Some views and comments by NIA,
http://inflation.us on 11 Jun 2011:
Here are the top 10 most important economic questions that NIA answered during the past week.
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1) I bought silver when NIA declared it the best investment for the next decade at $17 per ounce. Should I get out now while I am still up big? For my friends who don't own silver, should I tell them it is too late to invest? What is your outlook for silver in the second half of 2011?
It is dangerous not to own gold and silver. Although the U.S. dollar seems like a safe haven to most Americans because it has a number on it that always stays the same, the U.S. dollar is a fiat currency with no real value because it is no longer backed by gold. The only reason the U.S. dollar still has any purchasing power at all is due to the public's perception that it will always be accepted as money. Gold is the world's most stable asset and silver possesses all of the same monetary qualities as gold, but is a lot more volatile than gold.
We believe silver is a much better bargain than gold because the gold/silver ratio is currently 42 and during periods of high inflation it always declines to 16, which is where the Coinage Act of 1834 defined their values until silver was demonitized in 1873. Ever since silver was demonitized, America has been a fiat country gone insane with Americans being brainwashed into believing silver is only an industrial metal and paper dollars are money. Bernanke's devastating inflationary monetary policies will soon wake Americans up to the truth and we will see a decline in the ratio back to 16 or below permanently, which means we will see at least a 2.625 times increase in purchasing power for those who own silver vs. gold from their current levels. We are 100% confident the gold/silver ratio will at least decline to 16 this decade.
Because silver has been so undervalued for so long with a gold/silver ratio averaging north of 50 for the past century, most silver produced in recent decades has been consumed by industrial purposes and there are actually much larger inventories of gold available above ground today. Most likely we will probably see the gold/silver ratio overcorrect to the downside, possibly down to 10 or lower. Only 10 times more silver has been produced in world history than gold so a gold/silver ratio of 10 is actually a very realistic possibility. This means those who own silver will likely more than quadruple their purchasing power from current levels this decade, while Americans with savings in U.S. dollars lose all of their purchasing power.
COMEX registered physical silver inventories have declined 30% over the past six weeks down to 28.8 million ounces or just $1 billion worth of silver. A major shortage of physical silver is developing. A COMEX default is likely coming in the near-future as those holding futures contracts demand physical delivery and COMEX can't deliver. This could cause an explosion in silver prices, possibly to $100 per ounce overnight.
Silver prices rose too far too fast during the month of April. When we announced silver as the best investment for the next decade at $17 per ounce, we never thought silver would nearly reach $50 per ounce in early 2011. We were looking for silver to reach $50 per ounce in late 2011 with a decline in the gold/silver ratio this year to 38.
When silver reached a new all time nominal high of near $50 per ounce in April, the gold/silver ratio temporarily declined as low as 30.5, far below NIA's outlook for 2011 of 38. Silver prices were due for a natural pullback, but because COMEX raised margin requirements on multiple occasions right when silver began to dip, we saw a very rapid and steep pullback in silver prices due to forced liquidations, profit taking, and panic selling. The timing of COMEX's margin requirement increases can be described in no other way than manipulation.
COMEX has been manipulating down the price of silver in order to help their friends at JP Morgan, who have a huge silver naked short position. The manipulation has allowed JP Morgan to decrease its silver short position to just about its lowest level since it was acquired in 2008 from Bear Stearns with the backing of the Federal Reserve. Without this manipulation, it is possible that after a brief pullback, JP Morgan would be covering its silver short position today above $50 per ounce.
Although the pullback in silver was steep, this was not unexpected. It is something that NIA has warned about on countless occasions. We believe the pullback in silver is now over and most of the silver sold by speculators is now owned by stronger hands that are holding for the long-term. In our opinion, silver will make another move towards $50 per ounce and instead of pulling back, this time silver will break $50 per ounce and reach new all time nominal highs. We don't see much downsize risk for silver, because there are many investors who are waiting to buy as much silver as possible on any kind of dip from these levels.
2) What do you think about the new Utah money where people will be able to pay taxes and each other in gold and silver coins? Do you think this will pass the U.S. Senate and what will that do to silver?
Utah just legalized gold and silver as a currency, which is something that NIA strongly supports. Gold and silver will now be exempt from state capital gains tax in Utah. However, Utah doesn't have the power to exempt it from Federal capital gains tax. We support Ron Paul for President in the 2012 election because he will eliminate Federal taxes on gold and silver. After all, when gold prices go up you actually aren't making money. You are simply retaining your purchasing power as the U.S. dollar goes down. Ron Paul is the only candidate who understands this and understands that the U.S. constitution mandated only gold and silver to be used as legal tender. Fiat currencies are unconstitutional. Ben Bernanke is a criminal who is stealing the wealth of all Americans through inflation and NIA will not stop until all Americans understand the truth.
3) At the price of gold and silver now, is it safe to continue to purchase these metals? When do you plan to sell?
We are still buying gold and silver, and we will hold our gold and silver until the Dow Jones/gold ratio at least declines to 1, the median U.S. home/silver ratio at least declines to 1,000, and the gold/silver ratio at least declines to 16. Only when these ratios are met will it be a sign that it is time to diversify from precious metals. However, we will never sell precious metals in order to buy a fiat currency. We plan to use our precious metals to buy dirt cheap Real Estate in the U.S. once the market has completely bottomed, which is still many years away from happening.
4) What do you mean when you say, "No amount of tax increases and spending decreases will ever allow the U.S. to balance its budget."? Is there no way out of this hole? Is there no way to turn this bus around and prevent it from going over a cliff and into the abyss of hyperinflation?
If the government acted immediately and cut expenses across the board by 50% including entitlement programs, and the Federal Reserve raised interest rates to at least 5% or 6%, we believe hyperinflation could be prevented. However, the government doesn't believe inflation is a problem because the Fed looks at the core consumer price index (CPI), which excludes food and energy, because the Fed says food and energy inflation is transitory. The core CPI is mainly comprised of rents, which is very misleading because rents aren't going to rise by much in the short-term being that we just had the largest Real Estate bubble in history that still isn't done deflating.
Even core CPI will begin rising dramatically eventually. When price inflation becomes so large that the government realizes something must be done and can no longer ignore it, it will be too late. Our budget deficit as a percentage of annual government expenditures is at a level that many other countries were at right before they experienced hyperinflation. What triggered hyperinflation in prior instances is when foreigners stopped lending and a country's own central bank needed to print the money to fund the bulk of a country's deficit spending. We believe our two largest foreign lenders China and Japan are about to pull the plug on the U.S. and the Federal Reserve will become the U.S. treasury buyer of last resort. The Fed already owns more U.S. treasuries than China and Japan, but soon the Fed will be the only treasury buyer left.
If we wait another year to make dramatic spending cuts, it will be too late because soon we will have to deal with rising interest payments on our national debt. The annual interest we pay on our national debt is currently only around $200 billion per year due to our artificially low interest rates. When rates start to rise, annual interest on our debt could easily exceed $1 trillion and cause our budget deficits to explode even higher. The first place the U.S. needs to cut is the military. We need to leave Afghanistan immediately now than Bin Laden is dead and we must stop attacking countries that are no threat to us like Libya.
5) One of the issues that has propped up the dollar for decades is the ability of the U.S. government to "enforce" the dollar because of its enormous and superior military. What are your thoughts about this?
We don't think we can threaten other countries by force and make them continue buying U.S. treasuries because if they stopped buying our debt, the dollar would collapse and we won't have the resources to fund our military. Some people believe the world is buying our treasuries because they like the U.S. military policing the world, but we strongly disagree. We believe the world resents the U.S. for maintaining its 700 military bases in 130 countries. In our opinion, we are gaining enemies this way. China and Japan would be much better off using the money they spend on U.S. treasuries to expand the size of their own militaries. When the dollar collapses due to hyperinflation, no longer will the U.S. be the world's superpower due to its military. China's military will eventually exceed the size of ours. Our current military empire where we spend just about the same on defense as the rest of the world combined is unsustainable and over the long-term this wasteful spending is making us a lot less safe as a result. Having a safe and stable currency is the most important fundamental building block of having a safe and stable country.
6) We have a nation full of incredibly financially smart folks who should be concentrating on the solution instead of the problem. Where are they and why isn't anyone stepping up to the plate to try to save our country? I heard that Donald Trump had a plan to get us out of debt but don't know what that plan is. Have you heard about this plan and is it credible?
Donald Trump isn't very credible when it comes to getting out of debt, because his casino company is one of the most indebted companies in the world and it has filed for bankruptcy on numerous occasions. But then again, the U.S. is for all intents and purposes bankrupt so if Donald Trump changed his mind and decided to run for President, he could campaign based on his experience with reorganizing under bankruptcy and keeping companies alive and operating despite them being bankrupt. Unfortunately, Donald Trump has screwed over his shareholders countless times who were left with nothing, so he would probably also screw over holders of U.S. dollars who would be left with worthless pieces of paper that have no purchasing power.
7) When do you expect inflation to crimp the margins of consumer discretionary stocks?
Inflation is already hurting the margins of many consumer discretionary stocks that have been reporting earnings in recent weeks, which is something NIA predicted would happen late last year. Retailers are passing some of their rising costs on to their customers, but are reluctant to pass all of them on. Many retailers are passing on 1/2 of their rising wholesale costs by raising retail prices and eating the other 1/2 through shrinking gross margins. This same thing is happening to the product manufacturers who are seeing large raw material input cost increases. They are eating some of their rising costs to stay competitive and passing the rest on to their customers. Many manufacturers and retailers are hoping that Bernanke is right and that commodity inflation is transitory. Although some commodities have run too far too fast and will dip in the short-term as the dollar makes a possible temporary bounce, we can assure you that inflation is not transitory and the dollar collapse has just begun.
NIA says there is no chance of the U.S. ever balancing its budget, without eliminating the so-called untouchable entitlement programs like Social Security, Medicare, and Medicaid. How exactly would the disabled live if these entitlement programs were gone? It sounds like retirement would have to be eliminated. Would a person basically have to work to death?
Retirement will become a thing of the past for Americans relying on Social Security to retire as well as Americans with their savings in U.S. dollars. Seniors who are not relying on Social Security and have at least one third of the savings necessary to retire, and are smart enough to invest their savings now into silver, we believe will be able to retire and stay retired as they will increase their purchasing power while the rest of America goes broke. NIA expects to see a major trend in the upcoming years of retired Americans reentering the workforce as their Social Security checks continue to buy less and less. Seniors haven't seen any Social Security cost-of-living adjustment increases in years, despite there being massive price inflation, especially for food and energy. Adjusted for real price inflation, Americans receiving Social Security today should be receiving almost triple the amount that they are currently receiving.
9) When the U.S. dollar drops to zero value and it becomes necessary to use gold for daily needs, how will the exchange of goods for gold be accomplished? How do I use a 1 ounce gold coin, with present value of about $1,500, to purchase a loaf of bread and/or a quart of milk, for example? How will these 1 ounce coins be broken down?
It is possible to buy American Eagle and Canadian Maple Leaf gold coins that are as small as 1/10 of an ounce, but NIA strongly recommends against buying these coins because you will likely end up paying a 15% premium for them compared to just a 4% premium for the 1 ounce versions of these coins. We believe silver will be more commonly used for bartering purposes, as silver is currently around $36 per ounce and a few ounces of silver can easily buy a week's worth of groceries for a family. In fact, with the gold/silver ratio currently at 42 despite the fact that only 10 times more silver has been produced in world history than gold (with most of this silver being consumed for industrial purposes never to be seen again), NIA believes silver is undervalued compared to gold and will increase around 3 to 4 times in purchasing power compared to gold this decade. Therefore, it is possible that only 1 ounce of silver could be enough to buy a week's worth of groceries for a family during hyperinflation.
10) One of your stock suggestions from August of 2009 was Capital Gold at $2.48 per share and it was recently acquired by Gammon Gold for $6.56 per share. Do you have any opinions on Gammon?
A few weeks ago one of NIA's co-founders had a meeting with the co-founders of Gammon Gold (they left Gammon years ago and we didn't know them until after Gammon had already acquired Capital Gold). They told us that they have strong confidence in Gammon's current management team. We believe Gammon is a solid company for the long-term, but we also believe there are much bigger opportunities out there. We liked Capital Gold because it was one of the lowest market cap publicly traded gold producers that was profitable with a strong balance sheet. Gammon was very smart for acquiring Capital Gold because it was accretive to their EPS. However, it will be very difficult for Gammon to grow organically. Gammon's future revenue growth will likely come from both rising gold prices and possible further acquisitions. It will be hard for them to find another amazing acquisition opportunity like Capital Gold was. Gammon is changing its corporate name and starting next week will be known as AuRico Gold.
NIA is not an investment advisor. NIA's NIAnswers are meant for informational and educational purposes only. Never make investment decisions based on any information contained in any of NIA's NIAnswers. Just because many of NIA's previous economic predictions and forecasts were accurate, doesn't mean NIA's future economic predictions and forecasts will be accurate. All of NIA's predictions and forecasts could turn out to be completely wrong.
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