The Case for Dumping Dollars, Buying Gold

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 “Fool's 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, 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.

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…

Comments

[MJJP:]

Can we have a moratorium on the gold pumpers? The average person on the street is not going to swap his/her CD'S IRA 401k and even cash for gold on any significant scale. First off someone would have to have millions of dollars in assests to even make a difference. Secondly it's a gamble at best. Gold is only valuable because someone says it is. The govt can again like in the 30's ban the ownership of gold and confiscate it. How safe is that? How safe is holding the real stuff when someone finds out you have it? How safe is the holding company for the gold if they decide to skip town ? When you buy the real stuff you pay a premium for it ( above its value) not counting shipping and insurance. When you sell it it's for less than value plus shipping and insurance. Now assuming someone did as you suggest and hold gold the only way to use day to day is to convert it back to WHAT? PAPER! Try buying bread and milk with real gold. Try paying to fill your gas tank using gold. Good luck with getting change.

Oct 08 05:51 AM

[manya05:]

MJJP, you are correct that gold is valuable only because someone says it is. But, if enough people in the world say (and think) that gold is valuable, then...it is valuable. It is called a market.

Nobody is advocating you buy gold to then convert it to paper to buy milk or cigarettes (I wouldn't at least). But if you have wealth (assuming you have some money saved, or can save a little from month to month), then, keeping that wealth in dollars in your bank account has a high risk of deterioration in buying power (over the long term). The question we are trying to answer is, what is the safest/easiest way of storing the buying power of that wealth? If you are gazillionaire the answer is: you buy land, you buy arable land, you buy coastline land, you buy rental property, you buy a bread factory., you buy an oil field. But, if you are a working stiff like me, none of those are within reach, so, you buy gold.

Oct 08 06:34 AM

[jeremiah74:]

"MJJP, you are correct that gold is valuable only because someone says it is. But, if enough people in the world say (and think) that gold is valuable, then...it is valuable. It is called a market."

yes, but the thing is that people might change their mind on how valuable it is. so at the end of the day, gold isnt a safe store of value its just another bet like buying bonds or stocks.

there really is no safe way to store wealth, because wealth is really an abstract concept. if you want to store value you can pile up things like food and fuel, that you are likely to consume. this would be a safe store of your current wealth. but this can not be said of gold.


now the secret plan to create a global currency, sounds a lot like the James Bond film, Goldfinger. establishing a currency like this would have more costs than benefits, and I think will remain the domain of spy novels and films

Oct 08 06:53 AM

[ManAboutDallas:]

"The case for dumping dollars, buying gold" was BACK AT $865 gold on April 19th, 2009. Nonetheless, I hope you had a simply wonderful summer vacation. Welcome back.

Oct 08 07:57 AM

[tunaman4u2:]

Havent seen any articles like this lately

Oct 08 08:09 AM

[EE:]

That is why silver is better than gold by far. Go to investmentrarities.com and read Butler and others stating the case. Its better than any story on TV and you can save your cookies plus increase your wealth instead of just maintain it with gold. Hi HO silver. If you are not in resources you will soon be on food stamps as the $ is probably going to lose at least 70% more from here and then be replaced 1000 for 1 Amero or such. The USA is cooked because Bush & Obama didn't understand the big crooked banks should have failed. We would actually then be recovering now instead of ready to fall over another higher cliff.

Oct 08 08:32 AM

[a fat panda:]

Keep in mind that gold holds value where as a well run business creates it. Gold is a sensible hedge against the stupidity of government within your portfolio. At this point, it is probably best to increase that hedge. But until gold can mate and have children it isn't an investment. It is a hedge that will enable you to stand still while the rest of the country is sinking.

Oct 08 08:50 AM

[Sowhat2x:]

Bullion is purchasing insurance, miners are leverage. The inflation baby boomers saw in their life time will be doubled in 3-5 years while the "safe dollar" will lose much of its purchasing power. What did a new car or home cost in 1970? What do they cost now? Devaluation of currency and hyperinflation. That's the plan to bailout the bailouts.

Oct 08 08:55 AM

[Shocksink:]

Gold is good if you can store it for a long long time in this financial environment. 9 Months ago I bought some gold.....I bought 1kg (2x 500gr gold bullion) I paid around USD $870/ Troy oz. A month later I tried to sell it.....guess what......nobody wanted to buy it (because most people don´t know shit about gold), and only dealers would buy it at huge, i meant huge, spread. Because the dealers know that you won´t be able to sell gold that easily.Gold will be good only when you don´t care about liquidity.
Try to buy bread with a gold coin...and try to buy bread with $1 Euro...you´ll know what I´m talking about.

Oct 08 12:52 PM

[enviro111:]

Lots and lots of dummies here.

Some dummies at the beginning questioning whether gold will have any real value as money. For 5,000 years it has been money. That is a pretty good track record. Actually, in the last 25 years is probably been the 'worst' period for gold as money in the history of civilization. It is now in the process of re-establishing itself as money.

A fella who bought some physical gold and then wants to sell it a month later. Brillant! Physical gold is bought as insurance and kept for a long time -maybe forever! If you want to trade gold - buy the GLD ETF!

One smart fella suggested that bullion is insurance and miner's are leverage. Very true. Mines can be confiscated or be 'dry'. Stick to the big internation names or the ETFs.

One's definition of an investment determines if gold is an investment. Some say an investment must pay a dividend. Gold fails here. But so do most of the savings accounts which pay 0.01% on cash balances.

Silver isn't always better than gold. For decades it wasn't. Currently, it seems like it might be better - certainly more volatile. Ted Butler thinks it's better. It has always been better for small purchases. In future America it might not be better because virtually every American will have neither any gold or silver coins. This country has almost no 'real' money left in it. If the dollar collapses (say 90%) we will all be broke.

If someone is really worried about a collaspe in the US economy and society. Your money is probably not your biggest worry. If you are really worried (I'm not this worried), I would suggest.

1. Keep some cash at home (i.e., $2,000 if you can afford it).
2. Buy some silver ($250 in old junk coins)
3. Buy some gold eagles
4. Pay off your house and avoid debt
5. Store 6 months worth of food and water in your house.
6. Buy a crate of soap, cigarettes, razor blades and ammunition.
7. Talk to your neighbors about what they/you would do if the electricity/water/gas goes out for two weeks. Don't mention items 1-6.

Oct 08 02:49 PM

[The Recusant:]

Shocksink -- Gold can be purchased in many forms, physically or through ETFs, mutual funds, or as mining stocks. Converting it back into dollars is easily done if you hold your gold as paper but, as you experienced, may prove problematic if you hold physical gold. Which could be the case until everyone is trying to sell back the physical stuff. Then with the increased demand, new gold exchanges will surface to accommodate the need. But even at a high gold-to-currency exchange rate you will be making more than holding onto dollars that have lost their value.

Oct 08 02:52 PM

[ynwestor:]

If you were a central banker would you want your currency to remain pegged to the value of USD??? Time for PGD yet???

Oct 08 04:54 PM

[mbkelly75:]

Gold as an investment is up better than 17% on average annually for the last 8 years!!! There are a great many "investments" that have not done anywhere near as well. I actually favor dividend-paying stocks that have been RAISING their dividends for at least 5 years. Half of my portfolio is this kind of stock and most of them have been raising dividends for over 25 years. I have had both Gold and Silver in my portfolio at the same time though. The tradable portion of it is from CEF. They are MUCH clearer and transparent than either GLD or SLV. I raised that portion of my portfolio from 6% up to 16% last December (2008) and have done really well with it. GDX is a great way to invest in the miners. Think about it.

Oct 08 06:53 PM

[mbkelly75:]

BTW - I also got out of treasuries in the form of TLT and moved to corporates using LQD and that has been a good trade also.

Oct 08 06:54 PM

[E.D. Hart:]

With regard to the coming and ongoing $$$ devaluation: all resources denominated in US dollars will be more expensive, and oil and silver may outperform gold. Treasuries will likely get killed for the next ten years as interests rates cant go much lower.

Consider shorting via TBT.

Consider silver via slv and SLW

Consider Energy services cos via: XES

Long: all four of the above.

Oct 08 08:33 PM

[sethmcs:]

Being the contrarian that I am I think you should sell gold and collect dollars. Why? Inflation is too low. The dollar could rally. Most people assume that the fed intervention and expanding balance sheet will produce inflation. That is only true if the money hits the real economy. So far the money is bank entries on the books. Money is tight and with high employment the enonomy has too much slack. Gold is definiately in a bubble. The only rational reason for gold to be this high is China is stock piling it. Other than that what you have is fools expecting greater fools to pay more. Thanks for the opportunity for me to write something disagreeable.

Oct 08 11:19 PM

[BRAD3000:]

I did.
If make an assumption that your 401k will buy you 50% less in 5years then taking a 30% hit with tax & penalty still leaves you with 70% in the hand now and from there you bought bullion a year ago. In 5years gold could well be $2000/oz or more if the USD craters under its own debt - you can only roll the dice once in this one-way travel thru time...

Brad
Dallas TX.

On Oct 08 05:51 AM MJJP wrote:

> Can we have a moratorium on the gold pumpers? The average person
> on the street is not going to swap his/her CD'S IRA 401k and even
> cash for gold on any significant scale. First off someone would have
> to have millions of dollars in assests to even make a difference.
> Secondly it's a gamble at best. Gold is only valuable because someone
> says it is. The govt can again like in the 30's ban the ownership
> of gold and confiscate it. How safe is that? How safe is holding
> the real stuff when someone finds out you have it? How safe is the
> holding company for the gold if they decide to skip town ? When you
> buy the real stuff you pay a premium for it ( above its value) not
> counting shipping and insurance. When you sell it it's for less than
> value plus shipping and insurance. Now assuming someone did as you
> suggest and hold gold the only way to use day to day is to convert
> it back to WHAT? PAPER! Try buying bread and milk with real gold.
> Try paying to fill your gas tank using gold. Good luck with getting
> change.

Oct 09 01:38 PM

[BRAD3000:]

This also accounts for the lack of ammo and EBR (evil black rifle) availability the last 18 months but stuff seems to be coming back slowly now as the folks doing the buying have got all they think they need. Factor in the high potential for Obama to turn his attention to a new AW Ban crafted on the HR-1022/109 HR-45/111 after the dog & pony healthcare fiasco (win or lose) and its not very surprising that ammo became scarce and likewise reloading components. Price increases the last 2years have the remaining high end ammo just too expensive for mere mortals. I concur with the list below and with U6 being very high and likely to get to 18% in Q1 - I would expect crime stats to be high also. Burglaries & robberies in my city have increased 30 & 50% respectively.

Has anyone noted the Fed is *still* printing paper like theres no tomorrow - probably very close to $11trillion since Sept;'09... and Geithner asked Congress weeks ago to raise the US Debt cap from $12.1trillion to some undisclosed figure...? This is not good and I have to assume we are passed the point of being able to pay it back and service our offshore lnterest payments. The Tax Man Cometh..

Brad
"Panic Early - Beat The Rush..."

On Oct 08 02:49 PM enviro111 wrote:

> Lots and lots of dummies here.
> Some dummies at the beginning questioning whether gold will have... [snip]
> If someone is really worried about a collaspe in the US economy and
> society. Your money is probably not your biggest worry. If you are
> really worried (I'm not this worried), I would suggest.
>
> 1. Keep some cash at home (i.e., $2,000 if you can afford it).
> 2. Buy some silver ($250 in old junk coins)
> 3. Buy some gold eagles
> 4. Pay off your house and avoid debt
> 5. Store 6 months worth of food and water in your house.
> 6. Buy a crate of soap, cigarettes, razor blades and ammunition.
> 7. Talk to your neighbors about what they/you would do if the
electricity/water/gas goes out for two weeks. Don't mention
items 1-6.

Oct 09 02:40 PM

[Tony Daltorio:]

You must be blind - there is massive inflation occurring right now - it is asset inflation, the most dangerous type of inflation.

It is occurring in the US stock and Treasury markets which are both trading at bubble-like valuations right now. When these bubbles burst, you will wish you owned even a tiny bit of gold (which is not in a bubble).


On Oct 08 11:19 PM sethmcs wrote:

> Being the contrarian that I am I think you should sell gold and collect
> dollars. Why? Inflation is too low. The dollar could rally. Most
> people assume that the fed intervention and expanding balance sheet
> will produce inflation. That is only true if the money hits the real
> economy. So far the money is bank entries on the books. Money is
> tight and with high employment the enonomy has too much slack. Gold
> is definiately in a bubble. The only rational reason for gold to
> be this high is China is stock piling it. Other than that what you
> have is fools expecting greater fools to pay more. Thanks for the
> opportunity for me to write something disagreeable.

Oct 10 11:20 AM

[ManAboutDallas:]

Yet another educated fool who knows the price of everything, and the value of nothing. I hope you at least repaid your parents the tuition they wasted on you.


On Oct 08 05:51 AM MJJP wrote:

> Can we have a moratorium on the gold pumpers? The average person
> on the street is not going to swap his/her CD'S IRA 401k and even
> cash for gold on any significant scale. First off someone would have
> to have millions of dollars in assests to even make a difference.
> Secondly it's a gamble at best. Gold is only valuable because someone
> says it is. The govt can again like in the 30's ban the ownership
> of gold and confiscate it. How safe is that? How safe is holding
> the real stuff when someone finds out you have it? How safe is the
> holding company for the gold if they decide to skip town ? When you
> buy the real stuff you pay a premium for it ( above its value) not
> counting shipping and insurance. When you sell it it's for less than
> value plus shipping and insurance. Now assuming someone did as you
> suggest and hold gold the only way to use day to day is to convert
> it back to WHAT? PAPER! Try buying bread and milk with real gold.
> Try paying to fill your gas tank using gold. Good luck with getting
> change.

Oct 10 02:42 PM