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An "ABCs of Gold
Investing" Update
Six Situations to Monitor
for the Rest of 2008
"The next Fourth Turning
is due to begin shortly after the new millennium, midway through
the Oh-Oh decade. Around the year 2005, a sudden spark will catalyze
a Crisis mood. Remnants of the old social order will disintegrate.
Political and economic trust will implode. Real hardship will
beset the land, with severe distress that could involve questions
of class, race, nation, and empire."
-- William Strauss and Neil
Howe, The Fourth Turning, 1997
When IndyMac Bank collapsed
in early July, USAGOLD-Centennial Precious Metals logged the
largest single week volume in its 35 year history. And that was
just the beginning. By mid-August gold coin demand had become
so strong globally that U.S. Mint and South Africa's Rand Refinery
announced they could no longer keep up with their orders and
promptly shut down operations. Soon thereafter, the U.S. mint
resumed gold coin production, but explained that they would now
be forced to ration output. Much of the demand that spawned the
mints' problems came from individuals around the globe concerned
about the safety of their banks and financial institutions --
a worry not likely to dissipate anytime soon.
Conclusion:
Thus far the gold industry
has done a good job addressing the gold coin shortage problem.
Adjustments have been made, and the flow at this writing has
returned to some semblance of normal. Though there is no guarantee
that we won't revisit the problem of shortages later in the year,
the most likely outcome will be higher gold prices and higher
premiums on coins and bullion until market equilibrium is regained.
As a matter of fact, premiums have already risen on most gold
coins.
Recommendation: Please
keep in mind that the word "shortage" is not defined
as a complete absence. Shortages are not cause for undue alarm,
but do warrant decisive action. We expect demand to continue
at a steady pace no matter what the price does, particularly
if systemic risk remains in the headlines.
The economy has replaced the
Iraq war and gasoline prices as the centerpiece issue for this
election, yet neither candidate comes off as economically astute
enough to deal with its complexities. There was some talk about
oil at the party conventions, but the trade deficit was skipped
over, and neither party talked very convincingly about smaller
government, or balanced budgets, or the future value of the dollar. The
Fannie Mae and Freddie Mac debacle wasn't even mentioned, nor
was the Misery Index -- the combination of inflation and deflation
-- which over the past year has gone into double digits and remains
a primary concern for all Americans.
Conclusion: If you count yourself among the growing
list of those who feel that neither party can deal effectively
with the growing credit crisis, you are not alone. It's one thing
to make promises about the economy and taxes. It's quite another
to deliver, especially when those promises involve increased
military commitments overseas and bigger and better social programs
at home. Let's not forget that the same president who promised
to retire $1 trillion of the national debt in his first four
years (GW Bush), managed instead to add $4 trillion over his
term in office.
Recommendation: Looking back, the conventions did
as good a job selling gold to the American public as they did
selling their respective presidential candidates. Rather than
waiting for Washington to deliver on the economy, you might be
better served by taking matters into your own hands. Take to
heart this issue's masthead quote from Strauss and Howe's The
Fourth Turning.
A well-oiled and functioning
market for paper instruments depends in the end on faith and
trust. Value in one financial house depends upon performance
from another financial house which depends upon performance from
still another -- a seemingly infinite web of interlocking counterparties
fully dependent upon each  other
for their existence. A breakdown in one major institution, we
are told, could lead to a domino effect and collapse the entire
system. As a result, the Federal Reserve and U.S. government
have no other choice, the logic continues, than to bail out the
institution in trouble and shift that loss to the taxpayer. Fannie
Mae and Freddie Mac, the mortgage-backing behemoths, have rewritten
the book on bailouts, and who's to say that it ends there. It
is important to keep in mind, though, that Fannie and Freddie
are only part of the problem. There are other credit land mines
buried about this economy that could be tripped at any moment.
Conclusion: The good news (if you happen to go
to work every day on Wall Street like the fellow in the Stein
cartoon above) is that you are likely to get bailed out if your
balance sheet is reduced to a puddle. Fed chairman Ben Bernanke
was serious about those money-dropping helicopters after all.
The bad news is that there is a significant downside to the Fed's
Magic Money Machine. Runaway stagflation becomes a distinct possibility.
Already the Misery Index (the combination of inflation and unemployment)
is in double digit territory at roughly 12%. And that's the misery
level utilizing the government's numbers. It could be even worse
if you use Shadow Government Statistics. (Please see #5 "Lies,
damn lies and statistics" below.)
Recommendation: Systemic failure meets the printing
press and for those who keep their savings in dollars, and dollars
only, the risks are evident. Closely monitor the credit crisis
and how it is handled by the Washington authorities. Commenting
on the Fannie/Freddie government bailout, Robert Bruner of the
Darden School of Business at the University of Virginia said,
"If anybody thought we had a pure free-market financial
system, they should think again."
**Ed Stein cartoon published
with permission.
When the New York Times reported
that China's central bank was running out of capital, some took
the report as preposterous. How could a country have so much
money and be broke at the same time? To answer that question
all one has to do is to hold in his or her hand a stack of the
multi-million mark notes issued by Germany
in 1923. Technically, what you have in your hand qualifies
you as a multi-millionaire, possibly even a billionaire. There's
one problem: That stack of notes wouldn't have bought a cart
full of groceries.
For China ultimately it will
get down to the value of the money it takes in after it ships
something out. As the Times reported, "Victor Shih,
a specialist in Chinese central banking at Northwestern University,
said that when he visited the People's Bank of China for a series
of meetings this summer, he was surprised by how many officials
resented the institutional losses. He said the officials blamed
the United States and believed the controversial assertions set
forth in the book Currency War, a Chinese best seller
published a year ago. The book suggests that the United States
deliberately lured China into buying its securities knowing that
they would later plunge in value."
 Conclusion: Doesn't that sort of thinking qualify
China's central bank as a potential gold owner? There were reports
earlier this year that Robert Mundell, the Nobel Laureate in
economics, was advising China's central bank. Mundell has always
believed that gold should play a strong role in central bank
reserves because currencies issued by nation states are always
subject to depreciation and even the prospect of total collapse.
Any significant sale of gold by the central banks will likely
be met by significant purchases from other central banks. And
The Peoples' Bank of China likely sits at the top of the buyers'
list.
Recommendation: Keep a close eye on China because
it now holds the key to the U.S. Treasuries market. Its decisions
could become a major influence on U.S. interest rates, as well
as to what degree the U.S. budget deficits will need to be financed
with printing-press money.
If you would
like to broaden your view of gold market news and analysis, please
feel welcome to join
our free NewsGroup to receive by e-mail periodic gold news alerts,
plus timely notice of our VideoBriefs and USAGOLD Market Updates
featuring relevant commentary like this one!
More and more, I find myself
relying on the economic numbers posted by Shadow Government Statistics
(SGS) over those by the U.S. federal government. For my money,
and I mean that quite literally, I rely on SGS numbers for the
real story on the economy. Here are some examples of the differences.
Let's start with the inflation and unemployment rates -- two
figures near and dear to the hearts of all Americans. SGS, going
by the same Consumer Price Index used in 1980, pegs the inflation
rate at roughly 13% -- well into double digits. The Labor Department
has consumer prices up 6.2% over the same period. The official
unemployment number is running around 6%. SGS' number is closer
to 15% -- a 9% difference! If you combine the two to get the
old Misery Index, it is a little over 12% by the government's
calculations, and 28% by SGS'!! (Please see graphs below.)
Conclusion: Which numbers, in your opinion, are
closer to fact and which are closer to fiction? Decisions cannot
be made in a vacuum. Nor can they be made using bad numbers.
If a 28% Misery Index doesn't elevate your level of concern,
nothing will.
Recommendation: A visit to Shadow Government Statistics web site.
Recently the Bundesbank, Germany's
central bank, delivered a lecture on the role of gold as a central
bank reserve item. "National gold reserves," instructed
Bundesbank, "have a confidence and stability-building function
for the single currency in a monetary union. This function has
become even more important given the geopolitical situation and
the risks present in financial market developments." France
and the European Central Bank, both primary sellers of gold over
the past several months, might take note. I cannot remember a
more direct statement from a central bank on the role of gold
in the modern era, and a more direct assault on the "barbarous
relic" description made famous by John Maynard Keynes.
Conclusion: Germany holds the world's second largest
gold reserve next to the United States and plays a special role
in the European Union as its largest single economy. The Bundesbank's
caution will raise a few eyebrows across Europe not just in the
official sector but the private sector as well.
Recommendation: Like millions of private investors
across the globe, Germany holds gold as a form of savings impervious
to currency depreciation, systemic failure and geopolitical instability.
By its example, it has delivered an important message.
_______________________
Michael Kosares has over 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 ongoing commentary on the gold market and its economic,
political and financial underpinnings.
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