Metals: The Best Currency Collapse Insurance

More than ever, in these uncertain political and economic times, you need to consider opportunities in natural resources, industrial metals, and precious metals, an area I refer to as “discovery” investment.

The US dollar is in a secular decline. Commodities, for the most part, trade inverse to the dollar, rising with dollar weakness. Therefore, they remain the best protection against a long-term dollar decline and loss of purchasing power.

This goes a long way to explaining the strength of gold and silver in their ongoing bull market. Gold and silver declined in the beginning of the year, but they quickly bounced back. This pattern has been observed six times in the past six months. It always seems to revert back to the secular trend, which is dollar weakness and gold and silver strength.

Can the US currency strengthen in the current fiscal mess? Let’s not forget that the world still functions on the reserve currency status of the US dollar. This means that the dollar is in demand for many transactions, including, occasionally, the deleveraging of the world’s financial markets. This explains the “bounce” in the dollar during financial panics and market selloffs.

Think back to July 13, 2008, when the Bush administration’s Treasury Secretary, Henry Paulson (formerly of Goldman Sachs), decided under pressure to guarantee China’s stake in Fannie and Freddie with perhaps the first real use of the “G” word for “guaranteed.” Today, the upper limit of the government’s $200 billion Fannie/Freddie guarantee has been removed. Since then, the Feds, both Dems and GOPs, have Guaranteed practically everything that moves with fiat dollars.

In other words, they will continue printing dollars to take care of debts, putting pressure on the greenback. Recently, the Fed’s Dr. Janet Yellen opined that the Fed’s $600 billion in quantitative easing (QEII) will create three million jobs. The truth is, nobody knows. However, according to a newly released study from the University of Illinois, Chicago, states like Illinois and California are very “close to unwinding.”

Fed Chair Bernanke assured the Senate in January testimony that there would be no Fed bailout of states or municipalities. Given the US government’s proclivity to assure anything that moves is “too big to fail,” we find his assurances unlikely.

Of course, the US dollar isn’t the only currency in trouble. We are also mindful of the sovereign debt problems in Portugal and Spain that will shortly reappear on the world’s trade blotters. No matter how much Portuguese and Spanish debt China says it will buy, we think bailout-mania will once again ravish the EU’s solons. Long-term solutions here do not favor the euro’s existence as we know it.

The point is, all fiat currencies are under assault, and it makes sense to hedge by owning precious metals and rare industrial metals.

It would seem that the only way out of this morass is for a significant decline in the US currency. Even Republican Congressman Paul Ryan acknowledges that the debt ceiling must be increased and that the United States cannot be allowed to default -- same old message for the past decade of debt limit increases, of course. No one knows how this sequence of unsustainable political and economic phenomena will be resolved.

Ultimately, the US dollar must be replaced as the sole reserve currency. My friend Dennis Gartman always notes that the reserve currency status belongs to the biggest, baddest military in the world. Today, that force is still the United States military. However, with Defense Secretary Gates’s visit this weekend to China and his observation of new ballistic missile and stealth aircraft hardware, things are changing in that regard, albeit slowly.

China’s Yuan must eventually play a central role in world trade, and China is moving very slowly away from its dollar peg and toward full convertibility and bond market establishment for the Yuan. China’s problem, as the country itself knows, is inflation. Appreciation of the Yuan would help immeasurably with this problem.

In the interim, over the next decade, gold, silver, and precious metals will take on increasingly important roles as real money, as disaster hedges, and as true stores of value. And a new and important category of metals, called “Critical or Strategic Metals,” is firming up. The category is not simply about exploration and mining activities; it also includes the development of the intellectual property surrounding the supply and value chains.

It will be worth having ownership in gold and silver junior shares, particularly silver and critical metals such as REEs. Tantalum, niobium, graphite, lithium, and vanadium, to name just a few, are also interesting wealth creation opportunities.