Gold continues to shine as
one of the best performing asset classes through the first half
of 2008, according to the USAGOLD Annual Survey of Investments.
Only the CRB index, which of course includes a gold component,
outperformed gold itself over the past year. Arguably it was
the latest surge in oil prices that allowed the broad measure
of commodities to supplant gold from the number one position
over the last month of the second quarter.
As encouraging as the coveted
bottom of the survey chart is to the gold owner, the top of the
chart is extremely troubling for most households. The two biggest
losers are the asset classes where the vast majority of the net
worth of most individuals is wrapped up, equities (stocks, mutual
funds, 401ks, etc) and the family home.
As the month of June came to
an end, the DJIA had lost just over 15% from the same period
last year and has retreated more than 20% from the all-time high,
on the verge of confirming a bear market. With the U.S. economy
limping along on the cusp of recession, the stock market remains
vulnerable to a protracted bear market.
Gold has benefited from diversification
flows out of the more traditional asset classes, such as stocks.
This is a trend that is likely to continue and keep equities
under pressure. Gold mining stocks, which finished in the number
three slot on our survey, should remain an exception. Look for
gold mining stocks to continue outperforming other sectors and
the broader market indexes.
The present economic turmoil
can ultimately be traced back to Main Street -- the deflation of the housing
bubble -- which began roughly a year ago. The S&P/Case-Shiller
home price index shows that the average home price in twenty
major markets has fallen just over 15% y/y.
The combination of a 15% decline
in the stock market and a 15% decline in the value of the family
home has most people feeling significantly less well off this
year over last. Those with the uncommon foresight to diversify
their exposure to these two critical asset classes with gold
ownership are certainly weathering this economic storm in far
better shape than most. It's definitely not too late to start
that process.
With the outlook for stocks
rather dubious, many investors have historically turned to cash
and/or treasuries. However, these choices are not particularly
desirable due to the insidious bite of inflation.
A dollar held in your pocket
for the past year would buy 4.2% fewer goods and services based
on the government's own Consumer Price Index (CPI). Shadow Government
Statistics (SGS) publishes an electronic newsletter that analyzes
the flaws in current government economic data. They suggest that
inflation as represented by CPI is understated by roughly 7%
each year. The SGS alternate CPI shows that the same dollar in
your pocket may actually buy nearly 12% fewer good and services.
In our view, the SGS calculation comes closer to expressing the
true inflationary reality in the United States than does the
government's Consumer Price Index.
Jim Bullard, the president
of the St. Louis Fed, concedes in a recent editorial that, "It
is hurting Fed credibility to say that we are trying to keep
inflation low and stable, but at the same time we are not counting
some of the prices that are going up at the most rapid pace."
Depending on whose measure
of inflation you're inclined to believe, U.S. treasuries and
the average CD rate are either barely keeping pace with official
inflation, or well behind the actual curve. Either way, neither
has been a particularly good choice for wealth preservation when
inflation -- by any measure -- is factored into the equation.
The dollar on an exchange rate
basis continues to erode as well, falling nearly 12% y/y versus
a trade-weighted basket of foreign currencies. The dollar has
extended its long-term downtrend over the past twelve months
as a result of rising concerns about the health of the U.S. economy,
comparatively low interest rates, and our ever-growing national
debt.
The Fed aggressively lowered
the Fed funds rate from 5.25% to 2.00% over the past year in
an effort to stimulate the anemic U.S. economy. At the same time
they were flooding the market with dollars through a series of
new liquidity facilities, attempting to prevent the global credit
markets from seizing up.
While the Fed stopped publishing
M3 statistics in 2006, the St. Louis Fed's Money Zero Maturity
(MZM) is a reasonable proxy for the old broad measure of money
supply. MZM shows a 15.5% increase in money supply between June
2007 and June 2008. This figure is pretty consistent with the
SGS M3 continuation.
The Fed's expansionary and loose monetary
policy has unquestionably played a significant role in the decline
of the dollar, spiraling inflation, and the savvy investor's
desire to own something tangible as a hedge.
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We've included the Liv-Ex 100
Fine Wine index in this year's survey as a point of interest.
Fine wine is an investment generally associated with higher net
worth individuals, and its performance is reflective of the broader
flow out of paper assets and into tangibles.
Gold appreciated 43.01% between
June 29, 2007 and June 30, 2008. Despite this remarkable performance,
gold is actually somewhat of a laggard in the commodities realm.
Gold is one of the few major commodities still waiting to surpass
its
inflation-adjusted all-time high, which comes in around $2,300
per ounce.
The Bank of International Settlements
(BIS) recently warned that the nearly year-old credit crisis
is a long way from over. As credit losses mount and lenders hoard
liquidity, many believe we are still in the midst of the worst
financial crisis since the Great Depression.
"The current market turmoil
is without precedent in the postwar period. With a significant
risk of recession in the US, compounded by sharply rising inflation
in many countries, fears are building that the global economy
might be at some kind of tipping point," said Bill White,
the chief economist for the BIS.
Such concerns could potentially
wreak havoc on non-tangible assets in the coming survey year.
These worries, along with gold's very favorable supply/demand
fundamentals, could easily catapult the yellow metal back into
the number one position for the 2009 survey year.
