Hi, this is Jennifer from the Lone Star Silver Exchange. I hope all our members got through the hurricanes in one piece. If we're lucky, we won't have any more hit land this year.

Warehouse Stocks Drop Again

In the July 28th newsletter, I mentioned that COMEX warehouse stocks had dipped to 115.4 million ounces. After 9 weeks, including historically slow August trading, warehouse stocks have dropped to 107.79 millon ounces. This is approximately 6.6% in two months! At this rate, we will fall under the psychologically significant 100 million ounce mark around Christmas. Look for some fireworks if that happens.

Oil, Hurricanes, and Silver

My mother recently said to me, "It feels like we're going to have the Seventies all over again." Unfortunately, I think she's right. There are many parallels to the 1970s, including excessive money creation, commodity inflation, oil shocks, geopolitical instability, and budget deficits. If we find similar economic conditions in the past, we can take steps that were successful then and apply them today.

If you were alive in 1971, you probably remember that President Nixon took America off the international gold standard. This allowed the Federal Reserve to print as much paper money as it wanted, as foreign governments could no longer redeem dollars for gold. This rapid increase in the money supply caused consumer inflation.

A similar reaction is occurring today. The Fed has increased M3, a measure of the money supply, by approximately 8% a year since 1995. They cut the Federal Funds rate from 6.5% in 2001, to 1% in 2003. It became very easy to get credit, which encouraged people to take out mortgages and other loans. Unfortunately, credit booms lead to oversupply of goods and services, causing stagnation in the economy.

Excessive money creation causes commodities to increase in price. The Commodities Research Board Index (CRB) hit 284.11 today, a level we saw in the late 1970s. It measures the cost of 17 key commodities, from silver to coffee to oil. Inevitably, commodity inflation seeps into the general economy as consumer price inflation. Although the government states that inflation is tame, I'm sure you've noticed the increases at the grocery store and the gas pump this year.

The most important commodity is oil. Our economy is dependent on fossil fuels because they supply most of our heat, electricity, transportation, and even fertilizer for agriculture. Just like in the 1970s, increased demand and geopolitical instability can lead to oil sticker shock. The supply is so tight that unexpected events, like 4 hurricanes hitting Florida in 6 weeks, can put a serious dent in oil inventories. On top of natural phenomena, unrest in oil producing countries like Iraq, Nigeria, and Venezuela cause prices to spike. The price of crude oil futures passed $50 a barrel recently, so expect filling your gas tank to get more expensive soon.

Budget and trade deficits are even higher than in the Seventies. Simply stated, America spends more than it can afford. US monetary policy since 2002 has let the dollar slip in value against other currencies like the Euro and Yen. The theory is that dollar devaluation will make American exports cheaper, and imports more expensive. Despite the increase in the cost of imports (especially oil), our balance of trade hasn't improved. In fact, it's gotten progressively worse, and the manufacturing sector has continued to shed jobs.

I fear we are already seeing the beginning of Seventies-style stagflation, or slow economic growth with relatively high unemployment and prices. The disappointing employment numbers are a major issue in this year's Presidential election. George Bush has the worst job creation record of any President since Herbert Hoover. The Consumer Price Index is only up 2.7% this year, but it doesn't include the skyrocketing cost of health care. Wages have regressed to their 2001 level, when adjusted for inflation. Interest rates have already increased this year, which could hamper capital investment.

If we are replaying the Seventies, what can you do to protect your financial assets? You can invest in commodities, and stocks of companies that produce commodities. However, don't expect to see a substantial return right away. Prices don't really explode until the end of the bull market. Most people didn't buy silver until the late 1970s. Silver cost under $2 an ounce in 1971, and peaked at $54 in 1980. The simplest way to protect your future is to accumulate slowly at today's low prices, and wait until values skyrocket. That's how Jim Rogers, George Soros' former partner made money in the 1970s (for an interesting interview with Jim, see http://tjmather.com/value_investing/cache/jimrogers.html).

Unfortunately, many people trade themselves out of the bull market, waiting for the next pullback. But markets, like storms, are unpredictable. You can never be sure which way the hurricane will go, or how powerful it will be. If the dip never comes, you may not be able to afford to get back in. When people panic and run to stock up on silver, you don't want to find the store shelves empty. As Bill Murphy of GATA says, "The timing of all of this is so, so difficult ...The gold, silver hurricane season is still to come and they will all be of the 'Category 5' variety!"