Why Invest in Precious Metals?

economic, financial and marketing analysis

WHY INVEST IN PRECIOUS METALS
The rapid and ongoing growth in the global money supply and the massive scale
of unfunded government deficits and long-term obligations – in the US, Canada,
UK, EU and elsewhere - make us believe that we are heading into a period of high
inflation, perhaps even stagflation in the developed world. 

The monetary consequences of money printing and government deficits drive the
inflation component. The lack of savings, the focus on consumption rather than
production, poor demographics, rapid growth in the size of government, chronic
current account deficits and accelerating social welfare obligations are driving the
stagnation component.

Precious metals have a high positive correlation to inflation.  Stocks and bonds
have a negative correlation to inflation.  Mathematically, this means that precious
metals are an excellent inflation hedge and will tend to outperform bonds and
stocks during inflationary times.

In addition to the inflation driver we believe that gold is in the process of being
re-monetized. By that we mean that it is regaining is status as a safe currency in
addition to being an inflation hedging commodity. In light of the clear intention of
the governments in the developed world to devalue their way back to prosperity –
as if such a thing is even possible – this process should only continue to pick up
speed over time.

INFLATION/DEFLATION
Are we entering a deflationary or inflationary environment?  Falling house and
equity prices have many mainstream commentators convinced that deflation is
the issue.  However, by watching certain key indicators we can be much more
confident that inflation is the looming risk for investors, not deflation.

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EXCESS BANKS RESERVES
Excess bank reserves continue to explode in the US and around the globe –
US excess bank reserves stand at approximately US$ 1 trillion and counting. 
Assuming 10 to 1 lending ratios, the US banking system now has the ability to
create around US$ 10 trillion in additional money supply on top of only US$ 15
trillion in existence – almost a doubling of the money supply once they begin to
lend again.

GOVERNMENT DEBT LEVELS

The US bailout is running at approximately US$ 10 trillion and counting.  The per
capita numbers are equally alarming in Canada, UK, EU, China and India.  The
US monetary base is around US$ 15 trillion so this could add 40% to the US
money supply.  Research shows that even with the current dramatic deterioration
in US government finances we can expect worse to come.  Over the course of
the typical banking crisis government debt levels rise an average of 86% in the
three years following.  If investment demand is not present for the huge debt
issuances that this will entail, will the worlds central banks revert to monetizing
their governments’ debts – or in simple terms printing the money.

MONETARY BASE GROWTH

The Monetary Base, narrow money supply or M0 is currency (notes and coins) in
circulation and in bank vaults, plus reserves which commercial banks hold in their
accounts with the central bank (minimum reserves and excess reserves). M0 is
usually called the monetary base - the base from which other forms of money are
created - and is traditionally the most liquid measure of the money supply.  US
M0 has exploded! The US Federal Reserve has increased the monetary base over
150% since the start of the crisis.   Between January 1960 and August 2008, the
48-year average M0 growth rate was 6.0% with very little volatility around that
number. Growth rates exceeding 10% were rare and often preceded sharp gains
in commodities prices including precious metals.

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GOVERNMENT DEFICITS 
Governments around the world are stepping in as borrowers and spenders of
last resort via large Keynesian stimulus programs and/or quantitative easing –
i.e. money printing. Large government deficits have historically been inflationary.
Government deficit expectations for 2009:

US > 10% of US GDP

– Deficit in 2007 was 2% and peaked at around 4% during the inflationary
1970s
– US federal government needs to borrow US$2 trillion dollars in 2009 and
US$1.5 trillion in 2010
– US money supply is currently US$15 trillion – where will this US$ 3.5
trillion come from?

Global > 10% of global GDP

– Global government debt financing requirements are estimated to be
greater than US$5 trillion in 2009

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economic, financial and marketing analysis