Should Investors Activate Gold and Silver Airbags?

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"Investors looking to protect and diversify themselves against the current global financial system should strongly consider deploying gold and silver airbags."

Earlier this week, a fully loaded Brinks truck carrying between $3 million (M) and $5M in uncirculated loonies and toonies crashed on a snow covered highway in Ontario, Canada. The truck crossed the centre line and slammed into a rock, launching the coins in every direction. The accident is an unfortunate event, but can serve as an analogy about today's fragile fiat currencies.

The current financial system serves as a global high-speed economic highway that is filled with many obstacles, including debt, bubbles and politics. Being the world's reserve currency, the U.S. dollar is the truck that is one good bump away from losing control and crashing, causing a chaotic financial wreck. The U.S. official national debt now stands at over $15.6 trillion, representing about $140,000 per taxpayer. The record debt amount continues to increase as Washington gridlock is stronger than ever. The debt ceiling, which was raised last August to $16.394 trillion and initially expected to last well into 2013, is now estimated by Zero Hedge to be reached in September of this year. When Treasury Secretary Timothy Geithner was recently asked how much he would raise the debt ceiling if given only one more request, he responded, "No idea." After $20 trillion and $50 trillion were floated as ideas, he finally conceded, "It would be a lot. It would make you uncomfortable." The dire situation in Washington and the dollar is causing states to prepare for a bumpy road ahead.

In a bill that advanced on Tuesday, South Carolina residents would be able to use gold and silver coins as currency. The measure was approved by the House Judiciary Committee and would allow people to use both precious metals as money, as long as businesses agree to accept them. Under the bill, gold and silver coins in the state would also be exempt from any sales tax, an action that presidential candidate Ron Paul has long advocated. Eliminating sales and capital gains taxes on gold and silver are key steps to returning precious metals back to a normal currency role. Last year, Utah became the first state in the country to legalize gold and silver coins as currency. The Utah law also exempts the sale of the coins from state capital gains taxes.

As more states and individuals prepare for future turmoil, Washington continues to look for more ways to abuse the nation's currency. Geithner is currently trying to receive congressional permission to strip copper and other valuable metals from pennies and nickels. He told a House Appropriations Committee this week, "Currently, the costs of making the penny and the nickel are more than twice the face value of each of those coins," according to Philly.com. Since 1982, pennies are mostly made from zinc and only contain about 2.5% copper. Meanwhile, the nickel is composed of 75% copper and 25% nickel. Geithner hopes that minting changes "will save more than $75 million" per year, starting next year. The U.S. nickel has not contained any silver since 1945 and silver was completely removed from quarters and dimes in 1965.

Although met with criticism, some governments are willing to eliminate certain circulated coins altogether. The Canadian government announced in its budget on Thursday it will withdraw its penny from circulation this year, hoping to save around $11M annually. Finance Minister Jim Flaherty said, "Pennies take up too much space on our dressers at home. They take up far too much time for small businesses trying to grow and create jobs," according to Bloomberg. That may be true, but the move also helps to hide the debasement of currencies from the public.

While elevated gold and silver prices flash a warning light to governments and fiat currencies worldwide, the signal is ignored by many. Investors looking to protect and diversify themselves against the current global financial system should strongly consider deploying gold and silver airbags. Individuals not willing to purchase gold and silver may want to consider picking up some U.S. nickels, while they still contain copper.

Kyle Bass, the Hayman Capital fund manager who correctly predicted the credit bubble, is a big believer in gold, platinum and nickels. In Michael Lewis' latest book, Boomerang, Bass explained that he purchased a million dollars' worth of nickels, totaling twenty million nickels. Bass explained, "I'm telling you, in the next two years they'll change the content of the nickel. You really ought to call your bank and buy some now."

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Eric McWhinnie, Wall St. Cheat Sheet

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To contact the reporter on this story: Eric McWhinnie at [email protected]

Disclosure: Long EXK, AG, HL, PHYS

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