Why Silver Makes a More Attractive Investment Than Gold

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E-Gold

E-gold is a digital currency, used extensively on the Internet for making payments in exchange for goods and services.

It is one of the first digital e-currency providers, having started in 1996. E-gold accounts are backed by actual physical gold, dollar for dollar. You can take delivery of the physical gold if you wish, although there is an additional handling charge.

The E-gold e-currency is tied directly to the value of gold, so it's not possible to use outside influences to affect the value of it... unless one has the ability to affect the spot price of gold. Being tied to the price of gold, e-gold accounts fluctuate up and down with the value of national currencies as they move with the spot price of gold.

While gold is the most popular precious metal digital currency in use, E-gold also offers the platinum, palladium and silver precious metals as digital currency.

Funding an e-currency account is the job of a third party called a Market Maker [http://www.dx-currency-trades.com/market-maker.html]. A market maker is a merchant who exchanges national currencies for e-currencies, and places them in your online currency account. Similarly, they will buy your ecurrency and pay you in your national currency when you wish to exchange your egold for currency.

You can fund an e-gold with paypal, or buy e-gold with a credit card if you wish, though the market maker will charge up to 15% to do so. This is largely because of the cost to him of fraudulent charge backs.

E-currencies are now accepted fairly extensively by online merchants in exchange their products and services, mainly catering to people, who for whatever reason, don't have or can't get, a credit card.

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Copyright © 2005 :Russell Savige and DX-Currency-Trades.com [http://www.dx-currency-trades.com] This article may only be reproduced in full including this resourse box.

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Confused About Gold and the Dollar? Understand Their Relationship Before You Invest

It's not known for sure where the concept that an ounce of gold could always buy a nice businessman's suit came from, but the analogy is used today by many who want to paint a positive picture for gold. The premise of the story is used to reveal the fact that the dollar has lost 95%-98% of its purchasing power since the creation of the Federal Reserve in 1913.

The typical story goes something like this:

"In the early 1900's an ounce of gold was worth $20.00 and could buy a nice men's suit. During that time an ounce of gold was worth $20. Today an ounce of gold is worth around $960.00 and can still buy a very nice men's suit whereas $20 might get you a necktie."

But how much of the story is fact, and how much is fiction? Are we really comparing apples to apples when we use this analogy of the price of a businessman's suit and the price of an ounce of gold both then and now?

There's the assumption that the $20 cash just sat there earning nothing. Is this what a person did back in the beginning of the 20th century? Who in their right mind would do this? Would you do it today? Today's investor is always trying to have their money earn more money. In the 20's, they did the same.

The parable assumes that people did in fact take the $20 and put it under their mattress.

My grandmother was from that era and one of those who feared losing money. When she passed away in the 90's, we found some old birthday cards that she had received with the $10's and $20's still stuck in the card. But she probably didn't want to lose money in the stock market, so kept it from her husband who liked to dabble. Her husband, my grandfather, like many in the 20th century, did like to play the stock market or put their money in bonds or a bank where it could earn interest.

They called it the roaring 20's for a reason and the stock market was doing well and so were the banks.

But the stock market crashed in 1929 and the thousands of banks failed soon thereafter. In 1933, gold was even confiscated.

So stocks, bonds, dollars and gold all had their problems, but for the sake of argument, let's ignore the various problems of that era and deal with what's happened since that time with gold, bonds and stocks.

While it is true that the purchasing power of gold in and of itself has kept pace with inflation over the years, the dollar in and of itself has not. But the dollar does offer the investor something that gold doesn't, and that is interest.

Gold does not offer the investor any interest while the dollar that is put in the bank offers the depositor a return on their deposit. Bonds and some stocks offer interest (dividends) as well.

The bank offered a depositor interest on their savings account and this is what normal people did back in the 1920's. This accumulated interest is what the price of an ounce of gold should be compared to today.

So to do apples to apples historical comparison, one has to measure the value of one investment that they held at that point in time versus the other based on what a rational, reasonable investor would do.

Naturally, you would agree, a rational investor would not put the $20 under their mattress back in the 1920's just as they wouldn't today (emphasis on the word rational here). On a side note, I'll also leave out of this analysis the fact that the businessman's suit bought in the 20's, today would be rather old and musty and more than likely didn't retain its purchasing power and I'll also leave out the fact that those folks who put their dollars under the mattress back then would get a decent amount for them today from collectors if they were kept in good condition.

The Historic Analysis of Gold vs. the Dollar

Since we already know the price of gold today, we need to go back and calculate the interest paid on dollars and bonds from that period of time to today. I've also included a comparison to stocks.

I picked the year 1929 to do my calculation. Gold was priced about $20 an ounce1 then and had been holding steady at that price for years.

The dollar had not yet depreciated by 60% with the revaluing of gold to $35 an ounce in 1934, so in a sense, I'm allowing for the fact that the price of gold was artificially moved higher and the dollar was knocked down a peg or two. This depreciation of the dollar didn't help most as they were not allowed to own gold at the time. It only helped the government and the Federal Reserve, but that's a story for another time.

So to find the interest earned from 1929 to 2008, I turned to this website; http://www.measuringworth.org/interestrates/ and used the "short term"3 rates as my guide.4 Keep in mind I'm not using CD rates5 which have actually averaged 1.1% higher than short term rates over the last 10 years, but I did analyze long term bond rates6

Compounding the data, the $20 would have grown to $393.86 in the short-term asset account and $1,904.23 in the long-term asset (at a term of one year's account) by the year 2008.7 The DOW Jones Average would have returned you $562 (before dividends).8

These figures you can then compare to the current price of gold at $981.751

You can see from this analysis that the gold price historically fits somewhere between a short term savings account and a long term "one year bond" account. Gold has performed 42% better than the DOW during this time-frame.

So if someone put all their money each year into short-term asset accounts, they wouldn't be able to buy the same businessman's suit as they could if they had put it in gold, but they'd still be able to buy a decent suit at Men's Warehouse but not what $981 could buy you at Brooks Brothers.

Either way, it's a bit of a false conclusion comparing what a $20 ounce of gold can buy in 1929 versus what $20 cash can buy today. There has been a benefit of compounding interest one has received on that $20 put in the bank over the years. There is also the fact that the dollar still had gold backing for 42 years of this analysis until Nixon took the U.S. off the gold standard.

Now the Good News Concerning Gold...

Let's take a look at the dollar's performance after Nixon took the U.S. off the gold standard in August of 1971. The price of gold in August of 1971 averaged 42.73 an ounce.

What have the interest bearing savings accounts and long-term one year asset bonds earned versus gold during this 1971-2008 time-frame?

Beginning with $42.73 in 1971, the short-term savings account would have returned you $350.87 while the long-term one year asset would have returned you $832.93. The Dow Jones Industrial Average return would have been $425.34, again without dividends, but keep in mind that stocks since 1971 weren't paying anywhere near the dividends like they had been).

You will notice that the difference between the short-term savings account compounded from 1929 to 2008 isn't much different than the 1971 to 2008 figure, about $43.00. Why is this? ....because for 42 years, up until 1971, gold backed the dollar. At that time, gold and the dollar were perceived as equivalents. So since 1971 interest rates have had to rise to keep pace with the loss of purchasing power of the dollar. The problem is they haven't.

Not even the glorious stock market has kept pace with gold yet this is where most people invest their money. Long term bonds have held their own, but are now weakening compared to the price of gold.

Bottom line: Gold is breaking free!

The Great Decoupling of Gold from the Dollar

What you are seeing folks is the decoupling of gold from the dollar, short and long term bonds as well as stocks. Since 1971, gold has outperformed cash, stocks and bonds, yet you never see your financial adviser, sans a few, recommend gold as an investment. Why is that?

The answer is simply they can't make any money selling it...so they don't, plus the fact they don't understand it. Most people don't understand gold as an investment or how it fits into one's portfolio.

Gold needs to be a part of every person's portfolio. Gold is insurance as the dollar falls. Gold is the wealth you need to pay for things. Gold used to back the dollar. Now it has decoupled from it.

1 kitco.com (Click on Historical Charts for gold)

2 See actual year by year interest rates by inputting the years 1929 and 2007. They had only calculated through the year 2007 by the time of this writing.

3 Short-term (similar to a savings account at a bank): assumes that the principal investment is made in equal installments throughout the initial year at the average short-term rate for that year. The principal plus the interest accumulated is then reinvested at the average short-term rate for the second year. This continues until the final year, when the withdrawal is assumed to be made over equal installments throughout that year.

4 I calculated the year 2008 by using the short term rate of 3% and for the five months ending May 31st, 2009 I utilized a rate of 1.5%.

5 CD Rates Last 10 years; jumbocdinvestments.com

6 Long-term (assumes a government or corporate bond): assumes that the principal investment is made in equal installments throughout the initial year at the average long-term rate for that year. The principal plus the interest accumulated is reinvested at that same rate for the second year, and continues at that rate for the number of years of the term you have selected. At this point, the calculator will use the long-term rate of the next year and repeat the process. This continues until the final year, when the withdrawal is again assumed to be made over equal installments.

7 I used 1.83% for 2008 one year Government bond and .56% for the average of 5 months ended 5/31/09. Source: http://www.federalreserve.gov/releases/h15/data.htm

8 Keep in mind that taxes are not taken into account in this analysis as tax rates have varied over time for both income and capital gains. Tax deferred annuities could have been utilized in the analysis with gold where the accumulated value withdrawn at the end of 2008 would result in a combined federal and state tax rate close to 50% (depending on your state) while the sale of gold would result in a 28% tax on the capital gain. If one was taxed all along in the short-term and long-term account, the effective rate would be about 60% on average for the top tax bracket and possibly 15% or no tax for the lower tax brackets. There are too many variables involved, so I have just compared each asset with no tax ramifications.

After over 20 years as an investment adviser, Doug Eberhardt left the business to write & expose what's really going on in America's economy & help investors keep and grow their wealth. You can follow his blog at http://www.fedupbook.com/blog

If you would like to know more about investing in gold, read my free White Paper, "How Gold Investments Can Secure Your Retirement Years" available at http://www.fedupbook.com/whitepaper

Gold - A "Bridge Over Troubled Water"

Back in 1969, when Simon & Garfunkel recorded "Bridge over Troubled Water" the duo had a gut feeling that this song was going to make a very big splash. And they were right, as their recording went on to become a number-one hit (staying atop the charts for six weeks) - while being covered by literally dozens of other singers.

Like Simon & Garfunkel, investors entering the gold market around 2001 have also scored a smash hit. Since then - quite simply - gold has performed in spectacular fashion. Even in 2008, when fears of a global financial meltdown drove virtually every asset class into the ground, gold alone held its relative value, actually rising that year by almost 5%.

And the best news? It's an odd's on favorite that we are still early in what could prove to be an epic precious metals' bull run. Says Doug Casey, who wrote one of the top selling investment books of all time: "The easy money in precious metals and the mining stocks has been made, but the big money lies ahead." With so many other investments looking questionable and the world economic situation still unclear, this "metal of kings" can provide the savvy investor with a bridge over troubled water. For peace of mind, look at gold (and silver) as providing insurance first; profit second. Why is the Case for Gold so Compelling?

Central Banks have Become Net Buyers

Between 1999 and 2002, England's central bank sold two-thirds of its gold reserves at almost the exact bottom of what turned out to be the end of a 20 year bear market. The official who squandered this portion of his country's monetary legacy was later to become Great Britain's Prime Minister - and lend his name to what is known in financial circles as "The Brown Bottom." A few years later, Canada (also unwisely) followed suit, getting rid of almost its entire reserve of gold.

But it now appears that central bank thinking has changed. For the first time in over 22 years, they have actually become net buyers - led in the fall of 2009 by India's purchase of over 200 tons of gold. Most of these officials are once again concluding that the yellow metal's strong financial performance makes it a useful counter-weight to the swings of the U.S. dollar, which has been steadily losing value for a number of years. While gold is no longer the foundation of the international financial system, it is still considered by central banks to be a crucial reserve asset. Rumors are abuzz that China, as well as a number of wealthy Middle Eastern nations have been quietly scooping up what little gold the International Monetary Fund (IMF) has been offering for sale.

Supply is Down

According to the World Gold Council, gold's popularity continues to surge, driven by increasing industrial and jewelry manufacturing use, in addition to very strong investor demand - from individuals and institutions.

Also, producers have accelerated the unwinding of their hedge books. Years ago, mining giant Barrick Gold pre-sold much of its production forward under contract, promising to deliver at hundreds of dollars an ounce lower than where the metal trades today. In a better-late-than-never development, it recently decided to buy back all of its hedges - in the process, suffering a loss of several billion dollars...and adding to global gold demand.

The data strongly implies that available stockpiles will not keep pace with demand in coming years. Gold's global production peaked in 2002. Several of the world's largest mining companies expect further declines in production next year, and are in a scramble to increase reserves through the acquisition of new mining properties. South Africa, once the world's largest gold producer (now supplanted by China), mined its lowest amount of gold since 1922 - and its overall output is down 72 percent from its 1970 peak. Whereas China and Russia have become a major force in gold production, they also seem inclined to hold onto most of it - adding these precious ounces to their own reserves.

Importantly, no new major mine supply is expected in the near term. In general, it takes more than a decade to acquire, finance, build and staff a mine and commence production. Thus, the supply/demand imbalance is expected to continue - and is likely to increase for years to come.

Most of the new gold discoveries in recent years have been of the low grade/bulk tonnage variety, often in remote locations - sometimes near environmentally-sensitive areas. The normal procedure with these deposits is to dig up and crush thousands of tons of ore-bearing rock, then apply chemicals in a "heap-leach" process to get out the gold. The yield from this procedure is often only a few grams per ton! Compounding the supply problem is an ongoing global shortage of trained geologists, miners, diamond drills and mining equipment.

While Demand is Up...

Demand, on the other hand, continues to increase in the face of the newfound prosperity and increased disposable income being freed up by the Asian economic boom, particularly in China and India - three billion people adding fuel to a long-term shift in consumption demand.

Throughout the developing world, gold is the most liquid, efficient and widely accepted form of exchange and the best store of value - especially in rural areas that lack access to banking services. Jewelry is coveted in the developing world, where it functions as both adornment and savings. It is often the only asset a Muslim or Hindu woman is culturally permitted to own, and therefore may be her only form of protection against financial adversity. Additionally, the dowry concept is alive and well in India today, where gold is commonly transferred from the family of the bride to the groom.

Recently...

Legendary hedge fund manager, John Paulson has chosen to place a significant percentage of his total investment capital into gold and its relatives - ETFs and stocks. He actually owns more gold than that of several countries combined!
Northwestern Mutual Life Insurance Co., the 3rd largest life insurer, has now bought gold for the first time in its 152-year history.
The U.S. Mint is dealing with "pipeline" shortages of gold and silver blanks, causing delays or outright cancellation in the production of certain numismatic and bullion coins.
The Gold Buffalo - America's first 24 karat gold bullion coin - had its 2009 issue release delayed until last October, and in less than two months, discontinued sales until 2010...after exceeding its annual sales totals for each of the past two years.
The U. S. dollar is no longer perceived as the automatic safe haven for concerned investors around the globe. If you had a choice, would you rather own "digital dollars" - or gold?
It is in the government's interest to create inflation through excessive expansion of the money supply, in order to pay off its obligations of accumulated debt, such as employee pensions, Medicare and Social Security, in worth-less dollars.

Gold production is limited. Money creation by Printing Press is...Infinite.

Zimbabwe: Not that many years ago, the Zimbabwe dollar was trading at US $1.47. Last year, it had sunk to 100 TRILLION to the Dollar. A beautiful country which used to export grain to its neighbors now faces starvation. Imagine how a Zimbabwean family would feel, if they could lay claim to even one ounce of gold!

North Korea: In December 2009, North Koreans awoke to find that they would be required to exchange 100 units of their currency, the won, for just 1 unit of the government's new paper money. Overnight, the savings of these long-suffering people (except for the bureaucrats) had been wiped out. How different things might have been for them, if they possessed just a few ounces of "the poor man's gold" - silver!

The United States? Can we have "guns and butter" as the U.S. tried to do in the 1960's to finance the Vietnam War and the President's Great Society programs? In just the past year, the Federal Reserve has doubled the country's monetary base. In addition, how will we pay for a massive new healthcare program and two wars?

Within the next 12 months, it is estimated that the U.S. Treasury will have to finance between $2 and $3 trillion dollars in short-term debt, an amount equal to 30% of our GDP. Where will the money come from? Richard Russell, the doyen of financial newsletter writers (who began publishing in 1958) answers this rhetorical question. He says, "(And) my answer is that the money will have to come from the Fed by way of the printing press."

Is it any wonder that gold has outperformed nearly every other asset class over the past few years, including the S & P 500, protecting investors now in the same way that it has during other turbulent times? According to the Wall Street Journal:

"Even with the rebound this year, the U.S. stock market posted its worst performance for any calendar decade in nearly 200 years of American stock-market history. Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress. Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of 0.5% a year thanks to the twin bear markets this decade."

If gold had a voice, it would most likely sing, "I'm on your side, when times get rough/And friends just can't be found."

For 5,000 years, Gold and Silver have been looked upon as "Honest Money"

Honest, because gold and silver's rarity forces governments to limit the amount of paper in circulation. When citizens can exchange their printing press bills for "honest money" the government is forced to act responsibly regarding how much currency it can print...and how much it can spend!

Throughout history and across cultures, people have understood that it is wise to keep a portion of their wealth in gold. Over time, gold holds its value and serves as insurance. It is a truism that in Roman times, an ounce of gold would buy a fine tunic (garment) - and today that same golden ounce will still purchase a high quality suit.

The world is awash in fiat paper. Today, not a single currency is backed by gold - the first time in history when this has been the case. The total value of all paper money and bonds in the world is estimated to be on the order of $100 trillion, while the total value of all the gold ever mined is $5.9 trillion. Essentially then, for every dollar in paper money, there are only 5.9 cents worth of real money to back it up - a disconcerting thought. Perhaps the time has come to bring gold into your own portfolio, so that it can help serve as a "bridge over troubled water" for you.

Gold is Rare

Just how rare is gold? How small is the supply? According to the World Gold Council, as of 2006 the total amount of all gold ever mined comes out to under 6 billion ounces. Given that the total world population now exceeds 6.6 billion people, there is less than one ounce of gold available per person to invest in right now - a figure that shrinks even further in light of the fact that central banks already hold a considerable amount of the above ground supply.

It has been estimated that in USD terms, there are roughly $200 trillion in investable assets globally, but only $5.9 trillion of that wealth is in gold.

Why is this relevant? For one thing, financial portfolio managers suggest that at least 5 percent of a person's total net worth should be invested in precious metals as an insurance policy to protect against hard economic times and periods of geopolitical instability. Yet very few people have followed this advice - which is somewhat fortunate, as there is not enough gold to go around should the general public decide to act on this advice en masse!

Gold's Special Qualities

Gold has functioned as an adornment and store of value for more than 6,000 years. The earliest gold jewelry dates from the Sumerian civilization that flourished around 4,000 BC. Gold's intrinsic beauty, warmth, glitter, sensuality and spiritual richness have evoked powerful human emotions throughout history.

The Bible contains a detailed and lengthy description of the role that gold in its various forms played during King Solomon's reign (1 Kings Ch. 10). To hold an item made of gold is to possess something that has provided security and value for thousands of years.

Gold plays a vital part as a symbol of love and devotion. It has significance for occasions like weddings, anniversaries and birthdays, as well as a host of other holidays, ceremonies and customs. Consider, too, the ways in which gold has enriched our language - the best years of our lives are known as "the golden years" An advantageous situation is referred to as a "golden opportunity." A civilization's time of peace, prosperity and creativity is referred to as a "golden era". Treating others the way you wish to be treated is known as "The Golden Rule."

Gold is...

Free of religious or political affiliation
Neutral on race, gender and language preference
Easily transported
Universally accepted
With low/negative correlation to other major asset classes, helps diversify ones portfolio.
Impervious to corrosion, tarnish or decay
Free from debt (no one but the owner has claim to it)
Rare, scarce and difficult to produce -world supply increases less than 2% annually.
Cannot be created in unlimited quantities on a printing press like the dollar, yen or peso
All but impossible to counterfeit
Easily bought and sold anywhere in the world
Incapable of being bankrupted - no one but its owner has a claim to it.

Concluding Thoughts

Gold is quite simply, on a powerful run. In 2009 it traded at more than $1,200 an ounce - over 4 times higher than its low point in 2000. For 9 years in a row, the price of gold has increased. Can you name another asset class which has shown this kind of performance during the first decade of the new century? As a result, gold is gradually appearing on people's radar screen - and finding its way into Main Street portfolios.

At the top of gold's last bull market in 1980, the nominal high price was $850. To reach that same level on an inflation-adjusted basis today - using the CPI as calculated by the government - the price would rise to somewhere between $2,000 and $3,000. And what if the U.S. decided to return to a gold standard to back its paper dollars? Gold would have to be valued at more than $6,000 per ounce.

Major investment banks and brokerage firms that were long silent on gold are now talking it up. Merrill Lynch has reiterated its forecast that gold could top $1,500 during the next year or so.

Analysts know that the combination of slowing U.S. economic growth, the inflationary effects of rising oil and commodity prices and a change in supply-and-demand dynamics make gold a safe haven, which is likely to place further upward pressure on its price given the tight supply. Just like during the last metals bull market, we will see one of the giants of business publishing a book that advises investment in gold and precious metals, an event which may well serve as the tipping point toward a new investment Gold Rush.

Some observers believe that the gold price will be driven much higher, not so much due to greed, but more by fear, as the public - from some of the wealthiest investors, to those individuals and families who may only be able to afford fractional gold ounces - seek a way to protect their assets from the ravages of inflation, volatile stock and real estate prices, not to mention currency destruction like that experienced by the unfortunate citizens of Zimbabwe and North Korea.

Throughout history, the fate of every paper currency issued has been an eventual decline to its intrinsic value - zero. Could this happen to the United States? While no one can say for sure, betting against history could be a risky move. As the famous line from the Dirty Harry movie goes, "Do you feel lucky today?" Well, do you...?

Is the Last Train Leaving the Station?

Those who do not own gold need to ask themselves if it has become decision time. For those who decide to act - Do it to protect and diversify your portfolio. Do it for family. Do it because commodity bull markets typically last 15 years or more, and this one looks like it has a long way to go.

The last train may be leaving the station, so don't be left behind. The U.S. dollar may well continue to fall relative to foreign currencies. This will fan the flames of inflation as foreign goods become more expensive. Asian investors continue to dump the U.S. dollar, and the central banks of Singapore, South Korea, Taiwan and Vietnam have signaled their intention to cut purchases of U.S. bonds. China is becoming less friendly to the dollar and clearly intends to diversify. August 2007 marked the first time since 1998 that the rest of the world has sold more U.S. treasuries than it has purchased, and that trend continues. Our government has actually had to buy some of its own debt to make up this difference! U.S. Federal Reserve rate cuts have trimmed our yield advantage over other countries, making for a very gold-positive situation.

Become a part of this historic bull-run in gold, and rest easier at night knowing that you have preserved your purchasing power and that you hold something of real and increasing value.

As Simon & Garfunkel sang, "Your time has come to shine/All your dreams are on their way...."

Gold - God's Currency - Part 2

The market has been acting a bit strangely the past week or so. There's been a lot of speculation taking place, both to the upside and to the downside. Stocks are running way past their normal moves and falling much farther than would be expected. Are the Main Street stock speculators getting a bit itchy? Perhaps, but the trend of the market is still up, including the topic of this article:  Gold. 

If you have some time on your hands and you'd like to look back into the history of gold, you'd see some correlations with its long-term rise and fall. One that might stand out is the inverse correlation between its price and our government printing money. Since the printing of money has a direct correlation with the price of gold, let's start there.

 

The US dollar as we know it has been around for about 32 years. Yes, we were using the dollar long before that, but 32 years ago is when our government decided to take the dollar off the gold standard. That standard guaranteed that all dollars in circulation were backed by America's bullion reserves at Fort Knox, Tennessee. But that's no longer the case, and you can thank President Nixon and the Vietnam War for the detachment.

 

You see, we (America) needed money to pay for the Vietnam War, and we couldn't get enough if our dollar remained on the gold standard. So Nixon unpegged the dollar from gold and turned on the printing presses (which led to inflation, but that's a story for another time).

 

Today the US dollar is "fiat" money. Fiat money is basically any currency printed by a government as legal tender that is not redeemable for gold or other commodities and lacks economic value except that which the printing government gives it. So basically, fiat money is worth what others are willing to pay for it.  The problem with fiat money is that governments can print as much as they want, when they want, without asking anyone. This is not a good scenario for investors, but it can be mitigated if investors have gold as part of their portfolio.

 

Flashback to 1970: The US was in the middle of a very unpopular war on the other side of the world. It was in a small foreign land few people had heard of. The enemy was invisible. And our country didn't really have the money to pay for it. Fast forward 32 years: We are fighting a war on the other side of the world, in a foreign land few people had heard of, against people we can't see-and it's really expensive.

 

What happens when our government needs money to pay for what it can't afford? Does it have to dig up the money? No. Does it have to stop spending? No. All our government has to do is turn on a printing press, which is certainly less costly than spending $270 to mine an ounce of gold. All they have to do is move a decimal point on a computer in some building; they don't even have to print more money, though they indeed do that as well.

 

Printing money is such a big part of how our government works that at the end of 2002 (October), Ben S. Bernanke, a member of the Board of Governors of the Federal Reserve System, made a statement in response to a question about deflation. The question was about what the Fed was going to do to counter deflation, if and when it starts (I believe it has started already, but that too is another article). Bernanke's comment was, "We have an invention called the printing press, and if need be, we'll turn it on."  In other words, the money sitting in your money market account is going to be worth a whole lot less after the US gets through printing a whole lot more dollars. Bernanke's comment set off a pretty big chain of events. In a very short time, gold shot up $65 an ounce and the US dollar index lost 7%.

 

Printing money whenever the Fed decides it needs to brings up a question: "How much has the value of the dollar fallen over time?" I'm glad you asked. A dollar in 1900 was worth a dollar. That same dollar today is worth 7 cents (Department of Labor Statistics).  And do you know why the dollar is worth 14 times less today? Because the US government hasn't taken any lessons from the diamond industry; instead, it just kept increasing the money supply, so much so, that in 1900 there was $34 of cash in circulation per capita, compared with $2,075 of cash in circulation per capita today, an increase of 61 times. That should make you fall off your chair. The government cranked out 60 times more dollars over 100 years; and yet, the dollar has only fallen 14 times during that century. Not bad. Still, that should make you sit up and ask, "How can I preserve my hard-earned money?" Now we're talking.

 

How about putting part of your money in gold? In 1900, it cost $19 an ounce. Today (April 2003), an ounce costs $360. The price from 1900 has increased by a factor of 18. As I said before, during the same period, the value of the dollar dropped by a factor of 14. Are you following me? The value of gold increased by a factor of 18, while the value of the dollar decreased by a factor of 14.

 

Which one of these holds its true value? Gold. Obviously. In 1900, an ounce bought a man a nice suit, and in 2003 an ounce can still buy a man a nice suit. Gold holds its value, especially when we go to war and print money to pay for it. It holds its value because the US Fed (or any other government) can't "print" more of it. Plus, gold is not someone else's liability. You are not buying someone else's government debt, which means that governments can't mismanage it. It cannot be inflated away. God did a good job with gold. If there were no other reason to buy, that would be enough, but there's more.

 

Gold coins leave no paper trail. Gold can easily travel over borders, it can be stored easily, and it has the same value in downtown San Francisco as it does in downtown Istanbul. It is the world's only inflation-proof currency, and everyone accepts it. The only other inflation-proof commodity I know of is diamonds.

 

Let's take a look at the two easiest ways to buy gold:

 

1 - Gold mining stocks

2 - Gold mutual funds

 

Gold mining stocks are a great place to start. I suggest you look at the bluest of the blue chips of gold mining stocks. If you own zero gold, this is where to begin. It should be a company that doesn't hedge its mining production ("hedge" means it doesn't sell future mined gold for a set price, it sells it for whatever the market says it's worth at the time of production). Any company that does not hedge its production will experience a rising stock price when gold itself rises. If you don't want to buy an individual stock, you can go to an independent mutual fund ranking company and investigate gold sector mutual funds.

 

Lessons:

 

1 - Gold holds its value when compared to the US dollar. Compare its value over the last 100 years to the US dollar, and you can see why it is essential to your portfolio.

2 - Wars and the printing of money have a tendency to increase the value of gold over the short term. Right now we are in both.

3 - Buy gold now so that when the world wakes up to it you can feel like the person who bought technology stocks in 1995 and sold them in 2000.

4 - The US dollar is flooding into the market, which will drive up the price of gold.

 

To being prudent and smart.

 

(This article was originally written in April 2003)

RC PECK, CFP®
Registered Investment Advisor, Founder of Fearless Wealth?
Investment Education for Successful Professionals.
If your current stock plan is "I trust my stock broker," then your money may be at risk. Investing has changed, and where you put your money needs to change with it. Fearless Wealth is the remedy to the education deficit that people have around growing money. With over 20 years of investment success, RC Peck is a Certified Financial Planner, Registered Investment Advisor, and an NLP Practitioner, which means he knows what you should do to grow your money and how to get you to do it. To see how he does this, go here: http://www.FearlessWealth.com RC has recently released a special report, called "29 Minutes to Investment Success," which outlines "One Tool" that causes Mutual Fund managers to tremble and Stock Brokers to weep with fear. Discover how the "One Tool" can revolutionize your investments today. Click here to get the "One Tool": http://www.TheStockMarketStrategy.com

Gold Is Still Cheap and It's Still Early to Buy the Precious Metal

Today we show that gold is still cheap and that we're still early in the gold bull market that began in 2001. The price of gold is now roughly the price of the all time previous gold high way back in 1980 when the price reached $875 per ounce. Of course, adjusted for inflation, $875 dollars then = $2100 dollars now.

So you may be pondering the big question. Is it too late to buy gold at these prices? The simple answer is no, and let us explain why.

In nominal dollars the price of gold has recently hit a new record high. But measuring the price of gold in nominal dollars is incorrect as this price does not take into account the last 30 years of inflation and the loss of purchasing power of the US dollar. We all know that the purchasing power of the US dollar back in 1980 was a lot more powerful than it is today.

The current gold price is cheap if we adjust the current price for inflation. Estimates are that the current gold price should be between $2100 and $2300 per ounce of gold. And this price is only bringing gold back to the previous high in 1980 of $875 per ounce. Throwing in the destruction of capital, a weakening US dollar, massive debt and a mass injection of printed money, we have a recipe for a huge increase in the gold price. Back in the '70s, gold rose from $35 to $875. This equates to a 25-fold increase in the price of gold.

This latest gold bull market started when gold was priced at $270 or thereabouts way back in 2001. So a 25- fold increase in the 2001 price of gold could take the yellow metal all the way up to $6750 USD per ounce.

A useful barometer to determine the end of a cycle is the Dow/Gold ratio. Way back in 1980, gold peaked at $870 and the Dow reached a similar level. This creates a ratio of 1. Now for this ratio to become 1 again, gold and the Dow have to meet up somewhere. To pick that point will be lucky; it could be Dow 5000, Gold 5000; it could be Dow 10,000, gold 10,000, but when you see it, that will be the time to exit a large portion of your gold holdings and transfer them possibly back into beaten down equities or strong asset classes.

In all probability, equities will be a bad name as an investment, and very few people will be talking about them, yet alone invested in them. This is what we like, as our approach is to take the contrarian point of view, and invest when the herd is nowhere to be found. Here we refer back to a famous quote. "Be brave when everyone is afraid, and be afraid when everyone is brave."

Another way to look at where gold is valued today is by looking at the M1 money supply of US currency and deposits. We know that the US government holds approximately 290 million ounces of gold, and the M1 money supply is around $1.6 trillion. This simple ratio therefore suggests gold should be valued around the $5,500 level.

But time is running out to get into the gold market - the time to buy is not when everyone's talking about gold and there are articles in the mainstream press and news. The "insurance premium" is cheapest when it's less popular.

Gold is the ultimate asset, and there is no counter party risk when you purchase gold. That is, you are not relying on the fact that the other party might default as you are with bonds, options, futures, etc. Gold has no debt.

The US dollar is getting constantly devalued and slowly the world is waking up to the fact that the US dollar is a worthless piece of fiat currency that is surely to go much lower in price. There is no other way for the US government to clear its debt but lower the value of the US dollar by inflating the currency. Gold acts in an inverse relationship to the US dollar, so if the US dollar is devalued, the price of gold rises.

Gold is important because it is universally recognized as something of value. As such, it does not lose value. Yes, its price in currency might fluctuate, but this is due to the currency losing or gaining value, not the gold itself. Whereas a dollar might buy one thing today, but require two to buy the same thing tomorrow, the purchasing power of an ounce of gold will remain the same. Today an ounce still buys roughly the same number of loaves of bread as it did in Roman times. You can't say the same about a $100 note even 20 years ago let alone two thousand!

In terms of markets, generally speaking, a bull market in a particular market sector has 3 up phases, separated by 2 down phases. The first up phase occurs when the so-called "smart money" moves into the sector.

At this time the sector is generally disliked, and only astute observers see its potential. Remember when Gordon Brown, then British Chancellor of the Exchequer sold off a large part of Britain's gold reserves? That point served as a marker for the start of the new bull market in gold.

The second up phase begins when the big institutions (central banks, pension funds, hedge funds, high net worth individuals) start buying. While its impossible to say for certain, it seems that we

are early in this phase. The very smart hedge fund manager John Paulson, renowned for making a fortune through the housing market collapse, has recently bought large stakes in Anglo-Gold, a large South African mining company, and Kinross Gold, operating out of Canada.

The third up-phase is the so-called "mania" phase, when Larry Lawnmower and Suzie Sixpack are converting all their assets into gold.

This is the time to sell gold and buy other things, like farmland or other valuable assets going begging.

Sign up for your free e-course on why you should be buying gold now.

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We are three Kiwis (that's a local bird and colloquial term for New Zealanders) who, in total between us, have spent over 24 years of research and investment in the gold sector. This includes investing in bullion or physical gold (coins and bars), shares in gold mining companies, gold futures, and also in gold's sister precious metal, silver.

We met at an investment dinner and immediately discovered we all shared a similar outlook for where the world was heading. Over the course of the evening we also discovered we shared a desire to inform others about this and how they, too, could protect themselves. So, within two hours we shook on it and decided to do something about it! This site is the result of that hand shake!

We write from personal experience and knowledge gleaned from a certain amount of trial and error. These years of experience mean we have done the hard yards and determined where to find the most trusted and reliable information in the gold sector. We don't receive any commissions or payments from any third parties we may recommend and can therefore be relied upon to be impartial and unbiased.