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Despite Low Prices, Outlook for Silver Remains Bullish

Monetary Digest, June 2001

Low prices paint a dismal picture for silver; however, according to CPM Group’s Silver Survey 20011, the outlook for silver remains bright. CMi believes that current low prices provide an unheralded opportunity for investors. (Although this Monetary Digest highlights the Survey’s significant points, precious metals investors with strong interests in silver should consider buying a copy. See footnote.)

In 2000, newly refined silver failed to meet industrial demand for the eleventh consecutive year, resulting in a deficit of 117.5 million ounces. Although last year’s 117.5 million-ounce deficit was down from a 132.1 million-ounce shortfall in 1999, it is likely that a large deficit will remain until silver prices rise to such levels that will encourage the reopening of closed mines and exploration for new deposits. The deficit of 117.5 million ounces represents the “industrial deficit,” i.e., the shortfall because of industrial demand. Add the silver used for coinage, such as the U.S. Mint’s Silver Eagles and Mexico’s silver coin program, and 2000’s overall deficit swells to 142.5 million ounces.

Considering silver’s lackluster price performance of the last few years, it is unlikely that any efforts will be made to reopen mines or begin exploration programs until the price of silver not only rises much higher but also stays high for a while. Therefore, silver investors should have little fear of an avalanche of silver hitting the market when the price does move up. The famed Sunshine Mine, which opened in 1884 in the Coeur d’Alene Mining District near Kellogg, Idaho, was closed in February. And, reports have surfaced that Hecla Mining’s Lucky Chance, another famous Coeur d’Alene silver mine, is near closing. In fact, Hecla skipped dividends on its preferred stock for the first two quarters of this year. Barrick Gold is delaying start up of a project on the Chilean/Argentine border, which was expected to produce annually, starting in 2003, 35 million ounces of silver and 800,000 ounces of gold. Other mining companies have delayed or curtailed projects.

CPM forecasts a deficit of 97.8 million ounces in 2001; however, CPM tends to underestimate the deficit for the next year. For example, Silver Survey 1997 foresaw a deficit of 168.8 million ounces for 1997, but the Silver Survey 2001 shows the deficit for 1997 came in at 202 million ounces. The Silver Survey 1998 underestimated that year’s deficit by 20 million ounces. With the world’s economies weakening, copper production, which is the largest source of newly mined silver, has already started to decline; consequently, silver production will fall as the economy slows. Therefore, any slowing in demand will be met with a commensurate reduction in production, leaving the silver market in deficit. A major bullish factor for the silver market is that most applications involve small, even miniscule, amounts of silver. The best example is silver halide film.

Although the photographic industry is expected to consume 283 million ounces this year, each photo uses only a fraction of a grain of silver. Therefore, even if the price of silver were to double or triple, it would have little-if any-impact on the cost of taking photographs.

U.S. Government Exits Silver Market

Since the inception of the Silver Eagle program in 1986, the U.S. Mint has been using silver from the National Strategic Stockpile for the manufacture of Silver Eagles and commemorative silver coins. When the program began, the NSS held some 133 million ounces of silver. Last November, the final 15 million ounces from the NSS were transferred to the U.S. Mint.

At the current rate of sales, sometime in 2002 the U.S. Mint will consume the last of the silver from the NSS and then will be forced to buy silver for the Silver Eagle program. That will be a watershed moment. For the first time in 150 years, the U.S. government will be out of the silver business.

At one time, the government was the biggest silver buyer and accumulated the largest stockpile of silver the world has ever known. It stood at nearly 2.4 billion ounces in 1958. At that time, “silver certificates,” which were redeemable in silver at $1.29/oz., circulated along side Federal Reserve Notes, which were redeemable only in other FRNs. The Treasury Department’s position was that FRNs were as good as silver and that there was no reason to own the physical metal. However, Treasury officials also knew that if the price of silver climbed above $1.29, Americans would convert silver certificates for physical silver, and that eventually FRNs would be recognized for what they are: pieces of paper.

To protect the dollar, the Treasury began selling silver in 1959 to keep the price of silver at or below $1.29. However, by 1970 the largest stockpile of silver the world had ever known was reduced to a mere 139 million ounces, which was held in the Defense Department’s National Strategic Stockpile, the same silver that was later used for manufacturing Silver Eagles. At the same time, the Treasury also sold gold to protect the dollar. That, too, was a futile effort, and in 1971 President Richard Nixon closed the gold window, which meant that U.S. government would no longer redeem its paper money for gold.

As with all government ventures that seek to thwart laws of economics, the effort failed. In 1967, silver started up and nearly doubled by mid-1968. Over the next few years, prices drifted lower as speculators took their profits. By 1970, silver traded at pennies above the government’s official price of $1.29. Government spokesmen and establishment economists pointed to silver’s price decline as evidence that silver was “worth only $1.29.” They couldn’t have been more wrong. By 1973, silver’s price doubled again, kicking off a bull market that culminated in 1980 with silver topping $50.

Looking back, one may wonder why investors, who had accumulated silver at $1.29, sold at $2.60. That is because investors have varying perspectives on what are desirable profits. The investors who converted silver certificates to physical silver at $1.29 were delighted to double their money. Many investors have an affinity for silver and gold because of their Constitutionally-mandated uses as money. Those investors consider paper risky at best, fraudulent at worst, and do not plan to be stuck with paper when the masses realize they have been had. High doses of inflation usually wake up the masses. Others simply view silver, when prices are low, as an investment opportunity. Warren Buffett falls in this category.

Now, will Buffett accept a double, which would be at about $11.00? First, one has to grasp the enormous size of Buffett’s position: 129,700,000 ounces, which is equal to 27% of annual production and 24% of CPM Group’s high-end estimate of world bullion stocks. (Coming up with an estimate of bullion stocks involves a lot of guessing, and CPM actually gives a range of 308.8 – 553.8 million ounces.

Using the low-end of the range, Buffett owns 42% of the world’s stocks!) With such a huge position, which took months to accumulate and even required the sellers to ask for delayed deliveries, Buffett knows it cannot be liquidated with a phone call. He knew that going in and is probably willing to wait until silver users come knocking on his door. At what price will Buffett sell? Buffett probably doesn’t know that.

Circumstances change. When silver hits $15, prospects for silver may be so bright that he will want to hold out for $25. Maybe he will not sell in the conventional manner but will trade it for stocks in companies that use huge quantities of silver. Since Buffett’s entry into the silver market, rumors often have circulated that he is selling some or has sold all his silver position. CMi believes those rumors are without substance and are part of efforts by silver bears to keep down the price of silver. (Although this issue of Monetary Digest will not go into it, CMi believes that there is a group of bullion houses involved in manipulating the price of silver and that rumors of Buffett selling have been instrumental in keeping buyers out of the market.)

Contrary to the rumors, there is no evidence of Buffett having sold. In early 1999, during all the brouhaha surrounding news of Buffett’s foray into the silver market, Berkshire Hathaway, the investment company through which Buffett bought the silver, received requests for comments on its purchase and its outlook for silver. As for its reasons for purchasing silver, the company’s press release stated that “equilibrium between supply and demand will only likely be established by a somewhat higher price.” In other words, Berkshire Hathaway expects the price of silver to rise. The company also said that in the that it would comment only when there was a material change in its silver position.

Because the company has not said anything since then, it is reasonable to conclude that Berkshire Hathaway’s silver position has not materially changed. Another rumor has it that Berkshire Hathaway is “leasing” its silver. Leasing involves delivering the silver to the lessee, for which lessor receives interest and a promise of the silver being returned. Obviously, the same silver is not returned but the quantity borrowed is. Again, Berkshire Hathaway has made no statements concerning its silver position, so it is unlikely the company has leased its silver. However, there is the possibility that Berkshire would view leasing as no “material change” because any leased silver is to be returned. It’s anyone’s guess.

If Buffett has leased any of Berkshire’s silver, in the long run it doesn’t matter, except that today silver bulls can buy at artificially low prices. In time, the silver market’s voracious appetite will eat up all excess silver, and then-if Buffett has leased silver-Buffett will want his silver back. At that time, the borrowers will be forced to buy it, pushing silver prices higher. Yet, all this is speculation because we don’t know if Buffett has leased any of his hoard. Right now, adjusted for inflation, silver prices are at record lows, partly because of gold’s and silver’s declining prices as stocks roared higher and partly because of the efforts of the silver bears. Both developments keep investors out of precious metals. But, the silver bears’ nightmare must be another large investor attempting to emulate Buffett.

If someone were to take delivery of 30 million or 40 million ounces, the silver market would roil. Some critics say Buffett got in too early. Maybe, but when buying the huge quantity Buffett purchased, it’s not the same as calling CMi and ordering a bag of circulated 90% coins. It took Buffett seven months to establish his position. When Buffett “stood for delivery” in February 1998, the public (and silver short-sellers) learned that the world’s most acclaimed investor was taking delivery of 129.7 million ounces of silver. Buffett bought in the London dealer market, which gave cover to his buying, enabling him to establish such a huge position without it being disclosed.

Silver Inventories

Not only has the silver market suffered from a decade-long deficit, but the aboveground supplies that have been feeding the deficit are reaching critically low levels. As noted above, sometime in 2002 the U.S. government will cease to be a supplier of silver and become a buyer for its Silver Eagle program. The graph below shows that government inventories worldwide have been shrinking steadily since 1980.

The graph of Estimated Silver Inventories in London and Zurich shows how the deficit has eaten into reported European depository holdings. Include unreported European inventories, such as Berkshire Hathaway’s 129.7 million ounces, and estimates for holdings there climb to only 170 million ounces. As of May 10, silver in Comex-approved warehouse stood at 95.86 million ounces, which back up contracts that could call for the delivery of more than 330 million ounces.

The Comex gets away with fractional reserve backing of contracts because few longs “stand for delivery,” as did Warren Buffett in 1998. Most contracts are liquidated or “rolled forward.” However, as can be seen by looking at the graph of Comex Stocks, enough longs have taken delivery to drop inventories by nearly two-thirds since 1995. Silver inventories are the Achilles’ Heel of the silver bears. Every year, inventories decline, and at the current deficit rate, all silver estimated to exist will be used up in about six years. But, because silver (and gold) have been in bear markets for so long, most investors ignore this fact, and silver bears-operating on the futures exchanges, primarily the Comex-have pushed silver prices to 1993 levels.

Silver traders on the futures exchanges are mostly “momentum traders.” Ignoring the fundamentals, they go with the price movement. And, they have done well, except for early 1998 when Warren Buffett started taking delivery of 129.7 million ounces. Although Buffett bought in London, dealers there buy and sell on the New York-based Comex, and Buffett’s purchase really hurt the bears who happened to be short at that time.

A couple of years ago, CPM described the silver situation in a unique way. Silver inventories are like a barrel of water from which everyone is drinking. As long as water is coming out the spigot, no one has thought it necessary to lift the lid and see how much water remains in the barrel.

With silver, no one seems to care what inventories are as long as silver is available. And, here is perhaps the silver bears’ second Achilles’ Heel. For years, investors have been net sellers of silver. CPM estimates that last year investors turned loose of 142.5 million ounces, which was the sum of the industrial deficit and the silver used for coinage. In short, investors have fed the deficit. CMi believes investors did that because the stock market provided such tremendous profits during the 1990s. However, CMi sees signs of that coming to an end.

When investors are net sellers, the physical products-90% circulated coins, 100-oz bars, 1-oz silver rounds-sell at or near spot. In the mid-1990s and during the Y2K liquidation last year, investors could have purchased circulated 90% coins and 100-oz bars below spot. This meant, of course, that sellers received below spot. Today, things are different.

Circulated 90% coins carry premiums of thirty to forty cents; 100-oz bars sell at forty-five cents over spot, and 1-oz silver rounds at sixty-five cents over. Meanwhile, sellers of circ 90% coins receive spot or a little less. However, sellers of 100-oz bars and 1-oz rounds receive more than spot. And, there simply are not many sellers at these levels, which is the primary reason for the current premiums.

Although business is steady in the physicals market, most investors are still mesmerized by the stock market. And, here’s why inventories are another Achilles’ Heel. When investors turn net buyers of silver, they will no longer be feeding the industrial deficit. In fact, when investors become net buyers, they will add to the total deficit. All this begs the question: What could cause investors to become net buyers of silver? Many things, but the most likely is a severe stock market decline. A few months ago, when stocks were falling precipitously, investors were heavy buyers of gold and silver.

With the April rally, investors shied away. A strong move to the downside would send more buyers to the metals. A weak dollar could also send buyers to the metals. Richard Russell, editor of Dow Theory Letters, says the chart of the dollar is forming a potential “head and shoulders,” a pattern that has preceded bear markets. With the U.S. running a trade deficit of $1 billion a day, in time the dollar will come down.

Frankly, many analysts are amazed the dollar has not collapsed because of the trade deficit. When the dollar does fall, prices on foreign goods will rise, and when the billions of dollars held abroad start coming home, they will push domestic prices higher. The current balance of trade deficit will play an important part in bringing down the dollar. The deficit is running at more than $1 billion a day, and in 2000 it hit a record $449.5 billion, up $104 billion from 1999. China is now the largest exporter to the U.S.

A growing deficit with NAFTA countries (Canada and Mexico, and soon to be the rest of South America if President Bush gets his way.) helped bloat the deficit. The trade deficit is nearly 4% of Gross Domestic Product, proportions that generally are associated with Third World countries. No nation can run such a huge deficit without its currency weakening. In time, perhaps soon if Russell is reading his charts correctly, the dollar will head down, and more money will seek refuge in gold and silver.

The Ghost of Digital Photography

Finally, the assertions that digital photography will replace conventional silver halide photography needs to be put to rest. CMi has been in business since 1973, and during that time we have had to contend with rumors, even near proclamations, that the photographic industry was about to find a substitute for silver. The claims have haunted the industry. In fact, the above mentioned 1973 Merrill Lynch report carried this caveat: “Possible obstacles to silver attaining its price objectives include curtailed usage in photographic applications, if and when adequate economic substitutes are developed.”

Twenty-eight years later no substitutes have been developed. Meanwhile, silver used for photography rose from 52 million ounces in 1973 to 283.2 million ounces last year. It is unlikely that any substitute for silver in the photographic industry will be found, much less one that is cheaper. Then came digital cameras, which were supposed to render conventional cameras to the junk pile. Nothing close to that has happened. Although the first digital cameras were introduced in 1981, they were of inferior quality. Nevertheless, there was speculation that digital cameras would one day replace conventional cameras.

Consequently, in 1995, for defensive purposes, Kodak released its first digital camera for mass marketing. If digital cameras were going to replace silver halide cameras, Kodak was going a leader. However, a couple of years ago, Kodak threw in the towel on digital cameras, took a big hit to earnings, and went back to conventional cameras and film. Since then, photographic use of silver climbed from 221.2 million ounces to 283.2 last year. CPM projects the industry will use 296 million ounces this year. Not only have digital cameras not replaced silver halide cameras, but digital cameras have probably increased the use of silver halide paper.

People using digital cameras often have images transferred to silver halide photos, increasing the use of silver. But now, photos taken with conventional cameras can be stored on “compact discs.” This means not only can silver halide photos be stored digitally, they can be transmitted digitally. This will reduce the number of people buying digital cameras for use with their computers. In recent years, defenders of silver halide photography said it would “co-exist” with digital photography.

Now, it appears that digital photography is increasing the use of silver. CMi says it is time to lay to rest the fears that a substitute will be found for silver or that digital photography will replace silver halide film. The future for silver is bright. Today’s low prices are gifts from the bullion house manipulators.

It’s Still a Bear Market

The last Monetary Digest discussed in length the reasons why stocks have entered a bear market. Shortly after that issue was mailed, stocks suffered horrible losses, and the article seemed right on target. However, in April stocks enjoyed big gains, and erased investor fears. In mid-March, when stocks suffered staggering losses, most investors probably vowed to get out as soon as stocks rallied, but with the rally came new confidence. CMi believes that investors who are sticking with stocks are making a major mistake.

Richard Russell, editor of Dow Theory Letters, continues to believe that April’s rally was a bear market rally and not the start of a new bull market. In fact, as stocks were collapsing, he warned that rallies could be sharp, almost violent, and “appear better than the real thing.” Russell points out that never has a bull market began as such lofty levels. The S&P 500 is selling at 25 times earnings, six times sales, 6.25 times book value, and offer a dividend yield of only 1.25%. These values are far above those posted at market tops in 1977, 1966, 1937, and 1929. Yet, bullish reports blanket the media, encouraging investors to cast aside fears. CMi believes that fear of stocks at these levels are justified. Russell further points out that historically the most money is lost in the stocks during May through October.

Because the “good six months” just finished were so bad for stocks, the ensuing six months could be devastating. But perhaps the best sign of how weak stocks are lies in its reaction to the Fed’s interest rate cuts. With May 15 cut of 0.5%, the Fed has slashed the discount rate five times this year, from 6% to 3.5%. Still the Dow Industrials fail to climb to new highs. The NASDAQ is down 60% from last year high. If producing a perpetual bull market were as easy as lowering interest rates and printing money, South America would have the greatest stock markets in the world. The Fed is only delaying the inevitable: a stock market decline of major proportions.

There will come a time, however, when stocks will again be good buys, but that time is probably years away. Typically, bear markets end (which means bull markets begin) when pessimism is at its greatest, when investors have avoided stocks completely, permitting prices to fall to price-earnings ratios as low as 8 to 10. Dividends yields generally rise to 6% on blue chip companies. Conversely, bull markets end (and bear markets begin) when optimism is rampant.

Does this sound familiar? Despite the NASDAQ’s demise, and the Dow Industrials’ collapse in March, stock investors are again optimistic. In the gold and silver markets, with prices near record low levels, pessimism prevails. The handwriting is on the wall. Read it correctly for future profits.

A Major Miscalculation

The mintage numbers are out for year 2000 Gold Eagles, and they indicate that U.S. Mint officials must have been reading Gary North’s newsletter. With sales for all 2000 being only 94,000 coins, how did the Mint managed to produce 433,319 coins? Several factors must have caused the Mint’s miscalculation. First, 1998 and 1999 sales were stellar for the Mint. Right at 1.5 million 1-oz Gold Eagles were sold each year.

Second, December 1999 sales were strong at 106,000, with the most-if not all-being 2000-dated coins. (Generally, most of December’s sales are of the next year’s coins.) Third, with the 2000 coins being the first of the 2000 series, the coins were expected to be quite popular. However, with January’s sales being only 3000 coins and February’s being zero (No Gold Eagles of any size were sold in February 2000!), why would any coins be minted? The 433,319 coins must have been minted in December 1999 before the Mint had any idea that 2000 was going to be a bust for sales.

Look at the table of sales for 2000, taken from the Mint’s Web site. By the end of October, only 24,500 1-oz Gold had been sold. By then, the mistaken perception had gotten around that 2000 would be a low mintage year for Gold Eagles. This was because the Mint posts sales on its Web sites, not mintage. Consequently, many visitors to the Mint Web site thought that the numbers posted were mintage figures. Several Monetary Digests explained that the numbers represented sales and not mintage. Yet, CMi never had the slightest idea that the Mint had mass produced Gold Eagles. We estimated that mintage for year 2000 1-oz Gold Eagles would be 150,000 to 190,000. If all of December 1999’s sales, 106,000, were year 2000 coins and since total sales for 2000 totaled 94,000, that is 200,000, slightly above CMi’s high estimate.

Yet, total mintage was an astronomical 433,319 coins. At the current rate of 1-oz Gold Eagles sales-47,000 through April-the Mint could be selling year 2000 coins into 2003 unless the excess 2000 coins are melted, which has yet to be done in the Gold Eagle program. In the past when the Mint has had excess coins, it required its distributors to take backdated coins in order to get current coins.

CMi believes that melting the excess coins would be better for the Gold Eagle program but admits it’s unlikely. However, if there is no melt, 2001 could be the short mintage year that many people thought 2000 would be.

The Next Crisis Looms

The December 2000 Monetary Digest noted the deteriorating condition of the banking industry. Since then, the banks’ problems have become more visible, and conditions have worsened. Because of fractional reserve banking and borrowing short-term and lending long, banks are inherently insolvent at all times.

If all of a bank’s depositors asked for their money at one time, the bank could not pay. In fact, it would not take all of a bank’s depositors to collapse it. Probably about 10% would do it, maybe less. But, when banks make huge loans, such as the $300 billion or so to the telecom industry, they risk more than their capital, they risk also their depositors’ monies.

The Economist has called the telecom industry’s venture into third generation (3G) mobile phones “the biggest business gamble in history.” And, the launching of the 3G phones seems to be sputtering. 3G phones will offer users such glitzy features as high speed Internet connections and the ability to play video clips, in addition to voice service. By comparison, G2 phones provide voice and text messages. G1 phones are voice only.

Nokia, the largest manufacturer, has bragged that 3Gs will replace PCs as the preferred way to surf the Internet. However, it appears that such optimism may be misplaced. DoCoMo, the wireless arm of Japan’s NTT, postponed the commercial introduction of its 3G mobile network from May to October, saying the system needed further tests.

The announcement shook the industry-and its lenders-because DoCoMo is the recognized leader in 3G technology, and its launch was supposed to validate the 3G concept. Meanwhile, British Telecom sold its prized Japanese and Spanish assets to reduce the massive debts incurred when buying 3G licenses. Germany’s Deutsche Telekom had a first-quarter net loss of $369 million, despite its wireless arm have earned $544 million. Deutsche Telekom remains shackled with $52.6 billion in debt.

The company would like to sell stock in its wireless arm, but IPOs in Germany are not any better received right now than in the U.S. Motorola, a major manufacturer of mobile phones and wireless equipment, is closing its biggest factory in Britain, which will result in the loss of more than 3,000 jobs. JDS Uniphase, a market leader in fiber optics for high-speed connections, lost $1.3 billion in its third quarter and plans to cut its workforce by 20%.

Ericsson of Sweden, the world’s third largest maker of handsets, entered a 50-50 joint venture with much smaller competitor Sony. (Last year, Ericsson sold 43 million phones and Sony only 7.5 million.) In the first quarter of this year, Ericsson posted a loss of $502 million and admitted that its mobile handset business was looking shaky.

The deal with Sony was an admission that Ericsson misread the market shift from purely functional phones to trendy devices. But, the April Chapter 11 filing by Winstar Communications, a New York-Virginia telecommunications operator, revealed dangerous cross-linking with other players involved in the high-stakes telecom gamble. Two days before the bankruptcy declaration, Winstar defaulted on $75 million in interest on its $6.3 billion debt.

The bankruptcy revealed that of the total debt, an estimated $1 billion was a supply credit line from Lucent Technologies, which itself is in such precarious financial condition that it has had to issue several denials of looming bankruptcy. Lucent was once AT&T’s manufacturing arm but was spun off. The company owns the famed Bell Labs, which developed many telecommunications innovations. AT&T itself is suffering financially. Once the premier blue chip stock, last December AT&T slashed its annual dividend from $.88 to $.15.

The cut was mandated by lower earnings and the need to pay down debt. Another “New Economy” company, Internet provider PSINet, announced staggering fourth quarter losses of $3.2 billion and a $5 billion loss for its fiscal year. It, too, is rumored to be near Chapter 11. The Winstar filing revealed the little-publicized practice of key telecom suppliers, such as Lucent and Cisco Systems, of giving huge credit lines to companies, such as Winstar, in attempts to prevent collapse of orders for telecom equipment in the meltdown of the “New Economy.”

While giving huge credit lines to their customers, the telecom suppliers themselves have huge debts to their banking creditors, which sets up a cross-chain-reaction situation with a systemic meltdown potential. According to some accounts, the Winstar bankruptcy was a key factor in the Fed’s “emergency” rate cut on April 18. If the 3G gamble doesn’t pay off-and at the moment it looks like that if it does it will be greatly delayed-the telecom industry will strewn with the bodies of high-stakes gamblers. Also wounded will be some big U.S. banks that loaned heavily to the telecoms.

However, while some of the lesser players may go bankrupt or be absorbed by other companies, the banks will be bailed out by the Fed. The bail-out, of course, will be in the form of newly created money. Already the Fed is priming the pump. Over the last three months, M1 has risen at a 5.5% annualized rate, M2 at 11.8%, and M3 at 12.8%. MZM (near cash money of zero interest rates) is rising at 26.5%. Higher prices across the board cannot be far behind.

European Central Banks Fall in Line

For sometime, it appeared that the new European Central Bank had drawn the line at automatic interest rate cuts in the face of recession. Germany, an economic force in Europe, holds great influence with the ECB, and Germans have grave concerns about rising prices.

Memories of the great inflationary binge following WWI are stamped indelibly in the minds of Germans. However, the new ECB and the Bank of England fell in line behind the U.S. and reduced interest rates, albeit only a quarter of a point. Yet, it was a move that proved the world is ready to inflate to fight recessionary trends.

While the Germans may have apprehensions about inflation, no such fears haunt Americans. Memories of the Great Depression dominate economic thought in the U.S. Fearing recession, this year the Fed has slashed rates five times. Additionally, the Fed has increased the “near cash” money supplies so far this year at an annualized rate of 26%. “Broad money” has increased at 13% annualized.

Attempting to stimulate growth in the Land of the Rising Sun, the Bank of Japan has forced interest rates to zero-with no luck, yet. Economists are calling for the Bank of Japan to increase the money supply there. Can rampant inflation be far behind? Truly, the stage has been set for worldwide inflation. Yet, gold and silver prices are stagnant. CMi believes current gold and silver prices are determined more by manipulators than by market forces. Most investors are still mesmerized by the stock market. However, even with five interest rates cuts this year, stocks failed to go to new highs.

Yes, there have been strong rallies but no new highs. In time, stagnant stock prices will frustrate investors, and they will look about for other places to put their money. Gold and silver are priced right and will benefit from disgruntled investors. If stocks take a swan dive, gold and silver prices will respond more quickly.


With silver trading below $5.00, it not only is the best precious metals investment but is one of the best investments anywhere. On any positive news at all-or negative stock market development-silver could tack on $1.50 in days.

Additionally, in bull markets, silver moves higher than gold on a percentage basis. Investors unable, or not wanting to, handle silver’s weight and bulk should buy gold. Gold is only about $35 above its 20-year low. Finally, and just as important as their upside potential, silver and gold have little downside risk.


CMi recommends circulated 90% coins because they pick up premiums in rising markets. Presently, bags of circulated 90% coins are carrying small premiums because very little silver is being sold at these low prices. One-hundred ounce bars are a convenient way to invest in silver, but rarely do their premiums increase. One-ounce rounds offer greater flexibility than 100-oz bars.


The Perth Mint’s 1-oz Gold Dragons are the best buy in gold coins. The Mint has produced the maximum 30,000 coins permitted by law, and less than 2,000 remain unsold. When those are gone, Gold Dragons will be available only in the secondary market. The uniqueness of the Year of the Dragon falling on the year 2000 should cause these coins to be sought after for years to come. Additionally, Gold Dragons are also popular jewelry items. Gold Dragons sell at small premiums over bullion coins and should be the first choice for gold bullion coin investors.