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Gold – The Forgotten Asset Class
It has been over two decades since gold
was widely referred to as an asset class by Wall Street and the media. It
would probably be generous to say that even 1% of American investors have an
adequate understanding of why at least a 10% portion of their assets should
be safeguarded in gold and silver, primarily in bullion. An even smaller
percentage understands that they must have physical possession or a custodian
that can prove that they are holding their purchased gold in a segregated
account.
When our forefathers founded this
country, it was for good reason that they demanded that money only be backed
by precious metals. They understood well that putting the wealth of the
nation in the hands of politicians and private bankers was equal to handing
an automatic weapon to an assassin. The United States Constitution
specifically states that the act of attempting to change the backing of money
by precious metal is punishable by death. Why would they demand such a harsh
punishment for such an act? In the years ahead we are about to find out why,
and when we do, the raped public will be looking for some heads to roll.
Shockingly, it becomes apparent that
national heroes such as Abraham Lincoln and Franklin Roosevelt were key
figures in setting the US on a path to economic ruin. In fact, no figure in
history has been more responsible for catapulting us toward the day of
reckoning than current Federal Reserve Chairman, Alan Greenspan. In the cases
of Lincoln and Roosevelt; when Lincoln printed paper money to fight the Civil
War without gold backing, and Roosevelt made it illegal for individuals to
hold gold; their level of economic training and knowledge can be open to
question. In the case of Greenspan, however, there is indisputable evidence
that he has full awareness of the consequences of his actions. In his own
words, "In absence of the gold standard, there is no way to protect
savings from confiscation of wealth. There is no safe store of value. Deficit
spending is simply a scheme for confiscation of wealth." There it
is. No one can say it better than the man himself, even if he said it 40
years ago. Well, this is exactly what is transpiring today. It is probably a
good thing that Greenspan is of an advanced age; for when the masses understand
what he has done, they may well call for his neck as has happened in ancient
times to a central banker. Clearly, Greenspan has assisted the banks and the
Government in confiscating the wealth and savings of the people.
The average person is blind to what is
happening. Most believe there is not the slightest of problems with our
financial policies and economy. They are being bribed by unlimited consumer
goods with no money down or payments for several years; and below market
interest rates to purchase homes that are in the midst of an unprecedented
bubble. Although homeowners in the US are at record levels, they own the
smallest percent of equity in their homes of all time while foreclosures are
at record levels. They are encouraged to continue to draw equity out of their
homes to spend, weakening their ownership position. In actuality, banks wield
control over home ownership, especially in consideration of the state and
local deficits that will require continuous increases in property taxes. With
only the slightest of increases in interest rates, banks will own more and
more foreclosed homes over time. Even homeowners with 100% equity in their
homes could face hardships to pay increased property taxes in the future as
the true unemployment rate already approaches 10%. Real wages are down since
year 2000 while home prices have soared, a key factor in housing
affordability. The reality is banks lend to anyone now and care little
whether they will be paid back or not in the long-run. They know the dollar
is being devalued to worthlessness so as repayment they will seek out your
possessions, particularly your home instead. People have been lulled into a
false sense of security because they have been led to believe that their assets
such as real estate have no where to go but up. You would think that sheer
common sense alone would alert enough of the population that borrowing and
spending beyond one's production, both individually and nationally, is an
unsound policy that will entail repercussions.
The belief of endless upside in asset
bubbles is perpetrated by a subterfuge of economic statistics that border on
comical. Among the more obvious are: the Consumer Price Index, Producer Price
Index, unemployment numbers, and GDP statistics. It is unlikely that
professional observers really believe that the CPI releases have any
relationship to the real world after the substitutions, manipulations, and
statistical maneuverings that are performed to make
the outcome digestible to the market. For example, new cars are moved with 0%
financing, weakening used car prices where such financing is not offered, so,
the Government tracks used car prices for the CPI. The Federal Bureau of Labor Statistics (BLS) decreased their estimate of
households even though population was rising steadily in early 2004, with the
effect of making the unemployment rate decrease despite employment decreasing
from mid-2004. Such statistics are readily accepted by the market as long as
the long-only bias of the market is satisfied.
The corporate world has followed the
Government's poor example with an incredible amount of financial engineering
that makes a mockery of financial statements and results. The more
financially oriented that companies become, (e.g., GE, GM, JP Morgan, AIG),
the less confidence you can have in reported earnings. The January 31st
issue of "Barron's" reported on the inappropriate use of
finite-risk reinsurance which borders on criminally fraudulent
misrepresentation of financial results. In effect, they were selling
"insurance" to companies to retroactively "insure" away
incurred losses to remove them from the latest quarter. This is the type of
accounting trickery that leads to sudden bankruptcies with little advance
warning such as in the cases of Enron and Worldcom.
The Government in an effort to make it look like they are doing something and
that they don't condone such widespread behavior,
throw the book at an insignificant character such as Martha Stewart to make
headlines. Meanwhile, at many of the old line corporations mentioned above
that work closely with the US Government, far greater crimes and
misrepresentations are allowed as the Government looks the other way. Recent
headlines regarding Fannie Mae and AIG are shocking with huge implications,
yet the stocks magically rally shortly after such revelations leading
investors to shrug off the news with claims that "it was already
discounted by the market".
You simply can not make the masses
recognize what is right before their eyes until they are ready to see. If you
can recognize the importance of these events and the implications for the
future you probably already have a healthy allocation in gold, silver, and
related equities. Unfortunately, we have found that the vast majority that
has moved to protect their portfolios with investments in the precious metal
sector are foreigners. Americans are woefully under protected with a gaping
whole in their portfolios. Also, we find the majority that invest in the
sector since the gold bull market started in 2001, are mostly just looking to
jump on a hot sector rather than taking advantage of the overall portfolio
protection aspects of precious metals which are so desperately necessary
today. This is apparent in that we see more interest after strong runs when
you should be lightening up than during sharp sell-offs which should be
looked at as fantastic buying opportunities. The really sad part is investors
from China, Japan, the Middle East, and India are taking advantage of any
pullback to keep adding to their gold and silver holdings. India has
regularly paid up to $10 per ounce and more in premiums to get enough gold in
the country to satisfy demand. At the current pace, the high physical demand
for gold will not take long to overwhelm efforts by the Gold Cartel to cap
prices which they do to legitimize their inflationary economic and monetary
policies. The keepers of the fiat money system have gone forward with
acceleration in money creation that borders on insanity. Greenspan recently
claimed he manages the fiat money system similar to a gold standard. Nothing
could be further from the truth; you can't manufacture gold from thin air and
that will eventually be the undoing of the fiat money system as it always has
in the past.
Among the major reasons why gold should
be an important part of all portfolios are:
- Out of control government spending with budget
and trade deficits;
- Negative real interest rates;
- Tremendous leverage coupled with misallocated
capital;
- Continual importation of deflation, killing
pricing power and jobs;
- Demand is rising while production is declining;
- Gold has a negative beta which should offset
times when stocks decline;
- We are in a war environment which has
historically been very inflationary;
- Financial derivatives are out of control and
hiding huge financial failures;
- Energy prices are hitting all time highs as
well as many other commodities;
- The relative size of the gold market is tiny
with the bulk of inflows yet to come;
- The biggest growers and savers (Asians) are
already moving into gold;
- Huge short positions in gold and silver that
may not be possible to cover; and
- Foreign buying of US debt is waning which
should exacerbate money printing.
Monetary inflation in excess of real
production is theft. Alan Greenspan admitted his understanding of this
concept many years ago which is probably why gold was his favorite
indicator for many years, until recent times. Protect yourself. The
fundamentals for gold get better every single day as money expansion continues.
Use declines in the prices of metals and the stocks to build a position as
part of your portfolio. It could well protect everything else you own.
Richard J.
Greene
Managing Partner,
Portfolio Manager
Thunder Capital Management
More articles by the author can be accessed by the
"Research Articles" choice at: www.thundercapital.com
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