Thursday, April 16, 2009

Investing for Hyperinflation

/PRNewswire/ -- The National Inflation Association today released the following statement to its members:

"Today, hyperinflation is the last thing on most Americans' minds because they can't see it yet and they don't know it's coming.

Imagine taking a bottle and putting into it a bit of bacteria that you can only see under a microscope. Now let's say this bacteria doubled in size every minute and after 55 minutes, you still don't see any bacteria. But then, five minutes later or one hour since the bacteria started doubling, the entire bottle is full of bacteria.

Massive monetary inflation is already taking place today. Nobody can see it yet because temporary forces have pushed consumer good and commodity prices down, which has tricked economists into believing deflation is the real problem.

However, almost every action President Obama, Congress, and the Federal Reserve take every single day is sowing the seeds for hyperinflation. You need to invest today as if hyperinflation is already here, because once it arrives it will be too late.

People often ask us, how to invest in gold and how much gold is too much to have. There is no such thing as having too much gold. Although you should never put all your eggs in one basket, it is much better to have all of your money in gold than to have it all in U.S. dollars. The U.S. dollar will inevitably return to its true value, which is zero. Gold will always retain its value; unless huge new gold discoveries are made, which is very unlikely.

Many Americans are afraid to invest heavily into gold because of its volatility. Today's volatility in gold is nothing but noise that should be ignored. Many short-term traders buy gold for the wrong reasons. They buy it as a safe haven from stocks, and when stocks rally they sell their gold to buy stocks.

These investors are obviously not aware of the Dow/Gold ratio, which we went over in our last article. Clearly, the Dow/Gold ratio is in free-fall and last time it was in free-fall it bottomed at 1. Meaning, 1 oz of Gold was worth the same as the price of the Dow. We are likely headed there again.

There are many ways to invest in gold. Physical ownership, which means you buy gold bullion in the form of bars or coins and store it yourself, is obviously one option. You won't get rich owning physical gold, but you will at least retain your purchasing power while most Americans lose everything. Remember, as gold prices rise, the gold itself is not increasing in value but the U.S. dollar is losing its value.

One of the problems with buying physical gold is the dealers that sell physical gold often charge large premiums. On eBay, 1 oz gold coins are currently selling for around $1,000 per oz, despite gold's current spot price of $875 per oz. Generally, if you buy a larger quantity of gold in the form of a bar, you will pay less of a premium. But, it might not be a good idea to store gold bars on your own and risk them being stolen.

We believe one of the best ways to invest in gold is through exchange traded funds and notes, otherwise known as ETFs and ETNs. On Tuesday we will be releasing an NIA report on ETFs and ETNs, discussing all of the different gold, silver, and agriculture ETF/ETNs we like along with the risks involved in purchasing them. We will also be discussing ETF/ETNs that allow you to short the U.S. dollar and treasuries.

The way to get rich during hyperinflation is to buy the right gold mining stocks. Gold mining has many fixed production costs and just a 100% increase in the price of gold, could mean a 1,000% increase in the profitability of a gold mining company.

When it comes to gold stocks there are top-tier miners, mid-level miners, junior miners and gold exploration companies. So far we have profiled mostly top-tier and mid-level miners, but our most recent profile is a gold exploration company that we believe could become a mid-level to top-tier miner in the future. Gold exploration companies have the greatest upside potential, but also the most risk. What you need to look for are gold exploration companies that have joint ventures with top-tier miners, which is the case with our latest profile."

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