[gold and silver] a catch 22 situation

Gold or silver?

Fabian Tassano noted in April:

The gold price breaking above the 2006 high of $730 per ounce — an event I expect to happen this year — will mark the final death of the British public's lurve affair with Blairism. But let's not break out the champagne yet. I don't see any grounds for confidence that whatever succeeds it will be much better.

Chris Dillow added:

The upshot is that when gold prices are low, support for the incumbent government will be high.

Now Fabian reports:

Today, the spot gold price went to 739, a 27-year high.

Although Zachary Oxman, a senior trader at Wisdom Financial said prices will likely see a [temporary] correction into the $710-$720 level:

"which should be a great buying opportunity for a continued leg up as gold approaches $800 by year end."

When you think about it, it holds up. Gold has always been the resort of fear or at least uneasiness and this fear is what has been induced in the western economies by the Fed and ECB's latest little outing into instability.

So how about buying gold? Are you allowed?

On April 1, 1971, the United Kingdom lifted all restrictions on gold ownership and as of January 1, 1975, U.S. citizens were again free to own gold in any form, including bullion, and in any amount that they can afford, without restrictions or any federal ‘reporting’ of those holdings.

Blanchard Research gives six primary reasons why investors own gold:

1. As a hedge against inflation.

2. As a hedge against a declining dollar.

3. As a safe haven in times of geopolitical and financial market instability.

4. As a commodity, based on gold’s supply and demand fundamentals.

5. As a store of value.

6. As a portfolio diversifier.

Where are the major gold reserves just now? In whose hands? The World Gold Council says:

If we take national gold reserves, then most gold is owned by the USA followed by Germany and the IMF. If we include jewellery ownership, then India is the largest repository of gold in terms of total gold within the national boundaries. In terms of personal ownership, it is not known who owns the most, but is possibly a member of a ruling royal family in the East.

Blanchard Research noted, in 2005:

Gold languished in the 1980s and 1990s and was replaced by the dollar as the standard against which all things financial are measured. In the coming decade, as the dollar suffers one of the great meltdowns in monetary history, gold will reclaim its place at the center of the global financial system.

So how viable are government bonds? Alan Greenspan wrote, in 1966, of bonds not backed by gold, the current situation:

[G]overnment bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates.

The current and soon to be worse economic jitters were predicted two and a half years ago:

Paul Volcker, the former head of the Federal Reserve Board, said, in March, 2005, that unless America changes course, there is a “75 percent” chance of an economic crisis in the next five years. Steven Roach, Chief Economist at Morgan Stanley, predicts that America has no better than a 10 percent chance of avoiding “economic Armageddon.”

Alan Greenspan was in no doubt that a return to the gold standard was the only safe government policy:

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.

Britain abandoned the gold standard in 1931 and almost all western currency is fiat money. There seems little chance of a return in the immediate future.

So what's the message? That the rise in gold will spell the end of Blair/Brownism? Probably. That gold should be bought now? There's a strong case for getting in now - but it might be taken from you unless you have somewhere offshore to put it. Blanchard warns:

The problem is that the very circumstances that could make your gold so valuable could also result in its being taken from you.

Peter Cooper, of CNN noted, with regard to silver:

And unlike paper money the central bankers of the world can not print more silver. The supply of this commodity expands in line with mining operations and not printing presses. It is therefore less prone to devaluation than paper money.

Against this is whether you believe that precious metal mining firms operate independently of the financial cabals, i.e. that there is no overlap of personnel and friendships across the board. I'm not going to try to prove that they're all part of the same club - you can make your own mind up. But it seems logical to me that the power of the central banks would be immeasurably weakened unless they at least had some say in the regulation of further mining.

Fabian has mentioned how far gold is rising. Silver seems to be subject to much interest of late as well and does not seem so prone to confiscation or to other vicissitudes. It has an interesting feel to it. Here are some reasons as of 2003:

Supply side deficits now into the 14^th year.
Decreased investor selling.
Diminishing supply stockpiles.
Declining institutional and investor interests.
Large paper short positions.
Expanding uses for a scarce metal.
The return of silver as money.
The dollar and credit crises

Whenever silver rises, short positions are taken and derivatives are issued until the price is capped. Access to silver in any large quantities is difficult as well so it's basically in a managed state.

Now my own feeling is that if you were to progressively buy small amounts, letting it seep into your portfolio, whilst getting out of any non-real stocks and shares, you might have a decent haul of the stuff when the crash comes. Silver equities is a possibility.

The thing you'd be waiting for is a return to precious metals when paper crashes and naturally gold would hog the limelight. But now freed of managed constraints, sivler could find its own level like never before - at least, that's what you'd be hoping for.

Well worth looking at anyway.