THE YEAR FOR ALL THINGS SHINY

by Michael Checkan

The real driver behind any commodity bull market has been and continues to be the falling U.S. dollar. And this decade's commodity 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 U.S., to know more about my new specialization than me. They had lived through periods of currency devaluation.

However, in the 1970s, it was my turn to personally experience the devaluation of my native currency. And I got to watch the appreciation of the only "real money" in the world, gold. At the time, the U.S. dollar was king, the reserve currency of the world. Gold was trading at US$35 per once and silver at US$1.29.

Things began to change dramatically when President Nixon closed the gold window in August 1971. By 1980, the gold price reached US$850 per ounce (that's US$2,200 per ounce today!). 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's a few.

1. War: In the beginning of the 1970s, the U.S. 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, the U.S. has troops in more than 100 countries. That's more than 50% of the world's countries.
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 U.S. is the biggest debtor country in the world. The U.S. owes at least US$3 trillion to other governments, with US$1 trillion to China alone. When the politician is given the choice of either raising taxes or letting the dollar slide, which one 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 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.

If That Wasn't Bad Enough-We Have New Challenges Today
Shifting to the present, there are some new challenges for the U.S. 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 an adjustment 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, likely 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 US$100,000 in just a few years. Can you imagine what is going on with prices in extremely over-valued markets like California? 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?"

Let's take a closer look at what this means for precious metals...

Gold: The Sovereign of Precious 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 just 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 US$850 to be exceeded in 2007. 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 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 its price.

Silver is being rediscovered as an investment vehicle. The recent ETF has been a big factor affecting the price of silver. Certain institutions are barred from owning physical metals, so the ETFs will uncork a hidden investment demand.

As for my outlook for silver in 2007, I believe silver is heading for US$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 rarer 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 it consumed 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 platinum off-take in 2005. There is a trend towards 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 is the one precious metal that is subject to a 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 at about four times the price of palladium, the auto industry could soon trade their platinum for palladium.

By now, I would have expected this substitution to happen already, but the Russians still control the world's palladium supply. Everyone remembers when Russia stopped palladium shipments, so auto manufacturers are being cautious at the moment. But, eventually, manufacturers 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.

How to Invest in the Metals Mania
I try to "plan for the worst and hope for the best." That's why I suggest you place 5% of your assets into gold and then leave it there. Don't sell it. This is your "golden anchor" or "wealth insurance." Then invest another 15% of your assets into gold, silver, platinum, and palladium.

You can invest in gold, silver, or platinum in the Perth Mint Certificate Program (PMCP). The certificate program is the best way to buy and hold precious metals outside the U.S. dollar. This program is the only government guaranteed precious metals program in the world. 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.

You can own palladium by investing in Canadian Palladium Maple Leaf coins.

Bottom line, if you have not invested in metals yet, it is not too late. The major precious metals bull market will be with us for some time. But get in now, don't just watch it come and go. You may have to wait another quarter century for the next one.

Reprinted with the permission of The Oxford Club

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