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A Day of Reckoning

Monetary Digest, October 2001

Since August 15, 1971, when President Richard Nixon closed the gold window, the entire world has been on a fiat paper money system. No country’s paper money is redeemable in either gold or silver. History shows that whenever a country moves to a fiat paper currency, eventually politicians print that currency until it becomes worthless, resulting in hyperinflation, which destroys that nation’s economy and impoverishes people who are ignorant of the dangers of paper money.

The consequences are horrible enough when countries go on paper money systems, but when the whole world goes on paper money, we do not know how bad things will get. Truly, we have been in uncharted waters for the last thirty years, and over the last few years, one crisis after another has risen, suggesting that the world’s paper monetary system has been stretched to its limits.

With each crisis, the politicians print more paper money, laying the foundation for future crises. In the days following the terrorist attack on the World Trade Center and the Pentagon, the Federal Reserve “increased liquidity” by $200 billion. And, immediately before the reopening of the New York Stock Exchange the following Monday, the Fed lowered interest rates another half-point. On October 2, the Fed dropped rates still another half-point, the ninth rate cut this year. Most everyone is aware of the Fed’s rate cuts for they are highly publicized, but “liquidity” increases are less known because the media do not make a big deal of them. Money supply indicators measure the amount of money in the system.

The table shows the percentage money supply increases in three widely used measurements for the first eight months of 2001, 2000, and 1999. The increases so far this year have been huge compared with the increases for 2000 and 1999. Greenspan has the throttle wide open. Will these efforts forestall a severe economic downturn and make less painful a stock market decline, or will these efforts, which are nothing but the printing of more paper money, compound the problem? It is possible that the dark clouds casting gloom across the world’s economic landscape are signaling that a day of reckoning is upon us.

Not only have U.S. stocks suffered collapses comparable to those of 1929, but stock markets around the globe are sinking. Perhaps, plummeting stock prices are the first sign that the day of reckoning is imminent. On the other hand, falling stock prices may be wringing out the excesses that come with 18 years of rising stock prices. Or, maybe, we are entering a severe recession that will correct the economic excesses that accompany years of prosperity. Americans have lived through bear markets and recessions and can do so again.

However, maybe the marketplace is about to correct the mistakes that came with thirty years of cheap paper money. Paper money, which can be created literally at will, has enabled governments to finance every feel-good program imaginable. With no constraints on how much paper money can be printed, politicians do not have to make difficult decisions between competing programs. During the Vietnam War, for example, no choice had to be made between “Guns and Butter”; we were given both. If we are facing a day of reckoning that includes the repudiation of paper money, then great pain awaits us all.

People who hang onto paper money and/or investments redeemable in paper money (bonds, CDs, savings account, etc.) will see the “fruits of their labors” destroyed. People who opt for gold or silver (and a few other tangible assets) will be protected-somewhat. No one will escape unscathed. No investment exists that covers all bases. No matter how much gold and silver you own, if the goods and services you need are not available because of a devastated economy, you suffer. However, historically, gold and silver have weathered economic and financial chaos. If paper money is repudiated, then a great ideological battle awaits us also. The proponents of paper money-government bureaucrats, politicians, Federal Reserve lackeys, academicians and other hangers-on who benefit from government programs-will call for a continuation of paper money.

In the United States, the paper money proponents will argue whether to keep the dollar or install a new currency. Paper money proponents will, in all likelihood, dominate the debate, making most Americans believe that the decision is clear: either a continuation of the dollar or a new currency. Receiving less attention will be the advocates of a “hard currency,” either the direct use of gold and silver or a paper currency redeemable in gold and/or silver. While paper money has a dismal record, gold and silver have stellar track records. All enduring civilizations used gold and silver almost exclusively. Most famous is the Roman Empire, which lasted 1,300 years.

Other civilizations that relied on gold and silver include the Greeks, ancient Egypt, the Macedonian Empire, the Persian Empire, the Eastern Empires of China, and the Byzantine Empire. The quality of the Byzantine coinage was such that it was accepted without question from China to Brittany, from the Baltic Sea to Ethiopia. Bezants were used, not only by Byzantine travelers and merchants, but by those of other countries as well. Even medieval England’s Exchequer rolls were kept in bezants.1 In more recent times, the British Empire relied on its gold sovereign, a small coin (.2354 oz) which was minted at seven mints around the world. The Brits’ use of gold sovereigns resulted in one hundred years (1815-1915) of economic growth, without the booms and busts that have become commonplace since the advent of central banks and paper money.

In the United States, before establishment of the Federal Reserve, regions of the US suffered “panics” when local banks abused their issuances of paper money, but widespread economic problems were not a problem. Within fifteen years of the formation of the Fed, the US suffered the Great Depression. Ironically, one argument for the Fed was that it would do away with “panics.” (In a perverted way, the Fed was successful. It replaced regional panics with a worldwide depression.)

Unfortunately, most Americans do not know economic history. Worse, most Americans do not know what money is. Ask the average man what money is, and he will reach in his pocket and pull out some paper dollars. “I have money,” he will say. Or, perhaps, a woman will wave her check book, showing that she has money. Indeed, they do have money, because the merchant down the street will take the man’s paper dollars or the woman’s check. Nevertheless, paper dollars are a poor form of money, which ultimately hurt, or even destroy, the unknowing.

What is money?

To serve as money, a substance must be a medium of exchange, a measure of value, and a store of wealth. Money missing one feature, or failing to be sound in any of them, is a poor form of money. The more features missing, or the weaker the features, the worse the money. Historically, gold and silver have met the requirements; paper currencies have not.

A Medium of Exchange

As the first requisite-a medium of exchange-paper dollars function well. They are readily accepted not only in the United States, but in most places in the world. Since the collapse of the Soviet Union, paper dollars have been the defacto currency in Russia and most other former Soviet states.

Some South American countries, with horrible records of having abused their paper currencies, have moved toward making the dollar their currency. Today, the dollar is the world’s preeminent paper currency. However, it was not always that way. In the 1970s, the dollar was under great pressure and was falling against other major currencies. Nixon had closed the gold window, leaving foreign holders stuck with “IOU Nothings.” Additionally, the consequences of Lyndon Johnson’s “Guns and Butter” policies during the Vietnam War were taking their tolls.

The US had printed a lot of paper dollars. In Europe, at times, tourists could not pay taxi, hotel, or food bills with dollars. Europeans feared the dollar would drop further before they could convert to their local currencies. The dollar’s problems of the 1970s were solved when Ronald Reagan took office and Fed Chairman Paul Volcker raised interest rates, choking price inflation and making the dollar a more desirable currency (because of the higher interest rates and the likelihood that price inflation would be brought under control.)

Paper money advocates often point to Volcker’s policies as evidence that a “properly managed” paper money system can work. It must be remembered, though, that value the dollar held before the profligate 1970s was never regained-and will never be. In this instance, the dollar fails as a “store of value,” but we’re getting ahead of ourselves.

Inflation, Monetary and Price

Today, rising prices are generally referred to as inflation. However, until the last two decades or so, inflation was defined as “increases in the supply of money or credit, resulting in higher prices.” Higher prices were not inflation; they were the result of inflation. Word definitions change, however, and to effectively communicate, these changes must be taken into consideration.

Investors who choose to know what is really happening in the financial world need to recognize the difference between “price inflation” (rising prices) and “monetary inflation” (increases in the money supply.) Rising prices are signs that people are recognizing that monetary authorities are printing too many little pieces of paper. So, when the Europeans were refusing American dollars in 1970s, they knew that inflation (both price and monetary) was a problem.

A Measure of Value

In serving as “a measure of value,” money delineates relative values. People living in $300,000 houses are more wealthy (in material things) than those living in $50,000 houses. A $60,000 BMW is more valuable than a $15,000 Chevrolet. Obviously, many people would never agree that a $60,000 BMW is a better value than a $15,000 Chevy, but here the dollar is used to measure value. Here, though, is where the dollar fails as a measure of value.

If you tell someone you paid $35,000 for your house and he hasn’t seen your house, he has no idea what type of house you own, unless you tell him when you bought it. A $35,000 house purchased in 1960 is vastly difference than a $35,000 house bought last year. Because of price inflation, brought on by monetary inflation, the prices of houses keep rising when measured in dollars.

It is not that houses are becoming more valuable relative to other items, such as automobiles, it is that the measuring stick-the dollar-is shrinking. The dollar is a poor form of money when used as a measure of value.

A Store of Value

As a store of value, the dollar has performed miserably. In 1960, a man retiring with $100,000 in the bank thought himself set for life. However, if he lived too long, he soon found out that a shrinking dollar rendered his savings inadequate.

The dollar shrinks in purchasing power year after year for one reason: the Federal Reserve keeps increasing the supply. The value of money-even paper money-shrinks as the supply increases. With no constraints on how many dollars can be printed, in time the dollar could-and probably will-be worthless.

What is a Dollar?

Most people think a dollar is a little piece of paper that says One Dollar on it. In fact, One Dollar appears on the front and the back. Yet, those little pieces of paper are not dollars, but are Federal Reserve Notes. A note is an IOU.

If you borrow from a bank, you sign a note, which means you owe the bank. So, Federal Reserve Notes (FRNs) are really IOUs. The Federal Reserve owes the holder one dollar. But, if a dollar is a piece of paper that also is a FRN, what are you owed? This gets confusing because it was meant to be confusing. The government really does not want people knowing the difference between dollars, FRNs, and money.

To understand the situation, you need to know that a dollar is a weight of gold as defined by law. Today, a dollar is legally defined as 1/42.22 oz of gold. For most of this country’s existence, a dollar was 1/20 oz of gold. In 1933, Roosevelt called in gold, gave the people $20/oz, and immediately devalued the dollar to 1/35 oz of gold. It was a 75% devaluation of the dollar. Viewed another way, gold’s price was changed from $20/oz to $35/oz.

Some people have difficulty grasping why that move was called a devaluation when the price of gold went from $20/oz to $35/oz. That is because it was a devaluation of the dollar, which resulted in an upward revaluation of gold. Before Roosevelt’s call-in, a dollar was redeemable for 1/20 oz of gold; after the devaluation, a dollar was worth only 1/35 oz of gold.

As noted, it was a 75% devaluation, but it was worse than that. Before 1933, Americans could redeem dollars for 1/20 oz of gold. (Generally, a $20 bill was redeemed for a $20 Double Eagle.) However, after the devaluation, a dollar was worth 1/35 oz of gold, but Americans could no longer redeem dollars for gold. So, for Americans, it was a complete default by the government. Before the 1933 call-in, the dollar was effectively a warehouse receipt where the warehouse operator (the government) held the asset (the gold) for the receipt holder.

However, after Roosevelt’s infamous April 5, 1933 Executive Order, the receipt holder could no longer claim his asset at the warehouse. Imagine that you are a wheat farmer and that you have harvested your crop and delivered it for storage to a grain elevator.

The elevator operator gives you a receipt, but when you return to claim you grain, the operator refuses to give your grain to you. In essence, that is what the government did. If a private warehouse were to do that, the principals would be tried for fraud. When the government does it, it is deemed “necessary.”

How did we get in this mess?

People with large amounts of gold have always had the challenge of securing it, and throughout the world and the development of commerce, warehouses emerged where gold could be deposited. As with any warehouse, the depositors received warehouse receipts. Gold warehouses evolved into banks.

Commonly, in the early development of warehouse receipts, they carried the names of the depositors, and only the depositors could redeem the gold on presentation of the receipts. As time went by, receipt holders began to sign over the receipts to merchants, who would later redeem the gold backing up the receipts. Over time, instead of redeeming the receipts, merchants would pass the receipts to still someone else, and paper money began being used.

Gold being bulky and somewhat heavy, the paper receipts were more convenient and gained popularity where the warehouse operators were trusted. Throughout history, this scenario has been played out many times around the world. But, the important thing to remember is that, in all instances, it was the gold that had the value. The receipts were only paper, having no intrinsic value themselves.

Governments have long jealously guarded the right to be the issuer of money, be it paper or coin. This envious position has allowed governments to profit from the mintage of coins and to cheat the people with paper money. The esteemed Double Eagles are an excellent example of how our government profited from the mintage of gold coins.

When Double Eagles were minted, a dollar was 1/20 oz of gold; consequently, twenty paper dollars were worth one ounce of gold. However, a Double Eagle contains 0.9675 oz of gold, allowing the government a profit of 0.0325 oz on the mintage of a Double Eagle. This policy is known as seigniorage and is generally accepted as a proper function of government.

As the early empires approached their ends and were unable to directly tax their populaces, those empires typically debased their coinage. The Romans clipped edges from its coins as they passed through the treasury. (Anyone else found doing the same was subject to the death penalty.) The clippings were coined, thereby increasing the money supply. Other empires typically debased their coinage by reducing the gold content. As history shows, however, the government’s control of paper money is where the real dangers lie.

The history of paper money is one of abuse

First, paper money is introduced as a convenience but is still redeemable in gold or silver. Sometimes later, as the people stop being diligent about the government’s control of their money, the government issues more paper money than there is gold or silver to back it up.

When the people realize what is happening, they present their paper for specie, money in coin form. This is, in effect, a “run on the bank.” To thwart the people, the government suspends conversion. Roosevelt halted domestic redemption in 1933; Nixon stopped foreign redemptions in 1971. Now, we are stuck with a fiat money, which is “legal tender for all debts, public and private.” (See the paper money in your pocket.) It is money, by order of government. Following the terrorist attacks on the WTC Twin Towers and the Pentagon, the Fed “increased liquidity” by $200 billion.

To do that, all the Fed had to do was buy debt instruments in the open market. The money to pay for those bonds was created by punching in numbers on a computer keyboard. No taxes were increased. No money was borrowed. Virtually no effort was expended. Yet, the money supply grew $200 billion. That’s all there was to it.

Of course, as any economist or “sophisticated Fed watcher” will tell you, it was the right thing to do. The Fed had to avert panic. Besides, the government needs $40 billion to fight terrorism. However, those dollars now compete with the dollars you have in your checking account. Those new dollars also debase the dollars Americans have tied up in CDs.

Someday, Americans are going to realize that those new dollars the Fed creates to “avert crises” have equal purchasing power with those for which they had to work. Most Americans did not get their CDs participating in the stock market boom of the 1990s. They worked for their dollars. They watched their money, perhaps drove their cars a few years longer than they would have liked, wore their soles of their shoes a little thinner than they wanted, did not eat out as often as they would have liked, stayed home for vacations. Their frugality enabled them to put aside “a little for a rainy day” and for retirement.

Soon, those Americans will realize that their savings are tied up in investments redeemable only in paper dollars, which the Federal Reserve can create at will. Each dollar of the $200 billion in “liquidity” that the Fed “pumped into the financial system” after September 11 has the same purchasing power, the same claim to goods and services, as do the individual dollars for which average Americans worked and saved. Someday, no one knows when, Americans are going to go down to their banks, tell the tellers, “Give me my money, those little pieces of paper. I’m going to buy something of value, something that the Fed cannot duplicate out of thin air.”

The rush will be to buy anything tangible-real estate, classic cars, firearms, antiques. The really misguided will buy stocks, thinking they offer protection against inflation. Informed investors, however, will buy gold and silver. When the exodus for the dollar becomes widespread, we will suffer a devastating “confidence crisis,” and the dollar will plunge on the world currency markets because foreigners will dump dollars as well. In fact, foreigners will probably lead the exit of the dollar.

Then, Americans owning gold will not say, “Wow! Watch gold climb; see silver soar. I’m getting rich.” They will say, “I’m just glad I own some gold.” That will be the day of reckoning for the paper dollar, the Federal Reserve Note, the IOU Nothing. That day of reckoning is unavoidable because the Untied States and the entire world have been on a paper money system for thirty years. The dollar and all the other paper currencies have been abused by politicians for three decades, inflated to levels never dreamed of in 1971.

The dangers of paper money and the value of gold were illustrated during the 1998 Asian Crisis. Across Asia, paper currencies sank as people lost faith in them. It was a classic “confidence crisis.” In local currencies, gold skyrocketed in price. In South Korea, however, the importance of gold rose to the forefront as government agents went door-to-door asking the people to donate gold so that the government would have a “hard currency.” The late Franz Pick once said, “Government is the only agency that can take a useful commodity like paper, slap some ink on it, and make it worthless.”

We are nearly there. It is time to stop thinking of gold and silver as vehicles from which to earn profits recorded in paper dollars, but to view them as money. It is time to quit thinking, “I have $40,000 invested in precious metals,” but to think, “Wow, I’m lucky, I have 100 ounces of gold and 3,000 ounces of silver to ride out the storm ahead.” It is time to realize that gold and silver are the ultimate forms of money and that paper, albeit useful in many instances, eventually become worthless when used for money.

Silver: the Great Conductor

Of the metals, silver is the best conductor of heat and electricity; consequently, it is used widely throughout industry. Including photographic demand, some 845 million ounces were used in 2000. Since 1990, demand has exceeded production and secondary recovery by 1.39 billion ounces.

Now, a recent development appears set to increase demand by 50 million ounces annually within ten years. The ability to generate and use electricity sets apart First World countries from Third World countries. From generators to transformers, transmission and distribution to motors, wire forms the basic building block of the world’s electric power system. The discovery of revolutionary high temperature superconducting (HTS) compounds in 1986 led to the development of a radically new type of wire for the power industry-the most fundamental advancement in wire technology in more than a century. HTS wire, a ceramic compound made of certain metal oxides that exhibit zero electrical resistance at the temperature of liquid nitrogen (-195oC, -320oF) have now been perfected, and commercial production has begun.

Traditional superconductors function only at the temperature of liquid helium (-276oC, -450oF), an expensive gas requiring cumbersome equipment. The higher temperature of liquid nitrogen easily can be maintained by efficient mechanical refrigerators; hence the name, high-temperature superconductors (HTS). HTS wire carries 140 times the electrical current of copper wire and relies on silver for its flexibility, conductivity, and strength.

Silver is the crucial element in HTS because the ceramic core of the wire is brittle. But, when encased in silver, the wire can be drawn out to one-sixteenth the diameter of human hair and can be bundled and wound for use in electric motors. Further, the silver sheathing provides a protective and benign barriers for the ceramic. Silver is the only material that works in this unique application.

Studies have shown that the greatest amount of electric current flows in the superconducting oxides where they touch the silver. Although HTS wire has the potential for multiple applications, two applications appear set to have the greatest impact on electricity, both its delivery and consumption. First, the Department of Energy is spearheading (funding) a national program to increase the efficiency, reliability, and capacity of America’s electric power delivery system.

The goal is to reduce the nation’s reliance on imported oil by reducing transmission losses in conventional distribution systems, which can be as high as 8%. Eventually, though, silver-encapsulated HTS conductors will be incorporated into the complete range of electrical devices from the largest electric motors to toys. To accelerate the use of HTS products into the commercial sector, the DoE awarded two contracts to prove the practical utility of HTS high-power transmission cables and HTS power transformers.

The cable project entails the construction of a 120-meter HTS cable for replacement of existing copper cable at Detroit Edison’s Frisbee Station in downtown Detroit. Three HTS cables will replace nine copper cables and will carry the same 100 megawatts of power. This will free up six ducts, which can be used for other assets, such as more HTS cables or telecommunications cables. The cost savings of not having to build more ducts are enormous. Another project involves a 10-megavolt/amps HTS transformer for installation in a U.S. electric utility grid. An HTS transformer is oil-free and uses environmentally friendly liquid nitrogen to keep it at its operating temperature. At that temperature, HTS transformers lose no power due to resistance heating, and they weigh 30% to 50% less than conventional transformers, permitting increased capacity in smaller spaces.

As electrical demands grow, HTS transformers will help deliver that electricity with greater efficiency. The government’s interest in HTS wire does not end with the DoE. The Navy awarded a contract for the preliminary design and component fabrication for a 33,500 horsepower ship propulsion electrical motor, which will use HTS wire.

On announcing the contract, Secretary of the Navy Richard Danzig said, “Electric drive will reduce cost, noise, and maintenance demands of how our ships are driven. More importantly, electric drive, like other propulsion changes, will open immense opportunities for reducing vulnerability and allocating a great deal more power to war-fighting applications.” The project will begin with sea trials of a prototype ultra-compact 5,000-horsepower motor using HTS wire.

The electric propulsion market should grow rapidly because electric drives have fewer moving parts, and maintenance is reduced, as is the crew required for power-plant support. Most importantly, higher propelling efficiency means lower fuel costs. An HTS motor delivering the same power as a conventional motor can do so at 1/5 the size and 1/3 the weight. These two features provide tremendous benefits to ships, where space and weight are always major considerations.

Although silver-sheathed HTS wire was designed and patented by American Superconductor Corporation of Westborough, Massachusetts, at least three other countries, Denmark, Germany, and China, can produce HTS wires more than 100 meters long, which is necessary for most commercial uses. China was the last to join this elite group; it is not known whether the Chinese developed the technology or pirated it from one of the other countries.

The development of HTS wire is revolutionary, the greatest advancement in wire production in 100 years. Its applications will stretch from motors capable of propelling seagoing ships to tiny toys. Because of HTS, the generation, the delivery, and the storage of electricity will increase significantly, improving our quality of living by reducing fossil fuel needs. And, there is a side point of fascinating implications. HTS wire replaces copper wire. Approximately 24% of newly mined silver comes from the production of copper.

As HTS wire usage becomes widespread, it will reduce the demand for copper. As the demand for copper slackens, so should production. Consequently, use of HTS wire, which is expected to require 50 million ounces annually within a decade, could result in less silver being mined.

The Asia Nobody is Watching

From Japan throughout South East Asia to Singapore, the factories have been going silent. The most fantastic industrial slowdown seen in this century is now taking place. Taking Singapore as an illustrative case, industrial output has now fallen by 24% this year.

There are matching results right across the Asian economic landscape. With tourism at a near standstill and with exports to the U.S.A. imploding in a way never seen before, it cannot be long before the BIG “Asian crisis” explodes again. In North America, it appears that nobody is paying any attention to any of this. During the last crisis in Asia, the IMF and the World Bank stormed in and handed out money as if there would be no tomorrow. This saved the day and avoided the REAL problem.

If the IMF and the World Bank had NOT acted in this manner, then all the Asian nations would, of dire necessity, have been forced to sell large parts of their massive holdings of foreign exchange reserves. What do most of these reserves consist of? U.S. financial paper assets, mainly in the form of U.S. Treasury bonds, bills and notes.

While nobody is looking in Washington, Japan is already selling Treasuries while from South Korea to the south, a massive crisis is near. What was avoided in the late 1990s could be about to begin – a massive Asian selling of U.S. Treasury debt paper. (From the Late September issue of The Privateer)

Richard Russell on Gold

I’m showing a weekly chart of gold going back to September 1999. It appears that gold has formed a large and impressive base, actually in the form of a “head-and-shoulders” bottom. Whether gold is poised to break out on the upside remains to be seen, but one thing is certain-the base is there. To my mind, gold is intrinsically cheap.

The Dow at around 8800 buys over thirty ounces of gold. Back in 1980, at the peak of the gold market, the Dow would buy one ounce of gold. Let me put it this way-the potential is there. The Fed has now flooded the market with liquidity. Contrary opinion favors gold, and by that I mean that almost everybody has written gold off as a relic, a has-been. I think the psychological upside barrier to gold is $300. Above $300, and we could see some action. (From the October 10 issue of Dow Theory Letters)

Gold Dragons Sell Out

For the last 18 months or so, CMi recommended the 1-oz Gold Dragons as coins with numismatic potential. The Dragon is the fifth coin in the Perth Mint’s 12-coin Lunar Series, which, on completion, will contain one coin for each year of the Lunar Calendar cycle.

Although directed at the collector market, the Lunar Coins are priced only a few dollars above Gold Eagles, the most popular bullion coins in the U.S. All 30,000 of the 1-oz Gold Dragons have been sold, and the coins are no longer available from the Perth Mint, but a secondary market is developing. CMi believes that these coins will achieve premiums as more collectors learn of the Lunar Series and want to add the Dragons to their collections. The dragon is the most popular creature of the Lunar Calendar.

The Lunar Series was launched in 1996 with the Rat, which represents the first year of the Lunar Calendar. The Rat was followed by the Ox, the Tiger, the Rabbit, and the Dragon, which fell on the year 2000, making it the first time in a couple hundred years that the dragon fell on a century change and the first time in several thousand years that it fell on a millennium change.

This cycle of the Lunar Calendar will end in 2007 with the Year of the Pig. Production of the 1-oz Lunar coins is limited to 30,000. The brochure for the Year 2002 Horse indicates a cap of 50,000 coins, but that is not the case. When the brochure was printed, it was the intent of the Perth Mint to raise the production limit to 50,000 coins, but the Perth Mint rescinded the increase. Additionally, the Perth Mint has stated, in a press release, that the 1-oz coins for all future Lunar coins will be limited to 30,000. CMi believes this policy will make the Lunar Series even more attractive to collectors.

CMi believes that investors can profit two ways by going with the Lunar Series 1-oz coins, by an increase in the price of gold and by an increase in the premiums. Going in, investors pay only a few dollars more than they would for Gold Eagles. However, Gold Eagles have little, if any, potential for premium increases. They are strictly bullion coins.

The Lunar Coins, on the other hand, are sold mostly to collectors who are used to paying premiums for collector coins. CMi believes there are several reasons to expect the Lunar Series coins to achieve premiums. In 2008, China will host the Summer Olympics. As those Olympics approach, we can expect the media to pound us with stories, articles, interviews, etc. about China, its land, people, and culture.

More people will learn about the Lunar Calendar, and we can expect Lunar Calendar promotions of everything from trinkets to gold coins. And, the Horse, which is the 2002 coin, is the second most popular creature of the Lunar Calendar among Asians. Further, the horse is one of the favorite animals in the Western World. This is especially true in the United States, where we have been brought up on Western movies and where tens of thousands of Americans keep horses for enjoyment, from showing them to horseback riding.

Additionally, horse racing is one of the most popular sports in America, with the Kentucky Derby being its pinnacle. With the Dragons sold out, CMi recommends that investors go with the Year 2002 Horse. We believe the Gold Horse will be next 1-oz Lunar Series coin to reach its production limit. Year 2001 Gold Snakes are still available, but the snake is not an endearing creature to most people.

However, investors putting sets of the Lunar Series coins will want coins from each year, and now the Snakes are priced just above the popular bullion coins. CMi recommends that investors seriously consider the Lunar Coins when investing in gold. In the past, collectible coins have risen to very high prices during precious metals bull markets. Actually, sometimes those markets have overheated, and collectibles have achieved unrealistic prices. We are confident that the metals have turned the corner and are headed upward.

If we are right, the Lunar Series coins could do very well. Please note that this is not an endorsement of any and all coins promoted as “collectibles.” CMi is aware of the constant efforts of telemarketers to promote “numismatic” coins. Generally, those coins are old U.S. gold coins, but sometimes unheard of old European coins are touted. Our Web site has two pages warning of the dangers involved in buying “collector coins.” Investors not familiar with that information should go to and link to  Myths, Misunderstandings, and Outright Lies. CMi recommends buying bullion coins that have numismatic potential. Still, buy those coins only at or near bullion coin prices.

When (if) those coins do pick up premiums, they should then be traded for other bullion coins, preferably other bullion coins with numismatic potential. This way, you can increase the number of ounces of gold you own without more cash outlays. Using this principle, in the mid- to late-1990s, when platinum traded at about the same price as gold, CMi urged clients to buy platinum instead of gold. We knew that platinum had the potential to pick up a big premium over gold; we made this recommendation in many issues of Monetary Digest.

Over the past two years, clients who bought platinum in the 1990s have been able to trade, at times, their platinum for twice as many ounces in gold. Also in the 1990s, we told silver investors to make bags of 90% silver coins their first choice when buying silver because they had the potential to pick up premiums in a precious metals bull market. We’ve seen it happen several times since being in the gold/silver business.

When the frenetic Y2K buying hit in mid-1999, bags of 90% could have been traded for 50% more silver in bullion form, 100-oz bars or 1-oz silver rounds. In the late 1980s, a client bought 192 VF/XF $20 Libs when they traded at spot. With each coin having 0.9675 oz of gold, she effectively bought 186 ounces. In 1998, the customer traded the 192 $20 Libs for 236 1-oz Gold Eagles, for an increase of 50 ounces. CMi believes the same potential lies in the Lunar Series coins.

CMi knows that many telemarketers are promoting old U.S. gold coins because they are trading well off their pre-Y2K highs. We believe those premiums could fall further. In fact, we believe that VF/XF $20 Libs could again sell at spot and that MS-62 $20 Libs and St. Gaudens could sell at $20 to $30 over spot gold in a strong gold market.

On a rally to $320 to $350, the European banks, which have millions of old U.S. gold coins in all conditions, could let loose huge quantities of coins, which would drive the premiums on old U.S. gold coins down closer to spot. For that reason, we do not recommend old U.S. gold coins, but we think that the Lunar Series coins can achieve premiums over the next few years.


Basically, our recommendations remain unchanged. We believe silver holds greater upside potential than gold. We believe that platinum should be avoided at this time. In fact, investors still holding platinum should take steps to trade it for gold.

The August 2001 issue outlined several reasons for avoiding platinum now. We further believe the federal government is “sitting on the price of gold.” It is probably being done by having the Bank of England sell whatever gold is necessary to keep the price below $300. Anyone watching televison cannot help but notice the prominent position that England’s Prime Minister, Tony Blair, is playing in the “coalition” efforts against the terrorists and the Taliban.

The U.S. has had a close relationship with Great Britain since WWI. That includes coordinating efforts to support each other’s currencies and several failed efforts to keep down the price of gold. The present effort to suppress the price of gold, like the others, will fail. In the aftermath of the terrorist attacks, the government did not want to see the stock market drop 2,000 points and gold soar $200. That would have shown investor panic.

To avert any such panic, Greenspan lowered interest rates and flooded “the system with liquidity,” i.e. freshly created money. With the gold market being so thin, however, keeping a lid on the price has been relatively easy. All the government had to do was have the Bank of England sell about 50 million ounces. However, this effort to control the price of gold, like all the others, will fail.


We recommend pre-1965 circulated 90% coins for investors and for those wanting “survival” coins. Circulated 90% coins have the potential to pick up premiums and they could again be used as money if necessary.

One-hundred 999 fine silver bars are a convenient way to own silver. One-ounces silver rounds offer both purity and flexibility.


As noted, we recommend the Perth Mint’s Lunar Series coins. We suggest the Gold Horse for investors wanting a pure gold investment with added potential. Others will want to buy all the coins in the Series.

Ten of each would make a great gold portfolio. Investors who want only gold and could not care less about numismatic potential should opt for 1-oz Gold Eagles or Krugerrands, which are selling at big discounts to Gold Eagles.