9-7-09
 

Why Gold?
 

            Welcome to another slice of the world as the masses don't know it. Let's dive right in as things are getting interesting...

            Last week I explained how September would prove decisive in one way or another and it hasn't disappointed so far. Remember, the critical number to watch in 3774 on the Dow Jones TRANSPORT index; if it CLOSES above that this week, September should see a surge upwards. It closed on Friday at 3762, so just 12 points off- one decent up day now should settle the September debate.

            I've had some very good questions presented to me this week, so I thought I'd answer them here:

            "I'm hearing mixed signals coming from the housing market. Is this the bottom yet?"

            Well, it's always hard to time the exact bottom (or top) of any market, but we can take some intelligent guesses.

            What people lost sight of in the real estate boom is the critical question anyone who understand money asks before making any investment: what's in it for me and what's the risk?

            The foolish assumption 'investors' made here was assuming that property prices would continue to skyrocket and thus, they didn't care if the property threw off any income. Worse, in many cases people were happy to take a loss because they thought they would make money on the appreciation of the property.

            NEVER do this. As people are reminded once every decade or so, property prices CAN and WILL go down for periods of time. The longer term trend may well be up, but try telling that to people who bought investment property in 2006 for top dollar!

            So, by knowing this we can also get a good idea for how to truly value a property...

            Let's say you have $200,000 that you need to put to work. What are your choices for income currently and how safe are those choices (obviously higher income usually carries a higher risk)?

            If you buy a rental property with that $200,000, how much would you realistically make a year after all expenses and tax?

            Now, take that amount as a percentage of your $200,000. Weigh this up with the risk of owning property in terms of completely losing your money over time (low risk) and the effort involved.

            Now look at what else is available comparing like for like in terms of stocks, bonds etc.

            If you're only getting 3% on your $200,000 property investment, that property might well be too expensive.

            So try not to look at the market as a whole, but rather individual cases. Having said that, you have to keep an eye on the fundamentals too because part of your valuation is based on how much rent people will suffer paying.

            Look around. There's still a huge inventory of unsold homes. Worse still, how many people do you know of that are in foreclosure but are still not out? There's more inventory still to hit the market.

            "I hear talk of rampant inflation being inevitable, so why don't we just go 100% invested in gold?"

            One constant rule of investing is that it's not easy. In fact, any time something seems like a 'no-brainer' investment that's getting popular, I actually see as a warning sign. Remember, markets do all they can to fool you or we'd all be rich.

            Gold looks set to breach the $1,000 mark again and gold fans are hoping this will be the big break. Long time readers know what a constant gold bull I am, but let's put that in perspective...

            Contrary to a lot of opinion, history has shown that gold actually isn't the best defense against rampant inflation; stocks are (if purchased at sensible values). What gold is really about is something far deeper and even more ominous...

            Gold is the antithesis of government. Gold is truth from a monetary standpoint. Gold is one of the few things remaining in the world that is not a big fat lie.

            As far back as the Roman emperors, governments have been and still are, concerned with 'bread and circus' pandering to the masses to stay in power. What the masses want of course, is free money. The deception they use to achieve this magical feat is to PRINT IT. The Roman emperors were the first legal counterfeiters.

            Now thankfully, the whole world isn't completely brainless (though it's a close call) and sophisticated investors know what governments are really all about and they will buy more gold the more money printing governments do.

            What the price of gold is telling us actually isn't inflation (from a rising price perspective), but rather government dishonesty increasing.

(Some may argue that technically inflation is defined as the supply of money therefore gold actually is linked to inflation but I'm talking about the rising prices of things scenario- the supply of money and rising prices don't have a direct link).

           Because governments all over the world are trying to counterfeit their way out of a natural correction in the economy (they've made up the more palatable term: quantitative easing for this deception), ALL paper currencies are now suspect. Gold is set to rise in line with this.

           So what's my concern?

           Apart from the fact that everyone's saying gold is a no-brainer? Well, it's that all the governments and entourage of 'experts' are grossly underestimating the forces of DEflation that are still out there and are a powerful counter to their money-printing and such forces COULD cause a big pullback in gold along the way up.

           Let's take the latest unemployment figures that the markets cheered on Friday. Once again, what were ultimately bad numbers were celebrated simply because they weren't as bad as they predicted. Putting that nonsense aside, unemployment is 9.7% and rising even by the made up government figures. The true figure is actually 16.7% and a Fed chairman even admitted as such recently.

          That's a HUGE number. The recently hailed bank stress tests were based on unemployment staying under 10% (I wonder why these government figures are always stated as under that?).

            If you are or have ever been unemployed, you'll know how that affects a person and their spending habits. EVERYTHING gets cut back. This economy (and therefore the world economy) is 70% based on people BUYING STUFF (mostly junk) in malls.

            Does that sound very inflationary to you?

            That's got DEflation with a capital 'D' written all over it! BUT, governments have something called a printing press with which to fight it...

            Let me be clear: deflation is an absolute nightmare scenario and governments are petrified of it. Therefore, once this finally dawns on them, they will print so much money that the very existence of paper money will be called into question and that's when gold will have its day. This time will coincide with the exact moment most of the world had given up on gold.

            We started off with a discussion about INCOME. Income is the key to getting through this.

            And we will get through it. Governments may be dishonest and with this recent administration, dishonest AND socialist, but the American people are extraordinarily resilient and adaptable and WILL prevail. This country was forged from distrust of big government and Obama's popularity is tripping over this fact.

            If we could just stop sucking from the government teat for a minute and remember what this country was built on, this recession wouldn't just be over quicker, we'd come out the other side stronger than ever. We need to stop being cry-babies and do what needs to be done.

            Something else I know: what goes around comes around and dishonesty will come back to those who perpetrate it.

            Disagree with my assessment of this administration's policies? I was actually being KIND by calling them Socialist- they're actually getting on to becoming something worse (please feel free to email this section on to the whole world):

            Here's the dictionary definition of COMMUNISM (emphasis mine):

            "A political theory derived from Karl Marx advocating class war and leading to a society in which all property is publicly owned and each person works and is paid according to their abilities and needs."

            General Motors? Banks? Welfare? Proposed healthcare?? I could go on. America has been fighting Communism all over the world for a long time and lost a lot of her sons doing so. They must be turning in their graves.

            America and its people are great. They both deserve better.

            That's "why gold?"

            Until next time...

            Mark Patricks

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