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Date: October 23, 2007
Subject: G&G Newsletter - Precious Metals Smarts

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G&G Associates
Tax & Financial Consulting Services

By Mike Burnick

In September, the price of gold stirred from a brief summer bout of selling to once again surge again past the US$700 per ounce mark, and toward fresh multi-decade highs. What's the trigger for this quick turnaround in gold? The return of easy money!

As the sub-prime debacle continues to deepen in the U.S., central banks around the world were left with little choice but to crank up the printing presses again and create more credit out of thin air. Central banks have injected hundreds of billions of fresh cash into the global financial system.

The Fed has cut rates and the European Central Bank skipped an expected rate increase. Of course global investors correctly recognized this shift in policy as nothing more than the next chapter in debasing paper money, especially the U.S. dollar!

With the prospects of still lower interest rates on the horizon in the U.S., a factor that will certainly send the greenback into another steep decline, it's no surprise that precious metals are back in high demand.

Gold typically attracts all the glittering headlines, but for my money silver may be the better game in town in terms of upside potential right now. Let me explain.

Over time, gold and silver prices, the two most popular precious metals, generally track each other pretty well. However, cheaper silver prices often outperform gold in terms of percent return over long stretches.

Silver prices have shot up nearly 90% just since 2005, and while gold has also performed well, it's up just 56% by comparison.

Going a bit further back, both precious metals have posted impressive returns in recent years. Gold has averaged annual gains of 26% since 2002; while silver investors have really cleaned up with average yearly gains of 36%.

However, after the recent precious metals pullback, silver looks like a better bargain. It's still about 15% off its recent highs as of mid-September. What's more, while I fully expect renewed investor demand to push precious metals prices higher, surging industrial demand from around the world may give silver prices the edge once again in terms of upside performance.

Surging industrial demand for silver, especially from fast-growing emerging economies like China and India, is having a much bigger impact prices than most people realize.

According to data from the Silver Institute, industrial uses for silver soared 6% in 2006 to 430 million ounces, the fifth straight year of steady growth. In fact, total industrial demand gobbled up more than 50% of global supply last year for the first time.

Silver is in fact used in a growing number of industrial applications, many of them high-tech. For instance, silver is widely used in electronics such as computer circuitry, cell phones and especially in those new HD flat-panel plasma TVs.

Silver is widely used in industrial electronics including capacitors and conductors. It's also used in applications such as medical products, automobile and aircraft manufacturing, batteries and industrial reflective coatings. And surging demand in many of these markets should keep silver prices on a steady upward trajectory as the commodities bull market rolls on.

Gary Gray
Tax & Financial Consultant, RFC
G&G Associates
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