Get ready. We are now entering the final stages in the collapse of the U.S. dollar and it's not going to be pretty.
We don’t need QE3. The old saying is “keep dancing until the music stops playing.” In case no one has noticed, the music has already stopped playing. The die has been cast. The massive increases in monetary supplies that have already been injected into our monetary system will tank the value of the dollar and erode the very fabric of America's economic security.
Most people look at their 401-K or their bank statement and if it is higher than it was last month they feel happy. They say “hey I’m doing better than last month.” If you’re one of those people don’t feel bad. It is a very human emotion. However, what most people don’t realize is that, as Gerald Loeb taught us, it is not the amount of dollars you have it is the value of the dollars. The value of the dollar is the key.
Here is the trick that has been played on us by Dr. Bernanke and the Feds. The trick was called “Quantitative Easing.” It was so much fun they did it twice. Despite what you have been told on TV or read in the newspapers the reason for this trick was simple. Out of every dollar we spend to pay the interest on the debt we owe, we have to borrow $0.40.
By now I’m sure you are shaking you head and asking why something like this would be done. The reason is simple. The United States of America is the largest debtor nation in the history of the world. Our nation owes so much money that the only possible way we can hope to repay it is to use dollars that have a lesser value than the ones we borrowed.
Let me draw this hypothetical. I’m your uncle and my name is Uncle Sam. I’m a little down on my luck and I ask you to help me by lending me $100.00. For this favor I promise to pay you 5% interest a year and repay you $115.00 in three years. You don’t mind doing it because I have always been a good guy and paid my bills on time so you don’t see much of a risk and anyway you’re happy to help your uncle. What you don’t know is that good old Uncle Sam has a printing press in his basement, but we’ll get to that in a minute.
When you lend me the $100.00 the value of that sum would buy 10 gallons of milk, 10 loaves of bread and 10 chickens. The next day you hear some news that your Uncle Sam has been borrowing $100.00 from people all over town under the same terms as you. What you don’t know is that your Uncle Sam has been granted special rights by the government and he is allowed to use his printing press that he has in his basement to print money to pay back all of the people he borrowed money from. You think to yourself, “good for Uncle Sam”, as long as he pays me back it’s none of my business.
Sadly, it is your business. Your "Uncle Sam" has kept borrowing money and now owes so much he has to run his printing press day and night to pay the debts he owes. Your uncle, as promised, finally pays you back your money plus the 5% as you both agreed. You take the $115 dollars and go to buy milk, bread and chickens and find out that your $115.00 will now only buy 5 gallons of milk, 5 loaves of bread and 5 chickens. Even though you have more money than you lent your uncle, the value of your money has been cut in half.
By now you must be wondering why on earth I am asking you to read this. The reason is simple. I will quote Rob McEwen from his conference call on US Gold (NYSE:UXG). He said “the reason we are gathered here today is gold. Gold is money that will ensure that you live a long pleasant life.” Mr. McEwen went on to say that if you don’t have some gold in your portfolio you should and you should tell everyone you know that they should as well.
He also drew some nervous laughter when he said that by 2015 gold will be $5,000.00 an ounce and he went on to say that a lot of very smart people are telling him that $5000.00 an ounce is too low. I knew as I watched this call that the nervous laughter was because while this seems like an unbelievable exaggeration they innately knew he was right. It is also important to note that I include silver in with gold. Silver has always been called “poor man’s gold” and has historically traded at ratio of 40 to one to gold.
So how do we own gold and silver? It is good to own hard physical gold and silver. Storage, however, becomes a problem. You could rent a safe deposit box from the bank, but if things ever got as bad as some very smart people are predicting, what makes you think you will be able to get into the bank to access you safe deposit box? It sounds wild and crazy, but it is not unprecedented. In the 1930’s it was illegal to hold gold bullion. To keep in it in your house is a risk. As a friend of mine said to me - if you own physical gold and silver you also better own a gun and prepare yourself to use it.
There is another way to own gold and silver and that is to own the gold ETF (NYSEARCA:GLD) and the silver ETF (NYSEARCA:SLV). There are, however, disturbing reports that if these two stocks were ever asked to produce the gold and silver that they claim to own they would not be able to do so.
That begs the question, what’s left? While I trade GLD and SLV, I call them “float like a butterfly and sting like a bee” stocks. The emphasis is on trade. I have two stocks on my radar screen, Newmont Mining (NYSE:NEM) and US Gold. The reason I own Newmont Mining is because it is the only gold mining company in the S&P 500. The reason I like UXG is because according to CEO Rob McEwen, by 2015 they will be the second gold mining company in the S&P 500. Based on Rob McEwen’s unblemished 20 year record of being right, it is a bet I am willing to make.
There will be time to open a position in this company. Mr. McEwen warned that we will likely see a pullback of up to 20% in gold and silver before they run up. Mr. McEwen is the largest share holder of US Gold and Minera Andes. Mr. McEwen’s plan is to combine US Gold and Minera Andes into a company, aptly named McEwen Mining. Mr. McEwen is the CEO of both companies and he does not take a salary. Ask yourself, how many CEOs don’t take a salary? He makes his money the same way that all of the investors do. When the price of the stock goes up, he makes money. Therefore, when he wakes up every morning he is focused on one thing. How can he take McEwen Mining to the S&P 500?
Why is it so important to be included in the S&P 500? The answer is that to be in the S&P 500 you must be an American company that plays by American rules and to investors that is comfort. Index funds, pension funds and a myriad of investment vehicles have over $1 trillion dollars invested in the S&P 500. This is a staggering and powerful statistic.
So, In conclusion, gold and silver are simply a means to an end, it is not an end in itself. When we buy gold and silver, we are simply storing the value of human energy we invest in producing a commodity which we can exchange for gold. Gold has been money for thousands of years. It has always been so. We save it for future use, either by ourselves or our children. We buy it to ensure that the value of our money remains the same no matter “Black Swans” may cross our path.
Disclosure: I am long NEM.