An "ABCs of Gold Investing" Update
"The next Fourth Turning is due to begin shortly after the new
millennium, midway through the Oh-Oh decade. Around the year 2005, a sudden spark will
catalyze a Crisis mood. Remnants of the old social order will disintegrate.
Political and economic trust will implode. Real hardship will beset the land,
with severe distress that could involve questions of class, race, nation, and
empire."
-- William Strauss and Neil Howe, The Fourth Turning, 1997
When IndyMac Bank collapsed in early July, USAGOLD-Centennial Precious
Metals logged the largest single week volume in its 35 year history. And that
was just the beginning. By mid-August gold coin demand had become so strong
globally that U.S. Mint and South
Africa's Rand Refinery announced they
could no longer keep up with their orders and promptly shut down operations.
Soon thereafter, the U.S.
mint resumed gold coin production, but explained that they would now be
forced to ration output. Much of the demand that spawned the mints' problems
came from individuals around the globe concerned about the safety of their
banks and financial institutions -- a worry not likely to dissipate anytime
soon.
Conclusion: Thus far
the gold industry has done a good job addressing the gold coin shortage
problem. Adjustments have been made, and the flow at this writing has
returned to some semblance of normal. Though there is no guarantee that we
won't revisit the problem of shortages later in the year, the most likely
outcome will be higher gold prices and higher premiums on coins and bullion
until market equilibrium is regained. As a matter of fact, premiums have
already risen on most gold coins.
Recommendation: Please keep in mind that the word "shortage" is not defined
as a complete absence. Shortages are not cause for undue alarm, but do
warrant decisive action. We expect demand to continue at a steady pace no
matter what the price does, particularly if systemic risk remains in the
headlines.
The economy has replaced the Iraq war and gasoline prices as
the centerpiece issue for this election, yet neither candidate comes off as
economically astute enough to deal with its complexities. There was some talk
about oil at the party conventions, but the trade deficit was skipped over,
and neither party talked very convincingly about smaller government, or
balanced budgets, or the future value of the dollar. The Fannie Mae and
Freddie Mac debacle wasn't even mentioned, nor was the Misery Index -- the
combination of inflation and deflation -- which over the past year has gone
into double digits and remains a primary concern for all Americans.
Conclusion: If you
count yourself among the growing list of those who feel that neither party
can deal effectively with the growing credit crisis, you are not alone. It's
one thing to make promises about the economy and taxes. It's quite another to
deliver, especially when those promises involve increased military
commitments overseas and bigger and better social programs at home. Let's not
forget that the same president who promised to retire $1 trillion of the national
debt in his first four years (GW Bush), managed instead to add $4 trillion
over his term in office.
Recommendation: Looking
back, the conventions did as good a job selling gold to the American public
as they did selling their respective presidential candidates. Rather than
waiting for Washington
to deliver on the economy, you might be better served by taking matters into
your own hands. Take to heart this issue's masthead quote from Strauss and
Howe's The Fourth Turning.
A well-oiled and functioning market for paper instruments depends in
the end on faith and trust. Value in one financial house depends upon
performance from another financial house which depends upon performance from
still another -- a seemingly infinite web of interlocking counterparties
fully dependent upon each other for their existence. A breakdown in one major institution, we
are told, could lead to a domino effect and collapse the entire system. As a
result, the Federal Reserve and U.S. government have no other
choice, the logic continues, than to bail out the institution in trouble and
shift that loss to the taxpayer. Fannie Mae and Freddie Mac, the
mortgage-backing behemoths, have rewritten the book on bailouts, and who's to
say that it ends there. It is important to keep in mind, though, that Fannie
and Freddie are only part of the problem. There are other credit land mines
buried about this economy that could be tripped at any moment.
Conclusion: The
good news (if you happen to go to work every day on Wall Street like the
fellow in the Stein cartoon above) is that you are likely to get bailed out
if your balance sheet is reduced to a puddle. Fed chairman Ben Bernanke was serious
about those money-dropping helicopters after all. The bad news is that there
is a significant downside to the Fed's Magic Money Machine. Runaway
stagflation becomes a distinct possibility. Already the Misery Index (the
combination of inflation and unemployment) is in double digit territory at
roughly 12%. And that's the misery level utilizing the government's numbers.
It could be even worse if you use Shadow Government Statistics. (Please see
#5 "Lies, damn lies and statistics" below.)
Recommendation:
Systemic failure meets the printing press and for those who keep their
savings in dollars, and dollars only, the risks are evident. Closely monitor
the credit crisis and how it is handled by the Washington authorities. Commenting on the
Fannie/Freddie government bailout, Robert Bruner of the Darden School of
Business at the University
of Virginia said,
"If anybody thought we had a pure free-market financial system, they
should think again."
**Ed Stein cartoon published with permission.
When the New York Times reported that China's central bank was running
out of capital, some took the report as preposterous. How could a country
have so much money and be broke at the same time? To answer that question all
one has to do is to hold in his or her hand a stack of the multi-million mark
notes issued by Germany in 1923. Technically, what you have in your hand qualifies you as a
multi-millionaire, possibly even a billionaire. There's one problem: That
stack of notes wouldn't have bought a cart full of groceries.
For China
ultimately it will get down to the value of the money it takes in after it
ships something out. As the Times reported, "Victor Shih, a
specialist in Chinese central banking at Northwestern University,
said that when he visited the People's Bank of China for a series of meetings
this summer, he was surprised by how many officials resented the institutional
losses. He said the officials blamed the United States and believed the
controversial assertions set forth in the book Currency War, a Chinese
best seller published a year ago. The book suggests that the United States deliberately lured China into
buying its securities knowing that they would later plunge in value."
Conclusion: Doesn't
that sort of thinking qualify China's
central bank as a potential gold owner? There were reports earlier this year
that Robert Mundell, the Nobel Laureate in economics, was advising China's
central bank. Mundell has always believed that gold should play a strong role
in central bank reserves because currencies issued by nation states are
always subject to depreciation and even the prospect of total collapse. Any
significant sale of gold by the central banks will likely be met by
significant purchases from other central banks. And The Peoples' Bank of
China likely sits at the top of the buyers' list.
Recommendation: Keep a
close eye on China
because it now holds the key to the U.S. Treasuries market. Its decisions
could become a major influence on U.S.
interest rates, as well as to what degree the U.S. budget deficits will need to
be financed with printing-press money.
More and more, I find myself relying on the economic numbers posted by
Shadow Government Statistics (SGS) over those by the U.S. federal
government. For my money, and I mean that quite literally, I rely on SGS
numbers for the real story on the economy. Here are some examples of the
differences. Let's start with the inflation and unemployment rates -- two
figures near and dear to the hearts of all Americans. SGS, going by the same
Consumer Price Index used during the Clinton
administration, pegs the inflation rate at roughly 9% -- dangerously close to
the double digits. The Labor Department has consumer prices up 6.2% over the
same period. The official unemployment number is running around 6%. SGS'
number is closer to 15% -- a 9% difference! If you combine the two to get the
old Misery Index, it is 11% by the government's calculations, and 24% by
SGS'!! (Please see graphs below.)
Conclusion: Which
numbers, in your opinion, are closer to fact and which are closer to fiction?
Decisions cannot be made in a vacuum. Nor can they be made using bad numbers.
If a 24% Misery Index doesn't elevate your level of concern, nothing will.
Recommendation: A visit
to Shadow Government Statistics web site.
Recently the Bundesbank, Germany's central bank, delivered
a lecture on the role of gold as a central bank reserve item. "National
gold reserves," instructed Bundesbank, "have a confidence and
stability-building function for the single currency in a monetary union. This
function has become even more important given the geopolitical situation and
the risks present in financial market developments." France and the
European Central Bank, both primary sellers of gold over the past several
months, might take note. I cannot remember a more direct statement from a
central bank on the role of gold in the modern era, and a more direct assault
on the "barbarous relic" description made famous by John Maynard
Keynes.
Conclusion: Germany holds the world's second largest gold
reserve next to the United
States and plays a special role in the
European Union as its largest single economy. The Bundesbank's caution will
raise a few eyebrows across Europe not just
in the official sector but the private sector as well.
Recommendation: Like
millions of private investors across the globe, Germany holds gold as a form of
savings impervious to currency depreciation, systemic failure and
geopolitical instability. By its example, it has delivered an important
message.
Michael J. Kosares
USAGold - Centennial Precious Metals, Inc.
www.USAGold.com
Michael
Kosares has 35 years experience in the gold business and is the founder/owner
of USAGOLD-Centennial Precious Metals. He is the author of The ABCs of Gold Investing: How to Protect
and Build Your Wealth With Gold
as well as numerous magazine and internet articles. He is frequently
interviewed in the financial press and is well-known for his on-going
commentary on the gold market and its economic, political and financial
underpinnings.
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