Why Gold & Silver Now?

I didn’t recommend gold or silver in The Ruff Times (my newsletter) for 22 years, until December, 2003. Why didn’t I? And why do I now?

All the factors that drove the metal were bearish during those years, and, as I thought would happen, they turned out to be lousy investments for all those years. But the silver and gold bull (really calf) markets are finally back after all those years, and it’s time for me to explain why I am now a raging gold bull.

The worst financial decision you could make in 2006 is to ignore gold and silver. This one mistake will cost you more than all the dumb financial decisions you can make put together.

Gold and silver are now early in a historic bull market that will dwarf the 500-1700% profits we made in the 70’s.

Gold will hit at least $2,172, and $100 silver is inevitable. Is it unreasonable to expect such returns? Those are not unprecedented numbers. In 1980, gold hit $850 and silver hit $50. If you adjust those numbers for inflation since then, the metals will not make new highs until $2,172 (gold) and $125 (silver). We sold gold at $750 and $35 respectively in 1980, just two weeks before the peak. Not the exact top, but close is good enough. We started at gold $120 and silver $2.

The forces that took gold and silver into the stratosphere in the 70s are back in spades, only more so. Several times more so!

I am speaking from years of experience with gold and silver. I launched The Ruff Times in 1975, and gold became my first recommendation, and I recommended it all through the 70s. It soon became the biggest circulation financial newsletter in the known universe, reaching 175,000 subscribers. My mega best-selling book (almost three million sold), was published in 1977, and also enthusiastically recommended gold and silver. Some people believe they helped create the great gold market of the ‘70s. My climactically defining moment came in early 1980, when I decided the bull market had run its course, and put out a sell order. Gold was then $750, and silver $35. Two weeks later the bull market peaked and headed down for more than two decades, and I remained bearish, until December, 2003, which is where I am today. It’s déjà vu all over again, as Yogi Berra said.

So why am I bullish now? The most powerful, completely essential factor affecting gold is monetary inflation – the number of dollars created out of thin air by the Fed and the banks to solve society’s problems or to meet its demands, diluting the value of each dollar. The driving mechanism is debt creation. Monetary inflation is now so great as debt (real estate debt, consumer debt, credit card debt, etc,) has soared into the stratosphere , that now nobody knows how many dollars are floating around the world. In fact, the Federal Reserve, whose duty it is to create and regulate dollars, either doesn’t know, or doesn’t want you to know how many dollars there are in existence. They recently stopped reporting M-3 every month. M-3 used to be the most widely followed measurement of dollar growth.

We do know that only about 5% of the dollars are minted, printed or coined; the rest are in cyberspace, in the computers of banks. The rate of dollar creation is at least several times greater than in the 70s, which finally gave birth to a great inflation and soaring gold and silver.

The most compelling force affecting silver today is the supply/demand equation. Silver has become a critical industrial metal with thousands of uses, perhaps more than any other mineral taken from the ground except petroleum. These uses have been eating up the supply which used to be a huge overhang over the market. Soon there will be very little silver available to investors at today’s price. It must go up

Uncle Sam’s cupboard is now bare, so they have to go into the commercial markets whenever the want to mint silver eagle coins, among other things! The overhang is shrinking fast and will soon be completely gone. Why? Because industrial use is soaring, and production of new silver has plummeted during the 22 years of the silver and gold bear markets, as stockpiles have shrunk.

Most above-ground silver is in the form of jewelry, much of it in China and India, and won’t be dumped onto the market without a lot higher prices.

There is a serious production problem, partly because it takes four to ten years to create a new silver mine. The new supply of gold and silver started shrinking during that 22 years as the mining companies had to cut back on production to save their skins because they could only sell their product below the cost of production. Now that it is again profitable to mine gold and silver, it will take as much as ten years to actually get into production.

New silver supplies today are now almost entirely a by-product of mining other metals, such as copper, zinc, lead, etc. But it is still below the amount required just to meet current industrial demand.

In the 70’s, silver outperformed gold by two to one, and that was when there was a huge overhang, which is now going fast. The gap between gold and silver supplies has narrowed during the years; there’s now more gold than silver above ground.

If you don’t have the message about gold and silver yet, you are in good company. The financial TV shows act as if gold and silver don’t even exist. When the issue under discussion is the falling dollar, none of the Wall Street gurus even mention gold, even though the record is clear – when the dollar is in a long-term downtrend, gold soars, every time! When inflation is the subject, Wall Street ignores the classic inflation hedges, gold, silver, and mining stocks.

You never hear from the Wall Street gurus about silver, although when gold is soaring, silver does at least twice as well. Gold has risen from $252 to around $640 (up 280%), and silver has risen from under $4 to $12 (up 300%). In the 70s, gold rose 700% and silver 2,500%. We’ll do much better this time.

The ultimate irony is that gold and silver are so easy for unsophisticated Americans to buy from coin shops, which are as ubiquitous as fleas on a coyote. You can put the metals in an IRA if you buy American gold eagles. You can also put gold in the ground (mining stocks) or a gold mutual fund in a tax-exempt IRA. Now there are new gold and silver ETFs (Exchange Traded Funds) which your broker can sell you.

As far as mining stocks are concerned, when the wind blows, even the turkeys fly. You can put a list of the mining companies on the wall, throw darts at it, invest in the holes, and make money. A rising tide raises all boats. Of course, mining companies are businesses just like any other, and you can improve your performance if you know a few simple fundamentals that separate a real mine from a hole in the ground surrounded by liars. My job is to sort them out and advise you.

It is like being in a time warp going back to the 70s. Wall Street then acted as though the metals didn’t even exist until it had risen so high ($650 gold, $30 silver) that there wasn’t much profit left in them, so they did their usual thing; they bought high and eventually sold low.

It is cherry-picking time for you amateur contrarians, although skepticism and fear will lead most readers to miss out on the cheap buys, like now. Why? No guts!

I will help you find the guts to pick cherries, just as I did in the mid 70s. After being out of the market for 22 years, which turned out to be a really good idea, my patience has been rewarded, and I’m back! Gold and silver have finally been reborn, and they are still cheap. The fundamentals that drove them in the 70s are back in spades, only bigger. This golden calf will grow into a far bigger bull than the 70s. The current correction is a dream come true.

Fortunes are made by those who see the great turning points of history and bet on them early. This is one of those rare times.

There is a whole lot more detail about it in my new book, Ruff’s Little Book of Big Fortunes in Gold and Silver (subtitled: A Middle-Class License to Print Money) which is just now in print. You can order at Amazon.

Let me count the ways; hard assets first, which you can by from your local coin dealer or from the firms I recommend in The Ruff Times (www.rufftimes.com.) I have no financial interest in any coin dealer. I have not accepted commissions or kickbacks

Bullion-type coins. They are usually 99% gold or silver. The list includes South African Kruggerands, American Eagles, The Canadian Maple Leaf, and others.

Semi-numismatic coins. These are usually American, and are valued by a combination of bullion and scarcity. I really like them for reasons described in Chapter 13 of my new book.

Silver bags. You can buy bags of pre1964 90% silver, dimes, quarters and halves. Many of these coins have been melted down or hoarded, so they are becoming scarcer. You pay the value of the bullion, not the face value.

ETFs (Exchange-traded Funds). There are new gold or silver funds that are traded just like mutual funds, but they don’t buy stocks, only bullion, and their price at any moment reflects the price of the bullion.

Next come gold and silver mining stocks. They range from mutual funds invested in mining stocks, huge producers (1-million ounces annually or more), smaller producers (between 50-thousand and 1-million ounces annually), Development companies (they have found a deposit and are developing and further defining it), Exploration companies looking for a mine to develop in promising ground), and holes in the ground surrounded by liars.

So which to buy? A well balanced metals’ portfolio would contain some of each, depending on how much money you have to invest. More detailed guidelines are given in my book.

Howard J. Ruff, the legendary author and financial advisor, has remained in the public eye for more than a quarter of a century. He is founder and editor of the The Ruff Times Financial Newsletter (you can subscribe here). In 1981, The Ruff Times had more than 175,000 subscribers -- the largest financial advisory newsletter in the world.