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September 22, 2008

A Gift From the World's Central Banks
by John Rubino

Here we go. America's options have finally dwindled to just two: Accept a 1930s-style deflationary crash or embark on a Weimar Republic-style hyperinflation. There was never much doubt about which course our leaders would choose, but today they made it official. Treasury will assume essentially dictatorial powers to buy up pretty much the entire U.S. financial system, and the Fed will print the required trillions.

Nationalization on this scale pretty much guarantees a falling dollar and rising precious metals prices, which makes Michael Maloney a double winner. As a precious metals dealer and the author of a just-released book titled "Rich Dad's Guide to Investing in Gold and Silver", he's definitely on the right side of history. I spoke with Michael last week; here's some of what he had to say.

DollarCollapse: Your book is part of the bestselling "Rich Dad" series. How did that happen and what does it mean?

Michael Maloney: Robert Kiyosaki wrote the book Rich Dad, Poor Dad, which is now the third longest-running best seller in New York Times history, with 30 million copies sold. He also has a series of advisors that he recommends for building a business team, for creating corporations and property management, and so on. Years ago I started going to gold shows in Vancouver and Denver, and watched all the speakers get up in front of a bunch of gold bugs and tell them to buy gold, when of course they already had gold. So I decided to do the same thing but wanted to capture a new market. I wanted to tell people who didn't have gold and silver to buy gold and silver, and real estate investors made up the largest potential market, so I tried to figure out a way to approach them. I had been going to Robert Kiyosaki's seminars, and I asked him if I could be the advisor for precious metals, and he said 'we'll see, you've got to write a book first.' Here it is. This book is a compilation of about 40 books, including the one you and James Turk wrote, "The Coming Collapse of the Dollar."

DC: What's your take on the financial meltdown?

MM: We're in a credit bubble. The inflationists believe that Ben Bernanke will destroy the dollar, that the Fed has enough control over the economy that we'll just go into a big inflation and stay there. Ben Bernanke is scared to death of deflation. And he thinks he's master of the universe.

I'm an "indeflationist." I think we'll continue to have inflation, with M3 expanding at a rate of something like 18% a year. But we're also in a credit bubble, and the popping of a credit bubble is massively deflationary. That's what happened in 1929, the popping of an insignificant credit bubble compared to what we have going on today. We'll have a contraction; I don't think it's going to be just a straight up ride for the precious metals or the economy. I think the credit bubble will progress in stages. We're in the first stage now, and we'll create enough currency to start propelling us up again. Then an even bigger credit bubble will burst, and we'll create enough currency to push us into a hyperinflation. I'm not really expecting a hyperinflation till somewhere after 2015, when the baby boomers are retiring en masse. When they actually stop working and they're getting sick, they'll need to rely on government promises that can't be kept unless they print the necessary currency.

DC: What does that mean for gold?

MM: I have a feeling that right now we're putting in a double bottom and that by this time next year you'll see gold at $1,200 an ounce. But the other commodities other than oil could continue to pull back. The boom was driven by real estate, copper in housing and platinum in catalytic converters. Some of these sectors are small and can't take a lot of capital inflows without prices soaring. If industrial demand isn't there, then you could see those sectors continue to fall while precious metals start to rise simply because there's a problem with currency. Whether it's inflation or deflation, people run towards gold.

Gold and silver periodically do an accounting of all the fiat currency that's been created, whether it was created by debasing gold and silver coinage by mixing in a lesser, much cheaper metal like copper or by printing excess paper promises to pay out gold. Gold has been doing this since the first hyperinflation in Athens in 407 BC. When it does these accountings, sometimes it's a partial account of the physical currency in circulation, and sometimes when combined with a credit collapse it's an accounting of the entire money supply, the equivalent of our M3. In the late 1970s, for instance, the markets revalued gold so that all the gold held by the Treasury not only covered every paper dollar that was outstanding, for a month or so it also covered all outstanding revolving credit. We could have gone back on the gold standard if we had chosen to. Today this would require a gold price many times the current level, because this time it's set against all the world's currencies being fiat. So the accounting this time is going to much larger. I can't find an instance of where once it starts an accounting it stops. That's the premise of the book.

DC: Your silver chapter was flat-out exciting. Why is silver such a great story?

MM: The exchange rate of gold and silver used to float, which maintained a supply/demand equilibrium to keep both in circulation. Gresham's Law says that when two currencies are fixed against each other, the lower value money will get spent into circulation and the higher value money will be hoarded. Bad money chases out good. There used to be about 12 times more silver than gold. But lately that's been changing.

This is the third time in history when the general public became buyers of silver. The first time it forced the U.S. government to abandon silver in its coinage because it failed to keep the price below $1.29 in the mid-1960s. In 1979, the government tried to suppress both gold and silver by selling the metals into the markets. It failed and both rocketed. Since then, governments around the world have continued selling, getting rid of what used to be enormous stockpiles. This has depressed the price to the point that through the '90s I don't think there was a single primary silver producer that made a profit. They all survived by issuing stock. A few are starting to show a profit at this price, but the vast majority can't. The U.S. government has unintentionally made everyone think silver should be cheap when in fact it should have been in the $20 range all through the '90s and there would have been enough supply coming to the market to balance things out. So we've come to this critical juncture where the above ground supplies of silver have dwindled to just a fraction of what they once were. There's about a tenth as much silver available for investors to buy as there was in 1980, and currently there's less silver than there is gold, all courtesy of the U.S. government manipulating the price, causing us to think silver should be cheap. Now we're about to have a gold and silver rush, and for the first time in human history the amount of silver available for investors is less than the amount of available gold, probably about one-fifth the amount. Yet silver's price is currently 1/60th the price of gold. The markets will bring back an equilibrium, and that will require silver to outperform gold for an extended period of time. It's a buying opportunity, a gift from the world's central banks and the commercial banks that are manipulating these markets. As Jesse Livermore used to say, be right and sit tight.

BUY GOLD AND SILVER ONLINE AT GOLDMONEY

John Rubino
DollarCollapse.com

John Rubino is author of Clean Money: Picking Winners in the Green Tech Boom (Wiley, December 2008), co-author, with GoldMoney's James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, January 2008), and author of How to Profit from the Coming Real Estate Bust (Rodale, 2003). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for CFA Magazine and edits DollarCollapse.com and GreenStockInvesting.com.

Copyright © 2006-2009 John Rubino

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