LIVING OFF DIVIDENDS & PASSIVE INCOME

The media has been going on and on about deflation. Long-term bond prices have also been trending up and long term yields have been dropping, which means that the market thinks there will be long-term deflation. Even the Consumer Price Index numbers that came out claim that inflation is under 2% annually!

(Of course, if you’re one of the unlucky 533,000 people who lost their jobs last month, you really couldn’t care less about deflation).

Let’s first look at the Government reported numbers.

Now that the Federal Reserve has bailed out Citigroup, it’s back to business as usual. Having personally helped destabilize the world financial markets, they’re now predicting a rise in gold prices to $2,000/oz in 2009.

According to an article in the UK Telegraph:

Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world’s monetary system with liquidity, according to an internal client note from the US bank Citigroup.

The bank said the damage caused by the financial excesses of the last quarter century was forcing the world’s authorities to take steps that had never been tried before.

This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

As a follow-up to my previous 2 posts on gold, here’s a news article about the Australian Perth Mint suspending orders for gold bullion until January. Apparently having it’s workers slog 7 days a week isn’t enough to meet demand!

FEARS of the unknown long-term effects from the global financial crisis have sparked a new gold rush.

With retail and wholesale clients around the world stocking up on the precious metal, the Perth Mint has been forced to suspend orders.

As the World Gold Council reported that the dollar demand for gold reached a quarterly record of $US32 billion ($50.73 billion) in the third quarter, industry insiders said the race to secure physical gold had reached an intensity that had never been witnessed before.

Perth Mint sales and marketing director Ron Currie said the unprecedented demand had forced the Mint to cease orders until January, with staff working seven days a week, 24-hour days, over three shifts to meet orders.

One of the surprising things has been the increase in premiums on gold and silver coins. Even though the prices for both metals have dropped from their highs, the cost of buying gold or silver coins hasn’t dropped proportionately. In fact, there’s been reported shortages of these coins by the US Mint and the Australian Perth Mint, not to mention individual retailers.

Right now the premium on silver coins is a whopping 60%+. For gold it’s a lot lower but still higher than it’s historic 2.5-3%. I just got an email today from a newsletter service that I subscribe to that’s pretty interesting.

If You Want Cheap Gold Coins, Canada Has Them
By Tom Dyson

I don’t trust my bank. And I don’t trust the dollar.

As far as my savings are concerned, I’d rather keep them in gold. And I don’t mean gold futures or gold certificates or gold mining shares. I’m talking about physical gold bullion in a safety deposit box.

I’ve been an avid collector of gold and silver coins and have been following the prices for a years.

Gold is supposed to have a negative correlation with the stock market. This year has proved otherwise. Of course, as we’ve seen repeatedly in the past, all asset classes correlate to the downside.

Gold which peaked at $1030/oz earlier this year, has been trading in the $700 range for a few months. There has been a flight to safety, which for most people means buying US Treasuries. Indeed, the flight has been so large that it has pushed the yields down to absurdly low levels. The yield on the 3-month Treasury was almost zero at 0.4% and the 10 year is 3.52%. (The yield on the S&P500 was 3.55% this week, higher than the 10 year Treasuries rate for the first time since 1958).

Last Friday, gold dropped to $680/ounce before rebounding to $740/ounce. Like every other asset, gold has been hammered this year. However, this may be partially due to a strengthening of the dollar. In terms of other currencies, it’s still close to its all time highs.

I think this is a good time to buy some gold if you don’t already own some. (and if you do, then it’s a good time to add more!). People often ask what’s the best way to invest in gold.

I tell them to buy a little bit of everything. Here’s an excerpt of an email I got recently.

“I believe the gold juniors offer the best value for your paper dollar going forward,” says Ed Bugos of the violently beaten-down junior mining sector. The Canadian Venture Index, the bellwether of juniors, is down a nauseating 70% from its 2007 high.

China just released a 10 Kilo Gold Coin to commemorate the 2008 Olympics that are currently being held in Beijing. 10 kilos of .9999 Fine gold is a staggering 321 ounces, more than 22 pounds and its more than a half foot in diameter! Not only is it the largest gold coin, it’s the rarest as well: Only 29 have been struck for the entire world and all have been sold.

This spectacular museum piece is housed in an exotic African Blackwood presentation case, which is crowned with a 35 pound carved stone dragon. The coin is legal tender with a face value of 100,000 Yuan and is Proof struck, which means it has an ultra-high relief, frosted design set against a flawless mirror background.

Regular readers know I’ve been pretty pessimistic on the outlook of the US economy and bearish on the US dollar as well. However, since it seems like everyone is echoing the same sentiment, could it be that we’re due for a short (or medium) term spike in the US Dollar?

According to Lou Basenese, editor of the The Alpha Intelligence Alert, think it’s time to go long the USD.
Here are some of the reasons he cites:

1. Bernanke & Paulson Rediscover “Verbal Intervention.” Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke finally got off their duffs to defend the dollar. Paulson got things started in Qatar on Sunday. Speaking to the leaders of the Gulf oil states, he urged the countries to think twice about abandoning their dollar peg, as “ending the peg is not the solution to the inflation problem.” And Bernanke stepped up today. Speaking, via satellite, to an international monetary conference in Spain he insisted Fed policy will be a key factor, “ensuring that the dollar remains a strong, stable currency.” After such a long silence, this week’s tag team approach is nothing but a positive development.

Not exactly fresh news, but its been reported that Dick Cheney, our beloved vice-president is betting against the US Dollar. He has tens of millions of dollars in foreign government bond and currency funds and international and emerging market stocks. His excuse is that it’s in a blind fund and he doesn’t know what his advisers invest in. That sounds like complete rubbish to me. I can’t imagine someone as intelligent as Dick Cheney not knowing what a huge chunk of his reported $95 million networth is invested in.

I’ve believed for sometime now that the government actually wants a weaker dollar and have been investing accordingly, but having the vice-president profit from it is a bit too unethical. The fact that he’s been profiting from the war in Iraq through no-bid contracts to Halliburton (in which he still retains a large amount of shares) is bad enough. If this had been China, he’d have been executed for bringing dishonor to his country!

Based on continuing weakness in the dollar, gold briefly breeched the $1000 level yesterday along with oil hitting an all time high of $111 per barrel. I had a really strong suspicion that we’d see $1000 gold by mid-March.

Despite what Bernanke and Paulson said last summer, the housing bubble has spread to other parts of the economy and subprime mess has not been contained. In a last ditch effort to prevent banks from collapsing, the Federal Reserve announced a bailout of Fannie Mae, Freddie Mac and other banks, promising to exchange bogus mortgages for Treasuries during a 28 day window. They named this Term Securities Lending Facility (TSLF) but it’s just a good old bail-out.

I’m finally back in the US! Last week, I heard Dr. Marc Faber, of GloomBoomDoom
fame, on CNBC India. While gold is currently at a whopping $973/Oz, on that day gold had briefly touched $950/Oz for the first time ever.

Dr. Faber said two things that were very interesting:

1. Gold is a bargain at $950/Oz

2. Fed Chairman, Ben Bernanke doesn’t understand how the economy works

Seems like he agrees with Jim Rogers!

I’ve been advising everyone to invest in gold since it was $500/Oz. Of all the people I know, maybe 3 or 4 actually followed my advice and bought some gold. Most people thought I was stupid and vehemently disagreed with me. Most of their arguments consisted of the following points:

1. Gold has been a terrible investment for most of history and in fact had declined from its peak in the early 80’s for 17 years.

Today’s guest post comes from Bruce, CEO of Superior Gold and includes a free silver coin!

For many years I was a successful real estate investor. However, I realized that the market was getting very speculative and decided to get out while the going was good. In 2003, I sold my last investment property located in North Carolina. At the time, I had many colleagues in the tech sector, finance sector and even senior managers at well known companies all telling me of their plans of quitting their jobs and becoming future Donald Trumps.

To many of them, the real estate investment boom would never end. These weren’t small investors who bought a $100k house and flipped it in 6 months for $160k. No, these were very smart guys who were thinking of playing in the big leagues; backing local builder’s subdivisions, buying spec land on beach frontage and getting into the commercial flipping game. Many of these investments had $250k down-payments!

In case you were asleep, last week saw gold break all records and almost closed at $900/Oz. I still think its a good time to buy for long term investors. Lets see what other investment advisers think.

According to Merill Lynch, we’re already in a recession and according to Richard Russell of the Dow Letters, we’re entering a bear market.

The operative thesis for investors at this time is that the primary trend has turned down. A bear market is in progress. What does this mean? I’ve outlined this many times before, but here goes again – the position I favor here is cash and gold, a lot of gold. You can buy GLD, you can buy gold coins, and you can also buy GDX, which represents a list of gold mining shares. The important thing is to have a good position in all things golden.

I’ve been spending the past few days writing and re-writing B-school essays for the Jan 3rd deadline. Wasn’t going to post until the 4th, but with gold breaking previous records, I just had too!

Gold is currently trading for $857/oz, beating the previous high of $850/Oz that was set 28 years ago! (although the intra-day price was nearly $875, it didn’t close at that price). Gold was up a stellar 37% in 2007. How does that compare to other investments?

Dow Jones: 6.4%

S&P 500: 3.5%

NASDAQ: 9.8%

Oil : 57%

Shanghai : 96%

Brazil: 76%

India: 74%

Ireland: -25%

Venezuela: -29%

According to CNNMoney, the best and worst US real estate markets in 2007 were:

Bismark, ND: 15.3%

Salt Lake City: 14.5%

Yakima, WA: 13.6%

Binghamton, NY: 11.4%

Charlotte, NC: 11.0%

Palm Bay, FL: -12.4%

There’s always someone at a party who’s claiming their investment asset of choices is the best. In 1999, it was stocks. In 2005, it was real estate. Right now, I’m claiming its Canadian Income Funds and commodities like gold. But is there an investment that’s actually better than something else?

Many proponents of the stock market have claimed that it is better than real estate. It’s more liquid and there’s never been a 10 year cycle where the S&P 500 had a down year. Of course, that’s rubbish. Ever try selling your stocks when the market is tanking? You’ll get taken to the cleaners. According to CNN Money, stocks follow a 16 year cycle. They go up for 16 years and then they’re roughly flat for the next 16 or so years.

Reacting to the Federal Reserve’s rate cut today, gold surged past the $800 barrier for the first time since 1980! I’ve been hawking gold as an investment for 2 years and no one’s been listening to me!

According to a press release today:

Gold last topped $800 an ounce in 1980, when prices reached as high as $875 an ounce in January. Adjusted for inflation, an $800 ounce of gold in 1980 would be worth more than $2,000 today.

I think that gold will probably hit atleast $2,200 if not more.  Some people are predicting higher amounts, like $3,500. I’m not sure. But I do know the US Dollar is a lousy investment right now.

Oil closed at $94.51 and the Canadian Dollar now cost $1.06!

Jim Rogers, co-founder of Quantum Fund along with George Soros, achieved 4,000% returns in the 80’s. He’s famous for being bearish on the US economy and the US Dollar. However, he’s currently bullish on the Dollar, saying that everyone is negative on it.

In his opinion, when too many people take one side of a trade, the opposite is likely to happen. The Dollar has been in a bear market since 2002, but it turned bullish during 2005. He thinks its over-sold and in the short-term at least, due for a correction.

While I’m not buying any Dollars, I could definitely use a spike in the USD for my entry point into Australian Dollars.

Many claim the dollar’s weakness is helping offset a dropoff in U.S. economic demand that’s come from a recession in the housing market. Goods priced in dollars are cheaper in Europe or Australia, and manufacturing in the U.S. becomes more attractive for companies that export goods. That helps preserve jobs in the U.S.