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I just finished checking prices at 8:30 a.m. on September 15th and all of the metals are down. It’s been that way for a few days and the “bull market is over” crowd is out in full-force.

I just set up my home office in our new condo in Aventura, Florida.   My iMac’s data was imported to the computer on July 16th. Up popped the market close from July 16th. This gives me “perspective” – two months worth of perspective – and suddenly, the precious metals market looks pretty good to me.

Here are the prices from 7/16 and 9/15:

7/16/2011

9/15/2011

Gold

$1601.90

$1791.70

Silver

$   40.11

$    40.21

Platinum

$1773.00

$1797.00

Palladium

$ 793.00

$ 716.00

Considering that the summer is the slowest time of the year and the metals usually don’t start to make their annual rise in price until September, the markets look surprisingly strong to me.

Gold is up $523.90 (41.31%) in the last 12 months. Silver is up an even more impressive $19.51 (95%) in the same time frame. Where else could you have realized these gains?

The best way to look at the gold and silver markets is to ask yourself what caused the decade-long bull market and has anything changed that could derail it?

In the early stages of the bull market, it was all about the dollar. Since gold (and silver) is denominated in dollars, when the dollar fell, gold rose. Gold was not in a bull market in any major currency other than the US dollar. For the past several years, gold (and silver) has been rising in all of the fiat currencies, even the vaunted Swiss franc. What does that signify? It is a strong statement by the market that gold has become the world’s premiere “currency”. The central banks are losing the information war that is geared to keep investors in paper, not precious metals. Big money from China, India, Russia and the Middle East is pouring into PHYSICAL gold (and silver) in record amounts. Wealthy investors, and even several central banks, are unloading paper currency (mostly dollars) for real wealth, gold and silver.

With the current bank problems and sovereign government debt problems in Greece, Italy, Portugal and Ireland, the euro is losing its luster as a “stable store of value currency.” This will not end well for the EU or the euro. As a result of the recent fall of the euro, the dollar has moved up in the USDX. The euro is 57.6% of the USDX weighting, so when the euro falls, the dollar rises.

What is happening now is not a result of a strong dollar; it is the result of a weak and tanking euro. So we now have two opposing forces pulling on gold – the “rising” dollar is negative for gold and the falling euro is directing wealthy investors in Europe out of the euro and into gold and silver. The markets are very schizophrenic now.

All of the recent volatility can scare investors out of the market. They do not understand the big picture, the major trend. Buckle up and ignore the volatility. Takedowns like the one we are currently caught up in present the savvy investor with great opportunities to add to their positions at very attractive prices. As long as you pay cash for your gold (and silver) and are not margined, the up and down moves don’t matter. Look ahead to the end of the year and be ready for $2,000+ gold and $50+ silver.

Is gold overvalued? Is the 11-year bull market nearing an end?

Gold peaked in January 1980 at $850 an ounce. Gold is currently selling for around $1,800 so the commonly accepted view is that gold is way over-priced. But is it? Leveling the playing field, if we factor in the last 31 years worth of inflation, gold has to reach $2,282 in CPI inflation-adjusted dollars to match the previous bull market top of $850. But we all know that the CPI is an inaccurate gauge, biased to the low side.

John Williams publishes an indispensable website called Shadowstats. Here is a more accurate view of inflation, since 1980.

Inflation is actually running around 12%, not 3.5% as stated by the BLS.  You can build a strong case that the $2,282 gold target is way too low, maybe even by a factor of four!

In 2004, with gold selling for $400 an ounce, “Mr. Gold,” Jim Sinclair, calmly stated that gold would hit $1,650 in 2011.  Now that was a bold prediction and most people rolled their eyes when we mentioned $1,650 as a target.  It was more than four times the then current price and twice the 1980 all-time high.  Fast forward to 2011 – gold topped $1,650 by July and has been rising ever since.  I call that one of the great “calls” of all-time.  Sinclair should have your attention and he certainly has established a high degree of credibility.  Looking forward, Sinclair again calmly states that gold could top $12,000 in the next four to five years!  I can see some of you “rolling your eyes” in disbelief.  Just like the people who rolled their eyes in 2004 when he predicted gold would hit $1,650.

The high price of gold will be accompanied by a dramatic fall in the US dollar.  Sinclair predicts the dollar will drop into the 40’s in the USDX (currently at 76.62) and anyone on a “fixed” income will see their standard of living dramatically reduced.  People who invest in dollar-based assets such as bonds, CDs and stocks will not fare well.  Under this scenario a Mercedes or Porsche will cost over $200,000 and a gallon of gas will cost $6 or $7 a gallon.  Is this hard to believe?  Not for me.  I remember paying $0.25 a gallon for gas and I bought my first Mercedes, a 250SL roadster, in 1972 for around $10,000.  Today the Mercedes roadster costs well over $100,000.  In 1973 I purchased a new yellow Corvette convertible for $4,500.  It costs over $70,000 now.

We have all lived with inflation and are immune to it.  I was very well to do in 1971 with an income of $30,000.  I got along o.k. in 1984 with earnings of $75,000 (and my wife was earning $25,000 too).  To maintain the standard of living I enjoyed in those days, I need to earn at least $300,000, but even that is not enough since taxes now take a much bigger bite out of the amount I get to keep.

The point of all of this is to get you to acknowledge that we have been living with inflation for decades, and accept it.  And we will continue to live with inflation in the future but it will be more severe.  Viewed from this perspective, gold at $3,000 or $6,000 or even $12,000 is not out of line.

My view is a simple one.  Either you preserve your wealth in precious metals or you don’t.

It is a simple choice but one with enormous consequences if you make the wrong choice.  You see, gold is NOT an investment.  Gold is MONEY.  We live day-to-day with dollars.  We pay our rent, we buy food, clothing and cars with dollars, but it is impossible to SAVE in dollars without losing buying power over time.  Using John William’s 12% inflation number, if you are not making at least 12% AFTER TAXES you are losing buying power.  You can’t hit that number with bonds, or even with a conservative stock portfolio.  How can you safely earn 12% or more per year?  Well, gold has averaged 18% for the past 11 years.  Silver has done much better.

The Dow has returned nothing since 2001.  That is when the bull market in gold and silver commenced.  Gold was $252 and silver was $4.00.  Here is the decade-long scorecard:  Gold from $252 to $1,900 and silver from $4.00 to $50.00 (the recent highs in gold and silver, which will be left in the dust before the year is over).

Why should gold or silver cost more today than they did in 2001?  An ounce of gold or silver is exactly the same today as it was ten years ago, so really what has happened is that it takes MORE dollars to buy the same thing.  The dollar is losing value at a very rapid pace.  That is what gold and silver prices are telling you.  But are you listening?  How many of you have 25% of your net worth in precious metals?  How about 50%?  How about 75% or more?  Are you content to have most of your wealth denominated in dollars?  You should think about this very carefully.  You still have time to trade in rapidly depreciating dollars for relatively cheap gold and silver.

I measure my wealth in OUNCES, not in dollars.  The name of the game is to acquire as many ounces as you can and hold as few dollars as possible.  This philosophy has served me very well for a decade.  My net worth has increased many fold.

But the question still remains, “What if I am wrong.”

I do hear that all of the time.  People want me to guaranty them that gold will go up.  Funny, but they never ask for a guaranty that the dollar will hold its value, but they want a guaranty that gold will go up.  Nothing in life is certain (but death and taxes), but we have to make educated choices.  I am as certain as I can possibly be that gold and silver have a long way to go in this bull market and the dollar’s days as the world’s reserve currency are numbered.  One way or another, we have to make a choice.  Either we choose to stay in dollars or we choose to move wealth out of dollars into tangible assets like gold and silver.  There are no “guarantees” either way, but after looking carefully at the facts for the last 28 years, I am as certain as I can be that my approach is the right one.  I invest accordingly.

Why am I so certain that gold hasn’t peaked and that it won’t come tumbling back down, as it did in $1980?

Ask yourself why gold peaked in 1980 and then retreated, ending the bull market of the 70s?  The reason was Paul Volcker.  Paul Volcker, a Democrat, was appointed Chairman of the Federal Reserve in August 1979 by President Jimmy Carter and reappointed in 1983 by President Ronald Reagan.

Volcker’s Fed is widely credited with ending the United States’ stagflation crisis of the 1970s. Inflation, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983.

Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981. The prime rate rose to 21.5% in 1981 as well.  When interest rates are higher than the rate of inflation, gold loses its luster as a store of value.  It took 20% interest rates to stop the bull market in gold.  Is that possible today?  The Fed’s stated policy is to hold interest rates close to zero which is exactly the opposite of the policy needed to stem the rise in gold.

Why can’t the Fed allow interest rates to rise, say to 10%?  The National Debt is approaching $14.8 trillion and a balanced budget amendment has no chance of passing Congress.  Every one percent rise in interest rates will cost the Treasury $148,000,000,000 in extra interest per year.  A 10% rise will add an additional $1.48 trillion in interest to the deficit, apart from all other spending.  In other words, the Fed must contain interest rates, which means that they cannot contain the rise in gold and silver.  If they change policy, or lose control of interest rates, then the Treasury will have to MONETIZE much of the out-of-control debt by selling its bonds to the Fed who will create the money to make the purchases out of thin air.  That is what is commonly referred to as hyperinflation.  We are already early into that process – in the last year the Fed has purchased nearly 80% of the Treasury’s bonds!  Do you still wonder why gold is rising?  Do you really think that there is a way to halt the rise in gold, or the fall in the dollar?

The dollar’s weakness is masked by an even weaker euro.  The weaker the euro, the stronger the dollar appears in the USDX.  But gold is RISING in all currencies, not just the dollar, so gold has emerged as the world’s preferred currency.

Who is holding down the price of gold and silver?

You need look no further than JPMorgan.  They are short over 17 million ounces of gold and over 210 million ounces of silver (on the Comex).  Let’s put that number into dollars – JPMorgan is on the hook for $30.855 billion in gold and for $8.610 billion in silver.   They are fighting tooth and nail to hold down the prices but continually shorting the metals.  There is no way out for them.  There are no buyers for the contracts that they hold.  When they finally decide to close out their positions, the price of gold and silver will explode!