Silver Falcon Mining

As a follow-up to sinbob's last entry yesterday, a few words from Dr. Stephen Leeb, an investment guru to whom I have lent an ear on occasion . . .

We’ve been hit with a barrage of disappointing economic news lately, but it has so far only managed to temper investors’ enthusiasm of equities rather than scuttle them altogether. Stocks actually managed to put in a decent reversal yesterday after falling to 1,040 on the S&P 500 and less than 10,000 on the Dow Industrials. Most likely we’ll rally a bit more, but chances are we’ll soon revisit and, indeed, trade below yesterday’s nadir.

As more bad news gets digested, however, we’ll move closer to the Federal Reserve stepping in with additional quantitative easing, buying up bonds on the open market to put cash into the system. News of this is likely to ignite a powerful stock market rally; it’s just a question of from what level on the S&P and Dow it will occur.

The bond market is certainly worried about where we’re headed. In late 2008 – early 2009 when yields were as low as they are today, the S&P was 200 points or about 20 percent lower that it is today. A weak economy and declining corporate profit expectations suggest we’ll surrender at least a portion of that difference at some point.

Traders will be scrutinizing tomorrow’s GDP report as well as a policy speech from Fed Chair Ben Bernanke for clues as to where we’re headed and how soon the central bankers will act. One thing’s for sure, while we’re in a deflationary environment right now, more money printing will ultimately be inflationary. No surprise then that gold continues to display impressive relative strength and is just below record highs.

It’s not just Americans that are finding comfort in owning gold. The World Gold Council yesterday released its quarterly report on gold demand. Worldwide demand in the second quarter rose 36 percent to 1,500 metric tons. Leading the charge was investment demand, with China among the strongest investment markets, where retail demand rose by 121 percent to 37.7 tons in the period. This is a trend that should persist for years to come—and the supply of newly mined gold isn’t likely to keep pace.

The Chinese government actively encourages its citizens to buy gold as a means of channeling savings into investments. They go so far as to run ads on television extolling the virtues of owning the metal. Anyone can walk into a Chinese bank and purchase gold (at a smaller premium than what we pay here) and the metal can conveniently be stored at the same bank. There’s a solid rationale behind China’s gold strategy, in contrast to no such strategy here in the US.

For China, the bigger its position in gold the more likely it will be to acquire the resources it desperately needs to develop. Equally important, the more gold its citizens own the greater the control the government has over its citizens’ wealth and wellbeing. China’s sizeable and growing gold horde may at some point be used to back up the yuan.

They’re not there yet, but in light of the debasement that’s taking place in the dollar, the euro and the yen, we suspect the Chinese are angling to establish a gold-backed yuan. In other words, the Chinese would be able to say that you can exchange one yuan for a certain amount of gold (which, of course, would be less than the then current value of the yuan). This in turn would make the yuan a close substitute for gold. In a world of growing resource scarcity owning gold is as close as you come to controlling your fate.

At $1,240 an ounce gold is downright cheap, even after a decade of outperforming other asset categories. A year or two from now, with inflation again heating up, today’s price is likely to be a distant memory and your investment account the better for it.

And if you’re skeptical about the prospect for inflation given today’s deflationary backdrop, keep in mind that this inflation will be driven not by our own growth, but by growth in emerging economies in the context of increasing resource scarcity. So we could paradoxically be faced with asset (real estate) deflation and materials inflation simultaneously. That not a pretty picture, but it’s the likely scenario we’ll be faced with and our various metals investments will leave us in good stead should it come to pass.