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Recently, German politicians, led by Chancellor Angela Merkel, have begun signaling greater comfort with monetary debasement, even while the top bankers at the German Bundesbank remain firmly committed to sound money. All eyes turn now to the long awaited ruling of the German Constitutional Court on September 12th. Simply stated, the Court will rule as to whether it is constitutionally permissible for Germany to finance the debt of other nations. Before it abandons its preference for sound money, German leaders would do well to consider the long term consequences.

The UK and the U.S. were once the two richest nations on earth. Today, having followed Keynesian money debasing policies, they are among the world's largest debtors with their economies approaching possible deep recession. Indeed, today the U.S. Treasury's debt exceeds $16 trillion. America has joined Portugal, Iceland and Greece with a Treasury debt larger than its GDP.  Nevertheless, the Anglo-Americans have established a considerable following of central banks around the world that are engaged in monetary debasement.

Having experienced the ravages of the 1920's Weimar economic collapse, Germans have been dedicated followers of the Austrian School of sound money. As the leading exponent of sound money, Germany has garnered sympathy with Switzerland and the Netherlands. More recently, resource-rich nations such as China and Russia have joined this loose grouping and are calling for a replacement for the U.S. dollar as the international reserve currency.

We have referred repeatedly to the fundamental struggle taking place between the Anglo-American led money debasers and the German led sound money nations. Now, it appears increasingly that a major split is occurring within Germany itself. This has the potential to set the world on a downward spiral towards a hyper inflationary currency crisis.

Facing the difficult task of calling for continued austerity while holding together a tenuous political coalition, Chancellor Merkel looks ready to cave into expediency. Facing external political pressure from Anglo-American led Keynesians, Merkel appears ready to ask the German public to finance the rescue of their less successful Eurozone partners. It could also be that German politicians see this expensive course as a costly but rewarding path to their eventual political control of the European Union.

Unfortunately for Merkel and Draghi, the powerful Bundesbank, led by Jens Weidmann, does not agree that the benefits of debasement outweigh the risks. In particular, Weidmann objects to Draghi's preference for American style quantitative easing of Eurozone bonds. He believes, quite correctly, that purchases of sovereign debt of insolvent nations would put at risk the savings of German citizens. In addition, he has indicated that the policy would be in direct contravention of the European treaty.

If the German Constitutional Court rules against German rescue plans for other nations, the Bundesbank and all believers in sound money can breathe again. However, it could imply an urgent and possibly terminal threat to the euro. Likely that would imply considerable short-term monetary volatility involving a short-term price spike in the U.S. dollar and a longer-term increase in precious metals prices.

Given the almost unprecedented monetary and economic implications and the resultant wall of Keynesian political pressure being brought to bear, most observers may judge that the German Court will succumb under the cover of some form of legal camouflage language. However, it is important to remember that in the past, the German Constitutional Court has not shown itself to be a political pushover. Nevertheless, this time its decision could be literally earth shattering. It represents an awesome responsibility.

John Browne is a Senior Economic Consultant to Euro Pacific Capital. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

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After all, by the time gold put in its recent peak on August 22, it had logged a stunning 44% appreciation in calendar year 2011. And even after its recent tumble, the metal is still 22% higher than it was on January 27, the 2011 low. Therefore, some may conclude that gold has further to fall, and that the descent could be steep.

Given this anxiety, it might be helpful to summarize some factors we see impacting prices. Emotions loom large in the financial world, and it is easy to lose one's focus during periods of uncertainty. From as rational a perspective as I can gain during these irrational times, here is my view on why precious metals have recently pulled back so violently:

Market Technicals. Given the swift rise of gold and silver during the first half of 2011, precious metals were due for a correction – especially following the parabolic increases that we saw in August. Markets never go up in a straight line, and often the biggest downward movements occur in bull markets. These sharp movements are common in gold, especially during short periods of financial panic. For instance, gold fell more than 25% in the second half of 2008, and almost 15% from February to April 2009. Yet after the dust settled in those earlier corrections, gold resumed its upward march with even more gusto.

The progressive rise in margin requirements is another technical factor that has weighed on gold and silver. In recent months, many of the exchanges that offer margin accounts for metals futures contracts have made it significantly more expensive to hold those positions to maturity. This has caused many forced liquidations, putting downward pressure on prices. Many have even speculated that that these dramatic changes in margin requirements were deliberately planned to undermine confidence in gold as a safe haven asset.

Recession Risk. Recently, it has become clearer to more people that the economy is not recovering. Just last week, Fed Chairman Bernanke offered his most gloomy economic outlook since 2009. Many people recognize however that the Fed Chairman is sugar coating the truth and that the real economy is actually even worse. Some believe we are headed for a full-blown depression. In such conditions, liquid cash becomes king and, typically, commodities fall. In this respect, silver, which has more industrial use than gold, can be expected to fall faster in the short term.

But even gold can be expected to fall under these circumstances, especially if official inflation reports stay relatively calm. Unfortunately, what the markets have yet to grasp is that this time, recession will likely be accompanied by high inflation and a risk of currency collapse. To investors who understand this logic, precious metals are still highly attractive.

Liquidations. It has been rumored that some major investors, including hedge funds, have liquidated large precious-metal positions in recent weeks. Many of these investors were likely sitting on large gains in gold & silver, but with the broader equities markets taking a tumble, they may have decided to lock in profits to offset losses in other positions.

Recently, as political and banking problems have loomed larger, liquidity has become a primary factor in determining investment decisions. In other words, big investors are just trying to cover their debts instead of investing for the long term.

The Greek Bailout Plan. Many investors seem to have placed great hope in the recently announced Greek bailout plan to solve the sovereign debt crisis, driving down their appetite for gold as a long-term safe haven. This is overly optimistic. An orderly Greek default is not in our future. The German plan is a poor imitation of the Fed's "extend and pretend" policy that was the basis of TARP, also known as the bank bailouts. It is likely that when markets perceive the gaping holes in the plan, fears of a currency crisis will return, and gold will benefit accordingly.

US Dollar Strength. As it has so often in the past, the US dollar has gained strength in the early days of an economic slowdown. This has put downward pressure on the price of precious metals. We believe that dollar strength is a temporary phenomenon, for reasons with which our readers are quite familiar.

Central Bank Intervention. Central bankers have long been embarrassed by the price of gold, which exposes their surreptitious currency debasement. For many years, the central banks of major debtor countries have sought, via IMF intervention under Central Bank Gold Agreements I and II, to magnify any natural market volatility in order to dispel the perception that precious metals can be a superior store of wealth. Although the central banks of surplus nations are accumulating gold, it is possible that the IMF is acting still to magnify any market price volatility.

While some or all of the above factors may have contributed to the recent fall in precious metals prices, investors continue to face the prospect of a currency crisis that will cause gold & silver to soar. Even at $1,600 an ounce, gold is still only at some 64 percent of its all-time 1980 inflation-adjusted high. Readers should consider these factors before selling their holdings of precious metals and capitulating to the eradication of their wealth by central banks.

Only time will tell how far precious metals will fall. But if we are correct and gold reaches into the many thousands of dollars per ounce, our future selves will care little whether we bought at the absolute bottom. We will just take comfort in having bought.

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The euphoria over share prices has been bolstered by recently released data which catalogs rising consumer confidence and spending, and corporate earnings reports that have beaten estimates. In the meantime, the bond markets have remained resilient, despite evidence of massive public debt problems that bubble beneath the surface. But is this optimism based upon enough sound evidence to support long-term investment?

The recovery in the Dow, to within some 15 percent of its all-time high, should not be much of a surprise to our readers at Euro Pacific, nor should it count as a mark of confidence to anyone. We have always held that ultra-low interest rates distort the investment landscape by forcing yield-starved investors from bonds into equities. Driven by this massive government subsidy, along with a high real rate of inflation, the stock market cannot help but rally. Indeed, the only surprise is that our current rally took so long to develop.

The rally even appears to be immune to the uncertainties created by the unrest in Egypt, which is arguably the largest global political crisis we have seen since the invasion of Iraq in 2003. The big question is: can this rally be trusted for the longer-term? Three factors highlight the risks.

First, much has been made of the fact that consumer spending rose by 7.1 percent over the past quarter. But, over the same time period, personal incomes rose by only 1.7 percent. So, exactly how were consumers able to spend 5.4 percent more than they earned? The sad truth is that the vast bulk, or 76 percent, of the recent increase in consumer spending was financed by a reduction in savings and investments.

During a prolonged period of recessionary belt-tightening, as the pressure to replenish consumer items and splurge on non-necessities builds, consumers will eventually reach a point of frustration, and their willpower will fail. Steep discounts offered by aggressive retailers become too tempting. This is all understandable; but, to get to this point, wise economists like to see an extended period in which savings accumulate significantly. The United States never experienced such a period. The modest increases in savings in '08 and '09 are not enough to finance current levels of spending for very long.

How much longer can consumers be expected to liquidate their savings and investments, particularly once inflation leads to an increase in interest rates and more reasonable returns?

Second, US corporations have used the recent recession to increase their efficiency significantly. Workforces have been scaled back and worker productivity has risen. As a result, corporate profitability has increased, and the stock market has responded favorably. However, the heightened regulatory environment in the US, with unknowable healthcare burdens for employers at the forefront, continues to discourage hiring.

Indeed, many of the jobs lost in the recession will likely never return under the current regulatory regime. Under such conditions, it is hard to see genuine long-term consumer demand recovering to reach anything like pre-recession levels.

In the meantime, government spending is making up the shortfall. But with political pressures mounting to arrest spending growth, if not attempt actual cuts, how much longer can the government act as a surrogate for the American consumer?

Third, when interest rates rise, bank savings and relatively low-risk investments will become more competitive. At that point, assets such as Treasury Inflation Protected Securities (TIPS) may draw funds away from US equities. And, in a rising interest rate environment, with fear of inflation a primary concern, investors will increasingly eschew US stocks in favor of hard currency-based foreign equities and precious metals.

In short, the impressive recovery experienced recently by the US stock market is unlikely to be sustained through natural means. When the markets do ultimately turn south, the Fed will surely arrive on the scene with more liquidity. When that happens, the very currency upon which these investments are based will erode from under them.

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If one were asked to describe the major global economic changes that have unfolded since the financial crisis began, a good starting place would be the massive shift of debt from the private to the public sector. Attempting to arrest a deepening crisis, governments all around the world have bailed out businesses and companies by transferring bad debts to the public books. Although these moves have provided some current stability (after all, governments are much less likely to default), the long-term consequences may be dire.

Two of the world's largest economies, the EU ($16 trillion) and the US ($14 trillion), have become the leading practitioners of private-to-public debt shifting. The US has assumed the debts of banks, insurers, mortgage holders, and even entire industrial sectors. The European Union has done the same for entire states. The resulting public debt levels are, predictably, placing strains on both the dollar and the euro.

Worse still, the bailouts have created a spirit of apathy toward debt accumulation. Western governments have embarked on a debt binge for the ages. Already, the credit ratings of the United States and some of the EU's core countries, such as France and the UK, are being questioned.

While this socialization of private debt has created deep citizen resentment, it remains to be seen whether political pressure is enough to hold back the tide. In the US, the forces of fiscal restraint appear to have the upper hand at present; but, this late in the game, it is far from certain that the newly elected fiscal hawks will be able to avert civil unrest and debt default.

It is worth noting that the debt shift has offered some near-term benefits. Relieved of repayment anxiety, many companies have posted very promising earnings reports in recent months (one needs to only glance at Detroit). Despite continued demand weakness, these companies have worked hard to improve their balance sheets and raise operating margins. The resulting rally in share prices has given rise to a belief that recovery is at hand.

However, despite buoyant share prices, unemployment continues at dangerously high levels, depressing tax revenues and leading to much greater entitlement spending. This has made public debt levels rise even faster.

Total world direct sovereign debt, excluding guarantees and unfunded medical and pension obligations, is some $41.6 trillion dollars. When the $2.9 trillion owed by global municipalities is included, total direct public sector debt is over $50 trillion. Against this total, even the wealth of cash-rich nations such as China ($2.85 trillion in foreign-exchange reserves) and Japan ($1.1 trillion in reserves) pale into insignificance.

With so little credit to soak up the future financing needs of the US and the EU, it is no wonder that both their currencies are coming under pressure. It should be no surprise that Chinese President Hu began his state visit to the US by warning that the debased dollar was causing much of the world's monetary problems – and was thus no longer credible as the world's reserve. Once unshielded by that great privilege, I forecast that the US dollar will plummet.

In many ways, the euro may fare little better. The EU has organized a $1 trillion rescue package for its smaller members, but, in practice, there is not enough money for all the troubled peripherals, let alone a core state like France or Spain. Last week, the EU suggested that Greece should be allowed to default and restructure much of its debt. The Irish Times reported that the EU has allowed Ireland to print its own euros to settle the debts of its banks. Will it allow Portugal, Spain, Belgium, Italy and France to do the same? If so, what credibility will remain for the euro?

Possible because a major currency collapse is unprecedented in living memory, investors have been slow to react. While the markets are calm at present, we mustn't forget that the nature of panic is that it is sudden. It can erupt quickly and overwhelm the unprepared. When it does, even supposedly rock-solid assets like Treasury bonds may be discounted severely.

In such a climate, gold and silver are as faithful as Old Yeller.

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But just as investors were getting comfortable with the leading explanation – that a looming double dip recession will prevent inflation and thereby dampen demand for precious metals – the markets for both metals stabilized.

Most investors still credit the accepted orthodoxy that metals will only gain if inflation is widespread or a financial crisis encourages investors to seek safe havens. The failure of both metals to break below their upward trend lines, despite the lack of news on both fronts, should lay to rest these canards. Unfortunately, nothing appears more resilient than the belief in a gold bubble.

In my opinion, the current rise of precious metals is the direct result of the evident profligacy of governments the world over. Spendthrift politicians in Washington, London, and Tokyo, have caused people to lose faith in paper currencies. Investors, as well as an increasing number of lay citizens, understand that debts cannot be accumulated forever and that the most tempting solution will be to simply print more currency. The only alternative is an unpalatable tax hike that will only serve to reduce long-term revenue, as explained by the famed Laffer Curve.

This conflict will remain whether or not the CPI is currently spiking, and whether or not appetite for risk returns to the marketplace. So, until the political currents change or we face sovereign catastrophe, I believe gold and silver will be in a sustainable secular (long-term) bull market – not a bubble.

With the long term trend line of gold and silver still intact, but with current prices below their recent highs, many investors may be sensing buying opportunities. If so, which metal looks more attractive?

The price of gold and silver are typically influenced by several factors that do not affect prices for conventional commodities.

Gold holds the status of being the world's ultimate store of value. Neither governments nor wealthy individuals seem to be able to sleep soundly without some cache of the yellow metal. Gold is less used in the industry and its price less easily manipulated. Therefore, the big players in the precious metals markets, especially central banks, tend to invest portions of their vast holdings into gold.

Silver is generally the province of smaller investors. It is more accessible on a price-per-ounce basis, akin to the B-shares of Berkshire Hathaway. Silver has many industrial uses, giving it exposure to the commodity and monetary markets. This means the silver price tends to be more volatile and relatively less favored as a safe haven by the big players.

During the financial panic of 2008, the fortunes of gold and silver parted drastically. In that calendar year, when nearly every asset class fell dramatically, gold lost only 29% of its value from peak to trough. Silver, on the other hand, fell much harder – down 57%. But silver has bounced back harder. Since the trough, the price of silver is up 97%, as compared to 66% for gold. What's more, the price of silver is still below its 2008 high, while gold has been continually setting new records on a daily basis. Based on these technicals, it is likely that many investors may perceive value in silver.

Generally, the rule of thumb is that gold offers relative stability and silver offers greater upside (and downside). Therefore, the amount of additional risk an investor is willing to take will determine the gold/silver ratio in his portfolio. The other aspect is the ratio between physical metals and metal mining companies. The former are historically relatively safer, but don't generate revenues like owning stock in a miner can. Again, the allocation to each would be up to the individual investor. Each alternative represents a different way to access what I have argued is a secular bull market in precious metals.

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