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May 11, 2010

A Time for Gold

The frightening financial gyrations unleashed by the unrest in Greece, and compounded by the mysterious kinks of electronic stock markets, have quickly reintroduced naked fear into the hearts of investors. Not surprisingly, while these concerns throw into question the safety of just about every asset class, gold and silver are beckoning once again as a means to help protect purchasing power.

We are now in the early stages of what I believe will be a global sovereign debt crisis. With Greece, Portugal and Spain, we are seeing the results in what might be considered the “subprime” nations struggling with overly burdensome debt payments. However, just like in the mortgage crisis, many “prime” nations, like the United States and Great Britain suffer from the same disease. It is just that for these countries it will take a bit longer before the symptoms materialize.

The bottom line is that many nations, including the United States, have simply borrowed more than their citizens can realistically repay. For many such countries, default may be the only way out. The only question is how to do it. Will governments simply refuse to pay, or will they pretend to pay by printing money? I believe either option would be very bullish for gold and silver. If nations default, gold and silver prices should rise, if they inflate, they should soar.

Today the collective governments of the European Union, who had been following a more responsible policy than the United States, decided to capitulate. With their massive $900 billion dollar bailout package to any euro zone country that needs help financing their debt, the Europeans have decided to follow the path blazoned by the Federal Reserve. All debt problems, on both sides of the Atlantic, will now be monetized with a printing press.

While gold sold off on the bailout news, there is no question in my mind that the development is extremely bullish for gold. Germany has caved and the inflationists have prevailed. The moral hazard of the bailout will mean bigger deficits in more euro zone countries. Eventually even Germany itself will succumb and join the party. To defend the euro and sterilize their bond purchases the ECB will have to sell dollars. But to whom? The U.S. is certainly not buying.

If Europe, like America, becomes a net foreign borrower, the industrialized West must expect emerging markets to pick up the tab for both America and Europe! After all not every nation can ride the debt wagon; someone has to pull the cart. This will mean that China in particular will have to buy even more foreign exchange to prevent a collapse of both the euro and the dollar. This may push them to the breaking point much sooner than many like to think.

Last Thursday as the Dow Jones plunged 1,000 points, gold surged $35 to just under $1,200 per ounce. Yes, gold and silver may already be “hot”, but I believe there are still great quantities of kindling now lying around which could fuel a continuing fire.

I do not think you should wait for the sovereign default disease to spread. I do not think that it is too late to buy physical gold and silver. Once more people comprehend the magnitude of the problem, I believe prices may go higher than they are today.

in Europac

Related ETF`s: SPDR Gold Trust (ETF) (Public, NYSE:GLD) and iShares Silver Trust (ETF) (Public, NYSE:SLV)

Peter Schiff`s comments on the economy, stock markets, politics and gold. Schiff is the renowned writer of the bestseller Crash Proof: How to Profit from the Coming Economic Collapse.
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