Working in the precious metals business these past 16 years has its benefits. One of those is never knowing who is going to be on the other end of the telephone call when my phone rings. In recent years, potential investors in gold have raised the option of buying foreign currencies, especially the Euro, instead of buying physical gold in order to hedge against a severe decline of the US Dollar.

The chart immediately below illustrates the performance of gold versus the euro, British pound, Japanese yen and Swiss franc in dollar terms from 2000 to the present. Gold significantly outperformed all major currencies during the period. For example, the Euro hit a low of $0.84 sometime in 2000 after it was introduced at par in 1998, but it has subsequently risen to $1.37 at its peak two weeks ago. From low to high, that is only a gain of 63%. Now let's compare that performance to that of gold. Gold hit its low in April 2001 at $252/oz. and has subsequently risen to $672/oz. as of last Friday, May 11, 2007. I am not counting last year's peak at $729/oz. which makes the numbers look even better. From low to high, that is a gain of 166%. The gain is 189% if you measure from $252/oz. to $729/oz. Now how can anyone seriously argue that foreign currencies are a better store of value than gold? People delude themselves into thinking this nonsense until they look at the numbers.

Now let's consider what is happening in 2007 to these much-praised foreign currencies. One of my clients supplied me with the following source for the M3 money supply figures. In some cases, the only available figures were for M2 or M4. My client got them from Richard Daughty who frequently writes for "Safehaven" and "The Daily Reckoning". Apparently, Mr. Daughty got these figures from John Embry of Sprott Asset Management. These M3 numbers will cause you to do a double-take in disbelief.

The US M3 figure is missing because the US government stopped reporting it in March 2006. Some sources, who have pieced together the information from various governmental sources, state it is running around 15%. Rumor has it that Canada stopped reporting its M3 number officially about the same time. As I have stated repeatedly on the telephone to my clients, ALL governments are involved in currency debasement. It is the nature of governments (conservative and liberal, democratic and communist/totalitarian) to print paper money and to engage in make-work projects, transferring wealth from one part of society to another, etc. The one thing they cannot do is print gold or cornflakes or soybeans or any other commodity for that matter. That is why it is so vitally important to understand what is going on worldwide at the macroeconomic level.

As most students of the economic theory of monetarism know, stoking the money supply eventually leads to rising consumer prices. Milton Friedman made this theory his cornerstone which has come to be known as the University of Chicago School of Economics. However, even this relationship has broken down lately, especially in the US and UK where those governments employ a very narrow index of what constitutes the Consumer Price Index. Whether intentional or not, the governments of the US and UK tend to understate real-world consumer price inflation to the detriment of those citizens. Lower CPI numbers help the government sell bonds at lower interest rates, thus keeping borrowing costs under control. Lower CPI numbers also help corporations keep wage gains in check (during contract negotiations) to the detriment of their employees. A lower CPI number robs senior citizens of their cost-of-living adjustment (COLA) to their monthly social security checks. A smaller COLA means the government pays out less in retirement benefits, which helps keep the government deficit from looking really ominous.

This discussion of the inability of government-constructed consumer price indices to accurately reflect real-world inflation was captured in an article in the Financial Times, dated 14 May 2007. In the article by Wolfgang Munchau, he discusses what happened to consumer prices (and to his own personal inflation rate) when the Euro banknotes and coins were introduced in 2002. As he says, "prices charged by many hotels, restaurants and dry cleaners effectively doubled." He estimated that his own personal inflation rate was about 10% while "the official inflation index did not register any significant movements." He attributes this disparity to the fact that the official inflation index no longer reflected the real cost of living. "The index basket is full of manufactured goods largely produced in Asia, while we spend most of our money on services, such as childcare, education, healthcare, transportation, travel and gastronomy".

Does this sound familiar to the US consumer? It should because the Bureau of Labor statistics strip out "volatile" items, such as food and energy, when reporting the "core" inflation rate. Actually, there are two inflation numbers reported: the regular inflation rate and the "core" inflation rate. When inflation is discussed in the media, one cannot help but notice that the core rate is emphasized while the regular rate is minimized. With the real increased cost of living obscured, the typical middle class person cannot figure out why his paycheck can no longer cover all his expenses.

In my opinion, a truer (and thus more honest) approach would be to include all basic living expenses but on a weighted basis, apportioning a percentage to each category rather than excluding them altogether. Seasonal factors, which affect availability and thus costs of food and energy, could be easily adjusted to arrive at a truer, real-world inflation rate. Quite frankly, if you don't need food and energy to live, you might as well go live in the cemetery. All joking aside, we need real-world inflation indices that reflect the basic cost of living. Referring once again to the article by Wolfgang Munchau, he says "[t]he Federal Reserve follows a reasonably well-behaved core inflation index, yet this index has become totally irrelevant for middle-class families who spend most of their income on items such as education and healthcare, where cost inflation has exploded. While the official indicators are extremely convenient for policymakers, nobody in their right mind would rely on a measure that persistently misjudges what 21st century families spend their money on."

So what is a person to do?

I submit that the price of gold is a truer gauge of inflation than any government index, and thus a truer hedge. A large section of the world's population apparently agrees since gold has been rising internationally in terms of all major foreign currencies. (The accompanying charts of gold in euros and British pound sterling which begin in 2002 are just two representations of the global trend.) It won't take long until the inflation-driven move out of paper investments and into gold accelerates.

Deciding how much of one's portfolio should be devoted to gold is up to each individual investor, but our general recommendation ranges from 10% to 30%. The final diversification should reflect one's level of concern.

In my opinion, the gold price will not stay down for very long. In fact, it would not surprise me to see a counter-seasonal rally in the metals from late spring through the summer months. After the $30 selloff of the last two weeks, my trusted and confidential sources (who live in Europe and have provided very accurate and timely advice in the past) told me once again to buy every dip in price and hold on for $1000/oz. because absolutely nothing has changed. Add to that advice the information about worldwide currency debasement and I rest my case for the purchase of physical gold and silver.

George R. Cooper has been a client representative at USAGOLD-Centennial Precious Metals for over 15 years. Mr. Cooper did his undergraduate work at the University of Chicago and received his juris doctorate from the University of Denver.