Back in September 2010 I went out on a limb and called a top for those who trade gold and silver mining shares. My goal at the time was to have them consider taking their profits in paper gold and convert to the physical metal for delivery, what we specialize in here at Buy Gold and Silver Safely. At the time, the HUI, which represents the basket of un-hedged gold stocks, was trading at 513.95. Gold was trading at $1,309.40 in September of 2010 when I recommended selling mining shares and converting to the physical. I never recommended selling any physical holdings, only to dollar cost average into a position if you hadn’t already. Here is what I said;
“Putting capital in precious metal stocks or leveraging gold and silver are trades, not investments. The only real investment one needs to make is in physical gold and silver. You buy it for that allocation to your portfolio and you forget about it while keeping tabs on political and economic happenings. This is what I call peace of mind.”
Bernanke, in November 2010, finally followed through on his QE2 promise, which surprised me as it showed how desperate the Fed was back then, and the precious metals moved higher. By May of 2011, Bloomberg was saying Bernanke’s QE2 Averts Deflation, Spurs Rally, Expands Credit. But mining shares did not take off in price nearly as much as the metals did during the last bout of QE.
Here we are 6 months later with QE2 ending, and the HUI sits at 498.92 as I write, with gold trading at 1515.60. Those that got out of the mining shares and converted to physical gold are up 16.4% more than those who held the mining shares over those 6 months.
Bloomberg’s timing of that article in May was premature. Deflation is still an issue as the credit contraction has no more stimulus to keep the facade alive. The deflation game is back on.
Where To From Here?
While the inflation hawks still say gold will move higher, there’s more to the story than just an inflation/deflation analysis. There is still much unwinding of the credit expansion that has to occur, only propped up in the last 2 1/2 years by bouts of Fed quantitative easing (QE). All QE does is slow the rate at which the water is flowing out of the U.S. Titanic economy. The cracks in the ships hull are too many to plug. The damage has been done. All that is left to do for the investor is to jump in the gold and silver life boats.
But as people jump in the life boats, many have and will also continue rushing to the U.S. treasury boats. U.S. treasuries are only “perceived” wealth. They are similar in gold today in the fact that they pay very little in interest. CD’s and short term treasuries, while still viewed by many as safe havens, just aren’t paying what they used to. And when one analyzes what is really behind these so called “risk free” places to put money, they might want to consider taking some of that low interest bearing money and putting it into physical gold.
Bank Risk:
1. FDIC is $7.4 billion in the hole, with an increase of $657 million as of the last quarter CFO report. Banks are still failing with 45 bank failures so far in 2011.
2. The nations top 5 banks have over $4 trillion in sub-investment grade derivatives, more than at the height of the 2008 financial crisis.
3. Banks are not making money the old fashioned way, lending, so their balance sheets are deteriorating and Moody has been threatening to downgrade some of them.
4. What’s in your banks wallet? Have you analyzed their balance sheets? How much debt do they have? Are they marking to market the real value of their assets?
5. What happens to your peace of mind when the Temporary Liquidity Guarantee Program ends 12/31/2012?
6. Why cap FDIC insurance at $250,000? Why not $1 million or more? Does changing the amount insured stop the decline in purchasing power of what’s insured in your CDs?
Treasury Risk:
Have you seen the Fed’s Balance Sheet? It used to represent stability. Today, it is far from being stable with many assets that can’t be dumped on anyone (as much as they’d like to).
For a clearer view of the Fed’s Balance Sheet above, including what each colored asset represents, go here: http://bit.ly/FedPortfolio
Today’s Fed is not yesterday’s Fed. The safe colors of yesteryear have dissappeared into the multi-color, multi-depreciated asset entity it is today. The balance sheet does represent failed institutions assets that were bought with taxpayer funds and we can’t even audit them. Thank you for that Congress!
Gold:
Gold is presently in the midst of a 40 year pattern where prices could be hampered by the seasonal summer slow months. Precious metals are setting themselves up for what I believe will be the investment of a lifetime. But I don’t call it an investment per se. I call it “insurance.” Gold and silver need to be a part of your portfolio just as you insure your car, house, and life. You don’t know if it will be needed, but no other asset on the face of the earth has gone up 10 straight years as gold has. Yet your advisor keeps you out of it. Why? Because he doesn’t know how to make money off of selling physical gold.
Just ask your advisor if they recommend physical gold. They will reply, “no, gold is risky, or volatile.” Then ask them if they sell it. They will say we sell ETFs or mutual funds, but not the physical. If they sell the physical at all, they will try and see how they can make more than the 1% we charge here at Buy Gold and Silver Safely. Just remember, paper gold, like the ETFs, is not the same as owning physical gold. At least with physical gold American Eagle one ounce coins, you can get them insured, unlike the gold ETFs.
Congress can’t curtail their spending, let alone balance the budget. You can bet the debt ceiling will be raised as Treasury Secretary Geithner has been crying for of late. Implementing more QE so quickly will show the Fed’s hands, but believe me when I say that it will come. They may try and call it something else, or may try a different way to get the money into the system, but whether it be a congressional act, an Executive Order, or something similar, it will come….”to save the system.” Eventually this will lead to more inflation resulting in higher prices. But we still have to rid ourselves of the excesses that were accumulated during the credit expansion. For now though, the Fed can’t just on a whim move to QE3. They have to wait for the other expansion of the U.S. balance sheet; an increase in the $14.3 trillion debt ceiling. One increase at a time folks…we don’t want people to panic!
I have laid out what is occurring today in Chapter 4 of my book, “Buy Gold And Silver Safely.” It’s a road map that explains what is happening with inflation and deflation, how the banks are just as important (if not more) an issue that needs addressing moving forward and finally what the effect of mass psychology will have on things as all of these issues wreak havoc on your investments in the years to come. If everyone is jumping overboard, you don’t want to be the last one left on the sinking ship. Gold is the life boat to climb into today as the seas become more turbulent. You can buy gold now for a lot less than what you will be buying it for in the future and this summer pattern of a pullback is the perfect time to dollar cost average into a long term position.
If you haven’t yet invested in gold or silver, download this free report to see what’s really holding you back; 5 Reasons You Haven’t Bought Gold Or Silver
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About Doug EberhardtDoug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
Disclosure:
Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with capital you can’t afford to lose. This is neither a solicitation nor an offer to Purchase/Sell futures or options. No representation is being made that any account will or is likely to achieve gains or losses similar to those discussed in this outlook. The past track record of any trading system or methodology is not necessarily indicative of future results.
All trades, patterns, charts, systems, etc. discussed in this outlook and the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations. All ideas and material presented are entirely those of the author.
