Financial Sense University ~ To Buy or Not to Buy Precious Metals 09/09/2003

Imagine a once in a lifetime opportunity so incredible that the average investor cannot believe that it is legitimate—a chance to accumulate an asset at an 80% discount, the event of the century. Amazingly, there currently exists such an investment available to literally millions of Americans and billions of people around the world. While standing on the shoulders of financial giants, this paper will attempt to convince investors that every portfolio must contain a sound allocation of precious metals.

For many technical analysts, it’s commonplace to ignore the findings of fundamental analysis. Technicians generally prefer the unique perspective and aesthetic qualities that charting offers enthusiasts. However, there are times when technical and fundamental analysis meet in a confluence of staggering importance. The author of this article proposes that such a melding of technical and fundamental analysis is currently emerging within the precious metals markets.

A well known financial analyst named Jim Puplava, the author of SILVER and host of Financial Sense Newshour, aptly refers to the coming financial crisis facing this nation as "The Perfect Financial Storm." The storm that Mr. Puplava perceives may be described as a tidal wave or tsunami of epic proportions. A scholar of Austrian economics, the school of thought whose alumni correctly predicted the Great Crash of 1929, Mr. Puplava concludes that the storm will lead to a deteriorating American Dollar, triggering an equities market crisis and accelerating inflation.(1)

Americans are generally unaware of the ravages of hyper-inflation. Many people can recall the long lines at gas stations (and much higher precious metals prices) during the late 1970s and early 1980s. Although those price increases were significant, they were muted when compared with those of the American Civil War. Indeed, few Americans are aware that during that struggle within this nation, the Southern States experienced a devastating hyperinflation rate of 5,000%.

Consequently, many nations outside the U.S. have faced far worse battles against rapidly advancing prices. The 20th century has recorded numerous examples of runaway inflation. If the 5,000% Civil War inflation rate was shocking, prepare to be further jolted by the forthcoming hyperinflation statistics:

1.	Germany	1920-1923	3.25 million percent
2.	Russia	1921-1924	213 percent
3.	Austria	1921-1922	134 percent
4.	Poland	1922-1924	275 percent
5.	Hungary	1922-1924	98 percent World War II
6.	Greece	1943-1944	8.5 billion percent
7.	Hungary	1945-1946	4.19 quintillion percent

At a peak of 4.19 quintillion percent, Hungary's 1946 hyper-inflation rate is startling when compared to any of the statistics in the above list (2) Just how large a number is 4.19 quintillion percent? To shed some light on that figure, image a 10 with 18 zeros: 10,000,000,000,000,000,000 (in Europe, 10 to the 30th). Now further imagine such a large number representing the purchasing power of one small loaf of bread. For a truly enlightening, yet chilling perspective into the damaging affects of inflation, please read the free text: Fiat Money Inflation and France.(3) The book can be viewed at the Internet site listed in the footnotes of this article.

Hopefully the preceding list of inflation figures will not create fear, but help to enlighten readers. In order to protect much-deserved nest eggs, each individual must be given the appropriate knowledge to prepare for what lays ahead. However, many investors will ignore the dire warning signals beckoning on the horizon. How can one know the mind of individual investors in advance? History has demonstrated throughout the centuries, that great sweeping shifts in financial tides always catch the masses off guard.

Charles Mackay wrote of the effects of crowd behavior during The South Sea Bubble and the resulting panic in: Extraordinary Popular Delusions And The Madness Of Crowds. [There is a free link to the text in the footnotes.] Mackay made the resounding observation that: "Men, ...go mad in herds, while they only recover their senses slowly, and one by one."(4) This point is so important that it bears paraphrasing: During times of financial confusion and market upheaval, rarely do the majority of investors recognize the appropriate course of action until it is much too late and even then, they do so as individuals. Arguably, one of the greatest minds of antiquity, Sir Isaac Newton, lost much of his savings as the South Sea Bubble deflated. He was not alone, from Great Britain's South Sea Bubble to our nation's year 2000 stock market deflation, the crowd of investors have suffered substantial losses. Indeed, history reveals that only the wisest investors had the timely foresight to exchange their currency for precious metals; while the crowd stayed fully invested in over-inflated paper assets.

Investors and speculators involved in past market manias did not have the luxury of technical charting. Interestingly, precious metals related technical charts are mirroring the opportunity implied by current fundamental analysis. In order to appreciate the opportunity within the precious metals market, the chart below displays 600 years of silver prices. Silver peaked at an inflation-adjusted price of $806 per ounce in 1477, 15 years before the gold market's high in 1492. The chart below shows that during the 500+ year decline, more than 99% of silver's value evaporated (5) Arguably, the last chart indicates that the decline of silver prices represents the most prolonged bear market in history and an unparalleled contrarian investment opportunity. The blue line in the chart below portrays the silver prices:

The next chart contains a pattern easily recognized by technical analysts: The Inverted Head and Shoulders Pattern (IH&S.) (6) Such patterns tend to mark the bottom of protracted bear markets. Notice that in the Gold and Silver Stocks Index $XAU chart, price has crossed above the critically important neckline indicating a long-term uptrend has begun:

Most technical analysts would view the price break-out as a significant indication of a powerful new bull market. It should be noted that Gold & Silver stocks tend to lead their underlying commodities, only furthering the case for accumulating precious metals.

The last graph reveals a startling comparison between the S&P 500 Index and the Gold and Silver Stocks Index. The S&P is exhibiting a clear H&S pattern. Head and Shoulders patterns are equally as bearish as their IH&S cousins are bullish and often portend a change in trend from higher prices to much lower:

Notice that the S&P prices at the top of the chart have broken below the neckline, a very bearish sign for equities over the long-term. However, many gold and silver stocks have been hitting new highs during the past two years spurred on by the uptrend in the $XAU index at the bottom of the chart. The monthly charts of most stocks in the industry are revealing that volume continues to increase at a phenomenal rate, a very encouraging sign for metals bulls.

In addition to the rising precious metals prices, many other important commodities are trending higher, such as non-precious metals, food, rent, housing, utilities, natural gas and gasoline. Clearly, there exists overwhelming evidence in favor of accelerating inflation rates. Can you afford to watch the value of your paper assets depreciate further to perhaps zero? Will you be one of the unprepared herd of investors or will you commit to the necessary steps required to protect your family's future? Are you aware of the appropriate investment strategy in preparation for the upcoming storm?

To help investors answer such questions requires a solid understanding of true financial safety. Many investors falsely believe that their financial security is assured because they hold currency in money market funds, savings and checking accounts. Indeed, they are well protected from stock and bond market declines, yet not from the damaging affects of inflation. However, financial professionals have proven conclusively that the items necessary for living are currently rising and thus a new trend of inflation is unfolding.

Astute investors are well aware that powerful trends, such as accelerating prices and increasing interest rates are rarely short term in nature. Instead, they tend to persist for years, even decades. Evidently, an incredible shift in value is occurring, away from intangible paper assets toward those with tangible, intrinsic value such as gold and silver. Unlike paper currencies, the supply of precious metals is fixed and cannot become over-inflated (7.) Can you think of a single currency world-wide with the static qualities of metals? Precious metals represent the only safe currency during market instability and provide the ideal solution to investment safety.

Does it matter which metal is purchased, silver or gold? The interesting reality is that it does matter. Celebrated investors such as Warren Buffett, Bill Gates and George Soros have been demonstrating with their wallets, a firm belief in the shimmering metal silver. In fact, Warren Buffett has invested over $500 million in his purchase of 129 million ounces of silver.* Bill Gates, invested $10 million of his personal estate into the Pan American Silver company.* Lastly, George Soros and his brother own 26% of the Apex Silver Mines (8) Why do these distinguished financiers desire to own solid positions in silver interests, as opposed to gold? Because, silver is remarkably undervalued and is rebounding after 100 years of lower prices.

Indeed, there are numerous arguments in favor of silver as the metal of investing choice—far too many for the scope of this article (for a fascinating article explaining the importance of silver, please click here.) Yet this point is critical, when metals gained popularity in the past, one ounce of gold could purchase approximately 16 ounces of silver. Currently, one gold ounce can buy 70+ silver ounces! This indicates that silver represents nearly a 5 fold or 500% discount relative to gold.

Clearly, the answer to the statement: to buy or not to buy precious metals--is yes. Technical analysis is suggesting that an incredible shift is occurring within the trend of precious metals prices. The centuries long decline in metals prices appears to have reached its conclusion and a new trend of higher prices is emerging. Fundamental analysis is revealing that the price of silver is recovering from a recent 100 year low and is as much as 500% less expensive than its shinny cousin - gold. Additionally, the specter of higher commodities prices and the potential for significant inflation is looming overhead, like The Sword of Damocles. Undoubtedly, given the conditions outlined within this text, one investment can pledge capital safety; while offering substantial profits: Silver. Perhaps a line from William Shakespeare’s' timeless work, Julius Caesar, best captures the incredible opportunity manifesting within the silver market: “There is a tide in the affairs of men -- Which, taken at the flood, leads on to fortune”(9)

* All references to Bill Gates, Warren Buffett and George Soros are credited to this source.