Saturday, June 19, 2010

The Michael Masterson Journal

MM Journal

Issue No. 47 - $1.91

Saturday, June 19, 2010

 

"When we have gold we are in fear, when we have none we are in danger."

English proverb

Getting Wealthy From Inflation
Part II: Gold

In Part I of this series, I explained why inflation -- the biggest single threat to your financial security -- is inevitable. Briefly:

  • The government has been spending trillions of dollars to try to keep the banks and brokers and insurance companies from going out of business... even though those same banks and brokers and insur­ance companies are responsible for inflating the economy to begin with.

  • The government didn't actually have the trillions of dollars they spent on bailouts. They had to borrow it from the U.S. Treasury.

  • There are only two ways to pay it back: by raising taxes or printing more dollars.

  • Obama does not have the hold over the House and Senate that he had a year ago. It is highly unlikely that he will be able to raise taxes as much as he would like. But even if he raised the maximum tax rate to 90 percent (it's been done before), it won't be enough to make up for the overspending that has already occurred.

  • That means a huge amount of paper money will have to be printed. This has been done many times by many countries -- in an always futile attempt to mute the effect of deficit spending, bad investments, and war debts.

The economic situation in this country is probably worse now than it's ever been in my lifetime. As a result of the unprecedented inflation we're facing, the pundits I respect are predicting the U.S. dollar will actually collapse. And this might happen faster and sooner than you might guess. You may wake up one day and realize the value of your savings account has been reduced to almost nothing while your income is insufficient to meet your needs.

You can protect yourself now and profit in the future by investing shrewdly in assets that appreciate during times of inflation. In Part I, I talked about several opportunities in real estate. Today, I want to get you to start thinking seriously about investing in precious metals.

The first and most obvious option is to buy gold.

If you don't already own gold, you might want to start buying some. I'm not a financial advisor. But if I were, I'd tell you that you should have enough physical gold to keep you afloat for at least two or three years. If you can't buy that much, you should begin to buy what you can. Don't stop until at least 10 percent of your savings are in precious metals.

Do this not in the hopes that your precious metals will appreciate (although they probably will) but because, at the very least, they will hold their value during the coming storm.

What You Should Be Buying

The most convenient way to own physical gold is in the form of bullion coins. Be sure to buy top quality -- coins that aren't damaged in any way. Nicked or scratched coins won't get you full value when you go to sell them. And make sure that you are not paying a big premium for them. Five or six percent is the absolute limit, in my opinion.

Andrew Gordon, a senior analyst with ETR's sister publication, Investor's Daily Edge (IDE), tells me he recommends sticking with these five gold bullion coins:

1. South African Krugerrand

Krugerrands were the most commonly traded coins during the last gold bull market and are still traded today.

2. Canadian Maple Leaf

The Maple Leaf was first minted in 1979 and was an instant success. Like the Krugerrand, it contains a full 1 troy ounce of gold. It has a face value of $50 (Canadian), which is far less than the value of the gold itself.

3. Australian Kangaroo

The "Roo," as it's called, replaced Australia's "Nugget" coin. (Nobody liked the Nugget's design -- with a lump of gold on the reverse that looked like a rock.) It, too, weighs 1 troy ounce, with a face value of $100 (Australian).

4. Chinese Panda

The Panda was introduced in 1982, the first gold bullion coin designed as a series of limited editions. It is minted in 1-ounce, half-ounce, quarter-ounce, tenth-ounce, and twentieth-ounce sizes.

5. American Eagle

This is the gold bullion coin that everybody wants. First minted in 1986, it is easy to buy, easy to sell -- and is considered to be the most beautiful coin ever produced. It is available in 1-ounce, half-ounce, quarter-ounce, and tenth-ounce sizes.

I started buying gold coins about 10 years ago. Every month, I bought another box of Krugerrands or Maple Leafs and had them delivered to my house.

Then I hid them. I did that because, having been a consultant to the financial industry for 30 years, I don't trust banks and brokerages. Hoarding gold bullion coins is easy. So why not?

I stopped buying coins when I reached my target -- enough to live on for 10 years if I had to. (Call me paranoid, but having that much in gold in hand makes me feel safe.) Gold was trading for about $800 an ounce at the time. I had a feeling prices would continue to inflate, but I wasn't trying to game the market.

If I hadn't met my goal I would have continued buying. Even today, with gold around $1,200 per ounce, I would still be buying.

What About Mining Stocks?

Another way to hedge against inflation is to buy mining stocks. But you must be careful.

The mining business is tricky. It requires lots of expensive personnel and capital equipment. Key employees jump from one company to another without notice -- especially when the market is good.

In addition, the mining industry now faces extensive regulations from environmental (and other) agencies. That means you can expect two things: inefficiency and extra costs.

Like so many investment-related industries, mining is crowded with cheats. As Mark Twain once said, "A goldmine is a hole in the ground with a liar standing next to it."

And if all that were not enough, know this: Mining is a boom-and-bust business, thanks to price swings and the unwillingness of banks to lend to small miners when commodity prices are low.

These problems discourage most investors from putting their money in mining companies. And that is why, during the 20-year bear market in metals (1980-1999), it was possible to buy mining companies very cheaply, based on their fundamental values alone.

But all that changes when the prices of precious metals start to climb. Gold mining stocks move up first and fastest. Silver miners quickly follow. Platinum, copper, and palladium mining companies can shoot up too.

The cheapest mining companies to buy are those whose metals are still in the ground. With their assets still untapped, there are unknowns that can tank their value. This scares investors and keeps the prices down. But if you get into the right company, you can make a fortune.

I am invested in two mining funds. I made those investments because my job as a consultant to investment publishers gave me access to several of the top mining stock experts in the world. They are personal friends of mine, and I trust them. Still, I invested a sum that was not so big that if I lost all of it I would be devastated.

The Outlook for Gold

The price of gold has been on an upward climb for many years. Is this the end of the trend... or are we just partway through it?

That's the question Dr. Steve Sjuggerud recently asked his friend John Doody, editor of the Gold Stock Analyst newsletter.

John's answer (which Steve shared with readers of his own newsletter, Daily Wealth): "The primary driver of the gold price is real interest rates (after inflation) that investors earn on their cash."

In other words, says Steve, "If investors earn nothing on their cash, then gold goes up. If investors earn high rates of interest on their cash, then gold goes down. That's the only gold indicator you need to know."

Right now, the real interest rate is right around 0 percent, so John expects gold to stay about level. But as the economy picks up, we could see inflation. And then, says John, "real interest rates would go negative and gold would rise."

As Steve puts it: "The facts say you need to own gold when the 'real' interest rate is negative... almost regardless of what's in the news. [John's] work shows that gold goes up when the bank's paying you nothing. That's where we are now... and that's what you need to know."

"In short," says Steve, "gold looks good now, with low rates. And it could look better soon."

Dr. Russell "Rusty" McDougal, editor of IDE's Resource Windfall Speculator, is similarly optimistic about gold. "Give us five more years at the present pace, no disasters wanted or required," he says, "and we'll see gold at $2,400 or above."

If that happens, it would mean a fortune for those who invest wisely in exploration and mining stocks. Recently, the price of these stocks has been lagging the price of gold. "That means they are extremely attractive right now," Rusty says. "And this anomaly will not last with coming higher precious metal prices."

The gold market has been Rusty's primary focus of study for the past 17 years. He follows gold not just as an investment but because he thinks it is the best financial market to "understand how politics, economics, and monetary issues play out in the world."

"Free markets, honest money, and individual liberties are the offshoots of what gold represents," he says.

It's not an accident, he says, that gold has performed so well in the recent past. "It didn't happen in a vacuum. Rest well assured that no gold bugs were surprised."

The Five Key Reasons for the Rise of Gold

  • The U.S. dollar has been debased. It was fatally weakened when the U.S. government abandoned the gold standard, and it has been further weakened by the reckless government spending that has skyrocketed in the past several years. But other currencies are just as bad or worse. The only real safe haven for wealth these days is in gold and other precious metals.

  • The whole world isn't tuned into CNBC's relentlessly cheery newscasts. There are millions of savers and investors out there buying up precious metals because they understand the inevitability of inflation... and its dire consequences.

  • China has taken its gold reserves from 600 tons to 1,054 tons over the last six years. They hold over $2 trillion in foreign exchange reserves -- four times that of the U.S., Germany, Italy, and France combined.

  • Traditionally, central banks have been sellers of gold. Now they're buying. That fundamentally changes the dynamics of the market.

  • Monetary chaos always leads to a rediscovery of gold. China, India, Russia, Vietnam, Venezuela, and many other countries, as well as innumerable individuals have taken the cue. Gold is, once again, the answer.

Although gold has been up an average of 17 percent over the last nine years, Rusty McDougal points out that it has been anything but a free market. "It was overtly contained and still managed to perform exceptionally well!"

Now, he sees gold hitting at least $2,400 within five years.

"Gold is set to perform with or without major calamities coming our way," he says. "You stand to do exceedingly well with precious metal investments in the coming months and years. You can hunker down for doomsday if you want."

So what does Rusty recommend, other than physical gold? Mining stocks.

One of his earliest picks for Resource Windfall Speculator, Sangold, is still going strong. It's up 461 percent. Extorre Gold Mines, a recent pick, is up 416 percent. And as I write this, members of his advisory service are sitting on a 405 percent winner, a 141 percent winner, and a 118 percent winner, all mining companies.

I've been in the investment advisory business for 30 years. I once had my own rare coin business. And I've been buying gold for more than half my life. But I am a rank amateur when it comes to investing. So don't look to me for advice on specific precious metals investments. Turn to somebody who studies that market for a living.

Rusty McDougal has been doing it for more that 17 years -- and his hard work has paid off. His personal track record has included numerous 1,000 percent+ winners. One example: He spotted Altius Minerals years ahead of the pack for a 9,300 percent personal gain.  

You can learn all about Rusty's Resource Windfall Speculator here.

And for even more ways to protect -- and even grow -- your wealth in today's shaky economy, check out ETR's premium wealth-building advisory service, the Liberty Street League.

When you join the Liberty Street League today, you'll not only get dozens of specific recommendations -- you are also eligible for a fantastic deal offered to new members: a FREE copy of my New York Times and Wall Street Journal bestselling guidebook for entrepreneurs, marketers, and business builders: Ready, Fire, Aim.

Go here to find out more.

[Ed. Note: Michael Masterson welcomes your questions and comments. Send him a message at AskMichael@ETRFeedback.com.]

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1 comment:

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