SurvivalBlog.com

James:

UK’s Daily Telegraph has a warning from Bank of International Settlements (BIS) about danger of global economic depression. [JWR Adds: This was also featured by NewsMax in the US.]
Here are some excerpts from the Daily Telegraph article:
[begin quote]
“The Bank for International Settlements [BIS], the world’s most prestigious financial body, has warned that years of loose monetary policy has fueled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood… …The BIS said China may have repeated the disastrous errors made by Japan in the 1980s when Tokyo let rip with excess liquidity advertisement” The Chinese economy seems to be demonstrating very similar, disquieting symptoms,” it said, citing ballooning credit, an asset boom, and “massive investments” in heavy industry.
Some 40 percent of China’s state-owned enterprises are loss-making, exposing the banking system to likely stress in a downturn.
It said China’s growth was “unstable, unbalanced, uncoordinated and unsustainable”, borrowing a line from Chinese premier Wen Jiabao In a thinly-veiled rebuke to the US Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be “cleaned up” afterwards – which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dot com bust.
It said this approach had failed in the US in 1930 and in Japan in 1991 because excess debt and investment built up in the boom years had suffocating effects. While cutting interest rates in such a crisis may help, it has the effect of transferring wealth from creditors to debtors and “sowing the seeds for more serious problems further ahead.” The bank said it was far from clear whether the US would be able to shrug off the consequences of its latest imbalances, citing a current account deficit running at 6.5 percent of GDP, a rise in US external liabilities by over $4 trillion from 2001 to 2005, and an unprecedented drop in the savings rate. “The dollar clearly remains vulnerable to a sudden loss of private sector confidence,” it said. [end quote] – Don W.

JWR Replies: I was shocked at how remarkably frank the BIS Annual Report was in its assessment. When even the international bankers start talking this way, watch out! Coincidentally, Sean M. and Tom at CometGold.com both spotted this new story: Banks ‘set to call in a swathe of loans’ Some serious “food for thought and grounds for further research” (FFTAGFFR).

You may have noticed that on Tuesday the spot price of gold fell to a three-month low, and silver fell to a six-month low. Rather than shaking my confidence in the metals, I look at this as a buying opportunity. I am still fully confident that the metals are in a primary bull market cycle that is likely to extend for another decade. It is difficult to “time” investing in fluctuating markets, especially the metals, which tend to be volatile. However, there is a time-honored tradition of buying on dips. Tuesday’s sell-off represents a big dip in what is an overall bull market, so take advantage of it. When you buy immediately following a 5% dip that means that you are essentially buying metals with no commission. (Since dealer markup on precious metals is typically 3% to5% over the day’s spot price.)

I should also mention that Summer is traditionally a quiet time of year for the precious metals, with statistically the weakest spot prices. (Historically, the biggest gains come in late Fall of most years.) So it is a great time to buy. The aforementioned timing talk is not to denigrate the systematic dollar cost averaging approach to investing. That also has its merits. But for any of you that realize that you’ve been dawdling, take the current market dip as your cue.

Silver, or Gold?
I am a steadfast supporter of silver rather than gold investing. In the current bull market, the gains in silver are likely to be considerably much greater that the gains in gold. This is because silver benefits from what I call the penny stock effect. Psychologically, is is not “far” for silver to double from $12 to $24, but it is seemingly a long way for gold to double from $640 to $1,280. Furthermore, the aboveground supply of silver is being used up in industrial use, whereas most gold is recovered for re-use. If you look at the ratio of the price of silver to the price of gold from a multigenerational perspective, silver is the clear winner. For hundreds of years, the ratio was 16-to-1. (It took 16 ounces of silver to buy one ounce of gold.) In the 1930s the ratio was 90-to-1. When the metals reached their last bull market peak in 1981–admittedly a wacky time, with silver spiking to $50 per ounce–the ratio briefly dropped to about 17-to-1. But by 1985 the ratio had climbed back to 63-to-1. In 1991 the ratio peaked at about 98-to-1. But the silver-to-gold price ratio has been falling ever since. And with the aforementioned ongoing aboveground silver depletion, the ratio will surely continue to slip. Back in February, 2001 (when I fairly accurately called the bottom of the silver market) the ratio was around 59-to-1. Presently, the ratio is about 52-to-1. I expect a ratio to decline to something closer to 23-to-1 when the current bull market peaks out, possibly around 2018 with perhaps $2,500 per ounce gold and $108 per ounce silver. BTW, don’t quote me on those figures! A lot of underlying market factors could change between now and then, not the least of which is the fate of the US Dollar itself. The very existence of the dollar as a currency unit is uncertain, given that time scale. Objectively, if the US Dollar were to someday assume its real value (since it is now backed by nothing), then it would be equivalent to the Zimbabwean Dollar. And FWIW, for my opinion of the eventual value and use of the U.S. Dollar, see the cover illustration of my novel “Patriots: Surviving the Coming Collapse”.

Silver has been called “the poor man’s gold.”. I agree that it is the best choice for middle class investors. One concern is that dollar for dollar, silver is much more bulky and heavy than gold. (Presently 59 times more bulky!) But the average investor can still fit their entire silver investment in the bottom of a typical gun vault. For planning purposes: A $1,000 face value bag of 90% silver coins weighs about 55 pounds and is about the size of a bowling ball, and a 100 troy ounce (think of it as 6.86 pounds if measured in the more familiar avoirdupois scale.) Johnson Matthey silver bar measures 5-1/8” x 3” x 1-3/16”. They stack nicely, so after you buy two or three “$1,000 face” bags of silver coins for barter, you’ll probably want to buy the rest of your silver in the form of 100 ounce bars. Granted, silver is a poor choice for someone that needs to “Get out of Dodge ” in a hurry or on foot. Gold, or even platinum would be much better for that. But of course I’m also an advocate of living year-round at your retreat.