Open Your Engraved Invitation from the Fed... and Act on It

When I wrote the January 15 issue of the Weber Global Opportunities Report, my view was that gold had risen so far, and so fast, that a period of consolidation was to be expected. At the time, gold was around $860.

But what happened after that was extraordinary. The Fed panicked and allowed itself to be effectively governed by the cries and even whines of stock market investors.

They did the only thing they can really do: make money and credit cheaper. And by cheaper, I mean dramatically cheaper. Over the next few days, they lowered the official interest rate from 4.25% to 3%. That is a decline in interest rate payments of 29.4%. Importantly, it is also a 29.4% decline in the amount of interest savers get in the U.S. dollar.

As someone said, "It is astounding that those people who got over their heads in debt are being rewarded while those who saved are being punished." The punishment is particularly hard on those who were hoping to live on interest payments.

Several things have happened in the markets that I think all should be aware of. First was the effect on precious metals prices. The news struck gold while it was experiencing an expected correction. Immediately, gold began to soar and went far above its previous record high. In a few days, gold rose from $860 to $930, an 8.1% jump. The correction was over. The Fed action was an invitation to anyone who wanted to protect their savings to get out of the dollar and into gold, silver, and platinum.

By its action, the Fed has clearly shown that it is willing to risk destroying the value of the dollar in order to provide some solace to the stock market. And the market may in fact rise in coming months, on the back of this cheaper credit. It should certainly bail out the financial sector, which can now borrow cheap and lend a little higher. It remains to be seen whether this will really help the economy, however. I doubt it: Trying to fight the problems caused by cheap credit with more cheap credit seems crazy to me.

What is clear is that the precious metals markets have been given a tremendous shot in the arm. And surprisingly few are there to profit from it. Not many people have large precious metals positions, large as a percentage of their total portfolios. And quite a few investors who did have some amount of metals have lately gotten quite nervous at the already sharp rises in metals prices. Many of those have traded their way out of the market, hoping to buy back at lower prices.

One astounding thing about this bull market in the metals is that it is allowing no room for entry. Normally a price will back off after it has risen and provide such an entry point. But this is quite different. I can recall not a single instance where the market provided any such entry point since the gold price started to soar last September. I think this is unprecedented. And it has left many would-be buyers on the sidelines.

What I think is going to happen is that many will continue to stand aside in frustration as the prices continue to rise. But at some point the average investor, who still has no position in the metals worth mentioning, will start to be interested. This will herald the start of a huge rise that will climb to the level of Internet stocks in the late 1990s, and real estate more recently: It will be a situation where "everyone and his brother" will be wanting to get into the market.

But this time is years away. In the meantime, I think prices will continue to rise almost stealthily – pretty much under the radar screen. There has to be a period of correction – at least I have to believe this. This bull market is strong, but is it so strong that there won't be much of any "give," any rest?

From my point of view, it doesn't really matter. I have all the metals I am happy having, and am only interested in any correction as an observer of this bull market. I like to watch it breathe in and out, sprint and then rest. The fact that this is not happening makes me consider the possibility that this bull is so strong that there could be now underway a historic turning away from all paper currencies.

I say "all paper currencies" because one other interesting fact has emerged so far this year. Even with the collapse in the interest rate paid on U.S. dollar deposits compared to the stronger yields available on the euro, the pound, and the higher-yield currencies, the U.S. dollar has not fallen farther against those currencies. The euro has actually fallen 0.7% against the dollar so far this year even though you can now get more interest on it than you can on the dollar.

I have the feeling that the tenor of the market has shifted. It sees the problem with all paper monies and is loathe to bid up the values of them too far against the dollar. Money that would have gone before into the euro or the pound or the high-yielders has gone instead into gold, silver, and platinum.

My advice: Acquire as much of these metals as you are comfortable holding and just hold on. Don't try to trade your way into greater profits; this nearly always results in you missing out on big moves.

Whatever the percentage of your total holdings in this area, make sure it is small enough so you won't get nervous and be tempted to sell. But make sure it is large enough so a bull market will clearly make a difference in your financial life. There is no one percentage that works for everyone. You have to look at yourself to decide whether the correct percent is closer to 15% or 50%.

Where should the rest of your money be? For me, I feel comfortable being mostly in cash. In the event of continued falls in asset prices, cash will come in handy. Plus, if I am wrong about the metals, and the bull market falls apart from here on out, I'll be happy to have enough cash – some of which pulled out as profits on precious metals stocks – to see me through and ease the pain.

There is an argument that the bear market is over and that the stock market will start to rise strongly from here. This may be. But for me, much more certain is the resolve to inflate by the world's central banks. I repeat, all investors are being handed engraved invitations to protect their wealth by getting into the prime inflation hedges: the precious metals. I repeat, the Fed has said by its recent actions that it is willing to risk greater inflation in order to forestall any economic pain.

The way I see it, pain is inevitable in an economy that has lived beyond its means for decades and borrowed to make up the difference. Any pain that is forestalled by cheap money and credit is going to be balanced out by the greater inflation to come. And that is exactly what the precious metals markets are signaling.

Good investing,

Chris Weber

Editor's note: Chris has made some phenomenal gains in gold and precious metals since 2001. In his current portfolio of 12 metals recommendations, eight have made triple-digit returns. His average gain in these positions is an astounding 224%, with not a single loser in the bunch.