Summary of Inflation and Deflation the United States

The following is an excerpt from the March issue of The Morgan Report. This followed a lengthy discussion of how silver and gold both performed during inflationary and deflationary periods. Most of what I wrote was based upon the work of Roy Jastram and his work on Silver the Restless Metal and the Golden Constant.

Since 1800, the U.S. has had more years of inflation than deflation, 92 versus 53. The record for the two precious metals is remarkably similar. Both lost purchasing power in every inflation in the United States until the last period mentioned, 1951 to 1979, where silver out-performed gold. What adds interest to this similarity is that silver was effectively demonetized in 1834, whereas the gold standard prevailed a century longer. It is true that the U.S. Congress was fiddling with the silver market from 1807 through 1920, but the effect was to put a floor under the silver price, with the gold price being strictly set. And from 1933 until 1975, U.S. citizens could not buy gold.

However, precious metals have a long-standing reputation as hedges against inflation. Jastram writes, “This is not valid based on evidence of a century and a half in the United States and more than three centuries in England. The truth is, in most cases, the two metals, yes, both silver and gold, gained operational wealth in deflations.” From a long-term perspective, gold has held its purchasing power very well in the United States.

The long-term view of silver is different. Silver did fairly well, relative to gold, until 1890. After that, the purchasing power has been erratic. At times, silver’s performed poorly, compared to gold, until the last period mentioned in Jastram’s book, where the silver outperformed the gold by a very wide margin. However, we must be cautious here because so much of the upward move in both gold and silver took place in such a small timeframe.

Before moving from this historical study, I wish to mention a few other items the good professor was able to forecast. Chapter 5 is titled “Silver’s Industrial Revolution.” Jastram recognized that silver was to be a high-tech metal required by industry. I think even he would be astounded to learn that during the past ten years, silver’s use in industry has gone from roughly 35% of the entire annual production in silver, to greater than 50%. Not only that, but it is the fastest growing area of the silver market. The lithium ion battery for laptops will have a competitor and that is the Z power silver zinc battery that I’ve mentioned in other reports.

Apple Computer will be the first company to announce using this new battery. Silver’s use as a biocide continues to grow, being used in washing machines, refrigerators, and a host of other water purification systems, on both an individual and a municipal level. The supply side of silver is likely to decrease from 2009 to 2010, as base metals production will decline during this deflationary environment. As we all know, about 75% of silver is a result of base metal mining. Time and time again, the evidence is clearer and the facts are that silver is absolutely crucial to our way of life. However, it still remains the metal least understood by most of the world.

Now, we must look into the future. Indeed, the future is more uncertain at this point than at any point during my lifetime. My original intent in doing this study was to extrapolate the data so carefully laid by Professor Jastram, and lead you to a very solid conclusion. It is my determination that this cannot be done, because, in most of his study, the metals retain a monetary component, either officially or unofficially. Even the coinage in the United States was silver through 1964. So, I took a step back and evaluated the facts that we do know.

Presently, we have the deflationist Robert Prechter being the best known, and to this audience, perhaps, Ian Gordon or Bob Hoye, but even in this Canadian structure and in these camps, we have different signals. Prechter claims gold is topped and would be a bad investment during the ensuing depression, whereas both Ian Gordon and Bob Hoye extol the virtues of gold and gold only as the place to be during a deflationary period. Certainly, gold stocks play an important part in both of their analyses and, of course, gold stocks, as I’m writing this in February of 2009, really have under-performed the metal.

Gold has maintained. But so far, gold stocks have done poorly and the credit crisis continues taking its effect on the stock market. Silver has not kept up with gold, but has fared better than any of the base metals, thus acting, in my view, as silver would be expected to at this point in time—not as good as gold, but better than anything else in the metals category—showing once again the dual nature of silver being both an industrial and precious metal asset.

My view as to where we are heading actually supersedes both inflation and deflation. My very studied observation is that we are in what Robert Prechter refers to as a grand super cycle. However, my view is that we are at the tail end of the destruction of a currency and these events only take place every 200 to 300 years. This is crucial to know.

As stated in one of my early reports, a hyperinflation is not a function of the amount of money printed. If that were the case, we have more than enough money now to see a destruction in the United States currency. No, it’s a function of confidence and monetary velocity. I believe that over the next year, we’re probably going to see a rally into probably mid March, perhaps as long as into mid April 2009, and then I believe that the deflationary forces are going to be so overwhelming that the only good place to invest will be in cash or just keep accumulating metals and mining stocks on the dollar cost average basis. In other words, accumulate positions slowly over time rather than rush in and try to pick a bottom.

It’s not out of my realm of thinking, but we might see gold touch the major uptrend line before the bull market resumes. That would not invalidate a bull market in gold, it would only confirm it, but it could go lower than it is presently and still maintain a bull market. In fact, most major secular bull markets do test the major uptrend line at least once. Silver has already done this. It has touched the major uptrend line; whether it comes back and we test it or not remains to be seen. It would not be outside of my thinking that it’s actually done it already, preceding gold doing it, and it may not get down into the 880 level or whatever. But, again, the market knows more than any of us.

So, to re-emphasize my conclusion, we are in very, very interesting times and I do believe that the deflationary scenario does have merit at this time but, again, it’s way beyond that. We’re looking at a destruction of the currency. We’re looking at the United States dollar no longer being the reserve currency of the world. In other words, simply stated, we’re looking at a currency crisis.

During a currency crisis, the one thing that you don’t want is the currency that’s being destroyed, which is the United States dollar; you need an alternative currency. The only alternative currencies that I know of that have held up well are, of course, gold and silver. I do believe you need both. I do believe that I could certainly be wrong. Perhaps there’ll be some miracle cure here. I really doubt it, but you don’t need much more than a 10% or 20% protection in order to be well protected if things break down quite substantially for you to come out of this in very, very good condition.

On the other hand, I know many of you are what I call metal heads, like me, and you prefer a higher weighting than that; of course, that’s your personal choice. I’m not going to advocate much more than, say, 20% for most people. There will be a day, in my view, probably in the 2010 to 2012 timeframe, where the dollar just gets to a position where people don’t want it, not only on an international basis with our trading partners, which is already showing up, but also on an individual basis. And this is where you’ve got to be very careful to see what’s going on.

There will be a time when people decide that they’d rather purchase something that’s a hard good that can be stored and maybe bartered later, rather than hold the currency. Again, I don’t think we’re going to see that this year. I think 2009 will be mostly a deflationary year; 2010 is when I expect all of this monetary stimulus and printing of money will work itself into the economy. By that timeframe, it’ll start manifesting in huge increases in inflation. However, it could take off at any time and I’m well aware of that. I do have key indicators that we watch and keep watching.

Tags: deflation, inflation

Junk Silver or Junk Bonds?

Junk Silver

“Junk silver” and “junk bags” are terms that refer to $1000 in U.S. coinage—dimes, quarters, or half dollars minted 1964 or earlier; commonly known junk bags consist of 90% silver. Junk bags of silver dollars are sold separately and have always held a higher premium.

We are talking about coins that are only in fair condition and have no collectible value above the bullion value or the “melt value.” The word “junk” refers only to the value of the coins as bullion, and “junk” is not scrap silver.

When these coins were freshly minted they contained 0.7234 troy ounces of silver per dollar of face value. In practice, the recognized weight of fine silver is 0.715 troy ounces per coin, or 715 troy ounces per bag—a bit less than original, due to wear. Thus the market recognized junk bags as containing 715 ounces of silver if smelted to 0.999 purity. Less common as junk silver are Kennedy half dollars from 1965 to 1970, which contained 40% silver.

In days gone by, junk bags of Canadian dimes and quarters were in the marketplace, but in today’s world very few exist. The Canadian coins contained 80% silver (0.600 troy ounces per dollar of face value) until 1966. In 1967, they were minted in both 80% and 50% varieties. In 1968, they either contained 50% silver or none at all ((such as the Cupro-Nickel). Dollars and half dollars were minted in 80% silver until 1967.

Junk silver coins are still considered legal tender and at many times have carried very low premiums. Today, however, the premium on junk bags is about 20% or more. There have been higher premiums near the peak of the silver price in 1980 and also during Y2K, when silver bags were in high demand.

For those beginning to invest in the real silver market, U.S. silver coins are easily recognized. In addition to being easy to describe to someone who has never seen a 90% silver coin in their lifetime, coins provide convenient divisibility. In other words they can be traded in small amounts, while a silver bar of perhaps 100 troy ounces cannot be divided or used for small transactions.

Simply stated, junk silver is popular among survivalists, but today it might be added among financial survivalists! In the event of a currency collapse, it is speculated by many in the precious metals community that silver coins could provide a viable alternative to today’s currency (scrip), commonly perceived to be money.

So, that is a very brief summary of “junk” silver and it must be pointed out that there is no default risk associated with owning silver. The price does vary along with all other assets, so you might risk not being able to trade your silver for the same amount of currency used for the initial purchase.

Junk Bonds

Now let’s look at “junk bonds.” A junk bond is a high yield bond that is rated below investment grade at the time of purchase. Bonds can also become “junk” if the market determines that the issuer’s risk has increased. For a quick example, at one time General Motors bonds carried a very high rating with the risk of default being extremely low, but today does anyone think that GM is capable of paying back the bondholders? These junk bonds are called “Fallen Angels.” Generally, junk bonds have a higher risk of default or other adverse credit events, but typically pay higher yields than better quality bonds.

Risks in all bond investments, including “high” quality bonds:

1. Inflation

2. Currency risk

3. Risk of Principal

4. Market Risk

5. Political Risk

6. Default Risk

7. Liquidity Risk

There are other risks but the point is made: bonds of any caliber have risk! In this day and age, nearly everyone is familiar with the fact that certain rating agencies described the risk of certain “assets” to be high grade at near zero risk. Today that is laughable but certainly no joke, as it has basically taken down the global markets to the present level, and the trust (confidence) in the system has been greatly damaged.

These days, we see many fleeing to government bonds, due to the perceived safety. However, it might be interesting to note the words of currency expert, the late Dr. Franz Pick, who said that government bonds are “certificates of guaranteed confiscation.”

We might ask if Franz Pick’s statement is true or false. Perhaps we can approach the question differently since the outstanding public debt is roughly $35,000 for everyone in the U.S. Simply ask yourself if you, your friends, and your neighbors are able to pony up the amount required on a per capita basis. If so, don’t worry be happy! But if roughly $140,000 per household is not in your petty cash drawer (or your neighbor’s) you might start to consider what really deserves to be called junk—bonds or silver.

Jimmy Rogers states, “I’m now selling long-term U.S. government bonds short. That’s the last bubble I can find in the U.S. I cannot imagine why anybody would give money to the U.S. government for 30 years for less than a 4% yield. I certainly wouldn’t. There are going to be gigantic amounts of bonds coming to the market, and inflation will be coming back.”

As the debt burden continues to increase, more and more people will see the light and realize that it is not the government responsible for paying off the bonds—it’s the people themselves. And where is that “money” coming from?

It is an honor to be,

David Morgan

Tags: 90% silver bags, bonds, government debt, inflation, junk bonds, junk silver, silver coins, silver investing

United States Debt, and Gold

June 7th the national debt of the United States was $8.85 trillion, which leaves the annual interest on this large amount of debt over $406 billion or over one billion dollars everyday.

The debt of the United Sates continues to pile at the rate of $1.38 billion a day. The debt of the US is compounding, leaving a negative effect on the dollar, as well as, the incomes of the working class.

Experts continue to speculate about the financing of the US debt. “It will be financed through inflation,” said Richard Russel, a market analyst.

Russel continues by saying, “I’ve watched the purchasing power of the dollar going down the drain all my life. Now the process seems to be accelerating.”

There are a few theories based on history suggesting the price of precious metals will rise as paper money is devalued. A few analysts have named the dollar the “Achilles Heel of the U.S.”

“The US has no alternative but to continue on the path of systematic inflation,” says Russel.

Tags: gold, inflation, U.S. Debt, united states debt