Monetary Digest, August 2001
Most people have the misconception that the 1929 stock market crash caused the Great Depression of the ’30s. Actually, the Crash of ’29 signaled the Great Depression, which was brought on by the Federal Reserve’s manipulations of the money supply during the 1920s and 1930s.
In the ’20s, the Fed printed dollars in efforts to help Great Britain reestablish its pound sterling as a premier currency following World War I. Because the United States escaped the war unscathed and had supplied most of the Allies’ materiel, huge quantities of gold flowed into the U.S. Treasury, making the dollar the world’s number one currency. (In the aftermath of war, everyone knows the importance of gold.)
Britain, having long “ruled the world,” wanted pre-war status for the pound, but overvalued it. This resulted in the pound being shunned for the dollar and for gold. To shore up the pound, the U.S. Treasury bought pounds with dollars freshly-printed by the Federal Reserve. But, those dollars did more than support the pound, they also flowed into the economy, bringing on the Roaring Twenties, a period of robust prosperity. The Fed’s manipulations also produced a bull market in stocks like the world had never seen before.
To correct the excesses, in the late ’20s the Fed shrank the money supply; consequently, prices fell. Businesses, which during the ’20s had increased production capabilities, cut back and laid off workers. Small, regional banks collapsed as loans went unpaid and because depositors chose to withdraw their funds. To protect themselves, Americans were converting paper money to that “barbarous relic” gold. Consequently, President Franklin Roosevelt ordered banks to cease redeeming paper dollars in gold and Americans to turn in their gold.
At the depths of the Great Depression, the money supply had shrunk by a third, resulting in collapsed prices in nearly all sectors of the economy. With fewer dollars circulating, how could prices do anything but fall? The Great Depression was truly a deflationary collapse, as the Fed shrank the money supply. The Fed’s actions also caused thousands of banks to fail, thereby wiping out still more dollars.
(Here is another point about the failed banks of the 1930s. Most were state banks that had not joined the Federal Reserve System. Few large banks in metropolitan areas failed. As a result, large city banks enjoyed reduced competition after the 1930s. In the 1980s, with the savings & loan crisis, more competition disappeared, and today the mega-banks are merging rapidly. In a few years, only five or so banks will control 85% of deposits. Congress seems oblivious to this dangerous concentration of power.)
Limited knowledge of the details of the Great Depression causes most Americans to think that a recession, or economic slowdown, must be accompanied by falling prices. This misconception is so widespread that some writers and economists often label a period of falling prices “deflationary.”
For example, Richard Russell, noted author of Dow Theory Letters, writes about falling commodities prices and fears “we may be entering a deflationary period.” At the same time, Russell is the first to point out that through the first six months of this year, the Fed has increased the MZM (money of zero maturity) at an annual rate of 23.7%!
With the money supply exploding and six interest rate cuts this year, how can prices fall? Easily: over capacity. If the copper industry is producing more than the market demands, prices will fall. If the markets see an economic slowdown, prices fall in anticipation of reduced demand. Now, admittedly, that sounds like a recession brings on falling prices, but here we’re looking only at the trees (commodities prices) and not the forest (the whole economy.)
Although commodities prices may be falling, housing costs continue to rise. Except the NASDAQ, stocks are still at lofty prices. Has anyone seen lower prices for automobiles, despite claims of excess capacity? Yes, rebates are being offered to reduce inventories, but after inventories are reduced, auto prices continue to climb 2%-3% a year. Don’t forget medical and food costs. Has anyone seen lower costs in these two vital areas?
In the 1930s, the dollar had a 40% gold backing by law. This limited the number of dollars the Fed could print, but it still printed enough to bring on the Roaring Twenties, which were followed by the Great Depression. Today, the dollar is the legal tender by fiat, government command. You must accept dollars in exchange for “all debts, public and private.” And, as everyone knows, the dollar is no longer backed by gold.
Whenever a paper currency has been unlinked from gold, eventually the politicians (or central bankers) print it until it becomes worthless. Why will it be different this time? Because we’re smarter? Because Alan Greenspan, “Maestro,” as Watergate author Robert Woodward calls him, heads the Fed? Because we have computers and can collect data more easily? Not hardly. Evidence supports the position that computers will facilitate the destruction of the dollar.
During the hyper-inflation of the Weimar Republic (1917-1923), the Germans had to fell trees, turn the trees into pulp, make paper, and then slap ink on the paper to increase the supply of reichsmarks. Today, not nearly as much effort is required. A few people sit at computer keyboards and type in some numbers, and billions of dollars are created.
With money creation being so easy, why not do it? After all, hasn’t it become a maxim that 12 to 18 months after the Fed increases the money supply, the economy will grow? Unfortunately, over the long-run, paper money has a miserable track record.
In fact, the Great Depression occurred as the world was moving from gold to paper. It is also significant that the Great Depression started less than 20 years after the establishment of the Federal Reserve System. Ironically, one of the primary reasons given for establishing the Federal Reserve System was to avoid panics.
Before the Great Depression, economic crises were called panics, and generally they were caused by excessive printing of paper money by big banks, but the panics were generally localized to the areas served by the banks. With the advent of the Fed, the Great Depression spread nationwide.
Now that we’re on a pure paper system, who knows how bad the next depression will be. But, indications are we could be sitting on the precipice of a big one. A little background is in order.
From about 1815 to 1915, when World War I got really rolling, the world was on a gold standard, which meant the world’s major currencies were redeemable in gold and that foreign trade was settled in gold. Even The Economist, the anti-gold weekly news magazine published in London, admits it was a “golden era.” Business flourished, world trade expanded, and prices fell.
Yes, prices fell as productivity increased. This rewarded savers, who built investment pools from which businesses could borrow, or from which savers could start new business. The world’s economy was sound because it was built on savings and based on gold, a sound money. Unfortunately, after WWI the world abandoned the gold standard.
At the 1922 Genoa Conference, world leaders adopted the gold exchange standard. Under this bastardized version of the gold standard, currencies were backed by gold but also the U.S. dollar and the British pound. Because the dollar and the pound were fully convertible into gold, the gold exchange standard, its architects asserted, would “economize on gold.”
The establishment of the gold exchange standard was a giant step toward demonetizing gold and moving toward a paper money system. In 1931, the Brits stopped redeeming pounds in gold, and in 1944, as agreed at Bretton Woods, the mighty dollar stood alone as the only currency that could be considered a reserve to back other currencies.
In 1934, Franklin Roosevelt took another swipe at gold with his April 5, 1933 executive order that prohibited Americans from owning gold. The final blow, of course, was Richard Nixon closing the gold window on August 15, 1971. Since then, the world has been on a pure paper system, one that has seen many confidence crises and currencies collapses. Some currencies, such as the Mexican peso, have collapsed several times.
The cheap money of the 1920s resulted in temporary prosperity, much like a family living on borrowed money. When time came to pay for the excesses of the ’20s, it was the most devastating depression the world has ever seen. There are some eerie parallels between the 1920s and the 1990s. Will this decade parallel the 1930s? Do today’s recessionary signs signal serious problems ahead?
Just as in the 1920s, when the Fed had a loose money policy to support the faltering British pound under the new gold exchange standard, today the Fed is pumping out money at record rates. Since the first of the year, MZM has grown at an annual rate of 23.7%. Like the ’20s, we’ve had a loose money policy for years, and always in attempts to avert a crisis.
In 1997, a financial crisis spread turmoil throughout Asia and devastated several currencies. In 1998, with the world’s financial structure still weak from the Asian flu, the Fed had to put together the rescue of Long Term Credit Management, an aggressive hedge fund whose liabilities threatened the world’s banking system. The year 1998 also saw the Russian debt crisis, which the Fed alleviated with still more money.
In 1999, the Fed “increased liquidity,” i.e. printed massive quantities of money, in fear of bank runs because of Y2K concerns. Now, the Fed is lowering interest rates and increasing the money supply to avert a recession. And, let’s not forget Argentina, which cannot pay its debts, threatening the big U.S. banks that hold its loans. Fears are that the conflagration will spread to Brazil, Argentina’s biggest trading partner. Will all Latin America go up in smoke? Not if the Fed can help it, with paper money, of course.
Just as all the money the Fed created during the Roaring Twenties had to go somewhere, so did the money of the 1990s. Actually, the Fed has had a relative loose policy since the early 1990s when it sought to bring us out of the last recession. Much of the money, from both the ’20s and the ’90s, found its way to the stock market, resulting in two great bull markets.
Now, we have to wait to see how serious the corrective bear market and recession will be. If the stock market parallels the 1929 Crash, we still have a lot of downside in stocks. If the recession begins to approach the 30s, we have much economic pain awaiting us.
It is not pleasant to think that another Great Depression lies ahead. In fact, those who predict another Great Depression are quickly labeled extremists. So, let’s consider the other possibility: the worst recession since the Great Depression. The Fed will, however, fight a recession with everything it has.
Unfortunately, all the Fed has is the ability to create money, and after being off the gold standard for some 85 years, we’ve seen the results of paper money: destroyed currencies and wasted economies. Over the past 30 years, Brazil has had at least three currencies: the cruzeiro, the cruzado, and the real. Mexico struggles from one crisis to the next but sticks with the lowly peso, which just keeps on sinking.
Conventional economic thinking is that the economy has to respond to Fed policies, but that’s not always the case. During the 1970s, the term stagflation was coined to describe a stagnant economy and rising prices. In Japan, zero interest rates and massive government spending have failed to revive Japan’s stagnant economy, another instance where central bank intervention has failed.
Stagflation for the U.S. economy is a real possibility. And, if the economy does not respond to recent interest rate cuts and increased liquidity, what’s the next step? If the economy slips into a deep, prolonged recession, what will be the government’s course of action? Will the Fed print more? Interest rates to zero, like Japan? Will Congress cut taxes? Tax hikes? A return to the gold standard? The last is quite doubtful. History shows that governments return to gold only after their people completely refuse paper money. We appear to be a long way from that. So, what will be the government’s course of action? Probably more paper money.
Troubled times are on the horizon, and everyone with savings needs to take action to protect those savings. Historically, gold and silver have proven to be the absolute best forms of protection against economic and financial crises. It is true that during the Weimar Republic’s hyper-inflationary period, Germans who secured dollars saw their savings survive. In those days, however, the dollar was “as good as gold.” Today, the dollar is not backed by gold, and it is being printed in whatever quantities the Fed deems necessary. How many dollars will the next crisis require?
Investors who ignore the dark clouds are whistling past the graveyard. Now is a time to be afraid and the time to take steps to weather the storm. CMi recommends either gold or silver. With both at near record lows, gold and silver hold little downside risk but great upside potential. See Recommendations on page eight.
In late 1999, platinum prices surged upward, then climbed steadily, topping $600 by late 2000. The rise was attributed to Russia’s failure to deliver on its contracts to Japanese users. Although Russia supplied only 11% of the world’s platinum, the platinum market was so tight that Russia’s non-delivery sent platinum users scurrying to find supplies, and platinum prices soared. Recent price action, however, suggests the platinum run is over.
In mid-July, platinum traded back to the $480 level, a $140 drop since late May. Platinum’s weekly price graph also shows a perfect “double top,” which many technical analysts believe signals an end to a bull market.
In 1996, when platinum traded at or near the price of gold, and for a few days below the price of gold, CMi strongly recommended its clients buy platinum instead of gold. We thought platinum could achieve a $150 – $200 premium over the ensuing years. We failed to see the price of platinum doubling gold’s price, but we don’t mind missing such moves. Those clients who bought platinum profited quite handsomely. Now, though, we think there are good reasons investors should avoid platinum, despite it being way off its highs.
Russia has stepped up production, and in 2000 shipped twice the platinum it shipped in 1999, upping its market share to 21%. Additionally, the Japanese jewelry market, which makes up 50% of the world’s demand for the platinum shrank slightly in 2000. The Japanese economy remains stagnant, and there is no reason to believe that demand for platinum jewelry will rebound anytime soon.
The second largest demand for platinum, about 33%, is for auto catalysts. With the world sinking into recession, there will be less demand from the auto industry. (Through June, North American production of cars and light trucks was off about 12%, a huge drop.)
Additionally, Honda, which is perceived as the most PGM-intense auto manufacturer, recently announced plans to introduce catalytic converters that use metal oxides based on unspecified non-precious metals as well as platinum group metals (PGMs). Honda said it found ways to successfully deploy these catalysts and will introduce them in a new large SUV, which will be sold first in Japan.
If Honda licenses the manufacturing process, this new converter could substantially reduce platinum demand. The really big depressant, however, should be increased production from South Africa, which supplies more than 70% of the world’s platinum.
With rising platinum prices and the market in deficit in the late 1990s, South African producers stepped up production. Between 1996 and 1999, SA output grew at an annual compound rate of 4.5%. In 2000, SA platinum output slipped slightly because of labor difficulties, operating problems, and flooding at some mines. Those problems seem to be over, and platinum producers are pushing ahead with aggressive plans to increase production over the next decade.
Exploration expenditures are up worldwide, with a major push in Canada. But as for immediate production expansion, most of it rests in South Africa, which holds the bulk of the world’s platinum reserves. Anglo Platinum plans to increase production from about two million ounces (1999’s figures) to 3.5 million in 2006.
Other companies are expanding also, and those efforts are a real threat to the platinum market. In its May Precious Metals Investor, CPM Group wrote: “It looks as if the South African producers are aiming more to increase their palladium and rhodium production and in order to do so they must increase their platinum production as wellâ€”even if this risks glutting the platinum market.”
A few months ago, several telemarketing firms were pushing platinum, just as it was making its top. Then, CMi was strongly recommending its clients to sell any remaining platinum they had. When new investors asked about platinum we suggested they go with either gold or silver.
Despite platinum’s drawback to the $480 level, making it look attractive after being above $600, we believe that precious metals investors should avoid it. At some time in the future, platinum could again be a better investment than gold, as when we recommended it in 1996. Until then, stay out of the platinum market. Investors still holding platinum should seriously consider trading it for gold or silver, both of which have much less downside risk and tremendously more upside potential.
Beware Free Information
Even before the Internet leaped into our lives, it was often said that we lived in the Information Age. Now, there can be no doubt about it.
The average home has something like three televisions, and every car comes with a radio. ABC, CBS, and NBC are American icons. Radio talk shows run twenty-four hours a day, seven days a week. Cable and satellite broadcasts are loaded with financial programs. The Bloomberg Channel airs around the clock. Every town of any size has a newspaper; most larger cities have more than one. All major newspapers and many small ones publish Web sites. And, the Internet is crawling with sites offering investment advice. All of this should make us knowledgeable and informed investors, but it doesn’t.
At best, most investors are confused; at worst, they are flying blind. Although many investors caught the greatest stock bull market in history, this does not make them brilliant investors. Consider the many who came late to the game and have little to show for the risks they took. Worse, how about the unfortunate ones who got caught up in the dotcom madness and lost heavily? And, for those investors still in stocks, it remains to be seen whether they will take their winnings home or will hang around, hoping for another bull run.
Surviving the times ahead is going to mean evaluating circumstances draped against an understanding of the results of past similar developments. Few investors are steeped in either economic or stock market history. Most listen to “experts” pontificate on Moneyline or other “financial programs.” Listening to those people does, perhaps, more harm than good. Those programs are not intended to make investors more knowledgeable; they are designed to sell advertising that keeps investors buying stocks. Whenever a program carries negative news, it is couched with, “Yes, but the bright side is that …,” And, try finding a program that deals with surviving a bear market. Talking about a bear market doesn’t sell advertising.
Additionally, investors need a grasp of macro-economics; they need to see the “big picture.” Too many investors, who just happened to ride the biggest bull wave ever, attribute their investment success to their own investment prowess. Few will admit that they simply were lucky. Still fewer even know that they probably will not live long enough to see another comparable run. The only bull market comparable to the one now ending started during the Roaring Twenties and ended with the infamous Crash of ’29. It could be decades before another bull market starts. Meanwhile, you’re going to have to survive a bear market.
You are not going to get free the advice needed to survive a bear market. You may get a lot of “free advice,” but you are not going to get free the advice needed for the times ahead. You are going to have to buy it. For the stock market, CMi recommends Richard Russell’s Dow Theory Letters. For an overall view of the world’s financial problems and the challenges ahead, we like William Buckler’s The Privateer.
Russell’s letter deals specifically with his interpretation of the Dow Theory, as originally developed by The Wall Street Journal’s founder, Charles H. Dow. Dow’s theory was later refined by legendary Wall Street strategists William Hamilton, Robert Rhea, and George Schaefer. Today, Russell is recognized as the dean of Dow Theory advocates. A subscription to Dow Theory Letters is $250 for one year. This includes a hard copy mailed every three weeks and daily comments that can be accessed on the Internet. See his Web site at www.dowtheoryletters.com.
What will reading Dow Theory Letters do for you? First, if you still hold hopes of stocks renewing their upward march, Russell will probably convince you otherwise. Second, he may keep you from plunging back into stocks prematurely. In March, when stocks dropped precipitously, many analysts called a “bottom.” Russell, however, had warned that bear market rallies sometimes “seem better than the real thing” and cautioned investors not to be caught up in any strong rallies. It was a bear market according to Dow Theory, he said. And, he says it’s still a bear. Although April and May saw a strong rally, only the most astute traders pulled down profits. The average investor, the guy “in it for the long run” has not profited.
The next important thing Russell will do will be to alert you as to when to re-enter the stock market. Sometime in the future, stocks will bottom, and it will be time to buy. CMi clients often say, “OK, I like gold for the times ahead, but how will I know when to sell?” Right now, our answer is to sell when you see another investment you like better. That may be stocks offering such good returns that you can’t say no. Maybe that’s General Electric or General Motors selling at a dividend yield of 6%, who knows. But, let’s rely on Russell to make that call. In 1974, he called a turn in stocks when doom and gloom ruled Wall Street. His subscribers profited tremendously. Perhaps, he will do it again. Meanwhile, he says it’s a bear market for stocks.
Frankly, Russell is not yet a bull on gold and silver. He wants to see price confirmation before declaring a bull market in the metals. But, that’s OK, we’re not recommending Dow Theory Letters for Russell’s opinion on gold. It’s his stock market analysis that we believe is worth every penny of the $250 it costs for a one year subscription.
For an overall perspective of the world’s financial condition, we like The Privateer, which comes from Australia. Few Americans have the background to pull together the situation in Japan, Europe, and the U.S. when it comes to the world’s financial structure. From time to time, establishment publications such as The Wall Street Journal discuss the U.S.’s balance of trade deficit, but rarely are in depth analyzes offered. And, never will you find in an establishment publication a discussion of the world’s monetary system and the importance gold plays. When gold is mentioned in an establishment publication, it is derided. This is by design. The Establishment has opted for a paper money system. The longer paper money stays afloat, the more the Establishment can steal from the people.
It is normal for Americans to see the bright side of everything. That’s our nature, and it has enabled us to overcome formidable obstacles and to lay claim to some of the world’s greatest accomplishments. But, staying in stocks when the bear is about slay the bull does not make sense. And, not being knowledgeable about the dangers of the world being a paper money system is just as dangerous, if not more so. For these reasons, CMi recommends (and without any quid pro quo) Russell’s Dow Theory Letters and William Buckler’s The Privateer.
The Privateer is emailed 25 times a year at a cost of A$180, that’s 180 Australian dollars, which means it costs Americans about $95. On his Web site, Buckler also posts a weekly commentary on gold. To subscribe, visit www.the-privateer.com.
Silver Eagles’ Sales Strong
Through mid-July, the U.S. Mint sold 4,249,000 Silver Eagles, a little off year 2000’s pace when 9,133,000 Silver Eagles were sold for the whole year. This year’s sales are quite impressive considering the silver market has been quiet since April. Much of the interest in Silver Eagles is because of the reduced premiums at which they now are selling. Early in the year, they carried premiums of $2.00; now they can be bought in Mint boxes at $1.70 over spot. Smaller quantities cost a little more.
The U.S. Mint markets Silver Eagles through “authorized distributors.” Individuals cannot buy SEs directly from the Mint (proof coins excepted). CMi cannot buy directly from the Mint. The distribution is a classic manufacturer, wholesaler, retailer program. Typically, authorized distributors jack up the premiums early in the year to take advantage of eager buyers. As time passes, competition among the distributors drives down the premiums.
It is doubtful that premiums on SEs will drop any further. The Mint sells SEs out the door at about $1.30 – $1.35 over spot (London P.M. fix), regardless of the price of silver. (We do not know the precise premium because distributors consider that a “trade secret.”) However, SE buyers should be aware of what can happen as the price of silver rises.
If silver shoots quickly to the $7.00 – $8.00 level because of buying on the COMEX or because of a surge of industrial buying (which would be reflected in COMEX prices), the premiums on SEs will shrink. Not on new coins being sold by the U.S. Mint, but those already in the hands of the public.
Since 1986, when the first SEs were minted, some 96 million have been minted. Most were sold to the public at between $7.00 and $8.00. Investors love to “break even” on an investment after it has languished below their buying prices. We saw this in early 1998 when Warren Buffett started taking delivery of Berkshire Hathaway’s 129.7 million ounces. Silver shot to $7.50, and the public unloaded their Silver Eagles, driving SE premiums to zero. Some were sold below spot.
The drop came because Warren Buffett was taking delivery of 1,000-oz bars of silver. For the premiums to stay up on Silver Eagles, the public would have to had been buying also. But, the public was not buying; it was selling, and premiums fell. However, people who bought 1998-dated SEs while Buffett was taking delivery still had to pay about $2.00 over spot. Regardless of the price of silver, the Mint sells new SEs at the same premium.
Here’s CMi’s position on Silver Eagles. If you think it’s likely that you would be a seller of Silver Eagles if silver pops to the $7.00 – $10.00 range, don’t buy them. You would lose the premium, which right now is a minimum of 40%. If you know you would be a seller on a move to that range, then go with 100-oz bars.
However, if you expect a solid bull market in silver, with heavy public participation, then Silver Eagles should retain their premiums. In fact, if at the $7.00 – $8.00 level the public unloads millions of SEs and they are melted and silver then marches higher, bringing in the public, back-dated SEs could pick up premiums. If buying were to last five or six years, with renewed interest in coin collecting, then old SEs could pick up big premiums.
Whether you invest in Silver Eagles depends on if you would be a seller at $7.00 – $8.00 and if you think a solid bull market is coming for silver (and gold). If you think you would sell at $7.00 – $8.00, go with 100- oz silver bars. If you think it will be years before you sell, the Silver Eagles may be the way to go.
August 21-24, The History Channel, which is available on most cable and satellite networks, will begin a world premiere about gold. The advertised time is 9:00 p.m., EST. Readers are advised to check viewing times in their areas.
As a rule, The History Channel does an excellent job on its programming, and advertisements suggest this series will be super-excellent. All goldphiles will want to tune in. After the premiere, the series will be available on video. For more information, visit www.historychannel.com.
More Woes for Gold Mining Companies
The February/March Monetary Digest noted the dangers of mining stocks. Specifically pointed out were Sunshine Mining’s woes when management borrowed heavily and Sunshine was unable to service that debt. Consequently, lenders took control of the company, which resulted in prior shareholder equity being reduced to about 4%. Now, www.theminingweb.com, an Internet site from South Africa, has started speculation as to which South African mining companies will survive if workers strike there.
In case of a labor stoppage, companies outside South Africa should benefit from higher prices. That’s SHOULD benefit. As most readers know, many gold mining companies have sold forward years of production and will actually suffer financially if the price of gold rises significantly. Ashanti Goldfields (Ghana) and Cambior (Canada) were hit hard when gold rallied in the autumn of 1999 on the announcement that 15 European central banks had agreed to limit gold sales.
Barrick Gold, which boasts of its profits from forward sales, also brags that it has protected itself with “puts” against any “price shocks.” However, it remains to be seen if such strategies will hold up in the real world. MBAs (Masters of Business Administration) are famous for making things work on paper that don’t work in the real world.
While low gold prices have given investors the opportunity to buy both physical gold and gold stocks at low prices, those low gold prices have cursed the gold mining companies. Marginal companies will need luck to make it. If the price of gold rises, they benefit. However, if the price of gold goes up because of a labor strike in South Africa, some producers there may not survive. Companies outside South Africa have to contend with their forward sales and hedge book positions.
It is tough to make it in the mining industry, especially mining precious metals. That’s why CMi prefers the physical metal over stocks. There’s much less risk.
New Silver Uses
The industrial demand for silver has exceeded mine production and secondary recovery every year since 1990. According the CPM Group, the deficit has eaten up 1,386,000 ounces. Year 2000’s deficit was 117.5 million ounces; this year’s deficit is projected at 100 million ounces. What makes these numbers so exciting is that CPM estimates that only 759 million to 984 million ounces remain aboveground to meet future deficits.
The photographic industry is the biggest consumer, making up one-third of total demand. Other big uses are for jewelry, silverware, electronics, and batteries. What is generally not known is that researchers across a wide spectrum of industries are developing new uses for silver almost weekly. It is unlikely that any one of these new uses will ever consume as much silver as the photographic industry, or even one of the other big four; however, new uses will continue to grow and exacerbate the production deficit.
In the medical field, silver’s unique antiviral, antibacterial, and antifungal properties have been rediscovered. One of the most exciting is in bandages.
The FDA recently approved the sale of silver-based antimicrobial bandages for consumer use. Developed by Westaim Biomedical, these bandages employ a lower-dose version of the company’s Acticoat burn and wound dressings, which are used in more than 100 of North America’s 120 burn hospitals. Burns can result in severe, life threatening infections.
Tests and clinical trials prove the new bandages effective against more than 150 pathogens, including some “superbugs” that are antibiotic-resistant. Westaim is in discussions with over-the-counter bandage producers and hopes to bring the silver-coated dressings to the market within two years.
Silver bandages also improve the results of tattoo removals. For decades, the preferred method of tattoo removal has been laser treatments. Unfortunately, laser treatments are expensive. Now, though, the use of a modified infrared coagulator, a device similar to a laser beam, and silver bandages reduces the costs and improves the results.
Although approved for tattoo removal since 1991, the early use of modified infrared coagulators produced severe burns. Recent work, however, shows that using lower settings, combined with silver impregnated bandages, shortens the healing time and reduces the risk of blister breakage, infection, and scarring. This could be a godsend to the millions of young people who are marring their bodies with tattoos.
Another revolutionary use fights prostate cancer, which annually strikes some 180,000 American males. Through a nonsurgical outpatient procedure, radioactive “seeds,” about the size of rice grains, are implanted in the prostate, where they irradiate the tumor. The seeds are tiny pellets consisting of titanium capsules containing silver wires absorbed with radioactive iodine. The seeds irradiate the tumor from within and usually have a minimal effect on neighboring organs. This therapy results in a survival rate comparable to surgery but without the invasiveness.
Housewives have long known that the edges and cracks of sinks, tubs, and showers are breeding grounds for bacteria, which smell awful, look worse, and sometimes are harmful. In the UK, a mixture of silver chloride and titanium dioxide is being added to sealants like caulking and tile grout to fight such bacteria.
This mixture relieves a lot of headaches for sealant manufacturers, which have long needed a biocide potent enough to prevent their products from becoming harbors for bacteria. The chloride salt of silver fills the bill. It is almost insoluble in water, and in this application its low solubility provides a slow but significant steady flow of silver ions into the immediate area, making for effective sanitation. And, the sealants are safe for the workers manufacturing them.
Following the outbreak at the 1976 American Legion Convention in Philadelphia, Legionella pneumophila, a new microbial agent, was discovered. Legionella induces a form of pneumonia that kills 20% of those infected.
So serious and widespread did Legionnaire’s Disease become that annual international conferences have been held since 1989. At least 37 strains of Legionella have been identified. However, a silver-based solution appears to have shackled this killer.
More than 100 hospitals in the U.S. and Canada have installed silver-copper ionization systems that eradicate Legionella pneumophila from their hot water pipes. Tests have proven these systems to be more effective than the superheated water-and-flush method, which had been the standard procedure for cleaning systems.
Perhaps the most futuristic use for silver is being employed in Simi Valley, California, where a 100-year- old steel manufacturer and a biotechnology company have joined forces to build a germ-resistant home. AK Steel Corp. of Middletown, Ohio, and AgION Technologies of Wakefield, Massachusetts, are constructing the 11,000-square-foot home from AK Steel’s carbon and stainless steel coated with AgION’s proprietary silver-based antibacterial compound.
The project introduces a new way to combat germs on key surfaces by using silver-induced materials in “high touch” areas, such as handrails, faucets, door knobs, and in kitchens and bathrooms. Heating, ventilation and air-conditioning duct work, where bacteria often grow, also will be made of AgION-coated steel. Some non-steel products such as refrigerator trays and counter tops will be AgION coated. From these surfaces, antibacterial silver ions will be released over time.
Silver’s properties make it indispensable in the health-related industry, and the above discussions touch only a handful of silver’s contributions to health. But, because it is the most reflective of any metal, and is the best conductor of electrical and thermal heat, huge quantities of silver are used in products that make today’s lifestyle possible. Imagining what life would be like without silver is difficult. Yet, the amount of silver available for these uses decreases daily. CMi considers silver the best investment of the precious metals.
Because of silver’s huge industrial demand and growing uses, CMi believes silver to be a better investment than gold. It is also significant that in all prior bull markets, silver has outperformed gold, which is say that silver rose higher than gold on a percentage basis.
Possibly, silver’s outperforming gold relates to more people having used silver as money than have used gold. In the U.S., gold coins, although called-in in 1933, ceased to circulate long before then. However, silver coins circulated until the mid-1960s. And, the words for money and silver are the same in at least 17 languages. Consequently, when conditions, which usually are economic or financial crises, prompt people to protect their savings, more people opt for silver.
Additionally, it is often said that silver is the poor man’s money and gold is for the wealthy. If so, then this is another plus for silver because the masses have much more money collectively than do the wealthy. So, during a rush to precious metals, more money goes into silver, pushing it higher than gold on a percentage basis.
This is not to suggest that gold is a bad investment. In fact, gold is an excellent investment. New production fails to meet demand, and the huge short position overhanging the market eventually will have to be unwound. That alone should propel gold higher.
Except in the U.S., gold is in a bull market nearly everywhere in the world. That’s because the dollar is the strongest currency in the world. With the U.S. running a balance of payment deficit equal to about 4.5% of GDP, the dollar will not remain king of the hill forever. When the dollar slides, gold will rise. If the euro becomes widely accepted next year when it begins to circulate and establishes itself as competition for the dollar, then the dollar should be under tremendous pressure. This would be extremely positive for gold.
Although CMi believes silver to have an edge over gold, we recognize that silver’s bulk and weight make it difficult to handle and to store. If this is the case, then don’t hesitate to invest in gold.
As for platinum, we’ve made our position clear in this issue that it should be avoided now. In time, it may again be a better investment than gold, but not right now.
For those investors who see silver as a pure investment, we recommend 100-oz bars, which offer the lowest price on a per-ounce basis. Investors who want both an investment and protection against financial crises should go with either 1-oz silver rounds or circulated 90% coins.
One-ounce Gold Eagles remain the most popular bullion coin. However, Krugerrands sell about $5 below Gold Eagles, and those investors who do not care about 1099 reporting should go with the venerable K-Rands. As a clarification, K-Rand liquidations are reportable only when investors sell 25 or more to a dealer. Purchases of K-Rands by investors are not reportable, no matter the number purchased.
Yet, CMi believes that 1-oz Gold Dragons offer the better potential return than either the Gold Eagles or the Krugerrands. Gold Dragons are the 2000-dated coin of the Perth Mint’s Lunar Series, and production was capped at 30,000 coins. In late July, the Perth Mint had less than 1700 to be sold. When those coins are sold, Gold Dragons will be available only in the secondary market. The earlier coins in the Lunar Series have already achieved sizable premiums over their gold content. Dragons should do the same. Dragons sell a few dollars over the price of Gold Eagles. For more information on Gold Dragons, visit CMi’s Web site www.gold-dragons.com.
CMi does not recommend platinum at present levels. In fact, investors still holding platinum should consider trading it for gold or silver.