I believe the precious and base metals sectors are critically important to your portfolio and that the single best defense you can take for your portfolio is to go on the offense and to use precious and base metals investments – especially gold -to protect your wealth from the ravages of a falling dollar and to capitalize on a myriad of wealth-building opportunities. Words: 2010
So says Larry Edelson (www.moneyandmarkets.com) in an article* which Lorimer Wilson, editor of www.munKNEE.com, has reformatted into edited excerpts below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Edelson goes on to say:
Major Forces That Will Drive Precious and Base Metals Higher
First, let’s review the major forces that are poised to drive gold, silver, platinum, palladium, copper, aluminum, tin and more — higher and higher and why you should make metals investments a key part of your investment portfolio.
Force #1: Asia
There’s no question that Asia’s rise in the world is unprecedented and it’s being led by China’s economy which has grown at an average rate of about 10% for the last eight years. Moreover, not only is it just high growth in Asia, it’s growth that’s starting from a level that saw 1.4 billion people in China — and another 1.6 billion people in the rest of Asia — emerge out of absolute poverty and now that China and Asia are modernizing, the standard of living of 3 billion people — nearly half the world’s population — is soaring.
Consider, for instance, car ownership in China. Right now, even after almost two decades of explosive economic growth, car ownership in China is still only about 40 vehicles per 1,000 people, compared to 900 per every 1,000 in the U.S. If that stat just rises to 100 cars per every 1,000 people in China — which is certainly not a stretch of the imagination — the demand for cars will overwhelm the markets for steel, aluminum, platinum, palladium, rubber, iron – you name it. That’s just autos and that pales in comparison to what’s happening to the demand for copper and other metals for housing, urban construction, infrastructure projects, and more in Asia and that is why China, in particular, has been on a rampage to secure natural resources, especially metals, all over the world.
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The pace of China’s acquisitions of natural resource companies is exploding higher! Just look at the history. In 2002, China made only 1 deal in natural resource acquisitions; 2 deals in 2003; 3 deals in 2004; 11 deals in 2005; 25 deals in 2006; 33 deals in 2007; 53 deals in 2008; and more than 166 deals in 2009, mostly in natural resources! Asia and China’s demand alone would be enough to send metals prices higher but one of my major points today is that it’s not just Asian demand this time around. Demand for metals, indeed all natural resources — what I call tangible assets, real wealth — is being multiplied many times over by …
Force #2: U.S. Debt Implosion
Not only is Asian demand soaring but it’s happening at a time when the world is awash in debt and fiat currency and that is particularly true of the U.S., unfortunately. The U.S. is now the most indebted nation on the planet, and those debts — $136 trillion — are having immutable consequences on today’s economy and nearly all asset prices. Most of all, it’s changing the way they view the dollar! Hardly surprising, when you consider that even if the government could somehow pay off that debt at the rate of $100 million per day, every day starting right now, it would take more than 3,450 years to do so. As such, savvy domestic U.S. and international investors are now realizing that America’s massive debts are unpayable!
Force #3: The Devaluation of the U.S. Dollar
As a result of #2 above, the favorite debt solution of central bankers and politicians will be to pay off government debts with ever cheaper currency.
Step-by-step, international investors and international organizations are aggressively pushing to replace the dollar with a new reserve currency [which explains] why — despite recent disasters with other currencies like the British pound or the euro — the dollar is still down 32% since its high back in 2001. Moreover, it’s also why the dollar’s role as a reserve currency is being challenged all over the world, and why I believe we are now facing a final day of reckoning for the dollar.
A plunging dollar – a fiat paper currency losing purchasing power — is presenting investors with a whole different ball game. It means that if your capital is denominated exclusively in U.S. dollars and it does NOT include a strategy for protection against the falling dollar … you may be actually LOSING money even without knowing it as your money gradually buys less and less. Therefore, to truly preserve your capital and its purchasing power, you may decide you need to go on the offensive with a strategy that includes strategic contra-dollar investments such as precious and base metals that protect your wealth and allow you to grow it as well just like other savvy investors are doing with tangible assets and resources that not only provide the world with the basic necessities of life, but actually rise in value as the dollars falls.
These powerful forces — Asian demand, the financial crisis, and the falling dollar — give you a triple tailwind to invest in precious and base metals — and to propel those investments higher to protect and grow your wealth.
Most Metals Remain Cheap on an Inflation-adjusted Basis
Most believe that the prices of the precious and base metals are already high, or, that they’ve seen their highs just before the financial crisis hit and that they offer very little upside profit potential – but nothing could be further from the truth! The FACT of the matter is that the prices of most metals remain cheap on an inflation-adjusted basis — and have loads of catching up to do on the UPSIDE! For instance, consider:
Its peak inflation-adjusted price was near $10,000 per metric tonne back in 1933 and its current price is about $2,000 per tonne. In other words, aluminum is selling for less than about one-fifth of its prior peak value — and could rise more than 400% in price in the months and years ahead.
Its all-time peak in 1978 on an inflation-adjusted price was near $60,000 per metric tonne and today it sells for about $19,000 per tonne – or less than one-third its peak value.
The price of copper, perhaps one of the most important base metals of all sold at an all-time peak in 1973-4 on an inflation-adjusted price of more than $17,000 per metric tonne and yet sells for only $6,700 per tonne today, i.e., about 40% of its prior peak value, and can more than double in price in the years ahead, from roughly $3 a pound today to over $6 a pound!
Its inflation-adjusted high: Nearly $3,000 an ounce in 1979. Its price today: Just a tad over $1,500 an ounce. In other words, platinum prices are set to DOUBLE.
Its inflation-adjusted high was more than $2,000 an ounce back in 1917 but is now trading for just $435 an ounce, showing it has the potential to gain more than 400%.
Silver would have to rise almost ten-fold to reach its 1980 high in inflation-adjusted terms!
g is for gold. Adjusted for inflation, the current price approaching $1,400 is just a tad more than HALF its all-time high. Its previous 1980 peak — in today’s dollars — is $2,271 per ounce. In other words, gold prices could EASILY double again in just the next couple of years. Moreover, at $1,300 – $1,400 an ounce, I believe gold investors are banking on the dollar’s purchasing power remaining stable which it is not going to do…
– not with the financial crisis still roaring
– not with governments around the world contemplating spending even more money to try and stimulate their economies
– not with the Federal Reserve continuing to print paper dollars like there’s no tomorrow
– not with other central banks around the world … in China, India, Russia and more — actually buying up gold reserves to protect themselves from the dollar’s inevitable decline!
Three Longer-term Price Scenarios For Gold
I. Orderly decline in the dollar = $2,300/ounce
I believe that, no matter what, gold is going to hit its inflation-adjusted high of $2,300 an ounce — at a minimum but that assumes an orderly decline in the dollar, and an orderly process of phasing in of an eventual new world reserve currency of some kind.
II. More dramatic decline in the dollar = $3,000/ounce
In this scenario, where the world’s currency markets continue to show the kind of volatility that’s recently occurred with rising global uncertainty regarding the outcome, gold could eventually reach $3,000 an ounce.
III. Collapse in the dollar = $5,000/ounce
In scenario three, where the dollar falls completely out of bed and the markets take over, I wouldn’t be shocked to see $5,000 an ounce for gold.
Gold is showing you that soaring economic growth in Asia coupled with the financial crisis, which is going to inevitably pound the dollar lower, devaluing its purchasing power step-by-step, are converging to give you an investment sector that’s perfectly positioned to not only help you protect the value of your money in the months and years ahead, but also give you multiple opportunities for profits.
3 General Steps Investors Should Take
For ultimate protection, and for future profit potential, I believe that everyone should have up to 25% of their liquid investment funds in gold and gold-related opportunities. Naturally, each investor needs to take a look at his or her individual investment needs but whether you invest 10% or 25% in gold, I recommend your allocation be further subdivided into four equal units.
Using a 25% allocation, here’s how it would break down:
a) 6.25% in bullion, in ingots or bullion coins such as the American Eagle or Canadian Maple Leaf. Given the storage hassles and costs, there’s no need to put more than that in bullion
b) 6.25% into the SPDR Gold Trust ETF, symbol GLD, and
c) 6.25% divided equally amongst my three favorite gold mutual funds as follows:
i) Tocqueville Gold Fund (TGLDX)
ii) U.S. Global Investors World Precious Minerals Fund (UNWPX)
iii) U.S. Global Investors Gold and Precious Metals Fund (USERX)
d) 6.25% divided equally into the following top-rated gold mining companies that own the majority of the gold reserves in the world today:
i) Goldcorp Inc., (GG)
ii) Barrick Gold Corp., (ABX)
iii) Kinross Gold Corp, (KGC)
iv) Gammon Gold, (GRS)
Diversify beyond gold to the other metals that are benefitting from this environment — rising Asian demand coupled with a long-term bear market in the dollar. Consider an assortment of my favorite Exchange Traded Funds such as:
a) ETFS Physical Palladium Shares ETF (PALL)
b) ETFS Physical Platinum Shares ETF (PPLT)
c) ETFS Physical Silver Shares ETF (SIVR)
d) PowerShares DB Base Metals Fund (DBB)
Also consider the intelligent purchase of short- and long-term call options on metals companies, bearing in mind that options are not for everyone, and certainly not for ALL of your money as they are volatile, speculative investments. However, the purchase of options has two unique advantages in that you can never lose a penny more than you invest and you get virtually unlimited profit potential!
Consider active guidance in the area of metals investing, and all natural resources.
*http://www.uncommonwisdomdaily.com/your-single-best-defense-9722?FIELD9=2 (Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. To view archives or subscribe, visit our web site.)
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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