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Invest in Gold and Silver as Protect from US Economic Catastrophe

Commodities / Gold & Silver Jul 17, 2008 - 12:52 AM GMT

By: Money_and_Markets

Commodities

Best Financial Markets Analysis ArticleSean Brodrick writes: Our nation may be on the cusp of economic catastrophe — call it a panic, a meltdown, an implosion; I don't care what you call it. But it's bad. And it's coming straight at you like a runaway bus.

In times of crisis, people naturally gravitate toward gold, because it's the one investment that can hold its value when the fertilizer hits the fan.


As for silver, well, any trader will tell you that silver is gold on steroids. When gold jumps, silver can leap twice as far, percentage-wise.

And both gold and silver are easier to buy and store than barrels of oil (another good bet in these trying times). I've been recommending oil ETFs like USO and OIL for months now — they've been doing well. Now, I think it's the time to put some of your money in something else ... and that something else is gold and silver.

What if I'm wrong — what if there is no economic catastrophe? What if the government is able to stop the crises that are lining up from turning into full-blown disasters? Well, gold and silver are STILL good bets to ride the economic tides that are surging now.

Today, I want to explore five reasons why I think our country is in real trouble ... five crises that support the idea of buying gold and silver now ...

Crisis #1: Financial Markets on the Edge of Panic

I don't have to tell you the news in financial markets is bad ... the problem is it's going to get much, much worse.

We are seeing financial institutions collapse like slow dominoes: Countrywide Financial and New Century Financial last year ... Bear Stearns earlier this year ... IndyMac last week.

Meanwhile, Fannie Mae and Freddie Mac are on federally mandated life support. Since Fannie and Freddie own or guarantee about half of the $12 trillion of U.S. mortgages, they might be too big to fail. But their shareholders are getting clobbered.

And big regional banks are small enough to fail ... which is why National City and Washington Mutual both saw their stocks get 25% haircuts on Monday as terrified investors stampeded for the exits.

These are all just stocks on the leading edge of a much larger problem that Martin and Mike Larson have been warning us about for so long.

The mortgage crisis has become the Andromeda Strain of financial markets, devouring everything it comes in contact with. According to a Bridgewater study, total financial losses from the current credit crisis will hit $1.6-trillion — and that estimate was made BEFORE last week's bad news.

It's not just the losses on banks' books. A recent Bank of America study said that the meltdown in the U.S. subprime real estate market had led to a global loss of $7.7 TRILLION dollars in stock market values just since October.

Now we're seeing the damage spread into the "prime" mortgage market. Signs of devastation are everywhere. Two million homes are vacant across America even as tent cities of the dispossessed spring up in urban areas. RealtyTrac, the leading online marketplace for foreclosure properties, said that in June, U.S. foreclosure filings jumped 53% year over year. In fact, one in every 501 U.S. households received a foreclosure filing during the month.

Former Treasury Secretary Larry Summers says that housing finance has not been this bad since the Depression. And there are more shoes to drop. In fact, there could be many more shoes to drop. More than 300 banks could fail in the next three years, according to RBC Capital Markets analyst Gerard Cassidy, who had in February estimated no more than 150 banks were in trouble!

Bank and Thrift Failures per Year

Bottom line: Your money could be at risk. The percentage of uninsured deposits has doubled since 1992, climbing to about 37% of the nation's $7.07 trillion in deposits at the end of the first quarter, according to an analysis of data reported to the FDIC.

So, more than a third of America's deposits are at risk. Now would be a good time to check and see if the balance in any of your accounts has climbed over the insured limit of $100,000.

What to do with your excess cash? Consider buying gold and silver NOW!

Crisis #2: Fed Stoking Inflation

And now some history. The last time we saw something this bad was during the Great Depression, and it has been burned into central bankers' brainpans that the Great Depression was caused because The Fed stood by twiddling its thumbs as banks failed and the money supply imploded. They aren't going to let that happen again. In fact, as Greenspan before him, Fed Chairman Ben Bernanke has vowed not to allow a repeat of the 1930s money supply collapse.

By bailing out financial institutions — lending liquid assets against illiquid paper — the Fed is already pumping up the broad money supply. This has fanned the fires of inflation that was already stoked by the Commodity Supercycle and soaring energy prices. Just look at what happened to producer prices through May ... ZOOM!

Producer prices are soaring.

America is used to single-digit inflation, and in the low single digits at that. Is American prepared for double or even triple-digit inflation? Heck no! More to the point: Are YOU prepared?

Inflation makes the value of the U.S. dollar go down (since goods are priced in dollars, as prices go up, the value of the greenback goes lower). Conversely, as the dollar goes lower, the value of gold and silver usually go up. This process is picking up steam.

Solution? Consider gold and silver now!

Crisis #3: Massive U.S. Debt About to Balloon

Fannie and Freddie are among the largest financial companies in the world. Their liabilities — mortgage-backed securities and other debt — add up to some $5.3 trillion. Now, consider that total U.S. federal debt is about $9.6 trillion. About $5.4 trillion of that debt is held by the public (in the form of Treasury bonds, etc.), while $4.2 trillion is debt such as Social Security IOUs. This is the liability side of America's federal balance sheet, and its condition influences how much the government can borrow and at what rates.

The liabilities of Fannie and Freddie are currently NOT on this U.S. balance sheet. (In fact, the reason Fannie and Freddie went private, after being created as government entities in the 1930s, was to get their liabilities off the government's books).

But if there is a run on the debt of either company, that would put tremendous pressure on the Treasury and Federal Reserve to publicly guarantee that debt to prevent a systemic financial collapse. Indeed, that seems to be what is happening now.

The Fed said it would lend to the two companies "should such lending prove necessary." Secretary Paulson said his department is asking Congress for quick approval of a plan to expand its line of credit to the two companies and to buy their stock if necessary.

Overnight, what has long been an implicit taxpayer guarantee for both companies seems to be becoming explicit — committing American taxpayers to honoring as much as $5 trillion in new liabilities. Therefore, U.S. debt held by the public would more than double, and the national balance sheet would look very ugly.

And that should weigh on the U.S. dollar like a millstone. Indeed, the action in Treasuries on Friday shows this may already be happening.

What happened Friday? Bonds got routed on Friday, with long bond futures falling and 2-year Treasury Note yields soaring. Every single time BEFORE this phase of the credit crisis, traders aggressively bought Treasuries as a safe haven when the stock market cracked. This time, they did not.

There are a lot of "ifs" here, but if this trend continues, I think the U.S. dollar could be heading for a breakdown — one for the history books.

Again, this argues for buying gold and silver now!

Crisis #4: Energy Markets Going Ballistic

Oil pulled back nearly $7 yesterday — but that pullback is probably short-term only; nothing goes up in a straight line. The longer-term forces driving oil higher are still in place and getting stronger.

I've explained to you week after week after week about the dire confluence of supply and demand, geopolitics and geology in the oil markets — problems that are combining to send oil prices to $150 a barrel, $200 a barrel and beyond. So I won't go over old news. But here is the latest ...

  • Brazilian Oil Strike Begins. This week, Brazil's Oil Workers Confederation began a five-day strike against Petroleo Brasileiro SA, an action that could cut the country's daily crude production by more than 50%. Yes, it's short-term, but if labor troubles worsen in Brazil's oil fields and the strike extends, it could really squeeze global supply. The last time Brazil's oil workers went on a protracted strike, Brazil ended up importing oil!
  • Russia bids for Libyan oil. While the U.S. dithers on whether to drill offshore or whether to buy oil from "bad" countries, Russian oil companies such as OAO Gazprom, the world's largest natural gas producer, are buying up energy assets in Africa. In the latest twist, state-run Gazprom offered to buy ALL of Libya's spare oil and gas exports. You can see why Russia is doing it — three of Russia's major new oil projects failed to achieve oil production targets in 2007. But this also limits future sources of crude for the U.S.
  • IEA Raises 2008 World Oil Demand Forecast by 80,000 bpd. The International Energy Agency raised its forecast for world demand for oil for 2008 for the first time in several months, and anticipates demand in 2009 to increase by 1.1% to 87.7 million barrels per day (bpd), driven by emerging countries. The IEA, which had cut its forecast for world demand for 2008 for five months running, in its June report raised its forecast for the 2008 demand to 86.9 million barrels per day, an increase of around 80,000 bpd.

This is happening even as U.S. demand drops by over 400,000 barrels per day. And it's happening while U.S. exports are increasing. My point is that if global oil demand and U.S. exports are increasing even as U.S. oil use and our economy are shrinking , that means other countries (I'll spot you a "C" and an "I") are NOT experiencing a recession.

And THAT means oil prices will probably keep going higher even as Americans use less of it.

If you think gasoline at $4.50 a gallon is expensive, just wait until it gets to $6 a gallon. What do you think that will do to the U.S. economy? Just as importantly, what do you think that will do to the U.S. dollar?

Look, the petroleum exporting nations — Saudi Arabia, Russia, United Arab Emirates, etc. — are poised to become the biggest creditor to the U.S. government. Oil-rich Arab countries often wonder aloud about de-pegging their currencies from the U.S. dollar ... and are already working to diversify their portfolios into other investment vehicles, including gold.

I'd say that rising energy prices could hammer the U.S. dollar deep, deep into the Saudi sands, and send precious metals higher on a gusher of demand.

Solution: Consider buying gold and silver before that happens!

Crisis #5: We Are at the Brink of War with Iran

The U.S., including the Presidential candidates, are talking tough on Iran. What's more, the Jerusalem Post reported on July 11 that Israeli warplanes held maneuvers over Iraq, possibly preparing for a strike against Iran.

For its part, Iran is threatening Israel and America's Middle East bases with its missiles ... and saying it could cut off the Straits of Hormuz, through which a high proportion of the world's oil flows.

Of course, if Iran thinks the U.S. is too stretched in Iraq to attack Tehran, it's sorely mistaken. Military experts say the U.S. is quite capable of mounting a days- or even weeks-long bombing campaign against Iranian targets.

I sure hope that the U.S., Israel and Iran all back away from the brink ... from this dark path that leads to catastrophe. If it comes to war with Iran, forget $150 oil ... forget $200 oil ... try $300 or $400 per barrel oil!

Again, what do you think that will do to the U.S. economy and the U.S. dollar?

You can see why I think buying gold and silver makes perfect sense right now. All five of the scenarios I just outlined support higher gold and silver prices.

What's more ...

There Are Positive Reasons to Buy Gold, Too!

So far, I've just covered the reasons that could send you hiding under the bed. But there are plain ol' bullish factors for gold.

  • According to the World Gold Council, members of the Central Bank Gold Agreement sold 297 metric tonnes of gold so far in this agreement year (which ends in September). This suggests that the full 500 tonne quota will not be released to the markets this year. Less supply usually means a higher price.
  • Production from the world's gold mines remains flat. The big gold price increases seen over the past few years has not stimulated any significant global gold production increase. Indeed, output may well show a small decline over the next few years. Production is already falling off a cliff in South Africa, formerly the world's biggest gold producer.
  • Jewelry demand in India, the biggest fabrication market on Earth, is beginning to pick up again while emerging markets like China and Vietnam are having a sharp impact as their populations get more money and therefore buy more gold.
  • There are more industrial uses for silver all the time, and demand from investors is increasing along with new silver bullion funds around the world.
  • And investment demand from gold and silver ETFs is continuing to increase, soaking up more metal from the market, making a tight supply and demand situation tighter and helping put a floor under the price.

Silver, Gold and S&P 500

So even if none of the bad scenarios I laid out come to pass — and I hope they don't! — there are still good reasons for gold and silver to go up.

Two Ways to Buy Gold and Silver Now ...

I like two gold and silver ETFs as an easy way for investors to get a stake in these precious metals:

SPDR Gold Shares (GLD). Formerly known as StreetTracks Gold ETF, this exchange-traded fund holds physical gold and tracks the metal very closely. As inflation takes off and the value of the dollar goes down, gold should go up.

iShares Silver Trust (SLV ). Just as the GLD holds gold, the SLV holds silver.

Subscribers to my Red-Hot Commodity ETFs service already own these, and are sitting on open gains. But I think there's more upside ahead.

The really hard times are yet to come. But you don't have to be a victim, and your portfolio doesn't have to be a statistic. Get smart, get busy and consider buying ... well, you know.

Yours for trading profits,

Sean

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

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Comments

Christian Unruh
06 Aug 08, 23:06
Commodities will fall in price

what you don't seem to point out is that an economic slow down, which we are in, will surely lead to lower commodity prices, including oil. I'd bet on $80 oil and $750 gold before it heads back up. I do agree the value of the dollar over time will decrease. The question is relative to what? Do people really want to hold gold and silver? I'd like to buy land at the low point, and pay back the loan with worthless dollars later. Thoughts?


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