There are many legitimate reasons why you are not invested in these metals and most of them show the deck is stacked against you in learning the truth about gold and silver.

This article will reveal the five reasons why you haven’t yet invested in gold and silver. Keep in mind, gold and silver are not in a bubble just because their price has moved higher. Long term, it is the U.S. dollar that is in a bubble.

The fact that gold and silver are moving higher despite some strength in the dollar is quite revealing. What will happen to the price of gold and silver when the dollar resumes its downward trend?

5 Reasons Why You Haven’t Invested in Gold and Silver

Reason 1: Your Financial Advisor Doesn’t Understand Real Diversification, Let Alone How Gold Fits Into a Diversified Portfolio

When it comes to retirement planning, most financial advisors miss the mark in properly diversifying portfolios. The missing ingredient is the insurance against what most U.S. investors currently own; U.S. Stocks, U.S. Corporate Bonds and U.S. Government Bonds. All of these assets are subject to U.S. dollar risk. I addressed this before in Challenging Financial Advisors on the Need to Diversify Into Gold.

For decades, the typical financial advisor diversified U.S. investor
portfolios as follows:

60% Stocks
30% Bonds
5% Real Estate Investment Trust (REIT), Commodities, Other
5% Cash

One’s age and number of years from retirement would dictate the amount allocated to stocks. The old adage has been “subtract your age from 100 and that is the percentage you should be invested in stocks.” So if you’re 55, then 100-55 = 45, thus 45% of your portfolio should be invested in stocks.

The vehicles that advisors have typically used to invest in stocks would be a mixture of U.S. Large-Cap, Mid-Cap and Small-Cap mutual funds or ETF’s diversified among a wide range of sectors, with some foreign exposure. The bonds would be a mixture of mostly U.S. corporate, with some allocated to U.S. Government bonds through GNMA funds or U.S. Treasuries. The cash would be parked in U.S. money market accounts waiting for future investment opportunities.

Outside of some foreign exposure that could take advantage of currency appreciation in other countries, what in this “typical” recommendation from your financial advisor counteracts the fall of the U.S. dollar?

The answer, is nothing. Financial advisors may add some TIPS that are supposed to be an inflation hedge, but TIPS only follow the manipulated CPI that doesn’t take into account real inflation.

The fact of the matter is, an investor needs physical gold and silver bullion, not numismatic or “rare” coins (run, don’t walk from anyone who tries to sell you numismatic coins), to hedge against the risk exposure your portfolio has to the U.S. dollar.  Many financial advisors don’t understand this diversification because they believe that the U.S. dollar and U.S. treasuries are “risk free.”  They are not.

Reason 2: The Media Is Biased Against Gold and Always Pro-Stocks

The media is almost always bullish on stocks and always trying to spin good news out of bad reports on the economy. As long as you are investing in stocks, they have done their job.

Gold is competition to stocks.  Investing in physical gold doesn’t do anything for the economy, but it does do something for your portfolio. It makes it appreciate as it has the last 10 years.

The media is owned by corporations. Corporations also do heavy advertising on various media as do Mutual Funds who try and get investors to buy corporations. It would be a conflict of interest for any media to talk negatively about the stock market in general as they are biting the hand that feeds them. If they say something negative about the economy, then people might pull their money from the stock market and thus owners of stocks could see their value go down.

When one turns on the financial media, listen to what they say about gold (they hardly ever, ever, mention silver). I’ve heard all of them on CNBC, at one time or another, mock those who recommend gold. In fact, I have recordings of them doing so that I’ll put together for a forthcoming video. It’s so much nicer to make fun of the media and their bias in their own words!

Steve Leisman and Ron Insanna were just on CNBC talking about how “the Fed has a tool box, its still effective and there is nothing to worry about.” Yes Steve and Ron, all is well just because you say its well. We understand. Ron Insana and Marc Faber then proceeded to criticize a recent video put out by Tony Robbins warning people about a possible stock market decline. Then Melissa Lee came on and said, “to heck with Tony Robbins.” Rah, rah, rah! Go stock market!

Reason 3: Our Education System Teaches Us Nothing About Gold, Let Alone Money

If you have young children, ask them to do some simple math calculations using money. Set up a little store with $1, $5 and $20 bills, quarters, dimes, nickel’s and pennies. Pretend you are a customer and you with to purchase items from them (give them some items to purchase in advance). The purpose is, to see what they have learned in school about money. More likely than not, they may know how to add, subtract and even do multiplication tables, but they don’t know how to give change for a $3.33 item when handed a $5 bill.

While children eventually learn how to make change, they are never taught anything about the Federal Reserve, the name printed on the top of all paper bills, let alone what gold used to represent in this country; money.

Fast forward to one’s college education as high school teaches you nothing from an economic perspective, and the student is introduced to Keynesian economic philosophy. This philosophy fits right in with keeping the individual ignorant on how an economy is supposed to work, and in order to pass the class, one has to go along with the nonsense they teach;

Debt is good.

If there is deflation, print more money (quantitative easing).

If companies and banks are in trouble, bail them out.

Reason 4: Your Neighbor Probably Won’t Tell You They Bought Gold

Unlike the euphoria that surrounded the run up to the dot.com bust, when everyone and their neighbor was telling you to get into NASDAQ tech stocks, most people who own gold today, are quite about it. They don’t want the world to know they own gold. Gold is a private transaction and should be as the more people who know you own it, the more who may come busting down your door when and if a currency crisis hits.

In reality, the price of gold would be much higher if the owners of it were more vocal. The fact that it is moving higher despite financial advisors, media and little word of mouth supporting it means that its not just U.S. citizens who are buying, but the world is waking up to how gold can maintain one’s wealth and purchasing power.

Reason 5: The Government Has An Incentive to Keep the Lid On Gold

If the government was forced to live within its means, something I fully support, then we wouldn’t have the budget deficits, wars and other waste that has caused the national debt to surpass $13 trillion and march towards $14 trillion.

Republicans and democrats both are responsible for where we are. Anyone that thinks this spending will be curtailed at any point in the future simply doesn’t understand the nature of politicians. As long as the choice is between the lesser of two evils, its still evil and they’ll still spend. Increased spending depreciates the dollar.

But doesn’t spending stimulate the economy? The answer is, it has produced some green shoots, but those green shoots have roots embedded in the earth of fiat wealth. In other words, it is not wealth at all, but just more debt.

The recent influx of government spending has done little to stimulate the economy and the only reason the dollar is presently not crashing is because during this deflationary credit contraction, people are putting their wealth in what is currently still perceived to be that “risk free” asset; the U.S. dollar.

At some point the dollar will become weaker. At some point, gold and silver will be double where they are today. At some point, you will buy gold and silver or be left with depreciating dollars.

Gold is still in its second and longest phase. The professionals will still try and buck you off the gold and silver bull. The dips will come. Holders of physical gold and silver care not that it falls 20% on its way to appreciating 100% or more.

The U.S. government and Federal Reserve will never change their colors. Our education system will always have flaws when it comes to helping people understand wealth and money and how to manage it. The media will always be biased against gold. And sooner or later financial advisors will wake up to the risk involved with the U.S. dollar and recommend physical gold and silver for your portfolio.

You insure your house for fire, you don’t just insure the master bedroom.

10% to 20% of one’s portfolio needs to be in physical gold and silver bullion as insurance against the risk associated with the rest of your portfolio having exposure to the U.S. dollar.

Related posts:

1. Buy Gold and Silver Safely, the Lowest Cost Way to Purchase Gold and Silver Bullion, Is Open for Business
2. Leave of Absence To Finish My Book “Buy Gold and Silver Safely”
3. Money Magazine and a CFA Criticize Gold With Flawed Analysis

1. Interest earned on 90-day Treasury bills below the inflation rate is a signal for governments to try to stop deflation and reflate the economy.

2. During these periods, governments usually need to increase their deficits by escalating their borrowings to support the economy.

3. Both of these are occurring or being implemented in the U.S., and thus deficit spending puts downward pressure on the dollar. And when the dollar falls, investors tend to turn to gold.

In reading this article, I really didn’t see any conclusions as to deflation and gold except for the fact that the effects of deflation causes more government intervention/printing, and thus inflation, which in turn is good for gold.

But what about the price of gold in deflation?

When it comes to answering the question, “What does the price of gold do in deflation,” we really don’t have much to go on as historic examples here in the U.S., but analyzing Japan’s deflationary episode can shed some light.

The following three areas will be discussed in trying to decipher what the price of gold will do during deflation;

1. An analysis of Roy Jastram’s observations on gold and deflation.

2. A closer look at the 1929-1932 U.S. deflationary era and the possible flaw in Jastram’s analysis.

3. An analysis of what has happened with gold priced in Yen during the last decade of Japanese deflation.

Roy Jastram’s Analysis of Deflation and Gold

Roy Jastram is the author of the epic book on what happens with gold in  deflation and inflation called, The Golden Constant: The English and American Experience, 1560-1976. In this book he showed the following effect on the purchasing power of gold during three deflationary episodes.

Deflationary Periods
1814-1830 – Prices fell 50%, Purchasing Power of Gold
increased 100%
1864-1897 – Prices fell 65%, Purchasing Power of Gold
increased 40%
1929-1933 (Great Depression Era) Prices fell 31%, Purchasing Power of Gold increased 44%

The Flaw in Jastram’s Analysis of Deflation and Gold; The U.S. 1929-1932 Deflationary Episode

When looking at the analysis that Jastram did of the 1929-1933 era, he concluded that prices fell and the purchasing power of gold actually increased. But is this analysis accurate?

The problem with Jastram’s analysis is the price of gold was fixed during this era at just over $20 an ounce as seen in the following chart.

Naturally, if you have a fixed gold price and prices fall, an ounce of gold will buy you more of the lower priced goods than it would of higher priced goods.

So if Jastram made the observaton that the purchasing power of gold increased during the 1929-1933 era, he could be right, but its not entirely a fair assumption when the price of gold was fixed.  Gold could have performed better or worse than the fixed amount Jastram used for the price of gold in his analysis.

The question that needs to be answered then is, what would the price of gold have done during the 1929-1933 deflationary episode if it were traded freely? Since we only can go back in time and make assumptions, the answer might be found in what has occurred with Japan the last decade or so during their current deflationary experience.

Gold, the Yen and Japanese Deflation

While Frank Holmes and others lament on how the Fed will escalate their borrowing, which in fact results in monetary inflation, the price of gold hasn’t taken off because of it. While gold did it new highs in November of 2009 and July of 2010, there have been deflationary forces holding it back. In fact, the U.S. dollar increased in value the past 8 months and prices everywhere have been falling.

In the U.S., at present, the effects of the deflationary contraction we are experiencing, is resulting in the purchasing power of gold increasing as it buys more goods and services than when prices were higher. This is a good thing. This confirms Jastram’s conclusions, as long as the price of gold stays somewhat constant.

In the Feds attempt to stimulate, which is clearly just keeping things somewhat status quo, they have failed to increase productivity. Naturally they will continue to try and stimulate the economy as Bernanke perceives this will eventually work. But all of this stimulating is being dwarfed by the credit contraction that is occurring. Please see; Can the Federal Reserve Prevent Deflation?

This is exactly what has been happening in Japan the last decade. The Japanese government has been stimulating and at present the Japanese have the highest Debt to GDP ratio in the world at approximately 227%.  Please see; Is the U.S. Following in Japan’s Deflationary Footsteps?

But what has occurred in Japan with the Yen is that it has become stronger versus most other currencies. This does show that despite the continued Japanese government spending, the credit contraction of the inflationary years in Japan has caused a rush to perceived safety in the Yen as the stock markets and real estate markets deflated.

This appreciation in the Yen of course won’t last. Since the world wide recession the Japanese exports have fallen significantly with the decline in production and subsequent slowdown in GDP growth. The Japanese, whose citizens have traditionally bought their own debt could soon be unloading that debt on foreigners and looking for the last bastion of wealth; gold and silver. Could this be the eventual outcome in the U.S.?

Conclusion

To finally answer the question on how a currency will perform, despite its strength versus other currencies, in a deflationary period, the follow chart shows gold has appreciated 255% priced in Yen the last 10 years.

Who says deflation is bad for gold?

That said, we are still in the second and longest stage of this gold bull market and as the U.S. dollar rises, priced in other currencies as revealed by the U.S. Dollar Index, there could be a decline in the price of gold. Barring any external circumstances, the Elliott Wave folks seem to think this will occur. Market players will always try and buck people off the trend, but they have had a difficult time bringing gold down. People are waking up to what the government and the Federal Reserve is doing to our money.

A holder of physical gold cares not that it falls to under $1,000 on its way to $2,000 and higher. Dollar cost averaging into a position on any downturn in price makes good sense as the Japanese deflationary example has shown.

Related posts:

1. Can the Federal Reserve Prevent Deflation?
2. I Was A Guest On the Blogtalkradio Show The Optimistic Bear Talking About Gold and Deflation
3. Gold Will Struggle To Maintain Its Trend; Is Deflation a Concern?

It’s official!  Buy Gold and Silver Safely, the lowest cost way to purchase gold and silver bullion, is open for business.

The goal at Buy Gold and Silver Safely is simply to undercut the market in price. Think of us as the Walmart to the gold and silver industry! Like term insurance to the more expensive cash value life insurance.

Don’t be caught up in the lies and myths of the gold dealer network that advertise on conservative radio and television shows like “Glenn Beck.” Buy only gold and silver bullion coins and bars because when it comes to buying bullion, gold is gold and silver is silver, so why pay more?

We here at Buy Gold and Silver Safely do not sell rare or other numismatic coins, only bullion. Bullion coins and bars are all an investor needs to insure the risk they are taking with their  U.S. dollar based assets like U.S. stocks, U.S. corporate bonds and U.S. government bonds. No other asset hedges this risk like gold and silver do.

Buy Gold and Silver Safely; The Book

Doug Eberhardt’s book, “Buy Gold and Silver Safely” will be available soon. For those who may not know anything about gold and silver, this is a good place to start before thinking about investing.

This book will help answer all of the unanswered questions in educating the first time buyer, or even those who still have questions about gold and silver like what percentage of their portfolio should be allocated to gold.

While the Buy Gold and Silver Safely website is still in the process of being completed, along with a Newsletter, Buy Gold and Silver Safely is able to help investors purchase gold and silver bullion, both bars and coins, today.

Call for Quote on Gold and Silver Bullion Today

If you have any questions about investing in gold or would like to be quoted current prices, call us at 888-60GOLDIRA (888-604-6534).

Ask how gold and silver can be bought with your IRA.

Buy Gold and Silver Safely will not be undersold!

Call today and secure your own peace of mind that only gold and silver can bring you!

888-604-6534

Related posts:

1. Leave of Absence To Finish My Book “Buy Gold and Silver Safely”
2. 5 Reasons Why You Haven’t Invested in Gold and Silver
3. Gold and Silver: Jim Rogers Does NOT Win Over Peter Schiff

In deciding on whether to buy a stock, there are many things to consider including management of the company, sales, profit margin, how much cash is on hand and how much debt is held relative to equity, among other considerations.

Investing in Gold Mining Companies

When investing in gold mining companies, there is one other benefit or detriment depending on one’s timing, and that is the amount of gold ounces the company you invest in has on hand.

While investors will speculate on gold mining companies ability to produce more gold based on the productivity of the mines they operate, there is a way for an investor to profit when the company does nothing but normal business activities. This hidden profit in gold (and silver) mining companies comes from the number of ounces of the metal they currently have on hand.

Investors buy these gold mining companies in anticipation of these ounces held going higher higher in price. Of course, the ounces held could go lower in price too, thus negatively affecting the price of the stock.

This is what occurred during the market crash of 2008 where both the S&P and gold mining stocks got hammered as seen in the following chart.

For awhile in 2008, the price of gold got hammered too, but gold ended the year positive going from $838 at the end of 2007 to $885.50 by the end of 2008, a 5.4% increase in price.

Now that gold has broke to a new high in 2010, just north of $1,260, it has been struggling the past month to break out even further. Even the July move to an all-time high wasn’t much of an improvement over the November 2009 high.

The HUI Index, otherwise known as the Gold Bugs Index, hasn’t been as exciting as gold of late. In fact, the stocks that represent the HUI Index are well off their 52 week highs. Before getting into that analysis, for those who are not aware of what the HUI Index is, the next section will help.

What Is the HUI Index?

So what exactly is the HUI Index?  From the NYSE:

The NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) is a modified equal dollar weighted index of companies involved in gold mining. The HUI Index was designed to provide significant exposure to near term movements in gold prices by including companies that do not hedge their gold production beyond 1.5 years. The HUI Index was developed was a base value of 200.00 as of March 15, 1996. Adjustments are made quarterly after the close of trading on the third Friday of March, June, September & December so that each component stock represents its assigned weight in the index.

Companies that hedge their gold holdings want to protect them from losing value during any potential decline in the price of gold. They will buy put options so if the price of gold falls, they potentially won’t lose any net value on their hoard of gold.

Companies that have bought put options in the past 10 years have lost what they paid for them. They have subsequently learned to unwind their hedges as the price of gold has moved higher each of those 10 years. Perhaps some may be hedging again. It’s important to know these things before investing in a company. Sticking with those that make up the HUI Index alleviates this concern as they are restricted as to how much hedging they can do.

The companies that make up the HUI Index at present, as well as the percentage of the index they represent can be seen in the following chart.

Back to the HUI Performance

While Gold broke to new highs in November of 2009 and June of 2010, the HUI has not broken the high set in May of 2008 of 514.89. It came close on December 2, 2009 when it hit 510.58, but is still struggling today to lead gold higher as a predictor of what is to come.

The Elliot Wave theorists would like to tell you a fall in the HUI is coming, as well as gold as the following charts show, compliments of Ron Rosen (click charts for better view).

The interesting aspect to the price of gold to me is that it was moving higher during its run up in price, despite the fact the Dollar Index was at the same time moving higher, bucking the trend of the last 10 years.  This is an important juncture in analyzing the price movement of gold.

The last two days have seen some buying of gold come in again, even with the Dollar Index moving higher as seen in the following two tables.

August 11

This diversion we’ve been experiencing with both gold and the dollar moving higher is because of the perceived flight to safety that was occurring during the Greek and other PIIGS crisis that was developing which negatively affected the Euro.

But does the U.S. dollar represent safety? For now, it still does as over 70% of the world still transacts business in U.S. dollars. Naturally, with all the government spending occurring, this trend will reverse. “When” is the only question left to be answered.

The fact of the matter is however, gold has appreciated versus all currencies to the tune of over 140% in the past 10 years. Comparing the U.S. dollar to other weak currencies can be a recipe for disaster in protecting one’s portfolio.

Elliott Wave Issues

I’ve written before on the problem with Elliott Wave Theory. It simply doesn’t take into account external influences which can alter the course of things and cause the Elliott folks to draw new lines and make different conclusions. In a perfect world, they can be right.

The Bottom Line For Investors In Gold

The HUI went from its high of 514.89 in March of 2008 to a low of 151.37 by October 27, 2008, a 70% drop. Physical gold finished the year 2008 positive. Holders of physical gold care not that if falls to $900 or so on its way to $2,000 and higher.

While I am in the deflation camp and have written several articles stating the case for current deflation, with monetary inflation occurring at the same time, one must remember that gold has appreciated over 160% against the Japanese Yen the last 10 years. In other words, despite Japan’s decade plus struggle with deflation, gold has appreciated over 160% against the Yen the last 10 years.

How many of you would take that return for the next 10 years? Dollar cost averaging into a physical gold and silver position makes sense at present, hoping the price goes lower so you can secure an overall better price. Naturally the price will move much higher from current levels. You can bank on that!

For traders invested in gold mining stocks, or thinking of buying them, barring any external influences, I’d be cautious at present. I’d like to see the 515 mark taken out on the HUI before going long.

If one follows Dow Theory, they can take the same concept and apply it to the U.S. dollar price of gold and the HUI. Without one confirming the other, in this case, the HUI confirming the U.S. dollar price of gold highs, it’s best to be careful with any trading long the HUI at present….barring any external influences (which external influences among other concerns is why physical gold should be the base of one’s portfolio).

What is a guy who sells gold and silver bullion doing telling people to be cautious?

I’m not your typical “gold bug” where every other word out of my mouth is that of chicken little screaming “hyperinflation, hyperinflation!”  I do recommend everyone hedge their U.S. dollar portion of their portfolios against the risk associated with the U.S. dollar by owning physical gold and silver.

As I said before, dollar cost averaging into a position at any time, makes sense.

The rest of my analysis just gives the trader food for thought. They are my opinions based on my own research and those opinions are not meant as investment advice.

I’m not out to prove anything except that there is a flaw in the financial services industry I was a part of for over 20 years. That flaw is the belief the U.S. dollar is a “risk free” asset. I offer solutions to that flaw; physical bullion gold and silver.

Related posts:

1. Gold Will Struggle To Maintain Its Trend; Is Deflation a Concern?
2. Money Magazine and a CFA Criticize Gold With Flawed Analysis
3. Gold Below $500 an Ounce?

When Central Banks implement a zero-rate interest policy, they know that if they implemented negative returns, individuals would resort to hoarding the currency. The last thing a bank wants is to have its depositors take all their cash out and put it under their mattress to prevent losing money by keeping it in the bank and earning negative returns.

While the Japanese (2003) and Swiss (2009) have flirted with negative interest rates in the last decade, they have been short lived attempts at stimulating lending by the banks.

The Federal Reserve is presently following the Bank of Japan’s example in trying to stimulate the economy. In fact, the interest rate on the 3-month treasury bill is now lower than the Japanese 3-month Yen rate as seen in the following charts.

3-month Treasury Bill Rate;  JP 3-month Yen rate

While interest rates are at historic lows, they have done nothing to stimulate the economy in Japan since 1989. The U.S. meanwhile is just at the beginning of their unwinding of the excesses during the inflationary boom.

Instead of experiencing a long drawn out no-growth period ala Japan, Bernanke and the Fed have decided to combat this deflationary trend with a massive influx of stimulus to banks and businesses, Freddie and Fannie and anyone with a business pulse, including cash for clunkers, caulkers, appliances and environmental companies to the tune of $1.4 trillion in 2009 and on pace to surpass that record amount in 2010.

The problem is, even though the 2010 spending isn’t over with, the stimulus hasn’t worked.

Millions are still unemployed as the numbers haven’t improved by much (real unemployment rates are 16% – 20% depending on which calculation one utilizes). The only real improvement has been in government related jobs. Prices are falling and the Fed’s bag of tricks is running on empty. This is because their options are limited by the Federal Reserve Act of 1934.

The Fed is limited per the Act as to what they can purchase in their attempts to stimulate.

Private-Sector Assets Eligible and Ineligible

for Purchase by the Federal Reserve

2. There is No Express Authority for the Federal Reserve to Purchase:

• Corporate Bonds
• Commercial Paper
• Mortgages
• Equity
• Land (Other that Federal Reserve premises)

2. The Federal Reserve May Purchase

• Gold*
• Foreign Exchange
• Bankers’ Acceptances
• Bills of Exchange

Subject to:

Restriction 1.

Purchases of foreign exchange, bankers’ acceptances, and bills of exchange are to be in the open market.

Restriction 2.

In usual circumstances the bills of exchange must meet the \real bills” doctrine but, it seems, bankers’ acceptances do not.

In “unusual and exigent” circumstances the types of bills of exchange that are eligible to be purchased are open to interpretation.

* Subject to the Gold Reserve Act of 1934.

Of course the Fed can lend directly too, or in the case of a few companies, (AIG and GM), just take them over.

But since they are limited in scope, and without just “raining money” on people, there should be no worries for anyone. Congress has given the Fed even more tools to stimulate the economy in the coming years by giving them more power under the Restoring American Financial Stability Act of 2010 (I can hear you cheering now!).

From the Act:

TITLE XI—FEDERAL RESERVE SYSTEM PROVISIONS
Sec. 1151. Federal Reserve Act amendments on emergency lending authority.
Sec. 1152. Reviews of special Federal reserve credit facilities.
Sec. 1103. Public access to information.
Sec. 1104. Liquidity event determination.
Sec. 1105. Emergency financial stabilization.
Sec. 1106. Additional related amendments.
Sec. 1107. Federal Reserve Act amendments on Federal reserve bank governance.
Sec. 1108. Amendments to the Federal Reserve Act relating to supervision and regulation policy.

Bernanke and his cronies must be drooling like a pack of wolves waiting to get at the sheep once that gate is unlocked bill is passed. But what Congress in their usual ineptness never considers, is what has the Fed ever got right since Nixon took us off the gold standard in 1971? Did they forget already the Savings and Loan crisis? The Asian crisis? The stock market bubble? The real estate bubble? The banking crisis today?

If the Federal Reserves mandate is stable prices and full employment, and they have failed at obtaining these, what will giving them more power to effect “change” do for us?

Switzerland: A Shining Example of How To Do Things Right

Why do the Swiss historically have a better economy, growth, lower inflation, lower  unemployment, low interest rates, a higher GDP per capita and a stronger currency?

Look at the differences in the next two charts to see how stability has been accomplished in Switzerland.

Looking at this from a different perspective shows even further what stability can mean. The U.S. Dollar Index above paints the picture of how the U.S. Dollar has performed versus a basket of currencies outlined below.

The Dollar Index is computed using a trade-weighted average of the following six currencies:

• Euro 57.6 %
• Japan/Yen 13.6 %
• UK/Pound 11.9 %
• Canada/Dollar 9.1 %
• Sweden/Krona 4.2 %
• Switzerland/Franc 3.6 %

The index was introduced in 1973 with a base of 100 and incorporated the Euro when it was introduced in 1999.

The Swiss Franc only represents 3.6% of that Dollar Index, so a better way to compare the U.S. Dollar and the Swiss Franc is to price both in gold as the following chart does.

The Swiss Franc, and its stable economy, has outperformed the U.S. dollar, priced in gold, by 50% the last 10 years.

Part of the reason the Swiss economy has historically remained stable of course is the fact they don’t get involved in fighting wars. Their economy hasn’t had to outlay over a trillion dollars to fight two wars in the last decade.

Back To Interest Rates; Did the Swiss Offer Negative Interest Rates?

The answer is yes, and I’m not talking about the short stint of negative rates offered by banks in 2009.

Switzerland saw their currency, the Swiss franc, appreciate 28% versus the U.S. dollar. in just 6 months from Dec. 1972 to July 1973 as seen in the following chart. (click for sharper image)

Because of the rush to the Swiss currency, the Swiss National Bank implemented a policy of -10% interest rates a quarter to make their currency weaker. This resulted in an appreciation of 27% for the USD over the next six months.

But as you can see from the chart, the downtrend resumed and six months later, was back where it started.

To put this into perspective, Nixon took us off the gold standard Aug. 15, 1971. The Swiss franc was at 4.00 to the dollar at that time. Before the 28% appreciation to the U.S. dollar, it had already risen 6.25%. My speculation is this was because of the fact everyone knew the Swiss had a lot of gold in reserve.

Because the Swiss held so much gold in reserves, many people thought the Swiss franc was backed by gold. It of course wasn’t, but the perception still lingers. In fact, the Swiss were forced to sell much of their gold at a time when the price of gold was rising during the last two Central Bank Agreements. I can’t imagine the Swiss citizens have been too happy about that!

How would you feel if the U.S. government sold all “our” gold? (This is the part where the astute reader says…”what gold?”)

The important point here is to contemplate what “perception” can do for a currency.

Despite all of the monetary stimulus the Fed has been pumping into the system, just before this latest stumble in the dollar, the dollar had been appreciating versus the basket of currencies mentioned above. The latest decline is the result of a rebound in the Euro and some further strength in the Yen. This won’t last.

While the U.S. has its issues, the Euro has their banking issues and the Yen is backed by the highest Debt to GDP ratio in the world, more than twice that of the U.S.

The perception of the U.S. dollar the world over is still one of strength. Looking at the long term Dollar Index chart above, it is still above the 80 trend-line, which has only been broken twice since we went off the gold standard. It’s flirting with it again, but I view this as psychological support.

The fact that the Yen, despite the high debt to GDP ratio can perform well during their deflationary episode shows that it is “faith” in the currency that matters most. This faith can only last so long and for the U.S. Dollar, 70% of the world still have faith in it versus all other currencies. There is no logical reason for this but that’s the way it is. Perhaps its our military might or the threat thereof that keeps it from capitulating from the over $13 trillion of debt hanging over it.

Can The Fed Prevent Deflation?

So while the Fed has thus far failed in its attempt to stimulate the economy by  dumping a few more trillion into the economy through the entities mentioned above, they will no doubt keep trying to come up with new ways to get the economy going. But the Fed cannot force businesses and consumers to take on more debt. So while the banks aren’t loaning as they concentrate on improving their own balance sheets, deflation is weeding out the bad debt and returning things to where they ought to be. Deflation is a good thing. Prices come down. Debt is paid off or defaulted upon. Purchasing power increases. The bottom is put in. Growth returns.

But the Fed doesn’t understand this natural phenomenon.They have to stimulate and stimulate they will. They had a special way of solving things back in the 1929-1933 deflationary era as seen in the following chart.

Related posts:

1. Is the Federal Reserve Blind To Deflation?
2. What Does the Price of Gold Do In Deflation?
3. I Was A Guest On the Blogtalkradio Show The Optimistic Bear Talking About Gold and Deflation

I agree with him.

As a result of his analysis, Bullard gave a solution if signs of deflation started to appear by stating, “the U.S. quantitative easing program may be the best tool to avoid the low nominal interest rate, deflationary outcome.”

This, of course, I do not agree with.

Boston Federal Reserve President Eric S. Rosengren says that while not anticipating we will be in a deflationary period, it’s a risk that he does take seriously. He said, “A heightened risk of deflation is something that we should react to.”

And react they will. Head Fed cheerleader, Ben Bernanke has been quite clear on this.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

The fact that he even relates the U.S. dollar as equal to gold by saying “like gold,” could be the subject of a future article, but what he’s hinting at, is that he believes the Fed can fight deflation with the printing of money. The question is, how much money can they print without causing people to lose faith in the monetary system? Additionally,  for the Fed now, is will they be able to do enough printing to stimulate the economy?

They think they can. I think they can not.

The system has already had trillions pumped into it yet it has done nothing to stimulate the economy.

But understand, this is the minority view at the Federal Reserve. Most of the members don’t see any signs of deflation. Of course these are the members who react to problems AFTER they occur.

From the NY Times:

Thomas M. Hoenig, president of the Kansas City Fed and an inflation hawk, said in an interview Thursday that the comparisons to Japan were overstated. He likened the debate to the situation in mid-2003, when a sluggish recovery from the 2001 recession prompted predictions of deflation that did not come to pass. “I don’t think we should find ourselves picking up every piece of short-term data and jumping to conclusions,” he said.

Hoenig states that the U.S. comparisons to Japan are overstated. I’m going to send him my article Is the U.S. Following in Japan’s Deflationary Footsteps?

While Hoenig laments looking at short-term data and jumping to conclusions, my analysis goes back to the beginning of the Japanese deflation and compares where they were then to where the U.S. is today with their episode of deflationary credit contraction. The similarities are quite remarkable.

More importantly, the fact that Japan’s Debt to GDP ratio is the largest in the world, at 227% shows that the Fed has a lot of debt creation wiggle room to catch up to the Japanese example. I believe the Yen will crack up sooner than later because of it, but so far it has been quite resistant to any government stimulus.

I’ve written to the Fed before when Dallas President Richard Fisher was the lone dissenter in lowering interest rates during one of the votes last year. I do know they reply to inquiries as Fisher did respond in thanking me “for my astute observations.” Of course he proceeded from that point forward to vote with the rest of the board to lower interest rates. Fisher must have just caved in to the rest of the Keynesian clowns as Mish Shedlock calls them.

More from the NY Times:

“I think the fear of deflation in and of itself is probably overblown,” Charles I. Plosser, president of the Philadelphia Fed, said last week. He said that inflation expectations were “well anchored” and noted that $1 trillion in bank reserves was sitting at the Fed. “It’s hard to imagine with that much money sitting around, you would have a prolonged period of deflation,” he said. And Richard W. Fisher, president of the Dallas Fed, said this week, “Reasonable people can argue that there’s a risk of deflation, but we haven’t seen it in the numbers yet.”

The fact of the matter is, the $1 trillion that is “just sitting there” that Plosser speaks of, is small potatoes compared to the multiple trillions of credit unwinding and being defaulted upon. It’s like the ant trying to fend off an elephant.

And what numbers is Fisher not seeing that everyone else is? Remember, the Fed’s definition of deflation is falling prices, wrong as it is. Twenty three days ago I wrote Are We Experiencing Deflation? giving the proper definition of deflation, from an Austrian Economic point of view, and showing how prices were falling and have been for a a few months.

Since writing that article, prices continue to fall led by consumer prices which fell  for the third straight month.

Sign Sign everywhere a sign
Blocking out the scenery breaking my mind
Do this, don’t do that, can’t you read the sign
-Five Man Electrical Band

Evidently the Federal Reserve is Blind to the signs of Deflation.

Related posts:

1. Can the Federal Reserve Prevent Deflation?
2. I Was A Guest On the Blogtalkradio Show The Optimistic Bear Talking About Gold and Deflation
3. What Does the Price of Gold Do In Deflation?

It was a great show and the topics of discussion were gold, deflation, Austrian Economics, and a critique of mainstream financial advice including Modern Portfolio Theory and the Prudent Man Rule.

The link to listen is here:

http://surkanstance.blogspot.com/2010/07/this-week-on-bear-radio-gold-as.html

-

Specifically we discussed my recent 2 part article Is the U.S. Following in Japan’s Deflationary Footsteps?

Related posts:

1. Is the Federal Reserve Blind To Deflation?
2. What Does the Price of Gold Do In Deflation?
3. Can the Federal Reserve Prevent Deflation?

Timothy Geithner was interviewed by David Gregory on Meet the Press on Sunday (click on link for video and transcript) where Gregory asked the following question;

“What is a fair expectation for Americans to have out of the capital markets, if they see that as a place for savings, when for so many years we’ve heard, “Hey, you’ll get 10 to 15 percent returns over the long-term.” Is that what Americans can really expect?”

Before getting to Geithner’s non-response, please note that in my over 20 years as a financial advisor, 10% was the figure that was rammed into our brains as the historic norm for investors. No good financial advisor would tell anyone to expect anymore than 10% or the 15% that Gregory referenced “hearing” about. As you’ll see in a moment, even 10% is going to be a far fetched return to obtain in the years to come.

Geithner’s Non-Response

Geithner’s response was to not answer the question, but speak to how U.S. citizens can borrow easier for education for their children, a home, car or have access to credit cards. In other words, Geithner wants you to borrow, borrow, borrow as if it’s “the American way!”

My advice is if you have debt, pay it all off! As far as a car, if you live in a big city, analyze whether you need one and if you would be better off just renting one when you have to travel outside of the city. As far as those who are thinking of taking out a loan and buying a home right now, my advice is to wait as I wrote about not too long ago. At this time, consider debt your enemy and don’t listen to Geithner, do all you can to eliminate it.

Geithner, went on to talk about clearer disclosure on the risk and tell Gregory that citizens need to make more responsibile decisions.

Here is Geithner’s response in full;

I think what they can expect from these reforms is much more accessible, much more simple, much clearer disclosure about the terms in which they can borrow to finance education for their children, borrow to finance a home, borrow to finance a car, take a credit card.  Much more clear, transparent, simple disclosure than they had over the past several decades, and much better information about the risks you take in investing.  That’s a sensible thing for the government to do.  Now, of course, you need people to be able to make responsible decisions.  We can’t make those decisions for those individuals.  They’ve got to take that responsibility themselves.

Since Geithner didn’t answer the question as to what returns investors can expect in the years to come , Gregory interjected and asked the question again;

“But hasn’t the world fundamentally changed in the markets that you simply cannot expect to get the kind of return on investment that you’ve enjoyed and so many Americans have enjoyed for so many years?”

This question by Gregory is right on the mark as will be shown in this article. But Geithner again, is vague in his response by claiming, “I think it’s hard to know,” and reiterating his position of how citizens need to make better decisions and that they are saving more of their money.

Savings is a great thing and it’s good to see people saving more of their income. Naturally Geithner thinks this is a good thing as it gives much more needed capital to the cash strapped banks.

Geithner’s second response to the question in full;

I think it’s hard to know.  What you want people doing is making better decisions, more careful decisions about how much of their income they spend, how much of their income they save, what they use those savings for, how much they borrow.  And I think the trauma caused by this crisis is going to be profound and long-lasting, and you’re already seeing it induce, I think, an ultimately healthy and necessary change in behavior because people are already saving more of their income, and I think that’s going to be a good thing for the country.

So while its great that U.S. citizens are saving more, whether that money should be put into stocks and what one can expect in return on their investment is something Geithner couldn’t provide an answer to.

Geithner Tells Americans a 10% Or Better Return On Your Investments Is An Illusion

While Geithner was rambling on about taking on more debt, responsibility and savings, it’s what he didn’t say that leads one to the conclusion that any double digit return on investments is something he can’t visualize. Granted he can’t go on television and tell everyone to expect to get 10% to 15% returns for decades to come, but investment advisors have been telling people for years to “expect to receive 10% or more on your investments over the long run.”

Why Won’t Geithner Answer the Question?

Why won’t Geithner answer the question as to what he thinks stocks will do in the future? It’s because he knows the truth. Geithner’s claim of not knowing whether investors can obtain the double digit returns is a way for him to answer the question without revealing what I think he already knows to be the answer. His answer in my opinion is, there is no way investors are going to obtain double digit returns using the same techniques of investing they have in the past.

While I won’t go into detail in this article on what I think investors should do to achieve double digit returns (I will in future articles), I will explain why they shouldn’t expect to obtain that kind of return for years to come.

This Is Not your Father’s Stock Market and Don’t Expect His Returns Either

In studying the stock markets of our forefathers, stocks have enjoyed a nice 10% return over the years as seen in the following chart from Ed Easterling’s site, Crestmont Research.

From Easterlings site:

There are only three components (excluding transaction costs and expenses) to the total return from the stock market: dividend yield, earnings growth, and the change in the level of valuation (P/E ratio). To assess the potential returns from stocks for the next decade, this analysis presents the total return and its components for every ten-year period since 1900.

These components can be seen graphically in the following chart.

What Does This Mean To You the Investor?

In order to obtain that more than 10% return Gregory was asking Geithner about, over 8% of it has to come from capital growth (10% total return minus 2% dividends leaves the 8% that has to come from capital growth).

There have been only two times in the last 100 years where 8% capital growth was even close to being obtained. The first was during WWII and the second was the second was during the high inflation years of the late 70′s and early 80′s.

Capital growth has been falling ever since the late 70′s. In fact, real GDP has been negative in the U.S. for many years, even during the era of high flying real estate prices.

To make matters worse, today we are following in the footsteps of the 1929-1933 deflationary era where capital production fell 60%. Most citizens already know banks aren’t lending and consumers and businesses aren’t borrowing. Businesses are just trying to hang on, hoping for some sort of government reprieve as they cut expenses by laying off more and more workers. In fact, the government spending is the only thing keeping the game going!

What will happen when the music stops and the government’s  stops their spending spree?

Hopefully, if you have been reading my articles, you’ll have a golden chair to sit upon.

Timothy Geithner Knows the Truth but Doesn’t Want To Cause Panic in the Markets

I don’t think Timothy Geithner is mistaken by not being specific in answering Gregory’s question on what American’s can expect. His answer of “I don’t know,” is meant to not cause panic in the already fragile stock market that has been playing games above and below the 10,000 mark for a few months now.

I’m Not Afraid To Tell You the Truth

I can tell you straight out and not mince my words. The stock market, defined as the S&P 500 in this case, via a buy and hold approach, is not going to get you a 10% or higher return until companies start paying dividends in the 6% range again. Capital growth alone cannot get you even 5% return historically and the fact that most businesses aren’t growing today tells me that 5% figure is too high.

As seen in the “10 Year Stock Market Return (Components)” chart above, the era of the late 20′s and early 30′s were a decade of zero to negative capital growth. At least in those days, the yields were averaging 5%. Today, dividends are less than half that return, presently hovering around 2%.

So if we are in a deflationary credit contraction spiral like I think we are, capital growth is soon to be non-existent. In doing the math, how does anyone expect to obtain double digit returns in the years to come if it can’t be attained by yield and capital growth?

Ed Easterling goes as far as saying one can “never” expect to obtain those kinds of averages again. While I don’t rule out never, I do expect at some point inflation to rear its ugly head. The inflation rate could negate any future double digit returns as it did in the late 70′s and early 80′s. Meaning that if you are earning 10% and the inflation rate is 12%, you are actually losing wealth.

A Word On Manipulation of the Stock Market

I don’t think I’m too far out of line when I make a statement that big money can manipulate markets. I’ve witnessed unusual activity in the past when the market makers will drive the price up on a thinly traded stock after I have shorted it (back in the day).

Is it possible for the now holding banks; Goldman Sachs, J.P. Morgan’s, Bank of America’s to get together under the direction of some higher authority and go long the S&P to drive up the price? You’re damn right it is possible, but its only speculation. That’s why a “trader” can make money in any market. But in the end, the truth will always be born out in the financials of the companies. In the end, the buy and hold investor will be the loser while the large banks make all the profit. My goal is to help the little guy out. It is you who is the backbone of America and it is your investments that I want to see you keep and grow.

Bad News to Good News for Investors

I’m sorry to be the bearer of bad news in relaying my opinions on what I think the future holds for stocks. But I do believe there are ways to take control of one’s investing. While your financial advisor may still recommend the relic approach of “buy and hold hope,” the game has changed on them. It doesn’t mean it has to change for you.

While Geithner didn’t specifically tell Americans a 10% or better return is an illusion, it’s the fact he didn’t answer the question that speaks volumes for U.S. investors. I’ll do all I can to help investors separate fact from fiction and reveal truth they can profit from in the months and years to come.

Related posts:

1. Modern Portfolio Theory’s Biggest Flaw

The results of the European Bank Stress Test were exactly as I predicted. 7 0ut of 91 European banks were found to be short of the required 6% Tier 1 capital needed, or as Steve Liesman puts it, “we’ve made a mountain out of a mole hill.”

This small amount of course comes as a surprise to everyone on CNBC.

The data before the announcement follows:

S&P 500 1094.86
Dow 10348.11
NASDAQ 2244.32
Gold 1193.33
Silver 18.22
Oil 78.77
10 Year 2.85
EURO 1.2863
FTSE 5308.14
DAX 6161.75
CAC 40 3605.56

The immediate effect on the markets saw Gold take a little bit of a hit falling to $1,187.90 along with the U.S. stock market where all three indexes turned negative. The EURO fell to 1.281 while other data was unchanged .

If one analyzes the banks balance sheets, not just in Europe, but in the U.S., these stress tests don’t reveal the bigger picture of the bad loans that banks everywhere are trying to unwind as I pointed out in my prediction below 2 days ago.

While CNBC mocks the results…their enjoyment won’t last. Any fall in the price of gold should be seen as an opportunity to dollar cost average into a position, not a reason to sell.

***End Update***

I’m going to go out on a limb here and predict the results of the July 23rd European Bank Stress Test. The research I conducted for my forthcoming book, “Buy Gold and Silver Safely,” shows the U.S. banks are in deep trouble. I have presented the case in that book for some severe problems with the largest U.S. banks in the months and years ahead. Europe is no different and any Bank Stress Test Results won’t reveal the underlying problems that the major banks of the world are facing.

Bankers Meet and Discuss Announcement

As ECB bankers meet ahead of the ahead of the Stress-Test Results, what do you think they are banding together to discuss? I believe they are plotting to allow a few troubled banks to be exposed to some further scrutiny, but overall they’ll make sure the European Bank Stress Test Results will paint a positive picture of the European economy, thus further restoring confidence in the Euro and the monetary system overall.

After all, it’s one big confidence game to begin with based on pieces of paper having the ability to buy you things.  Emphasis on “con” as in the movie by the same name starring Dustin Hoffman and Ed Norton, where they performed one con after another.

In this case, the con is on the people who trust in the banks that have made the bad loans as these banks are now struggling to meet higher capital requirements. This struggle is as a result of the banks lending a multiple of what they had historically, exposing the fallacy of fractional reserve banking.

This excess lending resulted in the boom when credit was easy to come by. Now that the credit is contracting, banks aren’t loaning and businesses can’t get the capital needed to finance operations or expand. Individuals are finding stricter rules in qualifying for mortgages at the same time.  It’s the banks themselves who are struggling with the excess reserve requirements in “restoring confidence” in the system.

Just looking at some of the larger banks of the 91 going under stress tests reveals the startling fact that at a time when capital to asset ratios are required to improve, total income is declining rather quickly. At the same time, bad loans are increasing.

Remember, banks primarily make money when they are lending, outside of some insurance and other financial activities to generate income. Without this lending business occurring, banks aren’t making money liked they used to.

How Are European Banks Really Doing?

Italy

Intesa Sanpaolo bank in Italy has seen its revenues decline 36% in the last year. Not only that, but bad loans have increased 31.1% and past due loans 38.1%.

Ireland’s largest bank AIB suffers first-ever full-year loss of $3.25 bln as bad debts soar

Portugal

Head Of Largest Private Portuguese Bank Forced To Deny Bankruptcy Rumors

France

Doha Bank Q2 beats forecast but bad loans rise | Reuters

   JAKE
             Doesn't matter what the con is.
             Insider trading, a line we got on   a
             bookie club, insurance scam,
             whatever... You saw the money and you
             want it. More of it. Who cares   if you
             have to bend the rules a little?  As
             long as no one gets hurt.
Jake spins the gun cylinder then SLAPS it closed, pointing
it straight at the CAMERA.
                         JAKE (cont'd)
             Then someone does...
BLAM!!!

The July 23rd European Bank Stress Test Results Will Be One Big Con

I don’t expect any real bad news to come from the July 23 Bank Stress-Results. They’ll just reveal how the capitalization ratios have been increased to where banks can sustain any further sovereign debt crisis should it come.

But the data tells me things are much worse than anything they may say.

The system can’t afford any panic. Panic results in runs on banks. The bankers meeting today don’t want any panic to occur when they announce the results. “All is well with the banks!” will be their mantra.

Who will get hurt when the entire world banking system implodes? Those who don’t have the insurance that gold and silver provide.

No related posts.

The U.S. Dollar price of gold has dipped of late, although rebounding to $1,187 as I write this article. The following snapshot of yesterday’s price action is used as a reference point for this article.

Two months ago I was cautioning traders there could be one more attempt to buck people off the gold bull in Buy Gold Now or Wait? What Will Gold Do Next? and subsequently in Gold Will Struggle To Maintain Its Trend; Is Deflation a Concern?

It seems the bucking has come to fruition.

Looking at the 60 day gold chart below, you can see how gold is down priced in all the major currencies, the Euro, Yen, Pound, Franc and Canadian Dollar.

What’s interesting to note is that gold priced in Yen, Franc, Euro and Pound have been hit the hardest which is why the U.S. Dollar Index has fallen off its highs of late as seen in the following chart which shows it’s fall from just over 88.00 to its current level of just over 82.

So while gold has enjoyed a nice run up in price, it has now fallen a bit and investors are wondering whether it could fall in price further.

In reality, the only investors who are concerned about the price of gold falling are either traders, speculators who have leveraged a long position, or those who hold gold mining stocks in their portfolio.

Those who leveraged gold in the $1,240 range have seen their trade lose 4 or more times the fall in golds price. In other words, with gold presently trading at $1,180, they have not lost $60 an ounce, but if leveraged at 4 times their original investment, they have lost $240 an ounce. So a $100,000 investment leveraged at 4 times will have lost that investor, on paper, $19,332 of his original $100,000 investment. This becomes a concern the further the price of gold falls. That’s why buying gold on leverage, is a risky business and also why Monex has a “F” rating by the BBB as investors really didn’t know what they were getting in to.

Holders of physical gold meanwhile, are not concerned about any pullbacks in price. They know a fall in gold from the $1,200 range to the $900 range is no concern to them as eventually the price of gold will double or more from here. If anything, these holders of physical gold will do all they can to add to their position as the price of gold falls, thus getting a better overall price.

But an investment in gold isn’t supposed to be about making profit. It’s about insuring your portfolio against the fall of the U.S. Dollar. This doesn’t mean that speculators or traders can’t try and make a buck off of the current trends. There just needs to be a core position of gold established in one’s portfolio first.

So this begs the question, does one short gold?

Shorting Gold?

A trader or even a holder of physical gold wanting to hedge their long position, may want to short gold and take advantage of market price action. A trader will always want to trade, but should a holder of physical gold try and hedge their long position by going short gold at the same time?

Recently, I replied to an article called “Shorting Gold” written by a trader, michaelarold from “Holistic Swing Trading.  Michaelarold has a pretty good track record as highlighted below;

• Ranked #16 among over 20.000 investors for risk adjusted performance since inception (as of Dec 2009)
• Ranked #14 on list of most followed investors
• Positive return in every year since inception (2007)

While there may be better traders that’s not the point of critiquing his article.  He looks like he’s done quite well and I am following him now because of this. However, his article deserves some analysis.

Michaelarold post the following disclaimer to his article;

I believe that Gold is ALWAYS (and has always been) a trade and not an investment. Two of the reasons being that Gold doesn’t pay dividends or generates earnings.

This is an underlying fundamental problem with most people in that they make a statement like this as a matter of fact; “gold is a trade, not an investment.” If this were the case, then I’m sure those in Iceland, Argentina, Brazil, the Philippines, Mexico, Germany, etc., and even the at times in the U.S., might beg to differ.

Gold is first and foremost, insurance for one’s portfolio against the fall of  the countries currency. There is a reason why, as of this writing, gold is up in value by 170% versus all known currencies the last 10 years. Some countries, including the U.S., it’s up over 300%.

I replied to michaelarold’s shorting article and while agreeing with him on the deflation issue, said their might be a better way to play the trade where the risk vs. reward would be more in one’s favor.

Here is my reply to his “Shorting Gold” article;

You may be right
I may be crazy
But it just might be a lunatic you’re looking for
Turn out the light
Don’t try to save me
You may be wrong for all I know
But you may be right
(Billy Joel)

Gold is up over 170% versus all the major currencies the last decade. Can there be short term pullbacks? Sure there can. “Traders” can take advantage of such (I’m not a Trader, but I do make comments for those who like to play the game).

The main philosophy for holding gold however is to counteract the fall in the U.S. dollar (for U.S. Citizens) portion of their portfolio as an asset class. It’s the only insurance that was able to buoy people’s portfolios the last few years.

I too believe we are in a deflationary trend at present. I’ve written several articles pertaining to it. I’m in the process of finishing a book that dedicates a chapter to the deflation debate with 100 footnotes. It’s not an easy subject to analyze, but we are clearly deflating.

The 2 Trillion stimulus did nothing to stimulate the economy. What will another 1.5 Trillion do? I don’t think much at all. So while we have monetary inflation, banks aren’t lending and credit contraction is dwarfing any stimulus.

The fact that gold has held its own during this shows the value people place on it as 1. a hedge against risk and 2. money or “real wealth” as opposed to an “illusion” as Trace Mayer puts it.

Traders can possibly play the risk vs. reward game with gold and profit. A smarter play may be to avoid stepping in front of the train and dollar cost average into a long position on any dips. I would think the risk vs. reward would be much more in their favor.

But the trader in me can also see some consolidating occurring and with the EURO bouncing, the psychology could change for awhile (I called off the “long gold in EUROs” trade when the EURO fell to 1.25.).

The underlying fundamentals of why one is in gold of course won’t change. Buyers of physical gold care not that it falls to below $1,000 an ounce on its way to $2,000 and higher.

(I see Patrick.net put my article right next to yours, so I thought I’d comment…hope you don’t mind…I realize a Trader likes to trade, ha….55% is better than Vegas! – but I do see some temporary calmness coming back to the stock market and this might bode well for your trade. I just wouldn’t get greedy….advice my father who was a trader at the CBOT always gave me. I have subscribed to your site.).

Personally, I don’t mind being speculative if one has the capital to do so. In fact, michaelarold is increasing his short position today. A good trader always adds to their winning positions and of course, more importantly, takes profit. I’ve decided to follow michaelarold and see if he can continue his trading success.

But the core of the portfolio that is anchored in gold and silver should not be speculated with. It’s a difference of philosophy that michaelarold and I have. That difference has been exploited most recently when Iceland saw their currency decline 75% in value in one year, and rather quickly. All it takes is for some “event” to occur and things can turn on a dime.

In michaelarold’s native currency, the Euro, that “event” can come from any of the PIIGS (Portugal, Italy, Ireland, Greece or Spain). The IMF can’t keep bailing out every country, at the U.S. taxpayer expense I might add.

While a short trader can lose all of their investment on such an event, a holder of physical gold never can. Trading gold short may make investors profit, but for me, the smarter trade is to run with the bulls and trade any dips long. But securing one’s portfolio with physical gold and silver needs to be done first.

So while gold and silver don’t pay dividends, or generate earnings, it has still outperformed every other “investment” the last 10 years running on a year over year basis. The fact that the U.S. government continues its madness of spending and wars unabated signifies this performance will continue despite any pullbacks in price.

Related posts:

1. Current Gold Price Buy Sell Action and the Biggest Fraud In History (Part 2)
2. The Gold Price and the Problem With Elliott Wave Theory
3. CFA Calls Gold a “Lousy Investment” – Sorry, Gold Is Insurance Against a Declining Dollar