Gold and Silver’s Future

Posted by Michael Berry Ph.D

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1. Gold and Silver:

Treading Water
2. Salares Lithium Strikes Again

1.  Gold and Silver:  Treading Water

Gold and silver seem to be treading water.  The good news is that gold does not seem to want to fall below $1100 and that silver below $17 per ounce. So I suppose the real question is whether the two precious metals break up or down from here.  But these are, in my opinion,  short run considerations.  You see the world is changing and with the change must come a dramatic rethinking of its currency system.  Everyone knows it.

China   is rattling her currency sword as well.  Here we agree with Paul Krugman the more than left wing MIT Professor who claims that China is stuck in an unenviable position.  If she dumps her dollar portfolio the value of the dollar will fall – just what Washington would love to see. This would be anathema to China.   So Beijing is very astutely encouraging her citizens to buy gold and silver – really for the first time in decades.  This is a sort of home-made solution to the nasty Forex imbalance conundrum. Wars have been fought over such issues as currency debasement.

The historical root of this problem, of course, is the reserve currency status of the US dollar.  That lofty status bestowed on the US greenback following WWII has allowed our leaders in Washington to issue debt at will, which other countries must purchase, because they required dollars to trade. It has been a 60 year US party indeed. Now the bill is past due. With the Nixon Administration’s dismantling of the post-war Bretton Woods agreement and the move to a “goldless” (Godless?) floating exchange rate system, the decline began in earnest.

It was at this point that academe promised that modern economic theory (both Keynesian and Monetarists) and their proponents would always do the right thing independent of the politicos. For a time it worked. It was called the “Great Moderation.” You know, no more serious recessions no bubbles, no economic trauma and reduced regulation in the system. But even then we were firmly on our way to a tipping point which many (Rogoff, Ferguson and many more) believe we are now past.

The French leaders appear smarter than Americans with respect to twentieth century currency thinking whether we like to admit it or not.  During WW II they surrendered early on and Canada, the British Commonwealth and the Americans came to their rescue.  They went to nuclear energy in a big way early and now export $60 billion of electricity a year to Britain.  Finally they began redeeming gold for dollars in the late 60s and early 1970s. It would seem that France realizes that money is gold, energy and other unprintable and rare commodities. It remains to be seen what France will decide to do with the ailing Euro.

Today all currencies are adrift in a swelling sea of indebtedness with no anchors.  It is a sea where no one on the bridge wants to deal with the massive deleveraging necessary.  It remains, as I have oft suggested, a race to the currency bottom. One certain pathway forward to cancel the mountainous waves of debt is to inflate them away by allowing relative currency values to sink. In the hearts and minds of both politicians and bankers worldwide it is the easier way forward. Who will go to the bottom first? The Chinese base their stubborn peg to the dollar on the belief that it is the US currency among all others.

One reason gold and silver have been manipulated for so long (yes manipulated – exchange rates can be manipulated as in China’s peg to the dollar) is that they are a natural anchor to a floating rate, fiat currency system; they have served that purpose for thousands of years. As Ted Butler points out, on March 25th we shall see if the CFTC modifies the way futures markets work to remove the ability to “wag the dog.” Please stay tuned.  Our current system has been dysfunctional since 1971 when gold was ripped from its dollar backing.

If you are a trader, what happens to gold and silver in the short run matters to you.  If you are a long term discovery investor and believe that the currency tipping point has been passed then you must also believe that gold and silver (and other commodities), should account for at least 10% TO 20% OF YOUR PORTFOLIO.  We think that across the 3 discovery spaces (incubator, mature and legacy) the gold and silver names have not followed the price appreciation of the metals. Please take note.


Salares Lithium Strikes Again

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Dr. Michael Berry is a pioneer in the emerging field of “discovery investing.” He researches and writes on companies that focus on discovery in natural resources, high technology and biotech.
Previously, he successfully managed small and mid cap value funds for Heartland Advisors and Kemper Scudder.
While at the Darden School, University of Virginia, he was a professor of investments and has held the Wheat First Endowed Chair at James Madison University. His research in the study of behavioral strategies for investing has been published in numerous academic and practitioner journals.

He publishes Morning Notes by Michael A. Berry, Ph.D. The notes discuss geopolitics and their effect on capital markets.

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