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James West: Economic Crisis — A Crucible for Transforming Trashed Juniors into Treasured Equities?



-- Posted Wednesday, 18 February 2009 | | Source: GoldSeek.com

A gold bug who prefers equities as investments to bullion and bars, Midas Letter publisher James West expects his portfolio picks to shine to the tune of at least 15% appreciation on average. In this exclusive interview with The Gold Report, that sunny outlook stands in stark contrast to other things the well-regarded adviser sees on the horizon. He anticipates no letup in the storm of market volatility and holds out even less hope for the U.S. currency’s ability to stay afloat in a multi-trillion-dollar flood of new money.

 

The Gold Report: You’ve predicted that the United States’ defaulting on its debt is not just likely; it’s inevitable and imminent. Given the state of the world economy, can the federal government do anything to avoid this—and the resulting monetary collapse it would trigger?

 

James West: In pure theoretical terms, absolutely. Stop printing money and put the whole American system on a crash diet in terms of services and infrastructure development. Basically let the excess inventory of just about everything—real estate, automobiles, commodities—be absorbed into the normal, natural processes until no such excess inventories remain. When that’s done, we could resume a period of economic growth. But this also means sticking to—or rather committing to—a plan whereby they stop embracing the idea of perpetual economic growth, which is impossible, or perpetual deficit spending, which is also impossible.

 

TGR: And what’s the probability of that happening?

 

JW: It’s about as likely as one of the Muppets being elected president.

 

TGR: So what should investors be looking out for to protect their portfolios?

 

JW: The only credible defense against so much inflationary pressure is storing whatever value you might have in gold because storing it in whatever currency you have, assuming you live in a G7 nation, is not advisable. To actually invest money and put capital at risk to make money, I think you should invest in precious metals producers initially and then explore the junior producers for the riskier portions of your portfolio. I really don’t see how anything else can make money.

 

The true reflection of the value of any currency, the only one that’s really left, is how much gold it can buy. Whereas in 2001 it took $290 to buy an ounce of gold with U.S. dollars, in 2009 it takes over $900. To some extent that reflects an increase in the value of gold, but it’s more a reflection of the decrease in the U.S. dollar’s purchasing power relative to gold.

 

So continuing down that road by printing U.S. dollars? The quantity of gold is not changing in the same sort of relative manner that the quantity of money is changing, so the quantity of money relative to the quantity of gold it can buy is going up. Of course, this means that gold is going up. The role of gold has been to reflect the true purchasing power and value of a currency. Self-delusion remains possible as long as everybody agrees to continue to honor these certain value systems relative to gold and the price of gold does not explode. I imagine that, until gold does explode in price or the derivatives market where a lot of that fudged value is stored collapses, we will continue down the road of self-delusion.

 

TGR: But you believe the numbers are getting so astronomical that it has to come to an end somehow.

 

JW: Yes. It’s just not a sustainable mathematical equation in any way, shape or form. Technically, the dollar has already been defaulted upon, to some degree, and revalued. Since there’s 10 times the money in circulation than in 2002, in real terms a dollar is worth one tenth of what it was then. All the rhetoric coming out of Washington and Wall Street is designed to make us overlook that simple fact. Never mind the economic systems in which this is happening. Such an exponential growth increase in one variable in any equation—be it physics, biology, astronomy—would represent an unsustainable force. Nature automatically seeks equilibrium and, at some point, some force or counter-opposing events to balance it. That hasn’t happened yet, and that’s what is inevitable. All human systems, including economics, are based on and reflect the laws of nature. We can delude ourselves with our language and our formulas and our currencies and our mathematical interpretations into believing this or perpetuating the imbalance. But at some point, it must give in; it must give way.

 

TGR: Your formula about the quantity of gold being less than the quantity of dollars being produced is intriguing. If this is true and in essence we see the price of gold go up rapidly because the dollar goes up so rapidly, why not just put all of your gold investment in the physical form? In other words, given the potential inflation because of so many dollars being generated, why invest in the equities?

 

JW: A couple of reasons. For one thing, as physical bullion’s safe-haven value increases, it’s going to be subject to a herd mentality and to overpricing somewhere along the way. The only way to get through this entire crisis is for one of two things to happen. At some point either the system enforces its rebalancing nature on us or somebody in the whole human resource equation says, “Okay, that’s enough; we’re in deep trouble, we need to change everything, and we either do it ourselves or it’s going to be forced on us.” The longer we wait, the tougher it’s going to be.

 

In addition, there’s no real return on investment in physical gold. You can protect yourself from inflationary forces of currency expansion by putting your money in gold, and sure, as the price of gold rises, you can trade it in for an increased number of dollars. Either way, gold’s relative value remains stable because its purchasing power doesn’t really change. So gold is a store of the value of the purchasing power that is being eroded in currencies, but not an appreciation of value. It’s not leveraging the price of gold so that there’s a return on investment that would be provided, on the most minimalized basis, through senior producers on the maximum end of the scale with the coincident level of risk, the junior explorers.

 

TGR: So given all that’s happening around the world, and particularly in the U.S., you say that gold equities represent both the best defensive and ROI investments we can make in the next year or two.

 

JW: The only defense.

 

Publisher of the Midas Letter, James West has devoted 20 years to helping small companies in the resource sector—helping them raise money, further their projects, build their identities and get their stories in front of investors on the lookout for quality investments with excellent returns.

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-- Posted Wednesday, 18 February 2009 | Digg This Article | Source: GoldSeek.com




 



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