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News & Views
Forecasts, Commentary & Analysis on the Economy and Precious Metals
Celebrating our 42nd year in the gold business

December, 2012

SPECIAL REPORT
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USAGOLD's NEWS & VIEWS newsletter
mk Michael J. Kosares
Editor

"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose." - John Maynard Keynes


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WHY GOLD, WHY NOW

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The China Syndrome
The groundbreaking series on China's pivotal role in the gold market

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BlackSwans YellowGold
The standard reference on how gold performs during periods of deflation, chronic disinflation, runaway stagflation and hyperinflation

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Gold Chartography 101
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How would you invest money you didn't need for ten years?
"Perhaps we spend too much energy trying to foretell the future, and too little trying to be resilient whatever happens."

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Keynes on the menace
of printing money

How the celebrated economist might have structured his investment portfolio today.

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mkMichael J. Kosares, the author of these articles, has more than 40 years experience in the gold business. He is the founder and executive director of USAGOLD (both the website and gold brokerage service), the author of three books on the gold market, and the editor of "News & Views, Forecasts, Commentary & Analysis on the Economy and Precious Metals," the firm's client letter. He has written numerous magazine and internet essays and is well-known for his ongoing commentary on the gold market and its economic, political and financial underpinnings.

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"I keep six honest serving men
(They taught me all I knew);
Their names are What and Why and When
And How and Where and Who."

– Rudyard Kipling –

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USAGOLD's News & Views newsletter has provided cutting-edge coverage of the gold and silver markets for over 25 years. Its content is widely quoted, re-circulated and sourced at websites all over the world.

Its principal objectives have always been the same – to keep our clients informed on important developments in the gold market, condense the available gold-based news and opinion into a brief, readable digest, and, most importantly, to counter the traditional anti-gold bias in the mainstream media. That formula has won it a loyal five-figure subscription base.

If you would like to become a subscriber, we invite you to sign-up at our registration page. There is no charge for the service and your participation is welcome.

 

Saving Gold
Old reliable stands tall in crisis atmosphere

"This is the biggest debt bubble in history. Each time deflationary forces re-assert themselves, offsetting inflationary forces (monetary stimulus in some form) have to be correspondingly more aggressive to keep systemic failure at bay. The avoidance of a typical deflationary resolution of this long wave is incubating a coming wave of inflation. This will not be the conventional 'demand pull' inflation understood by most economists. The end game is an inflationary/currency crisis, dislocation across credit and derivative markets, and the transition to a new monetary system, with a new reserve currency replacing the dollar. This makes gold and silver the 'go-to' assets for capital preservation."

Paul Mylchreest, Thunder Road Report

by Michael J. Kosares

Around this time each year we like to remind our clientele that the real rate return should be one of the most important factors influencing the way you handles your savings. The real rate of return -- yield minus the inflation rate -- governs the flow of international capital into various investment vehicles. It also influences the way private investors employ their capital. When interest rates go above the inflation rate, like they did in the 1980s, the incentive is to save in the form of government and commercial bonds and bank savings deposits. When interest rates stay below the inflation rate, as they have for most of the last decade, the incentive is to save in the form of gold and other hard assets.

USAGOLD clients consistently cite the low yield on bonds, money markets and bank deposits as a top reason for buying gold. Over the past decade these clients have been amply rewarded as illustrated in our first table showing the real rate of return on gold coins and bullion. Though we could have used the Labor Department's version of the inflation rate, we opted instead to use the inflation rate as calculated by Shadow Government Statistics (SGS) -- a much higher inflation rate and one we believe closer to reality. Had we used the Labor Department's stats, the real rate of return would have been significantly higher.

Using the more conservative SGS inflation rate, gold's real rate of return averages just under 7% annually over the ten year period -- a very strong return on savings in an era when just staying even is considered to be a favorable outcome. Impressively a $100,000 gold coin purchase in 2003 would be worth $186,000 in real terms today.

However, for the saver interested in the real bottom line, the opportunity loss associated with paper instruments needs to be blended into the equation. The second table provides the real rate of return on bank certificates of deposits over the past decade. It is not a pretty picture. A $100,000 CD taken out in 2003 would be worth just under $47,000 with inflation taken into account -- a nearly $139,000 swing in real net worth between the two instruments.

The Savings Trap
There is another, largely hidden danger for those who save in the form of paper assets. Over the past four years, according to a recent Financial Times article, safe-haven investors poured $2 trillion into various fixed income funds and only $400 billion into stocks. Presumably this migration of capital has to do with the perceived risks in the stock market most notably the presence of computer-based traders who can spike the markets downward in a matter of seconds. The Financial Times points out though that bonds might offer "a false sense of security" particularly if inflation and interest rates rise. "Consider," says FT, "$1 million invested in 10-year Treasuries. The asset manager, MFS, calculates that if bond yields rise from 1.75 per cent to their long-term average of 5 per cent by the end of 2017, adjusted for inflation the investment will be worth just $690,000 in today's money, a real loss of about 7% per year." (Interesting that the inflation adjusted 7% real loss in 10-year Treasuries equals the annual real gain in gold over the past ten years.)

Storing wealth in largely mismanaged paper currencies can become something of savings trap offering low yields at potentially high risk -- not a good combination for the conservative investor. None of this, it needs to be said, is meant as advice to drain your savings from the banking system. Rather, it is to illustrate graphically the power of a proper diversification. It doesn't take a PhD in economics to see that in the scenario outlined above the overall loss would be over 30%. Keep in mind too that this loss is calculated using the inflation rate posted by the federal government, not the SGS rate which in some years has been three times the government published rate. In other words, when calculated at the real rate of return using 1980 Labor Department methodology, the loss would be substantially more.

The Saving Grace
I am often asked if I think gold will continue to perform as it has over the past decade. The short answer is that the odds favor a continuation of the current secular bull market as long as the conditions that created it persist. Those who put an arbitrary top to the price without taking into consideration the effects of monetary policy, particularly money printing, leave the bulk of the analysis on the table.

In post World War I Germany, for example, a 20-mark gold coin purchased the equivalent of twenty marks worth of goods and services in the marketplace. At the end of the nightmare German inflation in 1924, that same 20-mark gold coin (weighing roughly one-quarter troy ounces) provided the purchasing power of 14,520,000,000,000 paper marks. Those who track the nominal value of gold by itself take their eye off the prize. The investor who failed to recognize the forces driving the 1920s German gold market and took a nominal profit before the situation was remedied might very well have still lost his or her savings as the inflationary debacle moved to the next level.

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If you would like to broaden your view of gold market, we invite you to sign-up for our regular newsletter and receive quality commentary like what you are now reading. It's free of charge and comes by e-mail. You can opt out at any time.

 

At the same time, do not be fooled by the low real rates of return on gold over the past two years. Much of that lower return has had to do with weak end of year performances that obscure the higher prices achieved during the course of the preceding months. At the end of 2011 gold dropped by about $200 per ounce. It made up that drop in January, 2012. The end of year correction in 2011 was treated by many as a buying opportunity. Likewise the strong surge in gold coin demand immediately after the November, 2012 election serves as reminder that underlying demand remains strong and perhaps as a portent to what lies ahead in 2013.

For the most part, gold demand among investors globally has been driven by extremely low rates, central bank money printing (aka quantitative easing) and concerns about the relative safety of currency-based instruments including stocks and bonds. With the Federal Reserve and other central banks promising to keep rates low for the foreseeable future, the core driver to the bull market -- a strong real rate of return -- is likely to remain in place for years to come.

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Michael J. Kosares is the founder of USAGOLD and the author of "The ABCs of Gold Investing - How To Protect and Build Your Wealth With Gold." He has over forty years experience in the physical gold business. He is also the editor of News & Views, the firm's newsletter which is offered free of charge and specializes in issues and opinion of importance to owners of gold coins and bullion. If you would like to register for an e-mail alert when the next issue is published, please visit this link.

Disclaimer - Opinions expressed on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD does not warrant or guarantee the the accuracy, timeliness or completeness of the information found here.


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