Building a core position in gold bullion is a smart goal, to be sure, and a strategy Casey Research has been advising for years. However, ignoring the price you pay for gold could be seen as foolhardy; sure, it’s insurance, but isn’t price part of the consideration when you shop for insurance?

So, who’s right?

The World Gold Council just released their 2009 annual report on gold trends. From the densely populated pages of interesting data, there’s one compelling tidbit I gleaned that may shed some light on the buying behavior of gold investors.

Overall investment in gold was 7% higher in 2009 than 2008. This is significant when you consider that demand in the fourth quarter of 2008 – during one of the worst financial meltdowns in history – was so great that shortages of physical metal abounded everywhere. And yet investors bought more gold in 2009 when investor fear about global financial uncertainty was subdued.

Further, 2009 total funds invested in all forms of gold exceeded 2008 by 20%, and the average price was 11.6% higher. In other words, investors were buying gold even though the price wasn’t necessarily “low.” To be sure, that’s a broad statement. But the fact remains that year-on-year, more gold was purchased at higher prices when the markets were less scary, than when the price was lower and Hank Paulson was on CNBC every 15 minutes pontificating on how to save America’s financial system.

This isn’t to suggest one shouldn’t pay attention to price. And the data doesn’t identify how many of those who purchased gold last year were first-time buyers, as certainly there were newcomers to the sector that contributed to higher demand. But it begs the question, who would continue to buy gold when the price is higher?

Whoever doesn’t own enough, that’s who. The gold I bought last month was certainly higher priced than what I paid in 2008. But I’m trying to position my assets for protection from eventual dollar debasement and rising inflation. So perhaps focusing more on acquiring sufficient ounces to withstand a storm rather than stubbornly buying none, waiting for “cheaper” prices, however you define that, is a better mindset. Not owning enough gold is equivalent to holding a million-dollar mortgage and having a $10,000 life insurance policy. It won’t help much when you really need it.

Of course we should pay attention to price. But the trick is not letting that distract you from buying what you need. You’re not buying gold bullion as a speculation (although we expect to make a bundle on our holdings), but as a sound form of cash in an environment where government has no respect for a balance sheet and sees inflation as the only way out of its black hole of debt. During periods of inflation, the government does fine; it’s the citizens that suffer from the lost purchasing power of their savings. It’s clear our currency is being debased. What’s your plan of defense?

For those diligently accumulating gold, how do you know when you have enough? Check your anxiety quotient. If Ben continues printing money or Obama promises more goodies than he has the money to pay for, and you remain calm, then you likely have adequate gold. These are the investors who can afford to be stubborn about price as they build their holdings. In my opinion, this is where we all want to be.

What form of gold should you buy? It depends on why you’re buying it. If you understand gold’s role in history, owning a physical form will come naturally to you. If you see the threat of inflation on the horizon, or you worry about what is being done to the dollar, you’ll own both coins and an ETF. If you’re worried about possible exchange controls someday, you’ll consider a Perth Mint Certificate. And the more gloomy your outlook about the global economy, the greater the percentage of all forms of gold you’ll buy.

That said, we maintain a bias toward physical ownership. GLD and other gold ETFs are fine and do offer protection. But the custodian isn’t going to airmail gold to you when you cash in your shares; having the “hard money” in your hand gives you the freedom an ETF cannot. In our book, owning physical gold, in the form of one-ounce coins, is where your first dollar should go.

I remember when my wife and I decided it was time to get life insurance. We’d just had our kids, and it was time to play grown-up. Given what 5,000 years of history has taught us about the value of gold, and given what’s happening at this moment in history to our currency, are you playing grown-up with your investments?

Regards,
Jeff Clark, Casey’s Gold & Resource Report
for Whiskey & Gunpowder

March 8, 2010

Price Per Ounce or Total Ounces Owned was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

If you have a house which is falling down from termites, has a leaky roof, iron plumbing, stopped up septic tank, or whatever, and you approach a home insurance company, wanting full coverage for your house, and they say “you’ve got to be kidding,” should the D.C. Gang force the insurance company to issue you a homeowners policy? If you never cut your grass, never paint, never shovel snow off your sidewalk, and your neighbors consider you a menace, would any insurance company issue you a policy? Both Dems and Repubs might want big daddy government to force them to issue it, assuming the health care thing goes into effect. Why not throw pre-existing conditions out the window for home coverage?

Currently, there are scads of auto mechanical insurance policies advertising on the TV channels. If you have a true clunker which knocks, smokes, and leaks, would you expect an insurance company to issue you a policy? If the health care proposal for no pre-existing conditions considerations, why not for cars too?

If you were an alcoholic, with dozens of DUI’s, and a host of traffic accidents charged to you, would any insurance company issue you any coverage for any price, if they had their head screwed on correctly? If no pre-existing conditions can keep a health insurance company from insuring your health, why not force insurance companies to insure your driving habits, regardless of the risks?

Insurance companies as well as all businesses are in it to make a profit, and that’s the way it should be.

If you need a loan and go to a bank, shouldn’t they check your credit rating? If you have a credit rating of 100, have defaulted on lots of loans in the past, have no savings, your credit cards have been revoked, and there are tens of thousands of dollars still owed on them, would a banker loan you a quarter if he was in his right mind? If insurance companies can’t use pre-existing conditions to deny you health coverage, why not force the banks to loan you money, regardless of your credit rating?

If the Dems and Repubs have their way, along with Obama, and you have advanced cancer, Hodgkin’s, melanoma, kidney failure, or whatever, they want insurance companies to have no choice but have to insure you. In other words, by law or bureaucracy, the D.C. Gang in both parties wants to insure the death of insurance companies.

It seems to this amateur, that if you have a serious, incurable disease, or severe health condition which either can’t be fixed, or to fix it would cost several hundred thousand dollars, an insurance company wouldn’t really be interested in covering you for a hundred bucks a month. One of my best friends is in such bad health that he has cost his medical insurance company probably a million dollars already, and he is still living with myriad health problems. Bud is probably 150 pounds overweight, has never cared for himself, smoked for decades, has very high blood pressure, and did tons of drugs, in addition to being diabetic and having had several heart attacks. He is still covered because unless he misses a payment, his insurance can’t be cancelled. Believe me, he’ll never miss a payment! His insurance company is on the hook with a certain loser, but when he took out the policy, the insurance company thought him to be a fair risk.  They were wrong, and are paying for it.

Denying pre-existing conditions as an excuse for not issuing a health policy, sounds just wonderful to the un-thinking boobs who occupy those offices on Capitol Hill. Do they ever really THINK?

Actuaries are in business to do risk assessment for insurance companies. They go over statistics, figures, probabilities, and risks. If the Demos and Repubs have their way, you can forget actuaries, because the D.C. Gang will force insurance companies out of business. The point is, once again, that both parties have destroyed America with stupidity, greed, and that ever-present ego governing us, when we need laws only to protect us from our enemies, and not ourselves. With every vote over the last 75 years, it seems as though each vote drove another nail in our collective coffins. The Tea Parties have plainly demonstrated that we have had enough of both parties, and we should throw them both out with a couple of exceptions. The Democrats are worse than the Republicans, I’ll admit, but there are far too many office holders who haven’t a grain of common sense, and I have had enough of both of them. I am no longer proud to be a registered Republican, but have not yet re-registered as an independent. Local Republicans are fine.

Regards,
Don Stott

September 11, 2009

Pre-Existing Conditions? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

In a recent editorial, Peter Schiff reminded me of what my late friend Harry Browne, the former Libertarian Party candidate for president, used to say: “The government is great at breaking your leg, handing you a crutch, and then saying, ‘You see, without me, you couldn’t walk.’” That maxim is clearly illustrated by the financial industry regulatory reforms proposed recently by the Obama administration. (“Would you like a broken arm, or would you prefer a broken leg?”)

Every economic problem we face can be directly traced back to the federal government and the interfering laws that it continually passes. Remember the Resolution Trust Corp. back in the 1980s? It became “necessary” to bail out the savings and loan industry because so many of the S&Ls gambled wildly with their depositors’ money. Sound familiar? How could the S&Ls of the 1980s and the too-big-to-fail banks of the ’00s make such horrible business decisions? Were/Are the management teams just stupid or are they also incompetent?

Consider this: We’ve had a record number of bank failures just this year. As of June 19, 2009, the FDIC has closed 40 banks at a net cost of over $11.5 billion. Are you worried? Why not? Oh, your account is insured. By whom? So when the management of the bank that controls your deposits makes stupid business decisions, you don’t care? The FDIC will bail out your account. Not only that, the “insured” amount was increased from a “mere” $100,000 per account to $250,000 this year (this extra coverage expires at the end of 2013 and reverts back to the $100,000 figure in 2014 as currently scheduled). Do you see a slight problem here?

Just for giggles, suppose there were no FDIC and your deposits at any bank or S&L were simply not insured. Would you then perhaps have a slightly different outlook as to the safety of your money? Would you perhaps behave somewhat differently when selecting a bank in which to deposit your funds? Why? Do you now see that the FDIC is a federal government-sponsored insurance scheme to protect you from greedy and stupid bankers? Or do you perhaps see that the FDIC actually facilitates excessive risk-taking on the part of the bankers, since they have nothing to loose? Do you suppose there might be a slight moral hazard hiding somewhere in this mix? If the bank did not have the FDIC insuring your deposit and that same bank had to compete in the open, free market for your deposit account, would you suppose that the bank management might behave in a slightly more conservative manner? Wouldn’t you behave in a slightly more conservative manner when selecting a bank?

Now consider the actions of the too-big-to-fail companies, be they banks, insurance companies, Freddie and Fannie, or even automobile manufacturing companies. What’s to restrain the management of those companies? If they mess up, the government will protect them. And as we’ve all observed, the very folks that made the stupid and reckless business decisions will still get their multimillion-dollar bonuses. Would you be willing to make a wild guess that maybe there is a slight moral hazard hiding somewhere in this scheme?

What about the business management that continues to make prudent decisions and continues to operate profitably? What is their incentive? How are they rewarded? The same federal government that bails out the too-big-to-fail companies totally ignores the hardworking, successful managements of the smaller businesses. Actually, it’s even worse than that. The companies and individuals that are successful now get penalized, because their tax dollars are used to bail out the unsuccessful. They get to subsidize the failures. Isn’t that a wonderful reward for doing a good job?

So I again ask what am I missing? Am I the only person (or only one of the very few) concerned? When I/we comment about these obvious inequities, does anyone pay attention? Does anyone question the wisdom of the federal government’s decisions? Based on the feedback I’ve received from the congressmen and -women who claim to “represent” me, they certainly don’t care. Aside from the folks who attended the various Tea Parties on April 15, the rest of the folks don’t seem to care. What am I missing?

One of the factors that caused me to write this white paper is the incredible discussion of so-called “green shoots” from our eminent Fed head “Helicopter” Ben Bernanke and the observation of the recovery light at the end of the tunnel that now seem to be so visible to the mainstream media. As Ronald Reagan used to say, the media know a great deal that just isn’t true.

There has been a tremendous recent effort to create “transparency” in and from government. Using that as a diversionary tactic, the public’s attention is now away from the facts. While perception is important and can mask facts for a period of time, it cannot avoid ultimate economic laws of nature. In this case, the public’s attention is being diverted from the undeniable facts that we are nowhere near the bottom of this economic downturn. Banks are still hiding toxic waste in their off-balance sheet accounts. These virtually worthless assets are not just going to disappear with no one noticing. Sooner or later, these near-worthless assets must be accounted for. The so-called bank stress tests were a joke. The intent was just to give the public the perception that the worst is over.

It isn’t. We have at least one more major leg-down in our economic future. And I believe that leg will take us to a Dow of 5,000 and perhaps as low as 3,000. Yes, the Dow may continue upward to 10,000 from its current level of 8,500, but then it will head down once again. All we have to do is look at Japan 1989-present and our own economy from 1929-1932. Oh, yes, it can happen again! Absolutely nothing has been done to prevent a repeat of this history. In fact, what has already been done by the federal government interference with our markets almost assuredly guarantees that it will happen once again.

What is it that will happen? A depression. Why? Because too many government interferences have occurred over the decades since the last depression. Perhaps it might be helpful to first define the difference between a recession and a depression — at least by my definitions of the terms.

Business cycles frequently become what are referred to as overheated economic cycles. (Note that every one of these so-called overheated situations is a direct result of government monetary interference with what otherwise would be free market behavior.) So a so-called cooling-off period of adjustment then takes place to correct the malinvestments that were made during these periods of irrational exuberance (thanks, Alan). These adjustments happen rather quickly, and then the recession is finished. You’ve heard it called the “V” recession because we tend to enter quickly but then we tend to also recover quickly. Today, the mainstream is talking of a “W” recovery, meaning a double in-and-out recession. But recessions usually take place rather quickly and are then finished. In a depression, structural changes to the economy actually occur and then it takes years to readjust. Can you say Japan? The new version of the resulting economy is a major change from the prior economy. Old bubbles are never reinflated, but new bubbles are ultimately formed. Note that our federal government is trying to reinflate the last bubble, meaning a return to a consumer-led economy. It simply won’t happen. We’ll waste a tremendous amount of taxpayer money and it will all be for naught.

Ultimately, a new bubble will be created. In the past decade, we’ve enjoyed the Greenspan dot-com bubble followed by the real estate bubble. Now we are starting to form what I see as a bond bubble. In the process, everything in the path of this “recovery” is being socialized: banks, insurance companies, mortgage lenders, even automobile companies. Yet to come will probably include national health care. If you think private health care is expensive, wait until you see how much “free” health care costs. But this is what I mean by “structural” changes. It’s new territory for most of the participants.

What do you think will be the end result: inflation or deflation? I think we’re in for both deflation and inflation — in that order. Short-term deflation, but longer-term inflation. So I’d invest to protect myself against inflation. That means precious metals, energy, and commodities such as foods and water. Period. For the foreseeable future. Speculations would be in the area of biotech, nanotech, and stem-cell-tech.

I also hope that my comments are just being realistic — not doom and gloom. I admit my emotional reactions may be affecting my opinions. I hope not. But I’d rather be overprepared than underprepared or unprepared.

Considering that the value of our dollar is being actively destroyed by our government, how will you protect yourself and your family from further destruction of the dollar? Are you aware that the dollar is now worth 4% of what it was worth when the Federal Reserve was created with the charter mandate to provide a stable dollar? What did I just say? Are you happy with 4 cents of purchasing power left for your hard-earned 100-cent dollar? Don’t take my word for it — it’s on the Bureau of Labor Statistics (BLS) Web site. My recommendation includes making investments in areas that are not dollar denominated. As such, you can expect to benefit from a currency hedge as well as from the performance of the investment itself. Today, all currencies are fiat, so this becomes a relatively moot consideration — see my next comment below.

Still another area to consider is foreign exchange. Consider Swiss francs and Chinese renminbi (yuan) for starters. Also consider the Brazilian real, due to the country’s incredible discovery of offshore oil. The real would be a speculation, while the franc and yuan are slam-dunks. Norway’s kroner is also a consideration, due to the country’s oil economy. I’d stay away from the Canadian loonie simply because Canada’s economy is so closely tied to the US’.

I believe we are in a depression, not just a recession. By that, I mean we’re in for major structural changes, not just a clearing of some malinvestments that got out of hand in recent years. The Dow could go as high as 10,000 before the next drop, but there will be another drop. As I said, I expect the Dow to go as low at 5,000 and possibly 3,000. I know how that sounds, but that is what the markets are telling me. While we will then recover, it will be a long, drawn-out recovery. Years, not months. This is not the muddle-through recession that so many expect. I’m guessing we’ll remain in this morass for at least five years, if we’re lucky. We could go the way of Japan, which hasn’t recovered yet after two decades! The more Washington interferes with the markets, the more severe the problems then become and the longer the recovery period. As Bill Bonner is fond of saying, we’ll see “a corrective force equal and opposite to the deception and delusion that preceded it.” And of course, we could just be headed into outright and total socialism, so all this attempted planning could just be for naught.

But back to my original question: What am I missing? What do you know that I seem to be overlooking? Why am I not in agreement with all the mainstream economists and government officials such as “Helicopter” Ben Bernanke and Timothy tax cheat-in-charge-of-the-IRS Geithner? Why is it OK for the U.S. government to “fire” all the profitable Chrysler dealerships because they donated to the Republicans while keeping the unprofitable Chrysler dealerships because they supported the Democrats? Why is it OK to medically insure the 47 million uninsured at the expense of the folks that actually pay the premiums? Why is it OK to bail out AIG because it insured Goldman Sachs? Why is it OK to “gift” a major ownership of General Motors to the UAW simply because the union supported the Obama election campaign? Why is it OK to stiff the Chrysler and GM bondholders who, by USA contract law, have first right to the assets of the corporations in case of a bankruptcy? Why is it OK to simply ignore and override centuries-old corporate law? Why is it OK to issue presidential edicts that circumvent corporate and civil law? Why? What am I missing? Why?

There is much, much more to be said on this topic. However, what I’ve already written is probably more than enough for the moment. By the way, were I a registered broker or financial adviser, the securities rules and regulations would prohibit me from telling you the above. So don’t be too hard on your current financial adviser. The government would suspend his/her license for telling you the truth.

Regards,
Tex Norton

July 10, 2009

FDIC Fosters Moral Hazard Among Banks was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Insurance is taking hits from all over the landscape, from the probable inevitability of Hillary Care Plus, bidding fair to destroy health care insurance, foreclosures which have lead to loss of private customers (do any of us suppose that banks pay the same rate for home insurance that we do?), business failures, and the effects of Ike, Katrina, and Rita, with at least two storms probable to wreak havoc this season.  One wonders how many are on the hook for the recent earthquake in Belize.

A decade ago the rare foreclosure on a house really wasn’t that important other than to the individual who couldn’t meet his mortgage payments; the bank repossessed, the house was sold again within a relatively short period, and life went on as usual.  2009 is an entirely different proposition, with hundreds of thousands of homes that have been foreclosed on, lending tight (at least according to official sources; see my interview with an investment/mortgage banker in tomorrow’s Morning Whiskey!), job losses averaging over 625,000/month, a jobless rate that is officially eight and a half per cent. but probably twice that by former ways of tallying unemployment, and the whole socio-economic-political situation.

One factor which is new to this hurricane season is that never before has there been large numbers of what amount to abandoned houses.  Those which have not had storm shutters put up, or plywood, or at least a bunch of tape put up in big X configurations, and the usual sort of battening down homeowners normally do, are going to be a serious menace to other buildings in the vicinity.

How will damage caused by unoccupied domiciles be charged, and to whom?  It can scarcely be called “an act of God,” since the loss will be due to loss of preparation at least as much to the storms, themselves.  Who is responsible, the bank or the insurance company of the homeowner whose house has been clobbered, or the homeowner himself?  Someone is going to have to pay for the damage, and someone is going to have to clean up the messes or the entire neighborhood will diminish in value.

Banks are already troubled with malicious damage from the erstwhile owners who trash their former houses deliberately when forced to move out.  There are truly disgusting tales of those angry enough to defecate on the carpeting, break windows, sabotage appliances, sling bleach around, and generally act like thugs who never had any business getting a mortgage in the first place.  In at least one instance a major bank razed a selection of MacMansions, complete with all the extras such as eighty dollar a square foot (uninstalled) granite countertops, rather than try to protect or sell them.  Thieves are raiding the houses for copper and other valuables.  There are squatters.

In Galveston there are still 17,000 houses that were destroyed or have unrepaired damage from Ike during the last season.

Again, who is to bear the losses?  Who is responsible for protecting the properties?  No matter what the answer, it does not bode well for the economy.

Wells, as it is known in the trade, is hiring underutilized realtors to secure houses before storms and to take care of insulating outdoor faucets before freezes.

J P Morgan Chase is requiring bank employees to do the maintenance!  That must be wildly popular with tellers and lower managers who have their own belongings to protect.  One of the things I learned and have not written on yet is that a major problem in the banking houses is how little is done to foster employee loyalty and esprit de corps.  One can imagine the reaction of professionals being turned into maintenance men, and somehow I doubt that those who earn their salaries with their minds will be recompensed for the tasks they will be assigned to fix up, clean up, and protect houses they have no personal stake in.

To add to the excitement/frustration, government (of course) is getting into the act.  Palm Beach, Florida, County Commissioner Burt Aaronson has threatened banks with action if they do not see to this maintenance before storms hit.

Randall Webster, Director of the Emergency Management Department for Horry County, in South Carolina (Myrtle Beach, if that helps), is reported to have done approximately the same, and doubtless New Orleans, Houston, and other areas susceptible to severe storm damage will follow suit if they have not done so already.  I have sources at Citibank and BOA and will see if I can discover what their “emergency” prevention plans are.  If any of you have “insider” information, please respond below.

Back in the good old days, say, a hundred and thirty-five years and more ago, Americans felt responsible for “killing their own snakes” and also expected others to be responsible for any damage they had caused.  In this era of the Nanny State and Obamanomics, the almost certain outcome is the declaration of a “disaster area” by Mr. Obama.  More billions will be created to dispense from the Treasury, with more employees to oversee the new program…without anyone asking the residents of Houston or New Orleans precisely what they think of the efforts of FEMA, et al., after Ike and Katrina.  I have reports that singe my monitor with their vitriolic resentment over FEMA just walking off and leaving the mess.  I will remind you again that large grocery chains in Houston had five-item restrictions on purchases following Ike, and that vast amounts of damage have yet to be repaired.

FEMA caused far more problems than it solved during Ike, Katrina, and Rita, and very little has been done to clean up the destruction from those storms–unless one wishes to count the widely-publicized gratitude of a professional welfare recipient in New Orleans complaining that she “only” got a 60″ flat-screen TV for her subsidized housing and that she wasn’t “fooled” by the wood floors that were installed.  She doesn’t like the modern craze for distressed wood, any more than she liked having a job, which she tried for six months out of the sixty-plus years she has been on welfare.

Some may say, “Oh, well, FEMA tried, and we can’t get rid of the Nanny State, which is growing by ever-faster leaps to gargantuan proportions.”  If not us, who?  Still, it is not a major portion of our task to point out that hundreds died in the Super Dome because FEMA would not allow relief trucks to enter the city until the Governor geeked and gave FEMA control over the Louisiana Guard, although that is precisely the sort of governmental abuse some of us expect to see in increasing amounts.

Our sole question at this moment is whether the insurance field is a good candidate for our investment dollars, and I am going to “make a sign with my thumb,” in the negative.   Even with the clout insurance companies have had in the past, I have an itch that says that no matter how many millions of Bernankes are thrown at them, they could come out behind, as will all of the banks and homeowners.  Money tends to stick to the fingers of those who handle it first, in decreasing proportion to the distance between the source and those benefiting.

My suggestion is that if you have any insurance stocks it would be a good time to swap them for positions in small, well-capitalized gold or silver mines.

From our experiences with Ike insurance is going to be little consolation to those who want to go about their lives after suffering heavy hits, although those who have nothing better to do than wait for adjusters and fill out claims will benefit.  Our choice was to repair the electrical damage and roofs Ike blew off to protect other valuable property and to take care of our livestock, or to wait around for adjusters, estimates, reimbursement, and repair men while undergoing a great deal of inconvenience and possible danger to the stock in the hope of getting more than we spent.  Such matters are a personal choice dependant upon individual risk assessment.  I trust those of you who live in the path of tropical storms have plywood cut to cover your windows and have laid in ample supplies.

Regards,
Linda Brady Traynham

June 1, 2009

P.S.: Your lesson for today from my vast store of historical trivia:  Hollywood is responsible for the “thumbs down” and “thumbs up” signs.  What I quoted above is what ancient sources say, and Cecil B. DeMille decided that thumbs down was a sensible interpretation.

Adding Hurricanes to Foreclosure was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.