It now appears that the United States has finally succeeded in its efforts to destroy confidence in the U.S. dollar. Given the currency’s reserve status, its ubiquity in financial markets, and the economic power and political position of the United States, this was no easy task. However, to get the job done Washington chose the right man: Fed Chairman Ben Bernanke. Thanks to Bernanke’s herculean efforts, investors across the globe have now been fully weaned from their infantile belief that the U.S. dollar will remain the ultimate safe haven currency.

The proof of Ben’s success can be seen in comparing how the foreign exchange markets reacted to the recent crisis in the Middle East with how they reacted to the financial crisis of 2008. Back then, investors looking for safety abandoned their foreign currency positions and piled into the U.S. dollar (the market for U.S. Treasury Bonds in particular). As a result of these fund flows, the U.S. dollar surged 20% from August to November 2008.

However, during this latest round of global destabilization the dollar experienced no such rally. In fact, the greenback shed about 5% of its value since the Tunisia revolution began in December of 2010. The reason should be clear; the Fed has placed international investors on notice that it will unleash even greater doses of dollar debasement at the first whiff of additional economic weakness, deflation threat, or dollar appreciation. Just this week, Bernanke once again made clear that despite what he considers to be a better growth outlook at home and abroad, and spreading global inflation, the United States will not pull back from monetary accommodation, even as other nations conspicuously do so.  The architect of U.S. monetary policy has stated explicitly that dollar debasement will continue for the indefinite future.

Knowing this, why would any international investor seeking a “safe haven” choose to park assets in U.S. sovereign debt? If Bernanke is to be believed, continued economic weakness in the U.S. will cause low-yielding Treasuries to lose value due to inflation while the weakening dollar erodes the underlying value of the bond in real terms. This is a one-two punch that sane investors will seek to avoid. It is no coincidence that a record percentage of U.S. Treasury auctions are now being bought by central banks, for whom sanity is a lowly consideration.

But in reality, the Fed has much less influence over the dollar’s value than do central bankers in Beijing. There is little disagreement among economists that without Chinese support, the dollar would be a dead duck. But for the last twenty years or so the monetary arrangement that pegged the yuan against the dollar served the interests of both countries. The U.S. enjoyed a flood of cheap imports, the benefits of ultra-low interest rates, and a strong currency. The Chinese received a booming export economy, which accounted for about a third of the country’s GDP, and the ownership of a significant portion of the future of the United States. To maintain this peg, the People’s Bank of China had to print trillions of yuan and perpetually hold more than $1 trillion U.S. dollars in reserve.

But recently, having led to rampant money supply growth and inflation in China, the peg has become more trouble than it’s worth, particularly from the Chinese perspective. The latest reading on YOY money supply growth has China’s M2 increasing by 17.2%; which has helped send their reported CPI up 4.9% YOY.

Inflation in China is pushing up the prices of its exports. According to the latest survey released February 14th from Global Sources (a primary facilitator of trade with Greater China), export prices of various China products are likely to increase in the months ahead, especially if the cost of major materials and components continues to soar. The survey of 232 Chinese exporters revealed that 74% of respondents said they boosted export prices in 2010. The U.S. Bureau of Labor Statistics reported in early January that its China import price index rose 0.9% in the fourth quarter after holding steady for the previous 18 months. And Guangdong, the biggest exporting province, said recently that it would increase minimum wages by around 19% this March.

But here is the rub; China maintains its peg in order to keep export prices from rising in dollar terms. But the peg is now causing export prices to rise anyway. As a result, the policy is a dead letter. The simple fact is that the threat to China’s exports will exist whether they let their currency appreciate or not. But a strong currency offers the benefit of greater domestic consumption, while a weaker currency offers them nothing.

The Chinese government will take the path that preserves and balances their economy while enriching their entire population, rather than go down the road to never ending inflation. For China the realistic hope is that the greater purchasing power of a strong currency will enable their growing middle class to supplant U.S. consumers as the end market for China’s own manufacturing efforts. However, for the U.S. the challenge will be to develop a diversified manufacturing base in an expeditious manner before surging interest rates, a plummeting dollar and soaring inflation overwhelm the economy.

The dollar’s recent reaction to the turmoil in the Middle East and China’s inflation problem illustrate that we have come to a watershed moment in American history. The decade beginning in 2010 should prove to be the decade in which the U.S. dollar loses its status as the world’s reserve currency. As bad as that blow may be, the loss may provide the shock needed to get our economy back on a sustainable path. The real danger lies in refusing to adapt to the changing environment. Our current economic stewards are acting as if the dollar’s status is written in stone, when in fact it’s hanging by a thread.

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The United States is sitting on the world’s largest untapped oil reserve. The US could become the single largest exporter of oil and oil related products in the world. The untapped reserves are estimated up to 2.3 Trillion barrels, nearly three times the reserves held by the OPEC countries and sufficient to meet 300 years of demand, at today’s levels.

In the world of precious metals, silver spends a lot of time in the shadow of its big brother gold.

Gold, with its high price-to-weight and distinctive yellow tint, has always occupied a special place in the human psyche. To many people across many ages, gold is simply the ultimate form of money – and, as a long-term, stable store of value for one’s personal wealth, I agree it’s hard to beat.

However, rare circumstances are aligning today that I believe will make silver the true champion of this bull run.

WHAT’S DRIVING PRECIOUS METALS?

Gold and silver are both benefitting from a perfect storm in the sector.

Dollar devaluation means that much of the ‘gains’ we see are really just losses by people holding dollars. In other words, if your dollars lose 50% of their value, it’s going to take twice as many of them to buy the same ounce of gold.

But the rally is based on more than simple inflation. Precious metals are regaining their role as the ultimate reserve asset. That means many, many more people are buying and holding these metals than at any time in the last thirty years.

Another factor is the rise of emerging markets and decline of developed markets. As billions of poor Asians, Africans, and South Americans lift themselves out of poverty by embracing the free market, the US is plunging itself into poverty by rejecting it. This means there are a mind-boggling number of new customers for jewelry, savings, and industrial products that require precious metals – and that we are becoming less and less able to outbid them for these resources with our dollars.

SILVER’S DRIVING FASTER

If the world were going to hell in a hand-basket, then I would expect gold to outperform silver. However, it is only the developed economies that are on the rocks – and only the US that faces true catastrophe. Thus, we have seen silver outperform gold for the last eight years.

The market is telling us that while uncertainty reigns supreme, the global economy will prosper in the years ahead. While gold most effectively insures the investor against economic devastation, silver offers both a shield against monetary turmoil and exposure to market growth.

THE KEY: INDUSTRIAL DEMAND

This is because silver is both a precious metal and an industrial metal. Gold is mostly precious, copper is mostly industrial, but silver strikes a fine balance between the two. And it seems as if this moment in history is perfectly suited to this balance. We are facing not only the prospect of the collapse of the international monetary order, but also the largest industrialization process the world has ever seen.

While in a past era, wood, steel, or oil would have been the most critical commodity, today silver is used in everything we hold dear: iPhones, flat-screen TVs, batteries, solar panels, etc. Asia – the new heart of the global economy – is accumulating gold, but they’re consuming silver. That makes both metals good bets, but likely gives silver the edge.

It’s safe to say the future depends on a steady supply of silver. This burgeoning demand is reflected in the latest figures: global demand for silver is about 890 million ounces a year, while global mine production is about 720 million ounces a year. We’re actually consuming scrap to make up the difference. And unlike gold, which tends to remain in a recoverable state as coins or jewelry, a large quantity of silver is ending up in trash dumps – where it is essentially lost forever.

As long as the emerging markets continue to trend toward freer markets, and consumers the world over continue to demand computers, electronics, and green tech, silver should only become more scarce – and thus more valuable. I think these assumptions are pretty safe to make.

CAN THE WORLD THRIVE EX-US?

Of course, if everyone agreed with me, silver would already be worth hundreds of dollars an ounce and there wouldn’t be any profit to be made on the trade. Fortunately, there are a couple of bogeymen in the financial media scaring the majority of investors away from silver so far.

First, some analysts still believe – bless their hearts – that the US is really going to pull through this time into a sustainable recovery. After being duped by dot-coms and then housing, they are all aboard the Treasury Express back to Bubbletown. Unfortunately, as in the previous two cases, the current low interest rate environment is merely masking an underlying economy that is vastly more rotten than it was even a decade ago. The unemployment rate is a key signal that this time, Bernanke’s magic medicine won’t work.

A second cohort sees that the US is doomed, but still thinks we will drag the rest of the world down with us. This is the school that holds that despite our persistent current account deficits and monumental external debt, the world economy “needs” the US consumer to drive growth. As I alluded to in my book, How An Economy Grows And Why It Crashes, this is like a plantation master claiming his slaves need him around to consume the fruits of their labor, or else they wouldn’t have anything to do. Well, the results are in: after an initial panic rush into dollar-based assets, emerging markets are back at full sprint while the US is still limping along.

SILVER IN A DOLLAR COLLAPSE

Just like a Hollywood celebrity, we in the US spent our time at the top of the world – and soon let our status get to our heads. And like a celebrity, our adoring fans the world over will be quick to forget us as we fall from the limelight and deal with our powerful addiction to partying and cheap money. To survive the next decade in America, you are going to want an asset that is in demand globally, but is also free from counterparty risk here at home.

I recently did an interview with a group that is making a film about living in America in the year 2019. The premise is that inflation is rampant, the economy is in shambles, and groups are springing up that do all their trading in silver rounds. While I think their timeline is quite generous, this is a fairly accurate picture of what lies ahead.

Not only does silver appreciate while sitting in your safe due to overseas demand, but it also comes in units that are ideal for use as a common trade unit. Two or three ounces of silver can buy you groceries for a week. By contrast, just try to eat an ounce of gold’s worth of vegetables before they spoil. There are fractional gold coins and bars, but they carry very high markups.

None of us have had to think about these things in our lifetimes, but it is not abnormal in history. Soon, understanding precious metals will be as much a survival skill as knowing how to change a car tire.

THE GOLDEN RATIO

I always say that every investor should have at least 5-10% of his portfolio in physical precious metals. Of that, the proportion allocated to gold vs. silver depends mainly on risk tolerance. Silver tends to be more volatile than gold, so silver investors must have the discipline not to liquidate their stash at the first sign of a correction.

I generally advise a ratio of 2:1 gold-to-silver in the average portfolio. More aggressive investors can push it to 1.5:1 or beyond.

Year-to-date, silver is up 5 percentage points more than gold, and I expect that trend to continue. It’s important to understand that in this fast-changing world, silver is no longer runner-up.

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Click HERE to buy Peter Schiff’s best-selling, latest book, “How an Economy Grows and Why It Crashes.”

Peter Schiff
C.E.O. of Euro Pacific Precious Metals
email: info@europacmetals.com
website: www.europacmetals.com

Peter Schiff is CEO of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known coins at competitive prices. To learn about our products and policies, please visit www.europacmetals.com or call us at (888) GOLD-160.

Gold Report Bulletin: Kiska begins 37,000 metre Drilling Program. “I think that the Island Mountain area is a very compelling exploration situation” Doug Groh, The Gold Report. “We are increasing our rating to Strong Buy (from Outperform)””Our Mining Top Picks include. Bart Jaworski, Raymond James. .Kiska Metals” “I like to buy companies like Kiska when they’re small and frothy hot.” David Skarica The Gold Report “Making new discoveries and adding ounces: Major 37,000 metre drill program to begin early March” Dale Mah,   Mackie Research

…..more Gold Report Analyst Analysis on KISKA HERE

Seeking Value in Junior Miners

Independent investor Chen Lin takes advantage of high metals prices by investing in companies with the financial strength to stay the course until the resource is in production or can be expanded, making the company an attractive takeover target. For metal miners, the sustainability factor is critical because it can take years to get a mine to cash flow-positive status. Chen shares several of the companies he owns that he believes will return significant capital appreciation in this exclusive interview with The Gold Report.

The Gold Report: How important is technical analysis for you? Is it more useful as an entrance or exit point for a stock? Or, do you use technical indicators as a longer-term approach?

Chen Lin: That’s a very good question. I know technical analysis pretty well, and I watch a lot of indicators. Technical analysis probably helps most when entering or exiting a stock. You can also see some pretty good entrance points. Technical analysis also helps when the technical indicators improve and a lot of new technical buyers come into the picture; you can predict the stock will do well. But fundamental analysis is always most important for me, and value is the most important factor.

TGR: What indicators do you use—moving averages?

CL: I don’t follow those too closely; I look at the chart and I can see the trend. I set up an alert at my Fidelity account to email me whenever gold is crossing certain moving averages, such as the 200-day moving average. I use these as reference points to see the general trend for the stock. I also use Relative Strength Index (RSI) as a good indicator to see how a stock is overbought and oversold.

In general, you want to start selling when a stock is overbought and buy when it’s greatly oversold. But the company’s fundamentals are the most important. If it’s undervalued, it may still rise—like one stock I own that recently had a 90 RSI—which is extremely overbought—but is going higher still because the stock is undervalued from any perspective. It just rose so sharply, I had to sell some; but I’m keeping a lot of shares.

TGR: After a stock is fully valued, do you attempt to ride it as a momentum play to squeeze out more juice? Or are you just happy to take your money off the table and use it to enter another value play?

CL: Usually when a value stock reaches its valuation, it rides higher than its valuation and tends to get overvalued. Day and momentum traders rush in; so, stocks actually appreciate a lot in a very short period. Then I just start selling and taking profits gradually. Sometimes it will get a very big pop in one day when I’m selling, and I use those indicators to sell more. But in general it’s very hard to catch a peak. So, taking profits is a process instead of a one-day event.

TGR: You play anywhere from penny stocks in the single-digit millions up to the $3–$4 billion market-cap level. That’s a real advantage for an independent or non-institutional investor. Even most hedge funds don’t have that luxury. Obviously, liquidity issues don’t scare you. How do you manage those situations when a stock may not be marketable?

CL: I generally follow different rules, but first you have to know where the market is going. If the market has just started to rise, you can get into illiquid or risky stocks because, as the market rises, liquidity will come and illiquid stocks will become more and more liquid. But if the market is getting more mature and dangerous, you might want to sell them; for example, back in summer 2008, I sold all my junior stocks. For every stock, I set a rule for when I would sell. When they got to a certain level, I got out. By the end of 2008, I started to buy junior stocks—illiquid stocks.

TGR: You buy when you see activity in very small stocks?

CL: Activity is a good indicator, but it’s not the only indicator. I’m a value investor, so I look mostly at the valuation. But in general you want to invest in companies with rising volume and increased trading activity. That means more people are interested in the stock. So, if you believe that liquidity will be on the rise, then you can take a heavy position in a small-cap stock.

TGR: How do you start when you’re looking for a metals stock versus, let’s say, an energy stock?

CL: Metals stocks are very different in valuation from energy stocks. I generally like a metals stock with a world-class asset or potentially world-class asset. For an exploration company with 5 million ounces (Moz.) gold or gold equivalent in a desirable location that a major might be interested in taking over, you can put a value on the company. That’s because we know what price majors are paying for the gold.

The most recent takeover was for almost $1,000/oz. in the ground. Of course, there’s a potential to expand the resource too. For production companies, you look at the production profile. You look at the average cost, the cash flow and the balance sheet. A production company can immediately leverage to higher gold and silver prices. Use those numbers to calculate cash flow, and you have an objective valuation of the company.

TGR: Chen, do you currently favor silver over gold? Is there more upside, percentage-wise, to silver than there is to gold?

CL: Yes, I think so. I probably have a little more silver than gold because silver started relatively late and is just coming up. Gold starts first, and silver always outperforms gold in the second half of a bull market. That happened in the ’70s, and I think it could happen in this round.

On February 18, the margin of silver reserve requirements for silver contracts was increased by the exchange. Silver exploded because funds were betting heavily against silver, and they had to cover their shorts. It could easily go to $40/oz. and to $50/oz. There’s still a big short position in silver, and it could outperform gold.

TGR: Where would you be investing today if commodities weren’t in an upswing?

CL: If the underlying commodities were not in an upswing, I would be more focused on stocks with high liquidity—those with strong balance sheets and strong cash flow. When they generate cash flow, they don’t need to come to market to raise money. So, then they’re relatively insensitive to commodity prices. Another very important factor to consider is the cost of producing the commodity. That’s also in the cash flow model. If the commodity price stopped rising, or started to go down, I would invest in those stocks.

TGR: Do you have a metal stock you want to mention?

CL: I like Pretium Resources Inc. (TSX:PVG). That was my pick in early January. I met CEO Bob Quartermain at a conference, and we had a discussion. Quartermain was the founder of Silver Standard Resources Inc. (TSX:SSO; NASDAQ:SSRI); he retired, and then came back to run this company, which is a gold asset spinoff of Silver Standard.

When we met the stock was in the low $6 range, and I believed it was very much undervalued. So I put it in my newsletter, and it’s appreciated a lot. You can see it’s up about 50% in the past two months. But it’s still a very undervalued stock.

So why do I like it? One factor is that it has a very large gold deposit next to a large Seabridge Gold Inc. (TSX:SEA;NYSE.A:SA) deposit. Seabridge has 50 Moz., Pretium has 40 Moz. gold, is drilling and has more results coming. Its 40 Moz. low-grade deposit has already given the company some valuation. If you compare Pretium to NovaGold Resources Inc. (TSX:NG; NYSE.A:NG), it’s very much undervalued just on the low-grade part. But on the high-grade part it’s all blue sky. There is some basic valuation, and a lot more upside yet to be seen. They recently did an IPO, and the company is well funded for the next two years.

TGR: Is there another metal stock you want to mention?

CL: In our last interview, I mentioned a couple of silver stocks. One was Alexco Resource Corp. (TSX:AXR; NYSE.A:AXU), a very high-grade silver deposit in the Yukon. They own the whole district, they have started mining operations and they have a mill running. They’re beginning to produce 3 Moz. silver per year, but they can gradually increase to 5 Moz. and eventually to 7 Moz. What’s so special is that it’s a very high-grade silver/lead/zinc deposit, and if you apply lead and zinc credit, the silver cost is below zero. So, you’re talking 3 Moz. at zero cost. It’s free silver. If they go to 7 Moz. at zero cost, $30/oz. silver means a huge cash flow. So, it’s becoming an amazing cash flow generator.

TGR: Another silver play?

CL: Yes: Golden Minerals Company (TSX:AUM; NYSE.A:AUMN). Golden Minerals and Alexco have similar characteristics, namely that their silver is extremely high grade. El Quevar is Golden’s flagship property in northern Argentina. It’s in the high Andes, and there’s nobody living there. There’s plenty of water. The company has only explored a small area, but has already found very high silver content, and it’s expanding its resource.

Early on, the company was talking about 6 Moz., but it can build a much larger silver mine and increase capacity. Because of the grade, today’s silver price gives the company a huge margin. Plus, Golden Minerals owns huge properties throughout South America and Latin America, including Mexico. It’s a spinoff from Apex Silver, which went into bankruptcy, and all the exploration properties came to Golden Minerals. Apex put in their claim very early, and they own a lot of very good and important properties throughout South America.

TGR: Another company?

CL: I have owned a gold stock called OceanaGold Corp. (TSX:OGC; ASX:OGC) for a fairly long time. In early 2009, I got in at around $0.40, and I still own a very large position in it. The stock has not been doing very well over the past few months because the company raised money to build a Philippine mine, and the market didn’t take it well. That brought down the stock quite significantly in just a few months.

I have been adding a little more stock to my already large position, partly because they have a very stable 270,000 oz. (Koz.) per year operation in New Zealand. Potentially, the cash costs can come down next year, but at current gold prices they are generating a huge cash flow. Plus, it has this new mine in the Philippines coming on, and the company can dramatically increase its gold production and reduce costs because the cash cost is below zero if it’s getting credit for the copper.

TGR: You invest in very small stocks. Can you mention one?

CL: Majescor Resources Inc. (TSX.V:MJX) is a tiny company, and so liquidity is quite limited. I met the CEO late last year. The main property is in Haiti. The fascinating thing is, the company already has a huge historical resource drilled by the United Nations and verified by German engineers. It has over 1 billion lbs. of copper and very high-grade gold—about 250 Koz. gold at about 14 g/t.

The Haiti property is right next to a property of Newmont Mining Corp. (NYSE:NEM). Newmont’s CEO did an interview recently, and he mentioned that the Haiti operation is the most promising up-and-coming project for Newmont. The market cap right now is just $9 million, and that’s why I see potential. If successful, this can be a home run. Of course, if it’s a failure, you lose all your money.

TGR: Majescor is obviously a takeover candidate with a $9M market cap. Somebody can probably have it for $20M.

CL: Exactly, and hopefully a lot more. If Newmont wants to build a mine, it’s going to pour maybe a billion dollars into a world-class flagship mine. Majescor already has the mining permits, while Newmont is still applying for them. I think people will eventually find this company; we’re trying to get in there first.

TGR: Something else you wanted to mention?

CL: It’s a rare earth company—American Manganese Inc. (TSX.V:AMY, OTCPK:AMYZF). Manganese is a very important metal used to make steel and batteries and China controls about 97% of the electrolytic manganese metal (EMM) market. This could be the next rare earth trade. If you compare American Manganese side to side with Molycorp Inc. (NYSE:MCP), there are very good similarities, but its market cap is still just 1% of Molycorp’s. I think there’s a lot of upside here.

TGR: If this stock doubles, it gets large enough for small-cap mutual funds to buy it.

CL: Exactly. That’s the beauty of this stock. Right now, the mutual funds couldn’t buy it. So, once it rises, mutual funds get in and push the stock to much higher levels. I got in at half of today’s price. The company recently did a private placement, and I heard some funds were fighting to get in on that. Even though it’s already doubled from our initial purchase price, those kinds of stocks may not initially have a lot of liquidity. Once they get to a $100 million market cap, the mutual funds get in and more investors realize that this could be the next Molycorp. Liquidity will increase, and you ride the liquidity and rising volume; the stock can go much higher from here.

TGR: Chen, do you have another gold stock that you want to mention?

CL: Colossus Minerals Inc.’s (TSX:CSI) stock didn’t do anything in the past year. That’s typical, because traders only care about a mining stock until about a year before it’s in production. The company’s mine is going into production next year, so the stock can break out from here. Colossus has very high-grade gold. It also has platinum and palladium credit, and so the cost of gold will be below zero. They have 200–300 Koz. gold coming out. Production costs are always rising, but this is a world-class, low-cost producer. That should attract a lot of majors who fight for low production costs. A major could take it over. It’s only an $800 million market cap.

TGR: Thank you, Chen. This has been very informative.

Listen to Analyst Chen Lin on Jay Taylor Radio (2/22/11)

Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors, Inc., publisher of J. Taylor’s Gold, Energy & Technology Stocks newsletter and Roger Wiegand’s Trader Tracks. Using his wife’s Roth IRA account, Lin invested $5,411 in December 2002, and by December 31, 2010 it was worth $1,188,993—with no cash added. You can see his portfolio chart here.

A doctoral candidate in aeronautical engineering at Princeton, Chen found his investment strategies were so profitable that he put his Ph.D. on the back burner. Chen worked in the Internet and computer area where he founded a few start-up companies. After the tech bubble burst of 2000, Chen was able to move his technology portfolio into the resource sector with considerable success. Chen employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis. To subscribe to Lin’s What Is Chen Buying? What Is Chen Selling? newsletter click here, or call Claudio Bassi at (718) 457-1426.

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I read a great piece by HSBC Chief Economist guru Stephen King that appeared in the Financial Times this morning, “Trigger-happy central bankers risk wrecking the recovery,”  [Note: We often consider things great when they are aligned with one’s own world view; which is the case here; as I too think developed world central banks have gotten ahead of themselves.]

Here are some excerpts that I think make great sense: