Simit Patel

Something I've touched on before but have not elaborated too much on is the similarities between Argentina in 2001 and 2002 and the US now. Here is a fantastic analysis of this subject. Below is a breakdown of the key events:

1. In 1997, Argentina experienced a recession. The government response was to ease credit -- i.e. lower interest rates -- and increase government spending, which for Argentina, would mean increasing deficit spending (i.e. borrowing and spending rather than taxing and spending). The US followed the same path in the semi-bursting of the 2002 and 2003 NASDAQ bubble.

2. The excessive easing of credit leads to inflation. For Argentina this occurred in 1998 and 1999; in the US, this peaked in the summer of 2008. During these episodes of inflation, both countries receive warnings from the IMF that their monetary policies are unstable.

3. Both countries than revert back into a recession. This time, however, they are both saddled with greater debt.

4. The recession, coupled with the increased debt burden, leads to a credit crunch, defaults on borrowed funds, and bank failures. For both countries, this results in a decrease in the money supply.

This is where the similiarities end, as we don't know how the US will get out of this situation. Will it continue to follow Argentina? Let's see:

1. During its debt ridden recession of 2000, Argentina responded by continuing deficit spending. Likewise, Barack Obama has already stated that deficit spending is not a concern, and that deficits to stimulate the economy is needed.

2. Eventually, Argentina was having trouble finding borrowers to lend it money. To make its debt more attractive, it increased its yield -- what it was willing to pay to borrow money. In the United States, we are seeing bond prices rally, and many are pointing out similiarities to other bubbles. If this is a bubble, and if it starts deflating, interest rates will need to rise to make the bonds appealing (see our previous article on this subject). Interestingly, Paul Volcker, the Federal Reserve Chairman who raised rates in the '70s to help curb inflation and tighten the money supply, has been brought on to head a new economic advisory board. Are they looking to Volcker for assistance in raising rates?

3. For Argentina, the rate hikes were not sufficient. Eventually, the diminishing tax base, bank failures, and higher interest rates made Argentina unable to make debt repayments. The result was a run on the currency. If the US cannot find buyers for its debt, the same scenario would play out here, which would result in currency devaluation.

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alexasmother

Simit,
Thank you for explaining the similiarties between argentina and the united states. I have heard other people also talk about a currency devaluation. My question, how best can traders protect their capital and/or ride out this storm?
Thanks,
Amy

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Simit Patel

hi amy,

i think the simplest and best option is to purchase gold. i documented my specific approach here.

i also think it helps to continue studying and researching, so you can determine the best course of action for you based on your risk tolerance and life circumstances.

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Tom

Simit, will you share what you like to buy from APMEX for your personal stash and how you made your decision on the gold pieces, coins, etc. Thanks,

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Simit Patel

hey tom,

with silver, i focus on bars; specifically i buy bars imprinted by APMEX themselves as well as sunshine mint. with gold, i focus on acquisition of coins and grams; grams by pamp suisse, and american gold eagle coins that are 1/10th an ounce. if kruggerands go on sale, i'll get them. i buy them because i believe they are widely recognizable and very well-priced relative to other options.

i have more physical silver owned than i do gold, but i want to acquire more gold. so for a while i plan to only acquire more physical gold. i feel like some extra silver is around for bartering in small transactions, although i doubt we will see a complete and sustained monetary breakdown that would require that. but just to be safe, and because i think silver will likely appreciate more than gold on a percentage basis over the next few years.

Thank