Centennial Precious Metals, Inc: Serving Gold Coin & Bullion Investors Since 1973

8/26/06

A publication of USAGOLD-Centennial Precious Metals, Inc.
Serving gold investors since 1973

"The question might legitimately be asked, 'Russell, why only 15% of assets in gold?' And my answer runs like this -- Every fiat paper currency in history has ended up in the ash can. The dollar and the euro and the yen will end up the same way unless they are ultimately backed by something real like gold. Therefore, why not be invested say 50% or even more in gold? The answer is timing. And nobody on God's green earth knows the correct timing." -- Richard Russell, Dow Theory Letter

Short & Sweet. . . . . .The Daily Reckoning polled its readers on the question "If you could only hold one type of investment through the next five years, what would it be?" 45% said "gold and silver bullion" -- the leading choice. . . . . . .The Zimbabwe government, in its drive to thwart a somewhat burdensome 1000% inflation rate, has decided to issue a new currency lopping three zeroes from the face amount -- a Z$100,000 note will become a Z$100. . . . . . . Though at first blush this might seem a noble fix to the vexing problem of inflation, the Zimbabwe government failed in one small way. It neglected to introduce any new monetary or fiscal policy which might make the holders of the new notes believe that the inflation will be contained. (There's always something.) . . . . .Trevor Ncube, a prominent independent news publisher remarked, "Lopping off three zeros is semantics. It is like rearranging the chairs on the Titanic.". . . . . . .Over the last several months, we had two major meltdowns in the metals markets -- one in copper earlier this year and another last week in the nickel market. In both instances, the meltdown was driven by a shortage which initiated massive short-covering that launched the price through the roof. The measures instituted by the exchange to deal with the nickel problem provide insight into how a similar blow-up might be handled in the gold market. The London Metal Exchange -- in its wisdom -- will allow sellers who are unable to make physical delivery postpone their commitment at a cost of $300 per tonne per day -- a fairly hefty penalty. . . . . . . .Nickel runs about $33,350 a tonne (cash price), so the fee is about 1% per day. One wonders how long the shorts can absorb the fees before throwing in the towel, declaring bankruptcy or force majeure (the preferred methodology for dealing with a default). . . . . . . . . .China's largest nickel importer declared angrily "the LME nickel market is no longer a fair platform. Instead it has become a paradise for speculators." One wonders why he limited his comments to the nickel market. . . . . . . So what is the lesson for the average gold owner or gold owner wannabe from the nickel market meltdown? To put it rather bluntly, it provides vivid instruction as to why owning the metal outright and as soon as possible remains the best course of action. Gold plays a significantly different role in the investment portfolio than nickel, copper or, for that matter, soybean contracts. After centuries of debate and official denial, gold remains fundamentally the most reliable fiduciary asset of last resort -- the one thing you can count when currencies, exchanges and whole stock markets go into the soup. Attempt to imagine for a moment the complications of fortifying your portfolio once a similar crisis/remedy were launched in the gold market. . . . . At Barnes & Noble last week, I wandered into the magazine section and was surprised to see the cover for this week's Economist: Nasrallah Wins. . . . . . One of the often heard refrains in and around the gold market over the past week has been "How can the gold market be going down with all the negative news?" Inflation is up. The economy is erratic. The Mid-East is about as wobbly as its ever been even with the tenuous cease fire in Lebanon. The twin deficits are just as bad now as they were a year setting off this latest run to higher levels. So what's up? It comes down to something very simple. Gold rarely react to any of these situations one on one as the news is published. Gold waits. Assesses the situation. Then moves. The problems mentioned are long term and cannot be resolved overnight, if at all. Thus gold moves to a drummer that the press cannot hear, cannot see. . . . . . . . . . . .Don't be trapped into thinking that gold will always react to circumstances in the short run. Sometimes it takes awhile for the market to sort things out. Know why you own gold in the first place; own the physical metal (as opposed to futures and options); and, don't let the short-term market action affect your thinking. . . . . . . . . . .To give you an idea the size of the gap between politically inspired economic numbers and economic reality, the Congressional Budget Office projects a cumulative federal deficit of $1.76 billion over the next decade. For those of you who are initiates to this analysis, let me say that as of today (and the government fiscal year ends in September), the federal debt now stands at $8.5 trillion. Nearly $570 billion has been added to the national debt with 45 days left to go in the fiscal year. . . . .At that rate, it would not be far-fetched to believe that the government could add $600 billion in red ink by fiscal year end and reach the $1.76 trillion in less than three years -- not ten. . . . . . . . . . Dow Theory's Richard Russell as quoted 8/16/06 in a Reuters article: "No country can keep running up debts and deficits the way we are doing and still be a strong reserve currency. We are going to have a panic for gold as the dollar runs into major trouble. This country is not addressing the deficits and debt situation at all.". . . . . From that same Reuters article: "He sees gold as a 'long-term holding' and forecasts that the metal will ultimately hit $1,000 an ounce. 'If you don't have any, I would buy it,' Russell said.". . . . . . . . . . . . . . . . . . . .Even with gold's recent correction, it is still almost 40% higher than it was a year ago (See chart). . . . . . . . . . .Soon we will reach a milestone at USAGOLD-Centennial Precious Metals -- the tenth anniversary of the launching of the USAGOLD website. It is hard to believe it has been ten years since I sat down to the computer and wrote the very first Daily Gold Market Report -- the site's anchor page. . . . . . . . . .In this past weekend's Financial Times, Alvin Toffler, the futurologist who has been rated the third most influential business analyst behind Bill Gates and Peter Drucker, outlined his "big notion of the moment.". . . . . . . . "Instead of the geographically bounded, socially ascribed communities of the past," writes Nathan Gardels of the Financial Times, "[Toffler] foresees networks of like-minded that bring people together as never before." . . . . . . . . .The internet, of course, is one of the institutions that makes Toffler's organizing principle possible. Anyone who has participated in the USAGOLD website, either as an observer or participant, knows that Toffler's observation has already become reality through internet portals like USAGOLD. Our website, it seems to me, fits well the definition of the "like-minded network" Toffler describes. . . . . . . . The World Gold Council reports a 41% increase in gold sales first quarter 2006. . . . . .That's it for this edition of Short & Sweet, Happy Trails 'til next time. . . .Happy Trails. . . .MK

Please call our Trading Desk for quotes and assistance buying gold coins and bullion. 1-800-869-5115 Extension #100 4:00am - 7:00pm MT

Notable-Quotable:

"In each poll released since the foiling of the trans-Atlantic terror plot - Gallup, Newsweek, CBS, Zogby, Pew - George W. Bush's approval rating remains stuck in the 30's, just as it has been with little letup in the year since Katrina stripped the last remaining fig leaf of credibility from his presidency. While the new Middle East promised by Condi Rice remains a delusion, the death rattle of the domestic political order we've lived with since 9/11 can be found everywhere: in Americans' unhysterical reaction to the terror plot, in politicians' and pundits' hysterical overreaction to Joe Lieberman's defeat in Connecticut, even in the ho-hum box-office reaction to Oliver Stone's 'World Trade Center.'"

-- Frank Rich, New York Times - 8/20/06

"I spent much of last year, crying "Wolf" about a modern 1973. Then early this year, Jeff Cooper, a technical analyst pointed out that 2005 was (technically) a lot like 1972, implying that it would be 2006 that would be like 1973. Although this theory may now enjoy some technical support, more important is the fact that it is finally beginning to come about on a fundamental basis. . .

The year 2006, like the year 1973, started off on a high note with recent successes being celebrated in the financial markets early in the year. But there appears to be a growing realization of a 'paradigm shift,' and not one for the better. As this realization is driven home, perhaps by some dramatic, unforeseeable event, celebration is likely to give way to considerably more anxiety than we've seen already."

-- Tom Au, Prudent Bear.com - 8/20/06

MK Note: In january 1973 the gold traded in the $65 range. By mid year it approached the $130 level, then tracked back to the $110 level. 1973 was a set-up/accumulation year driven by oil and war. 1974 was the payoff year when the price approached the $200 level.

By the way, if you are looking for a reliable gold price reference, try this.

"In any discussion of the future of Gold, or of the price of Gold, the first thing that must be realized is that Gold is a political metal. In the true meaning of the word, its price is 'governed'. This is so for the very simple reason that Gold in its historical role as a currency is fundamentally incompatible with the modern worldwide financial system.

Up until August 15, 1971, there has never in history been an era when no paper currency was linked to Gold. The history of money is replete with instances of coin clipping, printing, debt defaults, and the other attendant ills of currency debasement. In all other eras of history, people could always escape to other currencies, whose Gold backing remained intact. But since 1971, there is no escape because no paper currency has any link to Gold. All of the economic, monetary, and financial upheaval of the past 30 years is a direct result of this fact.

The global paper currency system is very young. It depends for its continued functioning on the belief that the debt upon which it is based will, someday, be repaid. The one thing, above all others, that could shake that faith, and therefore the foundations of the modern financial system itself, is a rise (especially a sharp rise) in the U.S. Dollar price of Gold."

The Privateer.com - 8/11/06

An ABCs of Gold Investing UPDATE

C is for Choosing a Gold Firm

With oil moving higher and stocks in trouble, we are receiving a steady stream of inquiries on buying gold. First-time buyers need to be careful in choosing a gold firm. In talking with a number of clients who are in contact with some of our competitors, we are hearing stories of aggressive telephone sales tactics and item pricing. Long ago, we decided to keep our staff small, our pricing competitive and our relationship with prospective clientele more laid back. You can contact us without worrying about being put on a call list. We are happy to answer questions and discuss your gold purchase in full, but we leave the ball in your court with respect to the follow-up.

That might cost us a client now and then, but those who become clients do so in their own time and without being constantly bothered by one of our brokers. By this they become better clients who tend to stay with the firm for many years. (We have clients who started with us in the 1970s.) Most of our clientele are business and professional people fully capable of making up their own minds. They tend to gravitate to us because they find out we know what we are doing in the gold market and can apply that expertise to their gold portfolio. Contact us and discover the difference. And don't be like some who have caved in to the pressure and found out later that the great deal they thought they had wasn't so good after all. We have been a part of the gold business for over 30 years. We were just certified by the Better Business Bureau for over ten years of membership. Our volumes are large; our clientele well positioned based on their needs and goals. We look forward to working with you.

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