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August 9, 2011

The Tipping Point

The disastrous debt deal in Washington, the subsequent downgrading of U.S. credit, and continuing default fears on both sides of the Atlantic, are causing the kind of panic on Wall Street that we haven't seen since the dark days of 2008. As we arrive at what may be a tipping point in the global economy, it's important to look at what is really happening, recognize the financial consequences, and to take steps to insure that investment assets are positioned accordingly.

While the historic downgrade of U.S. debt is certainly a major event, the real story is the continued failure of the U.S. economy to recover from recession. From March 2009 to July 2011, the Dow Jones had surged more than 90% on the assumption that the economic crisis was a thing of the past. Euro Pacific Capital always argued otherwise. It is now dawning on investors and economists that the massive monetary stimulus only resulted in the illusion of health, while delivering in exchange a depreciated currency, crushing debt, and a moribund private sector. But this will not stop Washington from doing more damage with the same policies that hurt us in the first place. As a result, Americans looking for safety will not find it by holding cash. Any U.S. dollars currently stuffed into mattresses will, in a few years, likely be worth less than the mattresses themselves.

As may have been expected, the majority of investment professionals are reacting perversely to the crisis. On the day after the first ever downgrade was issued on American government debt, investors reacted by igniting one of the biggest rallies in the history of the treasury market. Such an illogical reaction suggests that investments of better value and fundamentals continue to be overlooked.

I see many places to find shelter from the growing economic storm. While media attention is focused on weakness in the Euro, other currencies are doing quite well against the dollar. Over the last 12 months, the Australian dollar is up 12.6%, and the Swiss franc is up 37%. I believe investments that produce reliable income denominated in these, and other, currencies offer meaningful protection from declines in the U.S. dollar. Assets such as non-dollar sovereign bonds, utilities, and real estate trusts all offer these traits. Gold, which I consider to be the only real money, is up 41% so far this year and today had its biggest one day gain in history. I believe that in the current environment exposure to precious metals offers the best way to preserve wealth.

Related ETFs & stocks: SPDR Gold Trust (ETF) (NYSE:GLD), iShares Silver Trust (ETF) (NYSE:SLV), Market Vectors Etf Trust (NYSE:GDX), Newmont Mining (NEM), Novagold (NG), Barrick Gold (ABX)

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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