Centennial Precious Metals, Inc: Serving Gold Coin & Bullion Investors Since 1973

An ABCs of Gold Investing Update

March 15, 2008

Prologue: What should we take away from the Bear Stearns bail out?

That Fed chairman Ben Bernanke wasn't kidding when he talked about the helicopters.

Says Financial Times:

"Yesterday's action by the Federal Reserve marks the first time since the 1960s that the central bank has authorized the provision of emergency finance to any financial institution other than a regulated deposit taking bank. As such it marks a dramatic expansion of the Fed's role as lender of last resort. . ."

Also, from John Gapper's column:

"The emergency rescue of Bear Stearns by JP Morgan Chase and the Federal Reserve is the moment when all doubts about the seriousness of the financial crisis facing the US evaporate. This is a worrying event for the US and the world."

When I wrote the book, The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold, I warned of a collapse of the dollar based on disturbing trends deeply ingrained in our economy -­ trends which threatened its stability, and hence, the value of our savings. I do not believe that anything has changed since its first printing, except that things have decidedly worsened. I warned that "the dollar is a currency in crisis." That crisis has become manifest, evident, and it has deepened. I warned that "assets denominated in a currency gone bad can be ultimately submerged in a sea of debased paper value sometimes never to recover." That is happening now more quickly and with more devastation than I had originally imagined. I talked of "the Federal Reserve, like the German central bank in the 1920s, being forced to monetize an ever-larger portion of the federal debt to the government in operation." The Fed is not only monetizing the federal debt, it is monetizing everything in sight -- the dumping ground for every ill-advised piece of paper created in investment houses from one end of Wall Street to the other.

I could go on, but I think I've made my point. I do not claim any high degree of prescience with respect to those predictions. I simply built upon the analysis of many others who came before me. There is nothing that happens on this planet that cannot be analyzed and projected on the cause-effect continuum. History is nothing more than a series of causes and effects one overlapping the other from its dawn to the present day. Thus we are connected with our ancient brethren all the way back to the cave, and perhaps that explains the rhyming aspect to history. We are constantly presented with similar stimuli which induce the familiar response.

In 2001, there were two outcomes predicted to the historical continuum of which I speak:

The first was that history had ended and that from here on out we were in a New Age where all the old causes and effects were no longer in place. The stock market, in this view, would rise forever. The United States and the dollar would permanently ride the crest of the wave. Gold would stay in its place. History, in fact, had flattened to a straight line with a trajectory toward the perfect society.

The second was that history cycles, and that it would continue to cycle. The top or bottom of one era was simply the indicator for the next, probably complimentary, cycle. In this view, the fact of the matter, despite the euphoria that went along with the 1990s,is that nothing had really changed. It simply appeared to have changed for the moment.

Needless to say, those who congregated around gold in those days largely fell into the second camp. At this juncture with the credit crisis threatening to take down the world economy and gold at all time highs, there is no longer a doubt whose view of history was correct and whose was wrong.

Yesterday I purchased gold from an early true believer (and client of the firm) who had bought close to a million dollars worth of gold in the $300 range in the late 1990s. He was selling off a portion to build a new house, and what he was selling was only a small portion of his gold savings in dollar terms. That to me is what gold ownership is all about. It is a form of savings not subject to the political winds and economic pressure which builds up around a currency and ultimately undermines its value. The preservation of value is the central theme of the book, and the seemingly intractable, seemingly ubiquitous, disturbing trends drive that theme. To reduce this to a principle (essence), gold preserves value.

The book is essentially a call to individual action as important now at $1000 gold as it was when gold sold for $300. Euro capital's Peter Schiff made a comment to Reuters the other day with which I agree whole-heartedly. "[Gold]," he said, "is a measure of the value of currencies and will go up as long as central banks continue to devalue currencies." In that same article, GoldSeek's Peter Spina alluded to another interesting aspect to this leg of gold bull's market - the entrance of big institutional money (pension funds, hedge and commodity funds, mutual funds, etc.), much of that inspired interestingly enough by the same flight to safety which has motivated individual investors for years.

If I were re-writing The ABCs of Gold Investing today, I would add the following as the most important development since the last revision:

We have entered a new era in world finance -- an era where the dollar will never again be viewed globally by individuals and institutions as it was in the past. Likewise, gold has entered a new era where it, too, will not be viewed as it was in the past.

The Drudge Report summarized the situation nicely the night before last with the headline "Gold In; Dollar Out." The rehabilitation of gold in the public perception is something that is going to be with us for a long time to come. Though its role in the individual and institutional portfolio hasn't changed, the public perception of that role has.

Now gold is generally perceived globally as the ultimate in reliability, a solid repository for private savings outside the local currency.

That reliability is just as important for those who save in yen, yuan, euros, pounds and francs (or most other currencies for that matter) as it is for those who save in dollars.

The age of competitive devaluations will continue with a vengeance as we proceed in the 21st century. A natural result will be the internationalization of gold demand. In turn, this demand is likely to become a fixed feature and primary driving force in the gold market for many years to come.

There is not a day goes by that someone doesn't ask me if I believe gold is going to continue to rise whether it be the press, members of our clientele (current or prospective) or acquaintances who know what we do for a living at USAGOLD-Centennial Precious Metals. My answer is always the same. It really doesn't matter if gold continues to rise or it begins to fall. What matters is whether or not you own it given the trends at work in the world economy.

The first chapter of The ABCs of Gold Investing concludes with this: "No matter what happens with the dollar, with the overarching debt problem in the United States, with the stock and bond markets, or with the banking system, the owner of gold will find a friend in the yellow metal -- something to rely upon when the chips are down. In gold, investors find a vehicle to protect their wealth. Gold is bedrock." The fact that gold has risen in the face of the complications thrown at us almost daily is a sidebar. Gold is simply doing what it was meant to do.

In short, it has been a good friend to us and, in my view, it will continue to be a good friend for the foreseeable future. One of the more rewarding comments we get on a regular basis at USAGOLD-Centennial Precious usually comes from clients who have been with us for many years:

"Thank you for helping me find a way to sleep at night."

-- Michael J. Kosares

Michael Kosares has nearly 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.