Thursday, December 8th, 2016 MST

A Repeat of the 1970s?

July 2002

In 1970, gold threw off the constraints of government-set prices and within ten years hit $850 on the free market, a twenty-four times move. Silver, which the U.S. government had said was worth only $1.29, shot to $50 for a 38-fold move. Eerie similarities suggest gold and silver could do it again.

In the 1970s, both metals had been long neglected by the masses. No one, except people in the mining industry, cared what the prices of gold and silver were. After all, the U.S. government had, via its participation in the London Gold Pool, spent the 1960s proving it could keep the price of gold under control. The U.S. Treasury alone kept the price of silver at $1.29 by selling silver from its 2.4 billion-ounce stockpile. Why should anyone think that gold and silver prices would rise? Yet, some people predicted higher precious metals prices because inflation was raising its ugly head.

During inflationary periods, smart money seeks the safe haven of precious metals. Although higher prices, as measured by accepted government yardsticks, are not in the news as in the 1970s, last year the Federal Reserve pumped one trillion dollars into the economy. Few complained because the increases were for good causes: to stem a weakening economy, to shore up a faltering stock market, and to ride out the uncertainties in the aftermath of the 9/11 terrorist attacks. Whatever the reasons, with the Fed having increased the supply of dollars by one trillion dollars, can higher prices for all goods be far behind?

The 1970s also had official selling of gold. Then it was the U.S. Treasury and the IMF, which auctioned gold on monthly intervals from the mid-70s into the late-70s. Within months of the last auction, however, gold made its vertical climb to $850. In recent years, most official sellers have been European central banks, most notably the Bank of England, which auctioned 345 metric tons over 2-1/2 years. The final BoE sale was held March 2002.

Although the BoE auctions received great notoriety, the Swiss National Bank is the larger seller. While the BoE auctioned 345 tons, the Swiss sold 477 tons. Over the next 2-1/2 years, the Swiss are expected to sell an additional 765 tons. The Swiss, however, sell discreetly, moving about 15 tons a month, and their sales rarely make the news. (Under the Washington Agreement on Gold [WAG], the Swiss were allocated 1300 tons over the five-year life of the Agreement. So far, the Swiss have sold about 500 tons, which puts them about 40% of the way through their program. The Netherlands is also a quiet seller and is expected to reduce its gold reserves by 173 tons over the next 2-1/2 years, all within WAG accords.)

As it turned out, in the 1970s the U.S. Treasury and the IMF sales simply fed a voracious market, and gold buyers enjoyed low prices because of the auctions. Now, it appears that the Brits, the Swiss, and the Dutch are doing the same today, selling gold cheaply to buyers who would be paying much higher prices if the central banks were not selling.

The 1970s saw huge price increases. Today, oil sells at about $25 a barrel, a price with which the world’s economies have learned to live. Yet, it is generally accepted that oil prices will go higher if problems in the Middle East are not resolved. Basically, we have two groups of people fighting over the same piece of land. The Jews claim that God reserved it for them; the Palestinians assert that 3,000 years of occupancy means it is their land. Chances of differences there being resolved peacefully are not good.

Meanwhile, Saddam Hussain, ever eager to lead a pan-Arabic movement against the United States and Israel, has suggested that Arabic oil producing countries quit selling oil to the United States and Israel. For about a month, Iraq did quit exporting oil, and rumors circulated that Iran would join Iraq in the boycott. However, that threat did not materialize.

Further damaging Iraq’s efforts, the Saudis said they will not use oil “as a weapon.” Yet, the Saudis are clearly upset with U.S. unequivocal support for Israel. And, to show his disapproval of U.S. support for Israel, Egypt’s Mubarak refused to meet Secretary of State Colin Powell during his April peace efforts in the Middle East.

Although Hussain’s efforts to unite Arabic countries in a boycott failed, the threat remains, one that could produce much higher oil prices that would cripple the world’s economy. In reality, an Arabic oil embargo is more threatening than all the Arabic armies because the U.S. has turned Israel into an 800-pound gorilla that could easily beat back any attacks. As the suicide bombings continue, the Israelis can be expected to retaliate, wreaking havoc on Palestinians

The Israeli attacks in April were so devastating that several Palestinian towns were ravaged, and such necessities as potable water, electricity, and sanitation facilities are no longer available. In Gaza, the Jabaliya Refugee Camp is one square mile of squalor where 100,000 Palestinians live.

The town of Jenin was practically destroyed by the invading Israelis who used armored bulldozers to level thousands of homes, sometimes in predawn hours attacks that sent children scrambling for their lives. The Israelis may call it “like-for-like” retaliation, but the Arab world sees it as state-sponsored terrorism. This leaves an oil embargo as a viable Arabic response to Israeli tactics, with the result being huge oil price hikes, just like in the ’70s.

Continuing the parallels, in the 1970s we had a cold war that was red hot. Now, though, the Soviet Union is no more, and Russia is more conciliatory. However, the U.S. has a new enemy, an almost invisible one at that, terrorism, and President Bush repeatedly makes threats about taking military action against Iraq, which Bush claims supports terrorism and is building weapons of mass destruction.

Again, other Arab nations have expressed their opposition to any military action against Iraq. In fact, the Saudis have denied the U.S. use of bases from which to launch an offensive against Iraq. Rumors circulate that the U.S. is quietly supplying secret bases in either Oman or Yemen for attacks on Iraq.

Further complicating the matter, our European allies–the British excepted–which supported us in the Gulf War, have expressed disapproval of military action against Iraq. Yet, Bush keeps rattling swords, and if we go ahead, we will have a major war right in the middle of the world’s most important oil fields.

Another similarity that may arise is the dollar. Although for years the dollar has been the world’s strongest currency, that may be ending. As measured against a “basket” of other currencies, the dollar appears to have topped. If so, we have no way of knowing how weak the dollar will become. If it sinks horribly, conditions may compare with the 1970s when the dollar held such pariah status that in some European cities cab drivers, restaurants, and hotels refused dollars.

In ’78, the Treasury even considered selling bonds redeemable in a combination of German marks, Swiss francs, and Japanese yen. Today, with the U.S. running a horrendous balance of payments deficit, hellbent on a shooting war, and a facing a debt-limit crisis, the dollar could again become a pariah. Just as the metals soared in the ’70s, they could do it again. Gold’s recent surge to $329 shows just how explosive it can be.

Perhaps the most striking parallel is that both metals have suffered at the hands of manipulators. In the 1960s and 1970s, the Treasury openly declared war on gold and silver. Today, the government denies being part of any cabal that seeks to keep the price of gold down, but evidence suggests otherwise. Further, evidence says that major bullion banks (and major gold producers) are involved in manipulating both metals’ prices. In the 1970s, when the government ceased attempting to keep the price of gold down, prices skyrocketed. When the manipulators see that they have lost, we could have a repeat performance, with gold and silver dwarfing their 1980 highs of $850 and $50.

First Quarter’s 5.8% Growth Questioned

When the Commerce Department reported that GDP had grown at a 5.8% annual rate in the first quarter, every government official who could commandeer a microphone gleefully talked about the economy’s resilience. Some declared the recession over; others said there was never a recession in the first place. Pundits noted it was the shortest nonrecession in history. Meanwhile, the Dow Industrials dropped below 10,000, and the dollar sank in the world currency markets. A look behind the numbers is in order.

The Economist, in calling the 5.8% increase a hard act to follow, noted that Britain’s economy grew by only 0.3% in the same quarter and that the pace for Japan and the Euro area is calculated at having been no more than 1%-2%.

More than half of the bounce in GDP came from firms reducing their inventories at a slower pace in than in the previous quarter. That is a peculiarity of measuring GDP. Companies continued to reduce inventories but at a lower rate, so the GDP “grew” 3.1%. Bill Buckler, in his early May Privateer, gave the specifics. Fourth quarter inventories fell by $119.3 billion, and first quarter inventories contracted by a further $36.2 billion. Although inventories fell $36.2 billion, those numbers added 3.1% to GDP.

Another boost came from defense spending, which increased at an annual rate of 20%. Also, residential construction, up an annualized 16%, was given a temporary fillip by one of the mildest winters on record. Total final retail sales (which does not count changes in inventories) rose at an annual rate of only 2.6%

Ignoring the phantom 3.1% growth from inventories reckoning and stripping out the jump in defense spending and half an unsustainable boom in home construction puts the GDP increase at only 1.5%, closer to growth in the other industrialized economies. Buckler comes up with an even lower number.

He notes that the difference between the announced 5.8% and the 3.1% inventories calculation is 2.7%. With total federal government spending up by 7.9% the first quarter, that puts fed spending at 23% of GDP, which accounted for about 1.8% of the remaining 2.7% growth. That leaves 0.9% growth from “real” economic activity, hardly a rosy scenario.

Although consumer spending climbed 3.5%, fixed investments by firms fell, for the fifth consecutive quarter. This is not a pretty picture, especially since consumers continue to pile up debt and personal bankruptcies are setting records. The fifth consecutive decline in fixed investments probably more accurately reflects the outlook for the economy.

Not only are there limits on consumer debt, but if the stock market continues its downward slide, spenders are likely to cut back. Richard Russell, editor of Dow Theory Letters, calls this the “reverse wealth effect.” Whereas rising stock prices create optimism and wealth, falling stock prices cause pessimism as wealth is lost.

Russell continues to declare that stocks are in a bear market. Perhaps worse, Russell says that stocks are still in the early stages of a bear market. Since the bear has already run 2-1/2 years, any turnaround is years away.

Generally, massive bull markets are followed by nasty bear markets. Some people undoubtedly say that with the decline in the NASDAQ, this has been a nasty bear market. Still, for this to be a really bad bear market, the blue chips must sink to where their dividends yield 6% to 8%. We could easily see the Dow Industrials below 5000 before this is over, and the NASDAQ, whose stocks pay next to nothing in dividends, at 500. If the recession worsens and is prolonged, earnings could be hurt, resulting in dividends being cut. If so, then for the blue chips’ dividends to pay 6% to 8%, the Dow would have to drop below 5000.

Such dire predictions may seem too pessimistic, but bear markets always end (and bull markets begin) with pessimism at its worst. We are no where near that now. In fact, Wall Street analysts remain bullish, as do investors who dumped some $29.2 billion into mutual funds in March.

A faltering stock market and a questionable economy are only two reasons for owning gold and silver. Others include Japan’s economic woes, a dollar that appears to have topped and is headed lower, President’s Bush’s obsession with attacking Iraq, the Israeli/Palestinian conflict, the United States’ massive balance of trade deficit, the Argentine conflagration threatening to spread to other South American nations, and the relentless downgrading of debt by the debt-rating agencies. The downgrading includes the debt of major corporate borrowers and governments, obviously Japan and Argentina. Ominously, some pessimists suggest that U.S. debt could be downgraded if the economy does not turn around and if the balance of trade deficit is not brought under control.

In deciding how to ride out the storm(s), investors have to make tough decisions. Investments that have become traditional, such as common stocks, CDs, bonds, and money market accounts could do poorly in the times ahead. Gold and silver, however, have proven track records during troubled times and can be trusted again as safe havens. Each investor has to decide how much of his or her assets should be in gold or silver, but everyone needs to have some precious metals protection. CMi will gladly discuss with Monetary Digest readers the merits of either gold or silver. Call us at 800-528-1380.

CPM Group Releases Silver Survey 2002

For many reasons, CMi believes that silver holds the potential to outperform gold in this budding precious metals bull market. We will not attempt to list all those reasons, but the huge industrial demand for silver stands out.

Whereas the primary demand for gold is jewelry, silver is essential to our modern economy. So much so that the industrial demand for silver has outstripped newly refined silver for the last twelve years, drawing down aboveground supplies. There are limits–although not known–how low aboveground supplies can fall before the price of silver starts climbing.

In monitoring silver’s supply/demand fundamentals, one of CMi’s sources is CPM Group’s annual Silver Survey. Silver Survey 2002 was released April 30, and its highlights are below:

Highlights:

  • The physical silver market operated in a deficit for the twelfth consecutive year in 2001, with newly refined supplies falling short of industrial demand by 83.8 million ounces. This reflects a narrowing of the deficit from 147.4 million ounces in 2000. In 2002, the net deficit in the bullion market is projected to expand once more, to 121.7 million ounces. At the end of 2001, bullion stocks are estimated to have totaled 311.2 – 496.2 million ounces, while investor holdings of silver coins total 467.5 million ounces.
  • Total supply rose 3.1% to 746.4 million ounces in 2001. In 2002, supplies could contract for the first time since 1993, perhaps falling 1.0% to 739.0 million ounces.
  • Mine production continued to rise in 2001, although at a more moderate pace than in the previous four years. Output rose 2.7% to 502.8 million ounces last year. This year mine production is projected to contract 0.3% to 501.4 million ounces.
  • Secondary supply rebounded from the previous year’s decline, rising 2.0% to 203.6 million ounces. Old scrap and Indian scrap supply expanded last year, while coin melt was just one-third the previous year’s level at 2.0 million ounces. This year secondary supply could decline marginally, falling 0.5% to 202.6 million ounces.
  • Government disposals of silver edged higher last year to 25 million ounces. This sector includes sales by the Chinese government as well as U.S. use in coins. In 2002, government disposals could total 20 million ounces.
  • Industrial demand for silver contracted sharply in 2001, falling 4.7% to 830.2 million ounces. Only jewelry and silverware demand remained flat last year, while all other applications reduced their silver requirements: Photographic demand for silver fell 2.0%, electronics and batteries demand declined 9.0%, while demand in all other uses dropped 14.8%. This year’s fabrication demand could rebound 3.7% to 860.7 million ounces.
  • Trading activity continued to contract in 2001. Total trading volume and open interest in the futures and options markets were lower. Daily trading activity in the London dealer market declined 6.6% to an average 108 million ounces for the year from 116 million ounces in 2000.

The report sells for $150 plus $5 S&H and can be ordered by calling 1-212-785-8320. Or, an order form can be found on CPM’s web site www.cpmgroup.com.

Russell on the Stock Market and Gold

Long time Monetary Digest readers know the esteem with which CMi holds Richard Russell’s stock market analysis. Since 1958, Russell has published his views in his Dow Theory Letters, which accepts no advertising and leaves Russell unbeholden to any advertiser’s position. In contrast, evening televison shows that purport to offer balanced stock market analysis get their revenues primarily from advertising by mutual funds and stock brokerage firms, which have vested interests in keeping investors “bullish on America.” There’s a big difference between being bullish on America and being bullish on stocks.

TV stock market programs are designed to sell advertising. Yet, the commentators never note that their viewpoints are distorted because of their desires (needs) to keep advertisers happy. Investors who watch such programs without the benefit of an unbiased viewpoint, such as Russell’s Dow Theory Letters, leave themselves vulnerable. It is highly unlikely investors will ever be warned to get out of the stock market. Such recommendations would be contrary to the products these programs’ advertisers sell.

CMi recommends that Monetary Digest readers still holding stocks seriously consider subscribing to Russell’s Dow Theory Letters. This is a dangerous stock market, one that has already inflicted great damage on stock portfolios, one that will probably wreak greater havoc. CMi believes that the ensuing bear market will be so devastating that it will drive two generations out of stocks, never to return.

Many investors may balk at Russell’s $250 annual fee, but that is foolish when $250 is compared with the money at risk in stocks. Readers wanting to subscribe need to send a check for $250 to Dow Theory Letters, PO Box 1759, La Jolla, CA 92038. Access to Russell’s daily remarks (Saturdays included) come with a subscription. His web site is www.dowtheoryletters.com.

Before the arrival of the Internet, Russell mailed hard copies of Dow Theory Letters twice a month. Now, he mails hard copies every three weeks, and DTL is a better value than before because of Russell’s daily “Remarks” on his web site.

Much can be gained from reading Russell’s observations about the stock market and stock investing. It is not enough simply to say that because you know Russell says it is a bear market that you are going to stay out of stocks. By reading DTL and Russell’s remarks, you gain insight into the workings of the stock market. Someday this bear market in stocks will end. Likewise, someday this bull market in the precious metals will end. By reading DTL, investors will be better prepared to make the right moves at the right times.

Here is one profitable Russell insight. He says that in a bear market he who loses the least wins. Three years ago, he suggested that before this stock market collapses, it may trade sideways for years–as it has done as measured by the Dow Industrials–making it very difficult to pick stocks winners. Almost daily, at CMi we talk with new gold investors who tell us that over the last two years they have suffered horrible beatings in the stock market. He who loses the least wins.

On page 4, we’ve reproduced (from the May 8 DTL) Russell’s “Picture” as he sees the stock market. Russell’s views should be of interest to readers who are still in stocks. Perhaps, the S&P Composite monthly chart says it all: It’s a bear market.

Perth Mint Lunar Series Coins

The March 2002 outlined our reasons for recommending the 1-oz gold coins of the Perth Mint’s Lunar Series. All the coins are available. The Perth Mint has sold out of Dragons, but they are available in the secondary market. As for the other backdated coins, the Perth Mint will sell them until the production cap of 30,000 is met. CMi recommends the 1-oz Lunar Series coins for long-term investors. We believe that these coins stand a very good chance of achieving high premiums as this precious metals bull market gains momentum. For more information on the Lunar Series coins, visit the web site www.gold-dragons.com.

Gold and Silver as Money

Knowing the dangers of paper money, the Founding Fathers clearly intended that only gold and silver be used as money in the United States of America. Article 1, Section 10 of the Constitution prohibits the states from coining money and emitting bills of credit. The coining of money prohibition keeps the states from setting up their own mints; the bills of credits prohibition stops the states from effectively printing their own paper money. Further, Article 1, Section 10 prohibits the states from making “anything but gold and silver coin a tender in payment of debts.” In other words, all debts are to be denominated in either gold or silver.

In Colonial Times, although coins of many foreign countries served as the circulating specie, the Spanish Milled Dollar or “piece of eight” became the standard and was the forerunner of our silver dollar and its fractional divisions. Yet, enterprising individuals struck their own coins and tokens.

Following the Constitutional Convention, Congress passed the Coinage Act of 1792 and therein laid out the dollar’s division and the coins to be minted. From that point until 1933, gold coins circulated as money in the United States. The Treasury continued to mint silver coins until 1965, but silver coins quickly disappeared as the copper clad coins dated 1965 and later began to circulate.

The Founding Fathers chose gold and silver to be our money because those two precious metals had stood the test of time. The Founding Fathers knew that gold and silver had served well many ancient civilizations, Greece and Rome being the most famous, for thousands of years. Further, the Founding Fathers were quite familiar with the ravages of paper money brought on France in the early 1700s when John Law convinced the regime of King Louis XV to issue unbacked paper to “stimulate the economy.” This became known as The Mississippi Scheme and is–along with the Weimar Republic’s destruction of the Reichsmark following World War I–the most notorious of paper money debacles.

Today, circulated pre-1965 U.S. silver coins, which were minted specifically to serve as money, are a popular way to invest in silver bullion. When minted, a bag contained 723 ounces, but because of wear, a bag yields approximately 715 ounces when smelted. As this is written, $1,000 bags carry a premium of forty cents an ounce over spot, making them an attractively priced silver bullion investment vehicle. Other favorite ways to invest in physical silver include 999 fine 100-oz bars and 1-oz silver rounds, which presently carry higher premiums than circulated 90% coins. In a strong, sustained bull market, however, bags of 90% can achieve higher premiums than the pure bullion items. (Under certain circumstances, 1,000-oz bars may be appropriate for some investors.)

Believing that U.S. 90% silver coins could again serve as money, investors looking for “survivalist coins” buy them. Yet, many readers may ask, “How could that be? The average person has no idea how much silver is in a dime or quarter.” (A dime contains approximately 0.0715 oz, a quarter 0.179 oz, and a half-dollar 0.358 oz.) Here’s how.

The dollar would have to be debased to the point where people rejected it. That may seem far fetched, but in the late 1970s dollars were eschewed in Europe as the dollar kept falling relative to European currencies. Then inflation was commonplace, with prices rising at an annual rate of 13%. The prime rate was 21%. The stock market was in the doldrums. The Soviets had just rolled into Afghanistan. We’d had two huge oil price increases. The United States was viewed as impotent with Jimmy Carter in the White House. (Remember the taking of U.S. hostages by Iranians “students?”)

Although it is unlikely that the U.S. will again face the same problems, similar problems could knock the dollar from its perch. The Fed increased the broad-based M3 money supply by $1 trillion in 2001, after hefty increases the years before. Price inflation could be a serious problem. Stocks could suffer greater declines than in the early 70s. Military action against Iraq could pump oil prices higher. Under such circumstances, the dollar could (probably would) sink on the world’s currency exchange markets.

Such conditions would push precious metals prices higher, as measured in paper dollars, and precious metals investors would simply enjoy profits. When they wanted to use the purchasing power of their silver and gold investments, they would sell. However, if circumstances became so dire that paper dollars and today’s base metals coins were rejected, that would be another ball game.

Under these circumstances, sellers of goods and services would want something of value. People holding goods would not want to turn loose of them for a rapidly depreciating paper currency. In some instances, barter–the trading of one commodity for another–would work. Yet, the most efficient facilitator of economic exchanges is a money that serves as a store of value.

In other words, if the recipient of the money stashes it away (saves it), it will retain its purchasing power. Silver and gold stand as the time-tested monies. Paper has a history of being printed until it is worthless. Eventually, that will be the fate of our beloved dollar, which today is a note, an IOU from our central bank, the Federal Reserve.

There is no way of knowing exactly how the dollar will meet its death. But, the history of paper currencies is that they are printed until they are worthless. When the dollar meets its fate, everyone will know that pre-1965 U.S. silver coins contain silver. People with pre-’65 coins will have a preferred currency, one that is readily acceptable by sellers.

The transition from paper dollars to gold and silver will not come overnight. Yet, there is no way of knowing the speed with which it will happen. One hundred years or so ago, when major paper currencies faltered, gold and silver became the preferred currencies, and logically so. Then gold and silver traded alongside paper money but at a higher value. As the paper money wilted, more trade was conducted in specie (coins). As governments were successful in renewing faith in their paper currencies, paper money reestablished itself. Admittedly, paper money is more convenient that gold and silver, but the opportunities for abuse by politicians are virtually unlimited.

In recent years, many paper currencies of smaller nations have faltered. South America seems to have more than its share of governments that like to print money. The Argentine peso is latest to wreak havoc on an unprepared people. In the last 20 years or so, Brazil has had at least three paper currencies. When the paper currencies of small nations fail, foreign currencies of big countries often substitute. There was a time when British pound sterling was accepted worldwide. Today the dollar enjoys that privileged position. In many small nations, the dollar circulates alongside domestic currencies.

The dollar is probably the preferred currency in Russia. Any Argentinian would love to have a stash of $20 bills. But, what will happen here in the United States when too many dollars are printed and the dollar sinks? What currency will step into the breach? No currency has the status of the dollar. Americans wouldn’t know yen from Monopoly money. We certainly won’t take Mexican pesos; we don’t even like taking Canadian dollars. When the dollar meets its eventual fate, gold and silver will reemerge, and pre-1965 U.S. coins, the few that are left, will be used as money. People with a few bags of 90% coins secreted away will have a readily accepted currency.

Finally, it needs be pointed out that both pre-’65 quarters and today’s nickel-clad quarters have “twenty-five cents” stamped on them. Consequently, many people wonder how a pre-’65 quarter will be worth more than the latter ones. It is the silver content. Admittedly, today most Americans have no idea how much silver is in a pre-’65 coin. Millions probably don’t even know pre-’65 coins contain silver. But, in case of a financial debacle that rendered the dollar worthless, people would quickly learn which coins would be worth having and which would not. People have an inherent desire to survive.

If we ever arrive at a time when the dollar is rejected, that time will not come overnight. We will roll into it. Slowly, small merchants will start accepting pre-’65 coins and other forms of silver and gold in exchange for their services. Some may post handwritten signs that read Ask about our silver coin prices. Then you will negotiate. Or, some merchants may post signs that say $10 paper or one silver quarter, or whatever the ratio may be. If that time comes, people with silver and gold will become all merchants’ favorite customers.

As noted above, in the early stages of a collapsing dollar, gold and silver holders will benefit by having their metals rise in price. When they want to exchange their gold or silver for goods or services, they will sell and use paper dollars. However, if conditions deteriorate in the United States to what we saw in Asia in 1999 and in Argentina more recently, then everyone will quickly learn the benefits of gold and silver and the disadvantages of paper money (and base metal coins). This writer saw it first hand in Brazil in 1979.

My wife and I were visiting my sister and brother-in-law in San Paulo. Then the Brazilian currency, the cruzeiro, was becoming worthless. The cruzeiro had been installed in 1945 and died in 1981, a long tenure for a South American currency. Its successor, the cruzado, lasted only four years and was replaced by another cruzeiro. In 1994, the real was made the official Brazilian currency. The unofficial currency was the dollar. Anyway, when I was in Brazil, the cruzeiro was falling fast. Kids did not even pick up coins that lay everywhere in the streets.

In San Paulo we bought some artwork. When I went to pay, the merchant said, “No, no, I know your sister and her husband.” She then pulled out a deposit slip for Barnett Bank in Florida and said, “Please deposit the money in my account when you return to the States.” People figure out ways to avoid dying currencies; those that do not, suffer.

Someday the dollar will be replaced by the Washington, the Kennedy, the Bush, or whatever, just as the cruzado replaced the cruzeiro. However, gold and silver, in any form–pre-’65 coins, 999 fine silver rounds or bars–will retain their value. If things get really bad, they will become the monies of commerce while the government attempts to install a new currency.

Old U.S. Gold Coins’ Premiums Fall

For years, CMi has urged investors to avoid old U.S. gold coins because of their high premiums. This advice benefitted many investors as the premiums on old U.S. gold coins have shrunk by huge margins. Only a few years ago, MS-62 Saint Gaudens and $20 Libs carried premiums of several hundred dollars. Today, these popular coins carry premiums of $70-$80. Further, although the price of gold is up $50 from a year ago, prices on MS-62 Double Eagles (St. Gaudens and $20 Libertys) are up only $20-$30.

CMi considers these premiums to be still too high for investors who simply want to invest in gold. We believe the modern Gold Eagles and the Perth Mint’s Lunar Series coins to be better investments. When common-date MS-62 Double Eagles can be bought at about the same prices as 1-oz Gold Eagles or the Perth Mint’s Lunar Series coins, they will be good buys.

Yet, CMi recognizes that some investors are willing to pay up for Double Eagles because of the legacy of these coins. For investors who like old U.S. gold coins, prices are much better than a few years ago. Although CMi specializes in bullion coins, we have excellent prices on old U.S. coins for investors who want them.

U.S. Treasury to Buy Silver

Because of the success of the U.S. Mint’s Silver Eagle program, the federal government is about to become a net buyer of silver for the first time in four decades. Since 1986, when Silver Eagles were introduced, the Mint has been making them with silver from the Defense Department’s Strategic Stockpile. Now, the Stockpile is nearly depleted, having only enough silver for another two months at the present rate of production. To continue the program, the Treasury will need to buy silver on the open market.

Senator Mike Crapo of Idaho, which is home to the nation’s most productive and famous silver mines, has introduced legislation that would permit the buying of silver by the Treasury. The legislation is necessary because the law that began the Silver Eagle program stipulated that silver from the Strategic Stockpile be used. The law did not cover how the program was to continue when the Stockpile was gone.

The Mint requires about 10 million ounces of silver annually. This includes the minting of commemoratives and Silver Eagles, of which more than 100 million have been minted since 1986. The Mint’s web site shows nearly 4.5 million sold this year. The American Eagle program, which includes Gold Eagles and Silver Eagles, has earned the Treasury more than $264 million. Because Silver Eagles provide the Mint a margin of profit of more than $1 on each coin, it is likely that Congress will pass the legislation. However, it is not known if the legislation will be passed before the Mint runs out of silver. The Mint is facing a dilemma.

If the Mint has only enough silver for two months, it has to decide whether to limit Silver Eagle production or even stop it for this year because Senator Crapo’s bill may not pass this session. The bill is not controversial and with, little, if any, opposition; however, more important matters may force the bill to the back burner. If the bill is not passed this session, it will have to be reintroduced next year. This session is supposed to end in October.

The Mint, not knowing when the bill will be passed, has to decide how much silver to hold back for commemoratives and Silver Eagles for 2003 just in case the legislation does not pass this year. The Mint usually stops making current year Silver Eagles in November when it begins preparation for the next year’s coins. (Although the Mint will start producing 2003-dated coins this year–assuming silver is available–those coins cannot be distributed until 2003.)

The Mint does not give warning when it plans to make the changeover to the next year’s production. So, Silver Eagle distributors never know when they’ve received their last shipment. This year, the cutoff could come early, and the potential silver shortage could make 2002 a low mintage year for Silver Eagles.

In the past, late in the year Silver Eagle premiums often jump when the Mint ceases production. If the Mint cuts short production, the premium increase could be larger than normal. CMi clients who want year 2002 Silver Eagles should place their orders ASAP. The unique circumstances at the Mint clouds the future for 2002 Silver Eagles. Production could be halted at anytime, which would cause premiums on this year’s Silver Eagles to jump immediately.

Recommendations

Over the last twelve months, the price of gold has climbed about $50. However, the price of silver is a few pennies below last year’s price. Still, CMi believes that silver holds the greater upside potential.

In the early stages of a precious metals bull market, gold often moves before silver. Many times, precious metals bull markets are set off by financial crisis or concerns. Such problems are usually noted by sophisticated investors who seem to prefer gold.

As gold moves, however, two things happen. One, investors notice that silver has lagged. This causes some investors to add silver to their holdings. Second, the public becomes aware of the problems, and the masses tend to prefer silver to gold. At least, the masses want to own some silver, and because in the aggregate the masses have more money than the wealthy, this causes silver’s price to move at a faster rate. So, in time, silver catches up and then passes gold, on a percentage basis. CMi recommends that investors who can manage silver’s bulk and weight give it serious consideration.

Silver

Right now, circulated 90% silver coins are attractively priced, carrying premiums smaller than the markups on 999 fine 100-ozs bars and 1-oz silver rounds. As noted in this newsletter, 90% silver coins were minted to be used as money and could serve that purpose again. Another advantage of 90% coins is that they often achieve high premiums in precious metals bull markets and during periods of heaving buying, even without a bull market.

In 1999, during the Y2K buying frenzy, circulated bags sold at 50% premiums over the value of their silver content. Then we recommended that silver investors go with either 100-oz silver bars or 1-oz silver rounds, which had much smaller premiums. Additionally, we strongly urged holders of 90% silver coins to swap for 1-oz rounds or bars. Those investors who acted increased their silver holdings by 35%-45% simply by changing from one form of silver to another.

Over the last three decades, CMi has seen several times when circulated 90% bags have picked up appreciable premiums. Add in the fact that circulated 90% have been smelted at a heavy rate since the Y2K liquidation began, and there are fewer circulated coins available. This bull market could result in huge premiums for circulated 90% coins.

For investors wanting a pure silver play and wanting silver in a convenient form, 100-oz are recommended. For some investors, 1,000-oz bars may work. Investors wanting pure silver and “survival coins” should go with 1-oz silver rounds.

Gold

The 1-oz Gold Eagles remain the most popular gold bullion coins. Krugerrands, which are identical to Gold Eagles, except for design and place of origin, have been selling at big discounts to Gold Eagles, at times as much as $10. Bargain hunters should consider Krugerrands. However, investors need keep in mind that when they sell 25 or more Krugerrands at a time, the transaction has to be reported on a 1099B. This applies to 1-oz Maple Leafs also. No such requirement applies to the Gold Eagles.

For clarification, the 1099B reporting applies only when investors sell 25 or more Krugerrands or Maple Leafs, not when these coins are purchased. There are no 1099B reporting requirements at all involved in the purchase of any gold (or silver).

With Gold Eagles and Maple Leafs selling at just about the same price, there is no good reason to buy Maple Leafs. In fact, because Maple Leafs scratch so easily, that is one reason not to buy Maple Leafs. They have a big “field” behind Queen Elizabeth’s head, a field that is easily scratched by the Maple Leaf’s sharp reeded edges. Investors who want pure gold coins should consider the Australian Kangaroos. Each Kangaroo comes encapsulated in a protective capsule. For more information on the Kangaroos, visit the web site www.goldcoinguide.com.

For long-term collectors, CMi recommends the Perth Mint’s Lunar Series coins. Although the year 2000 1-oz Gold Dragon reached its production cap of 30,000 and is no longer available from the Perth Mint, it is available in the secondary market. The Dragon carries the highest premium, the 2002 Horse the lowest. The other five coins–the Rat, the Ox, the Tiger, the Rabbit, and the Snake–sell at premiums less than Dragons but more than Horses.

Platinum

CMi believes that platinum is too high relative to gold and silver and should be avoided at this time. We have said this for more than two years. Over the last year, while gold has risen about 20%, platinum has fallen slightly.

Investors wanting to discuss these recommendations with CMi staff are invited to call. Our toll-free number is 800-528-1380. Officially, we take calls between 7:00 a.m. and 5:00 p.m., MST, Mondays through Fridays.

Actually, we often take calls much later than 5:00 p.m., and we sometimes take calls before 7:00 a.m. Sometimes we take calls on Saturdays.