The precious metals power higher

December 1, 2010 – Both gold and silver demonstrated some spectacular performance yesterday, climbing 1.4% and 3.8% respectively from the previous day’s closing price. November is the eighth month that gold has risen this year to generate its 26.5% year-to-date appreciation. Silver has also risen eight months this year, and so far is up a stunning 67.5%.

We can reasonably expect some more big moves higher, given how tight the market for physical metal remains. Physical metal cannot be conjured out of thin air like national currencies and paper representations of gold and silver. Mine production cannot be turned on overnight to increase the supply of newly mined metal. It takes years to build a mine. So where is the supply going to come from to meet the ever-growing demand for these two precious metal safe havens in a world wracked by sovereign debt worries, volatile currencies, banks loaded with dodgy assets and politicians who are placing with their serial bailouts never-ending burdens on the backs of taxpayers?

There is only one source to meet this demand – the physical gold and silver must come from their already existing aboveground stock.

To achieve this end, higher prices are needed to entice holders to exchange the physical gold and silver they now hold to instead own a national currency. But will they be sufficiently enticed to sell? After all, the proceeds from their sale are on deposit in a bank, which like most banks is probably loaded with risky assets.

Further, in contrast to the safety of precious metals, their bank deposit has risks and earns near zero interest income, which clearly is not enough to offset the risks. The integrity of deposit insurance is questionable because the assurance is being provided by an overleveraged and insolvent government. In any case, their deposit is only guaranteed by the reality the bank will be bailed out with taxpayer money or newly printed currency created out of thin air by the central bank.

So ask yourself, are you willing to exchange your physical metal for dollars or euros or any other currency? I wouldn’t, and most people reading these reports understand that the metals remain undervalued, so they wouldn’t either. We are what the market calls “strong hands”.

I am often asked when it will be time to sell the gold and silver we are now accumulating as our savings to get us though the crisis as it continues to unfold in the years ahead. I always respond that the end of this bull market will not be like the one that ended in January 1980. When gold and silver eventually become overvalued at some future date, you won’t “sell” your metals; you will “spend” them.

In other words, I expect that because national currencies are being so badly mismanaged, many will collapse – including the dollar, which was the conclusion of The Collapse of the Dollar that I wrote with John Rubino in 2004. As a consequence of the dollar and many other national currencies collapsing, so little confidence thereafter will be placed in any government’s management of a currency that few if any national currencies will exist. This watershed event will mark the end of the world’s reckless experiment foolishly started in 1971with fiat currencies backed by nothing. With the inevitable failure of national currencies, gold and silver will be the currency of choice.

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