GREAT PROFITS IN THE COMPANY OF GOOD FRIENDS MARCH 15, 2007, VOLUME 20, NO. 05

RIDING THE BULL MARKET IN PRECIOUS METALS

Take a look at the charts on the following pages, and you'll find little doubt that precious metals have been on the rise. We've asked Michael Checkan, our OC Wealth Advisory Panelist and precious metals expert, to give us the analysis on this boom. You'll also find reports from four of our top analysts on what they're tracking today. We hope you'll find this issue profitable.

The real driver behind any commodity bull market has been - and continues to be - the falling U.S. dollar. And this decade's bull market is no different.

I entered the world of precious metals and foreign currencies in the mid-1960s. At the time, Americans could not legally own gold bullion. All foreign currencies also had fixed exchange rates.

It wasn't unusual for my customers, living outside the United States, to know more about my new specialization than I did. They had lived through periods of currency devaluation.

However, in the 1970s it was my turn to experience the devaluation of my native currency. And I watched as the only "real money" in the world, gold, soared to new highs.

At the time, the U.S. dollar was king, the reserve currency of the world. Gold was trading at $35 per ounce and silver at $1.29.

Things began to change dramatically when President Nixon closed the gold window in August 1971. By 1980, the gold price reached $850 per ounce (that's $2,200 per ounce in today's dollars). The Swiss franc, the best performing currency against the U.S. dollar, rocketed from 23 to 90 cents per franc.

Is History Repeating Itself?

I definitely believe the '70s are alive and well here in the new millennium. The similarities are striking. Here are a few:

1. War: In the beginning of the 1970s, the United States was caught up in the Vietnam War, which depleted our treasury. Today, the U.S. is engaged in the "endless war" against terrorism. Right now, America has troops in more than 100 countries (over 50% of the world).
2. National Debt: In the 1970s, there was a "guns and butter" approach by the federal government. Today, there is a similar mindset. But now it is much worse, since the United States is the biggest debtsor country in the world. The U.S. owes at least $3 trillion to other governments, and $1 trillion to China alone. When the politician is given the choice of either raising taxes or letting the dollar slide, which do you think he'll choose?
3. Interest Rates: The world was flooded with U.S. dollars in the 1970s. And today, the story remains the same. The governments of the world accepted dollars but wanted to redeem them into gold. This eventually brought about the closing of the gold window. Today, the governments are diversifying out of the U.S. dollar and into currencies like the euro, Swiss franc, and Japanese yen (to name a few). It's no surprise to see these currencies are increasing in value against the weakening U.S. dollar.

More New Challenges Today

Shifting to the present, there are some new challenges for America that didn't exist in the 1970s...

1. Globalization: The world's wealth is moving from the West to the East. This process will continue, and will be a burden on the U.S. economy.
2. Baby Boomers' Retirement: The largest generation ever leaving the work force will have huge economic, social, and political ramifications. In 2006, the first Boomers turned 60. The reality is that 50 million Boomers are getting older every day. From an economic perspective, probably less than 25 % of them have saved anywhere near enough for retirement.
3. U.S. Housing Market: Another real problem is falling real estate prices in the United States. I sold my home in Washington, D.C., in 2004 and moved to the suburbs. I understand that the price of that home has gone down by $100,000 in just a few years. Also, the American consumer has been using home equity loans to buy "stuff." Can you imagine what will happen to tax receipts when this consumer, who makes up 75% of the GDP, can no longer "shop until he drops?"

Now, let's take a closer look at what this means for precious metals...

Gold: The King of Metals

My favorite precious metal has always been gold, because gold is more than an industrial commodity.

It's a reserve metal. It's a real currency that's not backed by debt like its fiat counterparts.

Right now, two factors suggest my favorite metal will only soar higher. My friend, Dr. Lawrence Parks, says, "Dollars are accumulated in enormous quantities at foreign central banks, especially China, Japan and now Russia."

Dr. Parks goes on to say, "Most important, hardly anyone understands that ordinary people, by law, guarantee the balance sheet of the U.S. banking system. Its assets are protected systematically by the Federal Reserve's 'lender of last resort' bail-out facility, and its liabilities are protected at the micro level by so-called 'Federal Deposit Insurance,' which is not insurance, but, as Mr. Greenspan has pointed out, a subsidy to the banks."

As for the outlook for gold in 2007, I expect the all-time high for gold of $850 to be exceeded. The trend for gold's continued rise remains in place. Typically, these moves are in a 13- to 15-year cycle, and we are now only in the sixth year of the latest cycle

Silver: The Not-So-Poor Man's Gold

The "poor man's gold" continues to be the best precious metal for future profit potential. It has outperformed the other three precious metals, and should continue to do so in the years ahead.

Demand is simply outstripping supply. For almost 18 years, consumption has been eating into above-ground stocks of silver. Global inventories have eroded from an estimated 2.1 billion ounces in 1990 to around 400 million ounces today.

Silver is primarily an industrial metal, and is hard to replace. Silver is used in such small quantities that industries use it regardless of the price.

As for my outlook for silver in 2007, I believe it's headed for $20 per ounce. However, silver must first take out its recent high of about US$15.25, and then a significant technical level at about US$17.50 per ounce.

Platinum: Even Rarer Than Gold

Platinum is 15 times more rare than gold, and recently surpassed its 1980 all-time high of US$1,050 per ounce. Platinum and its sister metal, palladium, are courted by the same users.

The leading suitor for these two metals is the auto-manufacturing sector. In 2005, the auto industry consumed 46% of the world's platinum supply and 45 % of the world's palladium supply.

There continues to be less than a one-year supply of platinum above ground, so scarcity is still an issue for this most precious of all precious metals.

The jewelry industry took 30% of the platinum off take in 2005. There is a trend toward platinum wedding bands in the U.S. right now. In Japan, platinum jewelry is actually preferred over gold.

As for the outlook for platinum in 2007, I believe it too is headed higher... but probably will have the least price appreciation of the four precious metals.

Palladium: Sleeping Giant of Metals

This is the "sleeper" of the precious metals. In my opinion, it is significantly undervalued, but it is the one precious metal that is subject to one country's actions: Russia. The Russian Federation accounts for approximately two-thirds of the world's palladium supply.

Over the past five years, palladium has traded in a range from US$1,075 (its all-time high) to around its present level of US$334 per ounce. Meanwhile, her sister, platinum, has been steadily rising and exceeded all-time highs set in 1980.

With platinum presently about four times the price of palladium, the auto industry could soon trade their platinum for palladium. I would have expected this substitution to happen already, but the Russians still control the world's palladium supply.

All the major players remember when Russia stopped palladium shipments, so auto manufacturers are being cautious... at the moment. But, eventually, heavy industry will switch to palladium if platinum continues to increase in price. Remember, in 2001, the price of palladium was more than US$1,000 per ounce.

As for the outlook for palladium in 2007, it should be a small part of your precious metals holdings. It is a speculative metal, which will be higher by the end of 2007.

The Best Ways to Invest in the "Metals Boom"

There's no one good way to take advantage of the market in precious metals - there are many.

To invest in physical gold, silver or platinum, I often recommend the Perth Mint Certificate Program. I believe it's a solid way to buy and hold precious metals outside the U.S. dollar.

Additionally, there is no charge for storing precious metals in an unallocated manner. So you could technically place your 100 ounces of gold in the Perth vault next to my 100 ounces.

To own physical palladium, I also recommend Canadian Palladium Maple Leaf coins.

Advisory Panelist Michael Checkan is President of Asset Strategies International, Inc. based in Rockville, Maryland. He is a Pillar One Partner and available to answer your questions about investing in precious metals and foreign currencies. Michael can be reached at 301.881.8600 or 800.831.0007; by fax 301.881.1936, by email assetsi@assetstrategies.com or via his web site ww.assetstrategies.com Editor's Note: For more information about ASI and the Perth Mint Certificate Program, please see the endorsed brochure.

Reprinted with the permission of The Oxford Club

BACK to Michael's Corner main page