Peter. Schiff – How to Get Rich in the Next Ten Years: How to Make High Profits at Market Lows

Author/Peter. Schiff, Peter D.

Translator/Li Jianxing

Publisher/British Virgin Islands Commercial Bank International

Publication date/ 2010/04 /08

Book excerpt:

The U.S. dollar is clearly headed for collapse, holding cash and bonds is dangerous, and the stock market has entered a bear market since July 2, 2008 , but after adjusting for annual inflation of 8%, it is an astonishing 42% short of the high point on January 14, 2000. In my analysis, it is still considered a long-term bear market that will continue after 2010. It’s just a process. What is happening at the same time is that, stimulated by the huge demand expected to be brought about by the industrial revolution in China and India, global agriculture, natural resources, and precious metal commodities have entered a long-term bull market. My strategic goal is to get heavily involved and own stocks of manufacturing companies or conservative, dividend-paying public companies, or commercial real estate companies that benefit from being the economic linchpin of resource-rich countries.

One great tip: Laying out the commodity market

What commodities are we referring to and how should we invest?

The Commodity Research Institute (CRB), the world's largest commodity futures research, data and analysis company, covers more than 100 commodities, but the most actively traded are the projects that make up several public indices.

The Reuters/Jeffries-CRB Future Price Index tracks the seventeen most commonly traded commodities. The common Dow Jones-AIG Commodity Index contains nineteen commodities. Although the weightings are different, the commodity indexes you see in newspapers basically all use the same basic commodities.

The classifications and subcategories of the Reuters/Jeffrey-CRB Index are the most representative: energy (crude oil, fuel oil, natural gas); precious metals (gold, platinum, silver); grains and oilseeds categories (corn, soybeans, wheat); livestock categories (live cattle, lean pork); industrial categories (copper, cotton); soft goods categories (cocoa, coffee, orange juice and sugar).

Depending on your approach, financial maturity, investment goals and risk tolerance, there are six main ways to trade commodities. (I exclude futures options because it is too speculative.)

Direct ownership through futures contracts (suitable for advanced investors): 1. Non-discretionary account; 2. Authorized account (Discretionary account); 3. Commodity Investment Fund (Commodity Pool).

Indirect ownership (suitable for general investors): 4. Index funds; 5. Stocks of production companies or companies providing related services in resource-rich countries; 6. Stocks of other companies in resource-rich countries that allot dividends .

Brilliant move 2: Switch to gold as a safe haven

The financial role of gold is very unique. Money gathers in gold as a safe haven and as a store of value when the purchasing power of currency is threatened by inflation or economic instability. To be honest, the United States has both of these problems. Inflation is gradually becoming a big problem abroad. The price of gold has more than tripled since 2000. There is nothing surprising, but the best is yet to come. Current gold prices reflect only a portion of the inflation that exists in the global monetary system. Inflation also plays an important role in the government's attempts to soften the effects of the subprime mortgage disaster. About $40 trillion in advance future liabilities such as social welfare and health insurance ensure that the money printing press will continue to run for a while.

When the U.S. dollar continues to depreciate toward collapse and foreign governments continue to interfere, gold will continue to rise, deriving additional value at a certain stage and becoming a potential currency. Our national debt, with or without provisions, is approximately US$50 trillion. This requires printing a lot of money, causing a lot of inflation, and causing gold to rise for a while. Be prepared to accept wild swings, that's a given. Eventually I think gold will hit $5,000 or more before the bull market ends.

Best move three: grab the silver band

Although the supply of silver is much larger than that of gold, and the industrial market is larger and more dispersed, what is interesting is that the silver we consume is far more than Mining volume. As a result, the global inventory has shrunk steadily, and unlike gold, a large part of the silver produced every year is consumed and disappears forever.

According to a report, silver inventories have dropped from more than 2.5 billion ounces in 1980 to about 500 million ounces in 2007, less than a full year consumption. Therefore, there may be a shortage of silver causing an imbalance between supply and demand. In addition to its role as a currency, silver is also an attractive commodity.

Having said that, silver and gold prices are highly correlated, and silver fluctuates more violently because industrial demand and inflation-related demand pull against each other. Silver is a store of value second only to gold. When the U.S. dollar falls, it rises. Although the probability of being used as currency again is smaller than that of gold, it is still possible. Therefore, confident investors buy silver, believing that the currency premium will further enhance the profits they enjoy.

Silver investors will pay close attention to the ratio of gold to silver prices.

The higher the ratio, the cheaper silver is relative to gold. Over the past century, the price of gold has averaged forty-seven times the price of silver. As I write this, the ratio is fifty-one to one-three, gold $920 and silver $18. Silver was worth $14 at the beginning of 2008, and its one-year return as of April 2008 was 29%.

Broadly speaking, my feeling about silver is that it is in a bull market along with the overall commodity market, but with stronger momentum. It has the potential to rise more than other precious metals, including gold, as it benefits from a falling dollar coupled with an upward cycle in the commodity sector and a lack of supply. But given historical volatility, there may also be greater downside risk.

Broadly speaking, there are six ways to hold gold and silver: 1. Physical ownership; 2. Perth Mint; 3. ETFs and ETNs; 4. Virtual gold coins; 5. Commodity futures; 6. Mining stocks.