is coming to and end.
The U.S. has been able to get away with it for so long because we won World War II and set up the dollar as the world’s reserve currency. Since then, everyone has used it to trade goods and settle international transactions, including oil trade. But our politicians have abused this power and the rest of the world is now looking to dump dollars and trade in for something more stable. (See recent articles here, here, here and here.) This is big news. If the world no longer has to hold, trade and transact in U.S. dollars, what do you think will happen to their value, especially given that the supply has doubled in the last year alone?
China or Japan could crash the dollar by dumping their reserves. And they are indeed dumping their dollars, but doing it slowly as to not create a sharp crash that leaves them holding the bag. But as more and more people get rid of dollars and refuse to continue buying U.S. debt (for fear that the government won’t be able to pay it back), the dollar dumping is likely to accelerate and lead to a panic and crash in the currency. I don’t claim to be able to predict when this will happen, only that it will indeed happen. My guess is within the next 2-3 years, although some are predicting a crash before the end of 2009.
The Solution – What to do?
The absolute best hedge against the coming inflation is gold and silver, which have an inverse relationship to the dollar. As the dollar goes down, gold and silver go up. To protect against a decline in the dollar, first limit your exposure to U.S. dollars and dollar-denominated paper assets (stocks/bonds/etc.). Instead, you want to own tangible things that have true intrinsic value, not paper promises that can turn out to be worthless, as they have many times throughout history.
As you might have gathered by now, gold investing is not some get-rich-quick scheme. It is about protecting yourself and stopping the confiscation of your wealth. Granted, many precious metals investors will get very wealthy in the process, as gold has more than tripled in value since 2002 and gold miners such as Yamana Gold (AUY) are up nearly 1,000% in the same time frame! Now wipe those dollar signs from your eyes. At the very minimum you should consider using precious metals as an “insurance policy” to protect your assets from what looks to be an inevitable dollar decline, if not all out collapse.
Remember, while today’s price of $1,040 gold is an all-time nominal high, the inflation-adjusted high is actually closer to $2,300, suggesting gold still has plenty of upside. Many respected gold analysts believe it could reach $5,000 or $10,000 in the event of a dollar collapse and panic. We are witnessing the greatest wealth transfer in the history of mankind. Are you protected? What side of the transfer will you be on?
Things I believe every investor should do:
Step 1: Get educated. Don’t take my, or anyone else’s, word on this. Read books and newsletters on the subject, watch documentary films such as Money Masters or Zeitgeist: Addendum and decide for yourself. My website has a page titled “Why Invest in Gold?” that is a good starting point. You can also subscribe to my free email alerts, which will let you know whenever I publish a new article about gold.
Step 2: Buy physical gold and silver and take possession of it (or have it stored at a third party depository). You can buy from your local coin shop or purchase from a number of online dealers that will store the gold for you. I highly recommend storing it outside of the U.S. banking system and outside of banks entirely if you can. I have been researching a number of dealers, their premiums, storage costs, reputations, etc., for my own personal needs. I am putting together a one-page document that compares the best/cheapest ways to buy and store physical gold and silver. I plan to publish it on this site in the next few weeks, but you can also email me to confirm your interest.
Make sure to avoid “Fools Gold.” ETFs, pool accounts, futures contracts and leveraged accounts are not real gold. They are just paper promises often with no gold or silver behind them. Also avoid collector coins such as those sold in late-night infomercials. They have ridiculous premiums that are often several times above the metal content value in the coin.
Step 3: Invest in gold and silver mining companies (gold or silver stocks). The greatest returns are offered by investing in the companies that mine gold and silver. You often get leverage of 2 to 4 times the price appreciation of gold or silver. If gold goes up by 50%, your miners may very well double or triple in value.
To do this, simply open an online trading account with TDAmeritrade or any other broker that you prefer. It will take a few days to get everything set up and they usually give you a sign-up bonus of 10 or more free trades (Google or ask for the offer when you sign up). Next, you transfer money into the account ($2,000 minimum) and can then easily buy and sell stocks and funds. You can take your money out at anytime if you change your mind or need the cash. It usually takes 2-3 days for the money to be transferred back to your bank account. It might appear intimidating at first, but is actually quite quick and easy to set up.
Once you have the account set up, you are ready to buy stocks. A simple and conservative approach would be to buy a few of the larger mining companies. Some of my favorites are Yamana Gold (AUY), Goldcorp (GG) and Silver Standard Resources (SSRI). For more diversification you can buy an ETF that holds several miners. The one that I like best is Market Vectors Gold Miners (GDX).
If you are willing to assume a little more risk and want the potential for much greater returns, you can buy junior producers and explorers. If you pick the right miners and they hit a new discovery or get bought out by a large miner, you stand to make some huge profits in a very short time frame. This is where my premium service can be of help.
I spend hours every day researching various mining companies around the world. I compare their valuations versus resources, look at their management track record, analyze their financial reports and look for companies that are undervalued relative to their peers. Many of the companies that I have invested in or written about to my subscribers have increased 300% or more in just a few years. This is where the big money can be made, although it also involves more risk.
The Gold Stock Bull Portfolio is up 128% year-to-date. I realize that sounds hard to believe, but I’ve made 35 winning trades and only 15 losing trades since the start of the year. If you are interested in viewing my portfolio in real time, receiving the monthly newsletter (view sample), and getting email alerts every time that I buy or sell a stock, click here to join.
It is just $35/month and you can cancel at any time if you don’t find it to be a good value or decide you don’t want to trade gold and silver stocks. Most newsletters charge hundreds of dollars for an entire year, but I only charge monthly so that you can try it out and let me prove its value.
As nice as it is to grow my business, my main motivation is to help as many people as possible reach their financial goals, live comfortably and protect themselves from what I view as outright theft. Even if you decide not to join my service and trade actively, you should seriously consider acquiring physical gold and silver and investing in a few of the gold stocks that I mentioned above. It will offer you protection and peace of mind, while potentially making you wealthy in the process.
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Update: Peter Schiff’s latest video relates directly to this article, discussing the dollar demise, gold’s breakout and the Independent article that helped to set off this firestorm…