Political Metals

I was planning for early retirement, and was looking at “investing” in something to preserve my purchasing power, fully aware that failing to do so would result in my hard earned savings being wiped out by the current high inflation, impending hyperinflation and/or currency debasement.

Scouring the web for information on “investing” in gold & silver, I heard one group of analyst exclaiming “buy now before the price explodes!”, and another saying “sell – gold is in a bubble”. Yet another said “wait for a correction - the price has gone up too much recently”. As a novice, I was all confused. They talked about the Comex, Gold and Banking Cartels, FED, Market Manipulations, LBMA, COT, CFTC, Fiat Money, etc… all Greek to me!

After gathering sufficient information on the merits of converting my paper currency savings into hard assets in the form of gold & silver (PMs), I embarked on a cautious and gradual buying process. In retrospect, I wished I had done so sooner and faster. Nevertheless, I’m now more prepared in the light of the financial, monetary, economic and geopolitical turmoil around us today.

What kept me holding on to my PMs through times when prices surged and times when they plunged in the midst of solid fundamentals was, and still is, the realization that I’m holding a class of assets which is political in nature. Governments the world over and in particular that of the US and Europe have been and still are, albeit with decreasing effectiveness, exerting downward pressure and control over the perceived value of PMs. Hence, the daily or short term price movements reported in whatever currencies or in whichever markets is of little significance. Only the long term trend matters. Chris Powell of GATA sums it up neatly:-

There are no markets any more, just interventions.

Gold has been used as money in one form or another since 700 BC until 1971, when president Nixon took the world’s reserve currency (US$) off the gold standard. Because the supply of gold is limited, while the supply of national paper currencies, which are no longer backed by gold, has been increasing exponentially, the price of gold would naturally rise exponentially in a free market. Gold, while no longer an official currency, is still a true barometer of inflation caused by rapidly increasing money supply. Left unchecked, the investing public would loose confidence in paper money as they see their purchasing power drop rapidly when measured against gold. Alan Greenspan, former chairman of the US Federal Reserve, said in a Bloomberg report on September 9, 2009:

[the rising gold price is] an indication of a very early stage of an endeavor to move away from paper currencies…

Gold is the currency that competes with government paper currencies and has a powerful influence on interest rates and the value of government bonds.

In a nutshell, this is why governments the world over have been suppressing the price of gold (and silver).

Further reading: China at the receiving end of Gold Manipulation - as revealed by Wikileaks.

How did gold & silver “performed” in your national currency last year?

The table below shows how gold and silver performed across major world currencies and a sample of other minor currencies in 2010. Their gains were impressive in all currencies, and especially great in Venezuela Bolivares due to a double devaluation of the currency within a year. (Updated Oct 2012: See updated table of global currencies Vs gold and silver)

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So, if indeed PMs prices are being suppressed, why do we still see such a stellar performance? More importantly, are they not already “over-priced” after such a large increase in one year? The answer to both lies in the chart below (courtesy of Mark Lundeen).

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This chart shows the inflation indexed values of US Currency in Circulation (CinC) with the price of gold and silver from January 1920 to 2010. It is evident that save for a brief period in 1980, the rate of increase in the PM price index has been much lower compared to the rate of increase in the quantity of dollars being printed into circulation. Price suppression does not mean that PMs prices were not allowed to rise, just that they were not allowed to rise in tandem with the rate of monetary base expansion. In other words, it’s a managed rise through various intervention schemes.

Herein lies the key reason why contrarians, gold bugs and smart money have been moving into PMs. Based on the data set above, gold & silver are undervalued when adjusted for inflation (due to increase in currency supply) by 319% and 1071% respectively. Using the PM prices on 1 Jan 2011, gold and silver could have been as high as US$4,500 and US$330 respectively in a free market. This is not meant to be a “prediction”, merely a ballpark figure to give an idea of the effect of price suppression. Holders of gold and silver also have good reasons to believe that the end is near for this suppression scheme. A ball held under water will very quickly find it’s natural level when released - so will the prices of these two Political Metals!

Conspiracy Theory

If you’re reading about this for the first time, it may sound like a conspiracy theory. However, if you look behind the mainstream media spin, you will find ample evidence that gold (and silver) price suppression is public record and public policy. There is a mountain of resources on the web documenting the gold suppression agenda of world governments. In my opinion, the place to go is the Gold Anti-Trust Action Committee (GATA) website. For starters, let me point you to this key address by Chris Powell, Secretary/Treasurer of GATA delivered at the International Precious Metals and Commodities Show, Olympia Park, Munich, Germany on Nov 7, 2009. If you don’t have the time to follow through the 20 links within that address that documents this public policy, it’ll do you good to just take a peek at this declassified Memorandum from the then Chairman of the Federal Reserve to the U.S. President in 1975.

Alternatively, watch this 34 min discussion between Chris Powell (GATA) and James Turk (Founder of GoldMoney) - an excellent summary of the whole issue of gold market manipulation by central banks & governments.

Post update: This recently embedded clip was uploaded on Feb 2011 and some of the issues mentioned therein have developed, and have been covered in some of the more recent posts.

When you own gold you’re fighting every central bank in the world. - Jim Rickards

Gold is the money of kings; silver is the money of gentlemen; barter is the money of peasants; but debt is the money of slaves.- Norm Franz

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Governments seek to control the populace through the issuance of unlimited debt-based paper money rather than to govern responsibly under the discipline of a gold or silver-backed currency. This is why I prefer gold & silver over paper currencies as a store of value and view them as Political Metals. In so doing, I protect myself against inflation and play my small part in the common man’s war against every central bank of the world.

So, should you invest in gold (and silver)? My short answer is NO. Long answer here.

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