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Why Gold Bullion Premiums are High and Going Higher

By Porter Stansberry
Friday, December 19, 2008

Yesterday, I explained why the U.S. dollar will lose much of its value during the government's all-out attempt to "paper over" trillions in worthless home loans, retirement obligations, and war debts.

Today, I'll show you the best way to protect yourself and prosper from it...

The huge inflation underway right now will be what I call "The End of America." I don't mean an end to our political union – I mean an end to the special role America has played in the global economy since World War II.

The coming great inflation will destroy America's economic leadership. It will lead – eventually – to the return of settling international obligations in gold instead of paper dollars. And this will happen much faster than anyone expects. By the time Obama leaves office, you will not be able to exchange dollars for any sound currency in the world without permission from the U.S. government. Theprice of gold will be well over $2,500 per ounce. Most importantly, commodities will no longer be priced in dollars either, but instead in the currencies of the leading producer. Americans haven't experienced anything like this since the Great Depression.

I'm sure 99% of you don't believe anything like this is possible. All I can do is warn you. Looking at these numbers and watching the bullion premium growing, I'm reminded of a classic quote from science-fiction author Robert Heinlein: "There is no such thing as luck. There is only adequate or inadequate preparation to cope with a statistical universe."

If you protect yourself from what's coming, your neighbors will think you were lucky. But luck's got nothing to do with it. And you can still protect yourself from The End of America.

The best way to protect yourself is to own gold bullion – plain, regular gold coins. The premium on these coins is moving higher over the spot price of gold. What does that mean? It means to actually take possession of gold in the United States, you have to pay a significant premium over the spot price of gold in the futures markets.

According to Parker Vogt, the head of Camino Coin (phone: 650-348-3000), one of the leading bullion dealers in the United States, the premium on a $100,000 order of gold coins would be 9.25%-9.50%. I've made a $100 bet with my colleague Tom Dyson that this spread increases over the next year.

Why? The reason is simple and well understood by all economists. It's called Gresham's Law.

Thomas Gresham was an advisor to Queen Elizabeth of England in the 1500s. The queen was perplexed by the shortage of bullion in England following the great debasement of the currency under Henry VIII and Edward VI. The kings, like all governments, had clipped coins to increase the money supply rather than increasing taxes to pay for their governments.

Then, by edict, they enforced legal tender laws, requiring the clipped coins be accepted for all obligations at face value. As a result, all the "good" money – coins that hadn't been in circulation – fled the country where the king couldn't destroy it. Meanwhile, clipped coins from all over the world found their way to England, where they earned more than their real value. As Gresham famously summarized, the bad money had forced out the good.

The same thing has been going on in America for years. As late as 1964, the U.S. half-dollar coin was still being minted with 90% silver. But in 1965, the silver content was lowered to only 40%. Even before this change became official, the market perceived the U.S. was slipping off the gold standard and the government couldn't afford to mint real silver coins much longer. The 90% silver coins had largely disappeared from circulation by the time the change was actually made in 1965.

In 1971, the government stopped including any silver in the coins. In 2007, the same problem arose with pennies and nickels, which are made with copper and zinc. The government banned the melting of the coins and forbade their export.

So... what does this have to do with the bullion premium?

The spot price of gold is set in London. Buying bullion in America now costs more because the market realizes the value of the dollar is inflated. Bullion has fled America. The market clearly believes legal tender laws will soon be imposed, forcing merchants to accept a fixed value of the dollar. The bad money, America's paper dollars, is chasing away the good money, gold bullion.

My advice is to buy physical gold as "wealth protection" against the currency debasement I see happening around us. Don't check the price every day. Think in terms of ounces accumulated rather than current market value. And do it soon.


Good investing,

Porter
 





Market Notes


COPPER JUST KEEPS DIGGING AND DIGGING

The health of our friend Dr. Copper is getting worse.

Long-time readers know the price of copper is one of our favorite "armchair economist" ways to gauge the health of the global economy. Since copper is used in everything from cars and computers to plumbing and power lines, its price immediately reflects what's happening in world industry. That's why we say copper has a Ph.D. in economics.

About three months ago, we marked $2.40 per pound as a "line in the sand" for the global economy. We said if copper closed below that level, it would signal that manufacturing is seized up. Copper didn't just cross our line, it jumped over it, landed on its head, and started digging... reaching $2.25... then $2... then $1.50. It's a spectacular collapse for one of the world's most important commodities.

The good doctor is still digging. Copper fell 5% yesterday to reach its lowest level in over three years. Current price: under $1.30. We're keeping an eye on copper... a true economic recovery will see the end of this digging.
 


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