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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
Information contained herein is obtained from
sources believed to be reliable, but its accuracy cannot be guaranteed. It is
not intended to constitute individual investment advice and is not designed
to meet your personal financial situation. The opinions expressed herein are
those of the author and are
subject to change without notice. The information herein may become outdated
and there is no obligation to update any such information. The author, 24hGold, entities in which they have an
interest, family and associates may from time to time have positions in the
securities or commodities discussed. No part of this publication can be
reproduced without the written consent of the author.
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