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Will spectacular monetary expansion cause spectacular rotating advances in the precious metals sector?

*Dow Theory Letters, by Richard Russell, May 3, 2011

‘It’s too early to tell whether the speculative silver edifice has toppled over, but there’s at least a fair chance that it has.  From what I hear, the silver smelters are busy melting down silver trays, silver tea sets, silver knives and forks, anything the public can dig up in the way of silver.

The public seldom gets it right, but this may be one of those rare instances when the public’s reaction to new highs and a towering parabolic structure is correct.

One of the ‘sophisticated’ plays was to sell gold short and buy silver.  With silver’s reversal, traders were forced to unwind the trade, meaning they had to sell silver and buy back gold, putting further pressure on silver while pushing up the price of gold.

The hardest concept to get across to investors is that with the dollar collapsing we’re dealing with what I call ‘raw purchasing power.’  For generations Americans have been used to considering the dollar ‘as good as gold.’  This is no longer true.  Against a basket of six currencies (i.e. the Dollar Index) the Dollar Index is within shooting distance of its all-time low of 70.56.  Thus, it now takes more dollars to buy the daily necessities of life such as bread, veggies, meats and milk.  It also takes more dollars to rent an apartment, pay your heating bills, pay your college tuition or pay your doctor.  The word for this is inflation or more specifically ‘price inflation.’

As I said above, most Americans still treat the dollar as being ‘as good as gold.’  Thus, when frightened by rising prices, Americans react in the same way that they’ve reacted for generations, they rush to the ‘safety’ of Treasury debt such as T-bills and T-bonds or even to blue chip stocks like Procter and Gamble or Wal-Mart.

But in today’s era of quantitative easing, everything must be gauged against real Constitutional money, namely — gold.”

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

Monex Bullion Investor