Gold & Silver
Your Protection Against a Falling Dollar-and Why You Should Keep Some of Your Precious Metals Offshore

by Michael Checkan

This is not breaking news. But what are you doing about it? Most Americans are doing nothing.

Historically, one of the best ways investors have protected themselves against a faltering currency is to purchase gold and silver. In this article, I'll show you why that's still a good strategy, and the best ways of doing so, based on my nearly 40 years of experience in the precious metals market. But first, let me show you the true consequences of the falling dollar. They're much larger than you might think.

A falling dollar means that everything that is priced in dollars is falling in value. If the dollar falls 10%, and you are paid US$50,000/year, your earnings will fall by US$5,000. If your home is worth US$200,000, its value will fall by $20,000. If your stock portfolio is worth US$100,000, it will decline by US$10,000.

If you're like most Americans, this erosion in the value of your dollar-based assets is invisible. That's because you're probably still paid in dollars, paying your mortgage in dollars and investing in dollar-denominated stocks.

But just because the decline is virtually invisible doesn't mean that it's not real. To understand one consequence of this decline, just take a vacation overseas, to a city like London. Just be ready to pay the equivalent of US$8 for a pint of beer, or US$20 for a meal of fish and chips!

More expensive international travel, though, is not the most important consequence of the dollar's decline. But to understand that consequence, you must understand the cause of the decline. That, in turn, points the way toward a strategy to protect you.

Most experts say the dollar is falling because of our "twin deficits": the federal budget deficit and trade deficit are at historically high levels. Simply put, more money is being spent than earned. If you overspent the balance in your checkbook, checks would be returned for "insufficient funds". But the U.S. doesn't have that problem...yet. This is because the dollar is the world's "reserve currency", viewed historically as being "as good as gold". Among other consequences, this is why oil is sold in dollars, not yen, or euros, and why people in third world countries hide dollars, not rubles, or pesos, under their mattresses.

Both deficits are serious, but the one that most concerns economists is the trade deficit. Academic studies say that when a trade deficit exceeds more than 5% of a nation's Gross Domestic Product (GDP), that country's currency must fall sharply-20%-40% in most cases. Devaluing the currency makes that country's exports more competitive, and imports more expensive. That in turn spurs exports and discourages imports, bringing things back into balance.

In the case of the United States, the balance of trade deficit now amounts to a stunning 5.7% of GDP. Economists are unanimous in stating that the only way this can be addressed is by substantial dollar devaluation. What's more, U.S. leaders now accept this and are calling for a lower dollar. Not directly, but by warning U.S. trade partners not to intervene to prevent the dollar from falling.

So...the dollar is falling, and is likely to fall more. In the near future, you can expect to be paying more for anything imported from overseas-and the declining dollar will then not be nearly as invisible as it is today. The real question is: How can precious metals protect you from this insidious decline in the purchasing power of your dollars?

The most fundamental reason is that precious metals, and particularly gold and silver, are, in fact, money. Gold has been a trusted store of value for more than 5,000 years, and silver for almost as long. The monetary nature of gold and silver is even specified in Art. I, Sec. 10 of the U.S. Constitution, which prohibits the states from making "any thing but gold and silver coin a tender [i.e., an offer] in payment of debts". However, there is no such prohibition for the federal government, and so today, the dollar has no connection whatsoever to gold or silver. It is "fiat" or paper money, with no intrinsic value, and backed by nothing but the "American dream".

Gold and silver, therefore, are competitors against the dollar and all other forms of paper money. And because of this, when the values of paper currencies like the dollar decline, gold and silver prices increase. That's what's been happening for the last 90 years, during which time the value of the dollar has fallen a stunning 95% against gold. Or, to put things in a slightly different perspective, during this 90-year period, gold has moved from US$20.67/ounce to US$450/ounce, an increase of 2,100%! This is the fundamental reason why gold and other precious metals should always be in your portfolio.

How Much Should You Invest in Precious Metals?

A growing number of investment advisors suggest placing 5% of your investment assets into gold, which is never sold. This is your "golden anchor". Another 15% of investment assets should be placed into gold and silver to be bought and eventually sold as you would a security. A purchase of one-half gold and one-half silver of the 15% allocation is often suggested. (You may also wish to purchase platinum or palladium with some of these funds; metals that tend to move in line with gold and silver prices, but which are primarily industrial metals with limited monetary use.)

There are a number of forms your investment in gold and silver can take, with the most conservative listed first:

• Gold and silver bullion, in the form of coins or bars;
• Gold and silver certificates, representing the ownership of a certain amount gold and silver stored in a secure location;
• Shares of gold and silver mining companies, traded on securities exchanges; and
• Futures contracts or options speculating on the future price of gold and silver.

Depending on your circumstances and tolerance for risk, you may wish to use a portion of your investments in gold and silver to speculate in mining stocks and futures and options contracts. There's no question that such investments provide tremendous leverage relative to any move in precious metals prices. However, since these investments themselves are denominated in dollars, or another paper currency, they don't provide the same protection from the falling value of a paper currency as physical gold and silver.

For that reason, I have always recommended to my clients that they invest the "golden anchor" and "investment" allocation of their precious metals portfolio into coins, bars, and/or certificates, on a non-leveraged basis.

Incidentally, gold, silver, and platinum coins, bars, and certificates may be included in your self-directed retirement plan. The IRA, or other form of self-directed plan, must have an administrator/trustee located in the United States, but storage can be anywhere in the world.

The Best Ways to Buy Coins, Bars and Certificates

In the U.S., the most common way to purchase precious metals in coin, bar or certificate form is through a dealer. In Europe, investors generally purchase through a bank.

The most popular coins for precious metals investments are the one-ounce American Eagle, Canadian Maple Leaf and Australian Kangaroo/Nugget. Precious metals bars are also available. The usual investment size is one-ounce and one kilo (32.15 ounces) in gold, 100 ounces in silver, and one-ounce and ten-ounce bars or 50 ounce "plates" in platinum. Typically, the larger the bar the lower the premium. All bars should bear an internationally recognized hallmark, such as Johnson-Matthey or Credit Suisse, guaranteeing the weight and fineness (percentage of precious metal).

When you purchase coins or bars directly, you'll need a secure location in which to store them. A safety deposit box, private vault or professionally installed floor safe at home are all acceptable. Many banks, especially in Switzerland, also offer precious metals custodial services, for an annual fee of approximately 0.25%-0.5% of the value of the metals.

Offshore storage of precious metals is attractive to those U.S. investors who are concerned about the repeated confiscation of gold in U.S. history, most recently in 1933. It was only in 1975 that Americans were again legally permitted to own gold.

Since storing large quantities of physical precious metals may prove problematic, precious metals certificates have grown in popularity. These allow you to purchase coins and bars without the inconvenience of storage. The best-known certificate is the Perth Mint Certificate, issued by the Perth Mint of Western Australia. This certificate is guaranteed by the government of Western Australia, and it is possible to store your metals at the Perth Mint at no additional charge.

The Case is Strong for Precious Metals

Precious metals are an important part of any portfolio in these uncertain times. And some of the world's most influential investors agree. In 1997, Warren Buffet bought a staggering US$650 million of silver bullion. More recently, George Soros, the man who made US$1 billion in a day by betting against the British pound, made a huge silver purchase as well.

Moreover, the bull market in precious metals is only beginning. The gains so far in precious metals have mainly been a reflection of the weakness of the dollar, not any inherent strength in gold or silver. But that's started to change. For instance, gold is now rising in terms of other currencies; in euro terms, for instance, gold prices have risen only 6.5% and even in dollar terms, gold prices remain US$400/ounce below the 1980 peak. The chart below illustrates this trend.

Five-Year Spot Gold in Euros vs. U.S. Dollar
Source: http://www.kitco.com

Best of all, you don't have to have the wealth of billionaires like Buffet or Soros to invest in precious metals. Even today, you can purchase a one-ounce silver coin for less than US $10, and a one-ounce gold coin for under US$500. That's pretty inexpensive monetary insurance, particularly if your assets are primarily in depreciating dollars.

Reprinted with the permission of The Sovereign Society.

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