Category Archives: Gold/Silver

Time To Go Long The Dollar?

Posted on by Nirav
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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.

2. The “Smart Money” is Cashing In. The smart money – Wall Street institutions – tends to be a great leading indicator. If you can figure out what they’re doing in time. Right now they’re sending a clear signal – take profits on your bearish dollar bets. Case in point, as the dollar met heavy selling on May 21, the smart money took almost $100 million in profits out of Currency Shares Euro Trust (NYSE: FXE). Enough to top the Wall Street Journal’s “Selling on Strength” screen. And this isn’t the first time the ETF recently made the list. All told, the increased selling activity indicates the smart money fears we may never see such high prices again.

3. George Soros Changed His Mind. Even the smartest investors are entitled to a mulligan. After bouncing roughly 3% off the March lows, in recent weeks, George Soros told the Wall Street Journal he is now “neutral” on the dollar. And expects it to strengthen over the next 12 to 18 months. Accordingly, he “greatly reduced his bets against the greenback.” Bottom line – we should pay attention when this hedge-fund phenom changes his mind. Here’s why, copied and pasted from my first article in defense of the dollar…

“A trader named Jean-Manuel Rozan once spent an entire afternoon arguing about the stock market with George Soros. Soros was vehemently bearish, and he had an elaborate theory to explain why, which turned out to be entirely wrong. The stock market boomed.”

“Two years later, Rozan ran into Soros at a tennis tournament. ‘Do you remember our conversation?’ Rozan asked. ‘I recall it very well,’ Soros replied. ‘I changed my mind, and made an absolute fortune.'”

My guess is he will make a fortune on this change of heart, too.

4. The Fed is Done. Okay. Maybe one more cut looms on the horizon. But after that, it’s time to get back to fighting inflation and hiking rates. Futures traders awoke to this same reality once revised GDP numbers were released May 29. They ratcheted up their bets that the Fed would raise rates in late October, putting the odds at 88%. Before the release, odds of an October hike stood at 70%. As I said last time, the Fed will hike again. Soon. And such moves will immediately strengthen the dollar.
5. Busted Rhymes and Tattered Clothing. The crickets are chirping among the rappers and super models. It’s been a long time since we’ve heard (even rumors) about the world’s fashionistas and rhyme-slingers extolling the virtues of the euro over the dollar. In other words, when pop-culture embraced the dollar hating, it signaled the inflection point. And it’s time for them to get caught on the wrong side of the trade for such foolish speculation.

6. The Retail Investor is (Blindly) Headed for the Slaughter. Sad as it may be, the retail investor tends to always show up late to the profit party. Right now they’re headed to the slaughter. The proof – the number and popularity of currency ETFs literally exploded in recent years. As one long-time advisor told an IndexUniverse.com reporter, “I’ve never seen this much interest in currency ETFs before…There’s just a pile of money coming into these funds now.” And that pile, according to my research, sits around $4 billion, despite most of the ETFs being less than two years old. This reminds me of my days back at Morgan Stanley. Whenever management decided to launch our own Small Cap Growth Fund for example, because the asset class was so “hot,” the asset class was too hot. It was time to recommend our clients take profits. And now that betting against the dollar is fashionable on Main Street, it’s time we head the other direction or risk getting burned like the rest of the performance chasers.

7. New President = Clean Slate. Whether Barrack “Haven’t-Been-to-Iraq-In-A-While” Obama or John “I-Have-Anger-Issues” McCain gets the nod, a new president will get a clean slate to establish their very own dollar policy. At least temporarily. And thanks to record crude prices, expect the new Commander-in-chief to move from the current administration’s weak lip service to more meaningful actions in support of the dollar.

8. We’re Still Not Decoupled. At least not from Europe. Doubts about euro-zone growth continue to pop up. The latest – a weaker than expected composite purchasing managers index reading, compiled by the Royal Bank of Scotland and NTC Economics. The measure from across the 15-nation euro-zone slumped to 51.1 in May, the worst in nearly five years. Bottom line – the European Central Bank is in a pinch. It can’t hike rates in the face of a slowdown. And it can’t cut rates with inflation running around 3.5%. In the end, the stalemate buys the dollar time to narrow the interest rate gap.

9. Institutions are Secretly Hedging their Bets. It’s not news that international stock funds significantly outperformed U.S.-focused funds over the last seven years. Or that the dollar decline aided their outperformance. However, few realize these very same funds are now protecting their portfolios against a dollar rally. Three of the top money managers in the business (Harris Associates, Dodge & Cox and Henderson Global Investors) are now hedging up to 55% of their currency exposure. A big jump, considering the international funds from Henderson and Dodge & Cox never hedged their exposure since opening in 2001.
And last but not Least…

10. The Dollar Decline is Getting Too Long in the Tooth. As I said before, “the cyclicality of the markets instructs us that the pendulum will eventually swing back the other way.” Combine that with Einstein’s theory of relativity and one thing is clear: Although the “real” value of our flat currency may never recover, its relative value certainly will. And with the worst of the financial crisis probably behind us, I stand by my conviction. The worst of the dollar weakness is behind us, too.

Consider this my second warning that the dollar will rise. And soon. That makes now perhaps the last opportunity to position your portfolios for maximum gain.

Good investing,

Lou Basenese

If you do feel like going long, Rydex Strengthening Dollar 2x Strategy (RYSBX) is a good way to enter this trade.

If the dollar does strengthen, there’s a good chance my commodity investments (includes gold and oil stocks) and foreign currency ETFs will decline. I might use RYSBX to hedge against the rising dollar.

Cheney Betting Against The Dollar

Posted on by Nirav
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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!

Ethics aside, at least he’s good at investing. By being bearish on the dollar and the US economy he joins the ranks of supermodels, billionaire investors and sovereign wealth funds!

But there’s significant conflict of interest. Rather than spending $2 Billion a week in Iraq, if the government was spending that money on infrastructure development we might have a better economy. A stronger economy wouldn’t need this rate cuts and government deficits wouldn’t be in the trillions of dollars. This might have conceivably led to a stronger dollar.

Instead we have a dollar that is the weakest its ever been. For the first time in history, the Swiss frank is stronger than the US dollar. Most foreign currencies have appreciated considerably against the dollar over the past 2 years and I don’t see any signs of this trend reversing.

So are you going to follow the leader and bail on US investments too? Or are you going to stick your guns and weather the storm?

Gold Cracks $1000/Oz: Investing For A Recession

Posted on by Nirav
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gold bullion coins, krugerrands, maple leafs, australian gold nuggets, american golden eagle

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.

Of course, the stock markets loved this move because it means the Fed is going to prevent banks from failing. However, this $200 Billion bail-out doesn’t come without a cost. The Fed is going to have to print an extra $200 Billion to cover this deficit. But it was a clever move, because Bernanke didn’t have to cut interest rates before the 17th of March, when he’s slated to do so anyway. Another move like that might have created a panic in the markets instead!

Bloomberg reported today that OPEC is going to make about $927 Billion dollars from the sale of oil this year. That’s almost $1 Trillion dollars! Worldwide, sovereign wealth funds (SWF) are thought to be worth about $2.8 Trillion. Considering that the combined wealth of global nationalized assets is about $12 Trillion, that’s really impressive. It probably means that SWFs and OPEC will start buying up pieces of America, since they really can’t do much else with all those US Dollars. Of course, they could buy Treasuries, but it seems like everyone’s now realizing that they’re useless as the dollar keeps on devaluing. Meanwhile, the US government is helpless against stopping the sale of US assets. Our own SWF is negative $9 Trillion, so we have some catching up to do before we can actually buy anything. I think the government’s best bet is to make all those Trillion worthless by printing more and more dollars. Bernanke knows this and so far he’s doing a bang up job. Of course, this leads to severe inflation, but don’t say I didn’t warn you.

Considering how wrong our economic advisers have been so far, I think it’s safe to assume the 0.3% GDP growth that’s forecast for the year is a tad optimistic. While everyone’s still denying it, I think we’re already in a recession and along with inflation, that amounts to a 70s style stagflation scenario.

Considering that consumer spending has slowed down and is likely to continue, US companies are going to go through some tough times. How do you protect your stock investments then? You can’t sell them and move to cash, because the US dollar is sliding too. Coupled with inflation, your wealth is going to slowly (or maybe not so slowly) erode over the next several years.

Here are some investment ideas:

1. Diversify into foreign currencies: I like Australian Dollars, Swiss francs, Japanese Yen. Jim Rogers likes Chinese Remnimbi and Warren Buffett like the Brazilian Real. Take your pick.

2. Buy US giants with international exposure: Consumer staples have historically done very well over the past 60 years, regardless of the economic scenario. I like stocks with a decent dividend yield like Pfeizer (PFE), Johnson and Johnson (JNJ), Merck (MRK), Unilever (UNL), Proctor & Gamble (PG), Kraft Foods (KFT) and Anheuser-Busch (BUD).

3. Invest in agriculture: Bush’s moronic plan to reduce our reliance on foreign oil by substituting ethanol has only resulted in a surge corn prices. The economic growth in countries like China, India, Russia and Brazil is increasing the size of the world’s middle class. These people will be improving their diet and adding more meat and veggies. They’ll also be drinking more milk. There’s already surge in global prices of all of these soft commodities. There are quite a few ETFs that will help you profit from these trends, like PowerShares Agriculture (DBA) which consists of 30% soy, 28% wheat, 23% corn, 16% sugar, Van Eck Agribusiness (MOO) [8% Monsanto, 8% Mosaic, 8% Komatsu, 8% Potash Corp] and PowerShares Commodity (DBC) [33% crude oil, 20% heating oil, 14% wheat, 11% aluminum, 10% corn, 10% gold].

Along with this, a demand for fertilizer will result in compannies like Potash Corp (POT) doing very well. If you’d like to invest in milk, American Dairy (ADY) and Dairy Crest (DCG) are too suggestions, but I haven’t done much research on them.

4. Buy Gold: I don’t think it’s too late to start investing in gold. You can buy gold coins and bars, the gold ETF (GLD) or mining stocks (GDX).

5. Invest in Metals: The global boom is creating a huge increase in the demand for metals like copper, iron, aluminum, zinc, etc. Mining stocks like BHP and RIO have done very well. Indian company, Sterlite (STL) also looks like it has good long term prospects.

6. Invest in Infrastructure: Not only is America’s infrastructure collapsing, but global growth makes betting on infrastructure a safe bet. I like Brookfield Infrastructure Partners (BIP).

7. Invest in Oil and Gas: Major oil companies like Exxon-Mobile(XOM) have served its investors well for decades. I’ve also invested in direct oil drilling programs, which go out and drill wells with your money and give you a share of the proceeds. I also like Canadian Royalty Trusts that invest in oil fields. There a few new ETFs that buy heating oil and gasoline futures. I’d stay away from these as their performance is as yet unknown and they might be subject to backwardation and contango.

8. Invest in Water: Water pipes all over the US are breaking. Built after WWII, these pipes had a lifespan off about 50 years. As the nation replaces these pipes over the next several years, cast-iron pipe companies are set to make a killing. Check out NorthWest Pipe (NWPX) and the water ETF (PHO).

I don’t know about the rest of US, but Nevada and Southern California are going to face a huge water shortage in the next decade. Most of the water comes from Lake Mead and the tremendous population growth in Las Vegas and Henderson has tapped the limits on the lake’s capacity. Check out this photo:

Lake Mead Hoover Dam

Dont’ you think a company that owned the water rights in Nevada and California would make a decent amount of cash over the next few years.


Is Gold A Bargain At $950/Oz!

Posted on by Nirav
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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.

2. Gold doesn’t pay interest and you’re blocking your money.

3. Gold has no real use. It’s just some rich people who are propping up the prices.

While, these are all valid points, they didn’t touch the main point of gold being a store of value. In times of uncertainty and times of hyperinflation, gold always does well. Whenever there is a lack of confidence in the banking system, gold prices tend to shoot up.

John Lee, portfolio manager at Macau Capital Management, has a good explanation:

Banks create dollars out of thin air and loan them to people. Even though money is created out of thin air, once the borrower pays back the loan, the transaction is complete and those borrowed dollars perish in bank’s books. In this scenario, the dollar’s purchasing power is preserved through non-dilution.

However, as we have witnessed through the recent subprime fiasco, many parties are getting away without fulfilling their obligation to repay a loan. Institutions were bailed out as the Fed bought their mortgage positions at face value with new money. Consumers were bailed out as lenders were elbowed to freeze foreclosures, freeze rate resets, forgive loans, and make lower payments.

Such compromises erode confidence in the system. If one person can get dollars through borrowing without paying back, and yet another had to work to obtain and save dollars, it is surely not an incentive to earn and keep dollars. Rather, it is a no brainer to borrow dollars and spend unabashedly. Savers are the most risk averse bunch of people, and when the monetary rules are muddied, they will opt out. This is how a run on the dollar starts.

Interestingly, unlike Faber or Rogers, Lee maintains that Bernanke does know what he’s doing and that its the correct course of action for the Federal Reserve.

Today, the USA is the world’s largest debtor nation. Regardless of how high oil is, there is no room to raise rates with tens of trillions of dollars in debts to be serviced.

Don’t blame Bernanke for our problems; even if Volcker were to be the chairman today, he would have acted in exact same way as Bernanke did.

The ideal dream for debtors is inflation, which is precisely what the Fed is advocating – expanding money supply through lowering interest rates and direct handouts. The Fed’s action is entirely logical acting on behalf of the average American, which is heavily in debt.

While I would contend that debasing a currency just because you can’t afford the interest payments is a wrong thing to do, Lee does at least agree that fiat money always results in hyperinflation.

The deflation camp has been on the wrong side throughout EVERY fiat money experiment thus far. The bear camp contends that the debt burden will eventually become so large that eventually the debt bubble will blow and the prices of everything stocks to real estate to copper and zinc will collapse.

Fiat money systems have always resorted to hyperinflation and destruction of the currency without fail. If hyperinflation could be avoided in a fiat system by the creation of the Fed, the Argentines in 2002 surely would have figured it out and avoided their hyperinflationary disaster.

He also thinks that the Federal bailout will lead to a further weakening in confidence which will cause the dollar to drop further.

The idea that the Fed and the government will allow debt cleansing lasses faire style is patently absurd in my opinion. Central bank action has spoken louder than words in the past six months as record $1 trillion+ has being printed to rescue banks. For instance, England’s largest mortgage lender, Northern Rock, has been nationalized. And as for the consumers, loan amounts are reduced without penalty or conditions, mortgage rate resets are postponed, federal guarantee limits are set to increase.

Here we go back to psychology. It is not so much about the amount of bail out money being printed, but rather that the smart money took issue with the way the handouts were given unconditionally across the spectrum. Confidence in the dollar was further eroded.

Ok, so what’s his point? Lee thinks that gold is heading much higher.

Gold is money and a refuge of capital when a defective fiat money system shows its ugly head. Gold is universally recognized, portable, divisible, liquid, and limited in supply which makes it the only real viable option as store of wealth. Today’s gold price has not fully priced in dollar’s deep and terminal issues and there is nothing that can be done to stop the further rise in gold. The Fed can talk tame CPI to try stabilizing commodity prices but the effect will be limited. Mind you, gold’s rising popularity should be seen as positive; the fall of the dollar system levels the playing fields for global consumers and producers.

The markets can easily handle $3,000 – $5,000 oz. gold in the near term horizon with minimal disturbance. It is when gold rises too much over $5,000 too fast that we might start to worry about global inflation panic.

Wow, gold at $5,000/Oz! That’s a bold prediction. I’m not sure if I agree with him, but I’m still sticking to my belief that gold will reach somewhere between $2,500 and $3,000 in this cycle. Look for gold to break $1000/Oz around the middle of March when Bernanke drops the federal funds rate another 50 basis points.

And whether or not Bernanke knows anything about the economy is still up for discussion. The popular consensus seems to be that he doesn’t!

10 Reasons Why Gold Should Break $1000 This Year

Posted on by Nirav
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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!

I would be lying if I said that none of them did well. One of my former associates has done incredibly well, and is one of my best clients now. But for the majority of them, the losses in terms of time, money, and piece of mind has deterred them from ever using the words “real estate” and “investment” in the same sentence!

I only bring this story up, because at the time I was 3 years into my precious metals business. I had felt that it was not only a good time be investing in gold, but to become a seller and promoter of gold. As a gold broker I tried to persuade many of my colleagues to diversify their 401(k), IRA’s and savings account into gold. If you think selling houses is difficult today, try to convince an upwardly mobile 30-something that allocating a portion of their earnings into gold was the right thing to do in 2003. My, how things have changed! Gold Bullion is on a tear, rising over 250% from January 31st 2003 to January 31st, 2008. And in 2007 alone, gold rose more than 30%. Not bad for the world’s oldest currency.

I strongly believe that gold will rise even higher this year and that everyone should have a portion of their investments diversified into gold. While I know that not every reader will agree with me, I would challenge you to provide a safer place to store your money in 2008.

Here’s why I think gold will break $1000/Oz this year:

1. Oil prices continue race to peak levels and for the first time in history GOLD has taken a peak road of it’s own.
2. Iraq war will not end in 2008, not likely 2009 furthering your contribution to the war fund by all Americans. In times of uncertainity, gold always does well.
3. Real estate market has years to recovery, more than likely a minimum of 4-7 years. Yet another sector that faces great uncertainity. Again, bullish for gold.
4. Job losses are continuing to mount in the American market where Corporations continue to outsource American jobs overseas.
5. China and India continue to record a demand for gold as America continues to enrich their economy based on goods made in their country.
6. European Central Banks will not be able to make available GOLD to other foreign countries thereby creating a shortage. By holding onto it,they’re increasing their wealth.
7. The US Federal Reserve continues to deny that inflation exists and in trying to quell to recession,it will be forced to decrease interest rates. This will weaken the dollar, which has an inverse relation to gold prices.
8. The government faces future obligations for Social Security and Medicaid worth $57 Trillion. It is promoting a weak dollar through increased the money supply to make it easier to repay debt.This will also push up the price of gold.
9. Global markets, while usually non-correlated, usually re-couple on the downside. Stock markets are usually inversely co-related to the price of gold. Seeing the worldwide correction in markets last month bodes well for the price of gold.
10. Gold is still undervalued. Adjusting for inflation, it will have to hit $2,300/Oz to achieve parity with the peak that occurred in 1980.

As President of the Superior Gold Group, I oversee a knowledgable and informed team of client specialist. We specialize in assisting clients diversify their portfolios by targeting a healthy 30-40% of their retirement funds and or personal savings into gold and other precious metals investments. Unlike other gold brokers we know that investments come in many shapes and sizes, but we advise our clients to never leave their nest egg in one basket. We would love to discuss how we can assist you. Give us a call at 888.969.6465 ext 102 or visit our site at www.gold101.com.

Clients who get the best results are those that expand their concepts of traditional investing (stocks,mutuals, CD’s, and savings accounts, etc) to include the knowledge of real money (i.e. Gold) and how fiat currencies have historically always led to a countries bankruptcy.

Also, if you mention the Living Off Dividends Blog and request a free information packet on portfolio diversification, we will extend a one-time courtesy gift of a Silver Kennedy half dollar. This half dollar in the early to late 60’s was valued at .50 cents. Today, due to the high prices of silver, it is worth a minimum three (3) to four (4) dollars, making it more valuable than a one dollar bill. How’s that for keeping up with inflation!

Start NOW with Precious metals. Pick up that phone and make the call! 888-969-6465 ext 102.

“Building Wealth You Can Touch With People You Can TRUST! The SUPERIOR GOLD GROUP”

Have Gold Prices Peaked?

Posted on by Nirav
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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 don’t know how far this bear market is fated to carry. Nor do I know how long it will last. My advice – be prepared for the worst and hope for the best. To hope costs you nothing, but to be unprepared can cost you much, maybe more than you can imagine at what probably is this early phase of the bear market.

Through over half a century of experience, I’ve learned to respect bear markets. I don’t trade them, I don’t fade them, I don’t short them – I stay out of them. I’ve learned to stay on the sidelines.

According to the Financial Times, Gold is the new global currency.

There was a time when gold was money. In today’s uncertain world, the yellow metal is back in fashion. Bullion prices rose to a record nominal high after the assassination of Benazir Bhutto in Pakistan added to nervousness about the world economy. Part of gold’s allure is its traditional status as a safe haven. It is seen as a store of value when everything else seems risky. But the bigger drivers behind the rising spot price are a depreciating dollar and the prospect of negative US real interest rates.

A better way to think of gold may be as central bankers used to before America dropped the gold standard: not as a commodity, but as another currency. As long as the dollar stays weak, gold’s bull run will last.

The arguments for further gains in the gold price are compelling. It looks cheap, despite climbing from a low of about $250 a troy ounce in 1999, when central banks were selling reserves. The UK’s decision back then to sell 60 per cent of its official holdings looks particularly poor judgment.

Gold is benefiting from diversification away from equities. Commodities have emerged as a distinct asset class, with billions of dollars poured into exchange traded funds. Physical demand for jewellery may have stalled in Asia, but consumption remains strong in the Middle East. Declining output in South Africa will help support spot prices.

But it is the relationship between the dollar and the reaction of the world’s central banks to the credit squeeze that some bulls would say really makes gold an attractive bet. The US Federal Reserve’s aggressive, rate-cutting response to the credit squeeze has created a risk of a sharp rise in American inflation. That in turn creates the risk of a precipitous fall in the dollar and so makes gold more attractive as a hedge.

The world’s major economies have experienced rapid money supply growth of 10 per cent plus per annum in recent years. The Fed remains the world’s biggest holder of gold, yet supplies of the metal are no longer growing annually. If gold is a finite currency, its value against not just the dollar, but sterling and the euro too, should rise.

Moreover, a sharp decline in US real interest rates – financial markets expect another half percentage point cut this month – means that the low yield on gold matters less. It may have been a poor hedge against inflation in the past but the combination of rising consumer prices and economic stagnation may make it a better store of value.

GaveKal also thinks its an ideal environment to own gold.

Gold has been an exceptional play, having risen +36% since mid-August. Of course, this marks the period in which the credit crunch drove the Fed to cut its discount rate, join the ECB in a series of liquidity injections, and begin stepping down the Fed Funds rate. However, these were not the only factors at play. The past six months has provided the ideal environment for gold:

1. Demand from Asia was on the rise;
2. Demand from the Middle East was also on the rise;
3. Real rates around the globe were fairly low;
4. And then came the credit crunch and the housing bust; and
5. Fears of currency debasement have escalated.

“Indeed, when it seems like things cannot get any better, they often do not. And, for example, if China were to really liberalize its capital markets, gold prices could lose a lot of steam. However, until something significant knocks off this surge in demand, it is hard to see gold retreating.

And Richard Russel believes gold is still a bargain.

What can I buy today at 1979-1980 prices? Russell, you’ve got to be kidding. Everything is much more expensive today. Forget those prices of 1979-1980. Get into reality, man.

Wait, there is one thing that I can buy today at around 1979-1980 prices. That one thing is gold. Gold today is selling just a bit higher than it sold for back in January 1980. How can that be? Brother, it be. Today you can buy gold for just a few percentages more than gold sold for at its high in January 1980.

‘Hey Russell, does that mean that gold is a bargain?’ My answer is that I don’t think of gold in terms of it being bargain-priced, I simply think of it as real money that is catching up to the times. I can’t buy the Dow at its 1980 price of 850. Hardly, the Dow is selling at 14 times its 1980 prices. Well then, how is it that gold is still under 900? That’s a long story, but let’s just say that I really don’t know. I do know that gold is underpriced compared with almost anything else. So yeah, when I think about it, yes, gold is a bargain. And I like bargains – particularly when the bargain happens to be real money.

I’m sticking to my belief that gold will break $2,500 in this cycle and probably reach $3,500. But its going to be a volatile ride over the next few years.

Gold Tops Last Year’s High

Posted on by Nirav
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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%

Sacramento, CA: -10.5%

Sarasota, FL : -10%

New Orleans, LA : -8.2%

Hagerstown, MD : – 8.0%

So what lies in store for 2008? Will gold hit $1,000/Oz and oil $125/barrel? Will the average national house price which dropped 3.3% last year drop another 3-4%? I bloody well hope so!

Are Stocks Better Than Other Investments?

Posted on by Nirav
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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.



Right now the Dow Jones Index is almost where it was back in early 2000. Adjusting for inflation, you’re still underwater. There’s also an often quoted comment about the stock market returning 11.5% a year over the long run. According to Ben Stein, this is factually incorrect. Over a rolling 20 year period since 1900, the stock market has on average returned just under 8%. Real estate also has had similar cycles. In Southern California, where I live, the market was down from 1991 to 1996, after booming for several years. Then in 1997 until 2005 it boomed again. Right now its falling again. Similarly in Salt Lake City, another market I follow and invest in, real estate boomed from 1991 until 1997 and then was stagnant until the end of 2004. Since 2005, its been in on the upswing again.NAR, the National Association of Real Estate, often cite the fact that nationwide, real estate has never gone down. That’s a useless fact unless you’re going to be buying a house in every major city in every state. Locally, real estate does follow periodic and somewhat predictable cycles. Between 2000 and 2005, when the stock market was tanking, real estate performed wonderfully.

And like stocks and real estate, commodities also have their own cycles. Chuck Butler , President of Everbank.com just sent me this email, “… the current Bull Market for commodities is at about 7 years and running… History shows us that (going back 200 years) that Bull Markets in Commodities have trends that last 17-22 years”. If you had bought gold in 1971 for $35/oz, you would’ve done extremely well by selling it in 1980-81 for nearly $800/oz. However, between 1982 and 2000 it languished and you might have given up and sold everything in 1999 after seeing the tremendous returns of the stock market. After all, nothing beats the stock market, right!

But $800/oz gold is here again. I’ve been investing since 2005 when it was around $500/oz. Gold has tripled since its lows of 2000 and is probably set to rally even further as the US Dollar continues its slide.

Even businesses are not free from cycles. There are times when businesses are cheap to buy (if you have the money) and are great money makers, and there are times when they are expensive (although easy with cheap money and easy liquidity) and tough to sustain at a profit.

So essentially there is no ideal investment. No single investment will yield substantial returns, year after year, for extended periods of time. Either you have to be on top of the economic factors that affect the various cycles, and keep switching in and out every few years or decades, or you need to diversify your assets so you have equal exposure to various different asset classes.

So unless you have exposure you US & foreign stocks and bonds, global real estate, currencies, commodities like oil & gas, precious metals, building materials like steel, lumber and copper, and even your own businesses, your investment portfolio is incomplete.

Claiming that one investment is better than another is just the result of ignorance. (Unless you decide to get a job as a day-trader, in which case trading indexed futures is probably the best vehicle, although the toughest to succeed at. But thats not an investment, its more like a job!)

Gold Breaks $800/Oz

Posted on by Nirav
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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 Backs The US Dollar

Posted on by Nirav
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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.

But a debased currency is a hefty price to pay for growth, and not an easily reversible one, says Rogers. It breeds inflation and weak purchasing power, which ultimately undermines any short-term boost in growth. He reiterated his belief that the U.S. dollar is bound for a decline similar to the British pound’s 50% decline in the early 1980s.

He’s not very impressed with Bernanke lowering the interest rates either.

“The fool went and cut interest rates with the stock market down 6%,” he says of Fed Chairman Ben Bernanke. “What’s he going to do when stocks are down 30%?”

He says Bernanke and the Fed are ignoring obvious evidence of inflation in food, education and entertainment prices.

“This is a man who’s made a career learning about printing money and now we’ve handed him the printing press,” he says, likening Bernanke to his predecessor Alan Greenspan in their penchant for saving the markets by cutting rates and inflating asset bubbles.

Rogers is a believer in the global growth story, particularly China’s. He said he’s sold out of all his emerging market investments except for his investments in China, claiming the other emerging nations have “been exploited by 20,000 MBAs running around looking for markets.”

Rogers hopes he’ll be able to pass down his Chinese stocks to his 4-year-old daughter, but adds he may be forced to sell.

“If a bubble develops in China in the next year or two, I’ll have to sell because bubbles end badly,” says Rogers, pointing to Japan, where stocks remain well below their levels of over a decade ago. But he believes Chinese stocks would have to double before he’d feel forced to sell.

The self-proclaimed “inactive investor” is not buying much these days. He’s bullish on commodities, though he agreed he’d be hard pressed to find anything to buy at these levels. If he’d buy any commodity it would be in the agricultural space rather than the metals, though he declined to specify one. He’s short the U.S. investment banks along with the dollar.

Next to China, Rogers says he’s long gold.

“I’ll undoubtedly buy more gold,” he says, predicting it will double from here in the next few years.