If there is an agreement reached by Congress and the debt ceiling is raised, gold and silver will go up. If there is no agreement reached by Congress and there is a default, gold and silver will go up but in a parabolic move. Either way gold and silver will continue to rise as the U.S. and European economies continue to debase their currencies by the printing of fiat paper money to try and pay off their debt with paper that is of a lesser value. Indeed, the West has gone so far as to not even bother to print fiat money into paper but instead they have created new vehicles like gold and silver derivative products that are nothing more than digital bytes that are traded across international borders. As Gerald Loeb taught us it is human nature to open your 401K and see more dollars than there were last month and feel that all is well. What Gerald Loeb also taught us however, is that we should not be fooled by how many dollars we have but instead determine what the true value of the dollars we have are?
As I have often written “the market will do what it has always done, misdirect, confuse and confound.” Last week I was feeling confused and confounded. Then on Sunday morning it occurred to me that the political partisan bickering being played out in Congress over the debt ceiling is nothing more than a well orchestrated charade by both parties to prepare the masses for what will be a an eventual default on our credit rating. I must admit that I never connected the dots but I now firmly believe this thesis is right. “I once was lost, but now I’m found, was blind but now I see.” The die has been cast. That ship has already sailed. We can only work to protect ourselves and our families from the eventual tsunami that will wipe out those who have not positioned themselves properly in precious metals.
I remember well back in the sixties being in kindergarten and doing drills by hiding under our desks to protect us from a nuclear bomb as the two super powers, the United States and the USSR played a Cold War game of chicken with nuclear arms. It is laughable now when I think that of a 6 year old hiding under a desk to save himself from a nuclear Armageddon.
Well those days are long gone and now the nuclear arms race has been replaced with a new war. This war is now being played on a different battlefield as the East and the West race to accumulate physical gold and physical silver reserves. Those of you that read me on a regular basis already know that I have been a gold and silver bug for 50 years. I think that while it is prudent to hold physical gold and silver it is also dangerous as it is not unprecedented for governments to confiscate gold and silver holdings while they write you a bogus check for what they perceive is the true value of the metals. We only need to look back to Executive Order 6102 on April 5th, 1933 to see evidence of it happening in our country. There are those who would say that they have buried their treasure in secret hiding places and have a little treasure map for their family to use if they need to find it. While this seems like a sensible idea and I do advocate the holding of physical gold and silver if the government has satellites that can see into the earth’s crust to locate deposits of ores and precious metals, what makes you think that they will not be able to use this technology to find your buried treasure. Add to that you’d be amazed what you will say when you are staring down the barrel of a gun.
So this begs the question, how do we hold gold and silver? While there are reports that the gold and silver ETF’s GLD and SLV do not actually hold the physical assets they purport their paper represents I feel that these rumors are a bit overdone and we are not close to that nightmare yet. If it makes you feel safer I would recommend that you hold the Sprott funds PHYS (gold) and PSLV (silver) which have the gold and silver held by the Canadian Mint and conduct a physical audit on a yearly basis. The downside to these holdings is that there is a premium of 18% for PSLV and about a 5% premium for PHYS but you can choose at anytime to take possession of the physical so for the premium you are paying you are able to feel comforted knowing that it is not a shell game and you really do own a piece of the underlying asset.
Another way to hold gold and silver is to hold the underlying mining companies that have lagged the physical asset. I have holdings in Barrick (NYSE:ABX) and Goldcorp (NYSE:GG) and would recommend a position in these companies on any pullback. They are the cream of the crop in gold and silver mining companies. If your time frame is a little longer (2015), I would also recommend U.S. gold (NYSE:UXG) which will soon be McEwen Mining. I urge all readers to Google US gold and CEO Rob McEwen. Mr. McEwen is one of the brightest CEO’s in the PM space and the truth is that if Rob McEwen was the CEO of a company that sold ice pops to the Eskimos I would probably be invested in it. He is that good! The stock has run up to an intraday high of $7.15 in the last week and closed on Friday at 6.90 but I would be a buyer under $7.00 as this will be a long term winner but if you invest in this you must do so knowing that the payday will be in 2015. Another stock that has a high probability of doing well is Novagold (NYSEMKT:NG). The flagship project of this company is the Donlin Creek project which they sold a 50% stake to Barrick for $127 million dollars. Novagold has agreed to repay Barrick $63.5 million dollars once the mine comes into production which could possibly be as soon as the end of 2011. While this stock closed Friday at $10.24. The fundamentals of the company support a buy at $9.00 or below. If it does not pull back to this level the risk to reward ratio is too high. I recommend Novagold as a buy at $9.00 or below. If it doesn’t pull back to this level – take a pass.
So while my long term thesis is the timely accumulation of gold and silver, I recommend that you choose any of the vehicles above.
Before I conclude this essay I want to address some reports from the mainstream media that gold at $1600.00 an ounce and silver having already reached its high of $50.00 an ounce are in a bubble. I will go on record right now and say that this is nonsense. A bubble is not determined by price. A bubble is created by a run up that is not supported by fundamental reasons. I remember back in the 2000 during the dot.com tulip mania. I remember very well driving in my car when an ad came on the radio for a company called Seashells.com. They said just go to their website and purchase sea shells. This was madness. I immediately called my broker and told her to immediately dump my tech portfolio. What ensued was a very heated discussion that ended with my threat of pulling all of my accounts from her company and filing charges with the SEC. She sold my Tech portfolio while the Nasdaq was at 4700 and several months later I watched as it cratered to 3600 and by 2003 it was at around 1500. That was a bubble. There was no fundamental reason for these companies to be trading at the levels they were. It was sheer “irrational exuberance.” The prices of gold and silver based on the debasement of currencies are in my opinion very cheap. I will go on record right now and say that by 2015 gold will be $5000.00 an ounce and silver will be $125.00 an ounce and I have had some very smart people tell me that my projections are too low. What has and will continue to drive the prices of gold and silver up is the continued debasement of currencies as the debtor governments look for a way to pay off debts with paper of lesser value. My recommendation is to keep buying physical gold and silver and to keep trading ETF’s and gold and silver mining companies.
Disclosure: I am long SLV, GLD, PSLV, PHYS, ABX, GG, UXG. I may open a position in Nova gold (NG) if it pulls back to $9.00 or lower.