Guess Who’s Betting On Inflation!

Gold Dinar Coin

If you’ve been reading the popular press for the past 6 months, there’s been a slew of articles talking about deflation. I’ve been somewhat skeptical of the long term probability of deflation and have been investing in gold and commodities in anticipation of inflation. Looks like I was a little early to the game (which, on Wall Street is just the same as being wrong!).

Now however, it looks like we are warming up the printing presses and gold has hit $1,000 twice in a week in anticipation of future inflation. Legendary hedge fund manager John Paulson, who made $2.5 Billion last year from his trades, has been betting heavily on gold and his fund has nearly 50% of its assets in gold or gold-related investments like gold mining stocks and ETFs. The gold ETF, GLD reportedly makes up 30% of his fund! He has also taken a large 12% stake in AngloGold Ashanti (ANGJ.J) making him the largest shareholder. According to Reuters, this is not a bet on the company being acquired but rather a bet on inflationary pressures pushing up the price of gold. As opposed to the popular theory of rising prices being a cause of inflation, I like to consider it as an effect of inflation, which is caused by printing money, a side-effect of fiat currency. If you’re unaware about the effects of inflation and how it can ravage the economic (and social) structure of a society, I strongly recommend watching the excellent videos on hyper-inflation.

Another fund which has done well with the gold mining ETF is David Einhorn’s Greenlight Capital, which picked it up at the lowest point of last year and which has more than doubled its investment so far.  They both join China in being bullish on gold. Between Paulson’s bullion dollar gold ETF purchase and China’s multi-billion gold bullion purchase, it’s no wonder gold prices have been trending upwards.

Why Is Gold At A $1000/Oz?

[St Gaudens Double Eagle 1 Oz Gold Coin]

St Gaudens Double Eagle 1 Oz Gold Coin

Today Gold hit an intraday price of $1005/ounce. While not a record, it’s definitely a historical moment, with this event occurring for only the sixth time in history.

We can only speculate as to why the run up to a $1000 so quick but some of the likely reasons are:

  • The continued monetization of US debt and resulting devaluation of the dollar
  • The ability for 1/6th of the world’s population (the Chinese) to now buy gold
  • The Indian Wedding season is about to begin soon and this is when Indian’s start buying gold jewelery
  • The Chinese government has been buying gold on the sly. Well maybe not so secretly. They even encouraging their citizens to buy silver and gold
  • The Chinese government just agreed to buy $50 Billion of IMF Bonds denominated in SDR (Special Drawing Rights), a mixture of various currencies, which might be a signal that the US Dollar is losing its status as the world’s reserve currency

The only question is whether this rally can last. In the long term, the answer seems obvious, but the short term is anyone’s guess. However, I think $1000 gold is here to stay.

How To Invest Like China

In the last post we saw that China was slowly diversifying away from it’s usual investments in US Treasury Bonds and investing in hard assets, natural resources and maybe other currencies.

There probably a very good reason why the world’s second largest holder of US Dollars is weaning itself away from bonds issued by the world’s largest debtor nation.  If you believe the Chinese know what they are doing, it might make sense to imitate their investment strategy.

While you don’t need to buy $80 Billion worth of gold, you might do well buying gold equal to at least 5% of your net worth. Gold is not an investment in itself but a historic store of value. Regardless what anyone tells you, the US Dollar is not a store of value. During times when governments print money hand-over-fist, gold typically does well. In fact, over the past 10 years, gold has appreciated against every single currency.

You can either buy the physical gold, gold ETF(GLD) & gold mining stock ETF (GDX), gold certificates or a custodial account. You can also buy silver and silver ETFs in a similar fashion. There was a recent Chinese news report recommending Chinese investors buy silver since its a better value than gold!

You can also exchange your US dollars directly for foreign currencies. Everbank currently has a Marketsafe BRIC CD, which invests in a basket of Brazilian Real, Russian Ruble, Indian Rupee and Chinese Remnimbi.  This CD doesn’t pay any interest but the principle is protected against loss! But if you’d rather take a risk and earn some interest, Everbank has a slew of CD products in several European and Asian currencies.

Another option are the CurrencyShare ETFs for Australian Dollars(FXA), British Pounds(FXB), Swiss Francs(FXF), Japanese Yen(FXY) and Euros(FXE).  Another ETF worth considering is UDN, an inverse US Dollar ETF, which is a basket of the above mentioned currencies. (However, inverse ETFs may not accurately follow the downward movement so you’re cautioned to do some research).

I do not recommend forex-trading as a means of hedging yourself against Dollar devaluation. Forex trading is a highly leveraged, zero-sum speculation. In a zero-sum game, a participant can only win at the expense of another participant. In fact, it may be considerably less than zero-sum becauase your brokerage can run your stops (which it can see) and effectively trade against you.

If you are thinking of investing in currencies, definitely check out Everbank’s free newsletter, the Daily Pfenning. It provides a very informative (and entertaining) look at global economics and investing. Actually, you should subscribe if you do any sort of investing! Everbank also has a low-cost custodial account for gold and from time to time (whenever the price of gold drops dramatically) they offer a MarketSafe (which means principle-protected) Gold CD. Sign up for the newsletter and they’ll inform you whenver they come out with new products.

If you have a penchant for natural resources, you should look into Master Limited Partnerships (MLPs) like Tortoise Energy (TYY) or Kinder Morgan (KMP). Both pay a juicy dividend that is considered a return of principle and thus non-taxable (although it does alter cost-basis). However both have appreciated significantly this year. Canadian Royalty Trusts like Enerplus Resources (ERF)  are also an option.

You can also buy natural resource stocks like Rio Tinto (RTP) or BHP Biliton(BHP). China has been trying to buy multi-billion dollar stakes in companies like these and is currently unsuccesful. If you think that a day may come where Chinalco will be successful, you might want to get in before that happens.

IRSA International (IRS) is an Argentinian company that trades on the ADRs.  It owns farm land, resorts, hotels and shopping malls in prime locations.  After decades of “quantitative easing” (another word for printing money) wreaked havoc on their economy and standard of living, Argentinians don’t trust banks or central bankers. They trust gold and farmland. The way the US economy is going, we too may come to that same conclusion. Just to be safe, I bought some of the stock. On the other hand, you might be better off buying farmland or a ranch for hunting. I’m pretty sure, buying farmland is next on China’s list!

Disclosure: I own ERF, TYY,FXA, IRS, Everbank MarketSafe Japanese REIT CD, GDX and physical gold/silver.

China To Buy $80 Billion Worth Of Gold

Here’s a news clip from nearly 4 weeks ago, about how and why China is moving away from US denominated assets and buying tons of gold instead. It looks like the Chinese believe there’s a threat of inflation looming.

Now there’s absolutely no reason to mimic the investment strategies of one of the world’s largest creditors to the USA, but if you think they’re doing a good job of managing their economy you might want to give it some thought.

Insurance Company Buys $400 Million in Gold

According to a recent report from Bloomberg, Northwestern Mutual Life Insurance Co., the third-largest U.S. life insurer, has been buying gold. This is the first time in its 152-year history that Northwestern has purchased gold.

According to Northwestern CEO Edward Zore, “Gold just seems to make sense; it’s a store of value. In the Depression, gold did very, very well.”

According to Bloomberg, Northwestern has accumulated about $400 million in gold. CEO Zore believes that the price of gold could double “or even rise fivefold” if the economy continues to weaken. “The downside risk is limited, but the upside is large,” Zore said. “We have stocks in our portfolio that lost 95%.” But gold “is not going down to $90.”

Despite the rise in “cash for gold” TV ads and billboards, people are still generally skeptical about buying gold as an investment or hedge against inflation. As I’ve said before, I think gold will be the next bubble as people eventually lose confidence in the dollar and US governments ability to repay its debt.

Check out the increase in the money supply over the past year.

Exploding Money Supply

A lot of you will protest that it hasn’t really increased and that the banks that got the money from the Fed have just given back to the Fed to shore up their reserves. True, and the Fed is paying the banks interest on this money too. But as some point the Fed is going to stop paying interest, and the greedy bankers are going to start lending this money out. The Fed hopes that this money will work its way into the economy in a slow and orderly fashion, so it takes maybe 5-10 years to enter the system and not rush in all of a sudden, because if it did the result would be similar a massive drug overdose. But in smaller amounts, its more palatable with contained inflation. But it will result in inflation nonetheless. And when it does, gold prices are likely to keep on rising.

If you interested in buying gold coins check out my previous posts on gold/silver and coins, as well as my personal list of favorite gold coins.

China Buying Gold On The Sly!

I just read this interesting article in the Financial Times. Seems like China has tired of US dollars and is looking to get rid of them.

Beijing Bets on Bullion

 By Patti Waldmeir in Shanghai , Financial Times, 6 May 2009

China is expected to keep buying gold to diversify its vast foreign reserves after it recently revealed it had been secretively buying bullion.

Beijing and Shanghai-based gold industry analysts said the country had almost doubled its bullion holdings. But they said China was likely to make as many purchases as possible within its borders, rather than turn to international markets where it could push up gold prices.

Beijing’s exact gold purchasing intentions are a state secret, but industry analysts are betting on more purchases as Beijing has been clear about its desire to diversify its foreign reserves away from the US dollar. Although gold is quoted in dollars, its price usually rises when the dollar weakens.

The analysts base their bet, at least in part, on the history of another buyer: Russia. After Moscow announced it was buying bullion, it regularly disclosed information revealing almost monthly increases in its gold assets.

“I’m absolutely sure that they will continue buying because China’s gold holdings are very small in terms of the size of its economy and the growing significance of its currency,” says Paul Atherley, managing director of Leyshon Resources in China. “But we will find out about it only after they have done it.”

China’s current gold reserves represent only about 1.6 per cent of total foreign reserves, a vastly smaller percentage than the world’s average of 10.5 per cent. Nevertheless, its percentage is similar to the 2.2 per cent in Japan, the world’s seventh-largest holder. The challenge for Beijing is to attain a similar diversification, requiring large amounts of gold, without disturbing the market.

Hou Huimin of the China Gold Association, forecast that China’s gold reserves could rise in the long term to as much as 5,000 tonnes. “It won’t be a leapfrog achievement but a gradual increase along with the country’s economic status.”

One potential source of gold for China is the International Monetary Fund’s expected sale of about 400 tonnes of bullion. Analysts said Beijing could try to purchase a block of that sale in an off-market agreement.

China last year overtook South Africa as the world’s largest gold producer and is estimated to have produced 282 tonnes of gold. Some gold from state-owned producers goes directly into Beijing’s gold stockpile every year. Gold purchases from state-owned producers can be made secretly and at below-market prices, making them more attractive than international purchases.

In addition, turnover at the Shanghai gold exchange rose nearly threefold between 2007 and 2008 but it is impossible to know how much of that, if any, may have been reserve buying, analysts said.

I wonder if they’re buying any American Buffalo Gold coins 😉 The US mint considers it a bullion coin.

The End of Cheap $1000 Gold?

Today’s guest post comes from Bruce, CEO of Superior Gold.

Last year I wrote an article for Living Off Dividends & Passive Income outlining 10 reasons why gold would break $1000. It was a conservative estimate at the time, which was achieved later in the year. Since then the Dow has touched 6400 points, many major U.S. banks have collapsed and the U.S. economy is searching for sound footing during a recession that may or may not be half way completed.

At the time of my article Gold was around $880 and some good people at made it seem as though I was predicting an imminent U.S. led invasion of China.

The president of Superior Gold Group thinks I should buy gold? Shocker.

– The Writer’s Coin

Alan Greenspan (Federal Reserve), Jim Cramer (Stock) and Ron Paul (Congressmen) have all recently recommended gold for diversity and protection.

When I invest, I only invest with the long-term in mind, so I’ll never drop any money into gold. It’s too volatile, simply because it relies on the economy and stock market to be in a slump.

– Erick Folgate

I would consider a Dow that swings from 13,000 to 6,500 in 14 months the definition of volatility, but then again I am no stock expert.

These guys have a right to their opinion and I have a right to mine. In the article I mentioned various reasons for Gold’s ascent and those reasons have only strengthened in the past year. Unlike the Wall Street Investment Bankers of now defunct financial powerhouses or Ponzi scheme Billionaires, as the president of the Superior Gold Group I actually have to look at many of my clients face to face. I have a vested interest in making the best analysis of the financial markets so that I can relay them to my clients and guide them into sound financial decisions. On to this year’s predictions:

Gold Prices in 2009

Clearly when you read the charts, government reports or listened to politicians it is clear that the United States and prominent economies around the world are searching for an end to their economic troubles. Gold is headed to $3,000….. or so the Gold bears would love for me to predict so that they can label me a Gold Bug or Gold Zealot ala Harry Dent and his 35,000 Dow projection. I am not in the projection business I am in the wealth protection business.

Any “expert” can make a prediction. At the Superior Gold Group we focus on understanding trends and making conservative projections that allow our clients to maintain a balanced and diversified portfolio that will never consist of 100% exposure of any one single asset class.

Wall Street trained financial planners never discuss physical gold/silver. Real Estate Brokers/Agents never discuss owning physical gold/silver. What they discuss is how this stock or this house will double in X time, but rarely discuss diversity. True diversity is the only way to protect your assets from turbulence and calamity in the markets.

We educate each of our clients on the importance of diversifying their portfolios. You would not believe the amount of American workers and investors that our company has had to console because their IRA and 401(k) are worth 40% less than it was just 18 months ago thanks to a severe deficiency of alternate investment forms.

Why Buy Gold in 2009?

One takes a position in Gold/Silver for many reasons. Just like any other investment, one size never fits all. We have recommended that our clients purchase Gold for wealth protection. Historically, the price of gold “does not change”. In reality, gold remains a constant price in relation to the currency it is compared to. In other words as the dollar gets weaker, the price of gold goes up. The inverse is true as well, but consider this; In 1932, the price of gold was roughly $20 for an ounce of gold. Today that same gold ounce sells for $925 (3/17/09). Gold is the hedge against inflation for your portfolio.

So the decision to own gold is really simple. If you believe that the U.S. Economy is growing, real estate prices are stable and your retirement account is performing smoothly, DON’T BUY GOLD. However, if you like me and countless financial strategist have loudly predicted that economic recovery is years in the making, protect your Portfolio today by taking a position in Gold of at least 10% of your total exposure.

– Bruce Sands.

How To Invest In Gold

The first question you’re probably asking is whether gold is a good investment to begin with. Take a look at the performance of gold prices over the past 5 years versus the stock market.


[Updated on June 2011] As you can see, gold is up more than 250% since 2005, while the Dow Jones Industrial Index is up about 15% for the same period.  In fact, gold has been the best performing investment for the past decade.

Of course, the best time to buy gold was few years ago, but its still not too late.

The Federal Reserve is doing its best to devalue the US Dollar (buying $600 Billion in US Treasuries will do that). As the dollar, and other currencies continue to drop in value, gold prices will continue to rise.

So how does one invest in gold?

It isn’t difficult and there are 3 main ways:

  1. I like buying gold coins. You can choose between collectible and bullion gold coins.  As the price of gold has increased, the spreads on the collectible coins have increased as well. Check out this list of my favorite gold coins. You can also buy gold bars, but the coins are more interesting and are likely to appreciate more as gold awareness increases.
  2. You can also buy the Gold ETF (GLD).
  3. You can also buy the Gold Miners ETF (GDX). I’ve also invested in this. Gold doesn’t offer any yield, so I periodically sell covered calls against this position to generate some income. Since gold stocks are incredibly volatile, the calls haven’t expired in the money yet. (which means they expire worthless and I get the keep the premium).

So whats your favorite gold investment?

Global Economic Recession: Coming To A Town Near You!

Gerald Celente runs The Trends Research Institue and has been analysing economic news and data and predicting trends for over 20 years. He advocated buying gold in 2001 when it was under $300/oz and has been accurate in a lot of his predictions.

Right now he’s predicting a revisting of the Great Depression era with huge vacancies in commercial real estate, large amounts of unemployment, a spike in gold prices. He also thinks we’ll see a surge in crime rates and a tax revolution with a revolt against property taxes first followed by school taxes. He thinks Obama’s promise for change is hokum and has no faith in his economic stimulus plans. On the bright side, he doesn’t believe this is the end of the world and says that a new technological revolution similar to the internet in the early 90s will bring us out of it.

Check out this very interesting video:

One person who obviously doesn’t believe him is Elliott Spitzer. He just bought a $180 million office building in Washinton DC, just down the street from the now infamous Mayflower hotel. He paid about $42 million in cash for this acquisition!

Eliott Spitzer is quoted as being optimistic about the real estate market!

Demand For Gold Tops $100 Billion!

Looks like I’m not alone in my enthusiasm for gold. For the first time ever, annual demand for gold exceeded $100 billion! According to the WSJ:

Demand for gold surpassed $100 billion last year for the first time ever, amid increased industrial and jewelry consumption and investors’ purchase of the metal as a safe haven, the World Gold Council reported Wednesday.

Gold demand — including jewelry consumption, industrial demand and identifiable investments such as bars, gold coins and gold exchange-traded funds — hit $102 billion in 2008, up 29% from a year ago.

In tonnage terms, gold demand rose 4% to 3,659 tons, the WGC said. Gold holdings in SPDR Gold Shares, the largest gold exchange-traded fund, rose to 1,008.80 tons Tuesday, surpassing the 1,000 ton level for the first time, according to the latest data from the fund. The total was up more than 200 tons from a month ago.

Gold is now about $26 below its all-time high above $1,003 an ounce, hit in March 2008. Talk of “gunning for the $1,000 level” should keep buyers at the helm, said Jon Nadler, senior analyst at Kitco Bullion Dealers.

Helping gold prices hold firm Wednesday was more gloomy news from the U.S. economy.

Doesn’t seem like the market has any faith in Obama’s economic recovery plan. Gold and silver prices have spiked and the stock market’s declined.