Britannia Radio

Today's Daily Reckoning: Gold: The Barbarous Relic You Can Trust San Jose de los Perros, Nicaragua Thursday, February 26, 2009 --------------------- *** If history is any indicator, the final low for the stock market won't happen for a couple years - unless we have a Japan-like slump... *** Gold has resisted the general market downtrend and is moving in the opposite direction...question marks are unwanted and unloved during the boom years. But now... *** A correction for the gold price coming our way...houses going for $50,000...and more! --- Special Offer -- Imagine Getting Rich No matter what the markets do - it is possible to pull in some major profits right now...and it's easier than you think. In fact, you could turn $200 into $1.2 million - and you don't even have to do any of the work of deciding when to buy or sell. You can start making enormous gains right now - click here for the full story. --------------------- Oh...we are such optimists! So far, the Crash of '09 has paralleled the Crash of '29...and the Crash of 1873. All three began in early September. All three saw the big selling in late October. Both in the case of '29 and '09 a near-term bottom was hit in mid-November. "Moreover, the percentage declines," writes Dominic Frisby at MoneyMorning, "were virtually identical. An initial decline from the high to a late October low of about 40%, then a rebound of about 15%, followed by a final low in late November - down about another 22%. The parallels are uncanny. "The worrying thing...it is not unreasonable to expect the eventual low to come no earlier than 2010-11." After the initial lows were hit in the Crash of 1873, a rebound continued until May of the following year. After the Crash of '29, the rebound continued until late April of the following year. In the case of the 1873 sell-off, the final low was not hit until four years later, and in the case of the '29, the final low was hit in 1932, with stocks 90% below their peaks. This time the rebound following the November low only recovered 15% of the losses...then, stocks headed down again...and have just now slipped to a new low. If the pattern of the previous two major crashes continues; the final low won't come for a couple years. Unless we have a Japan-style slump...in which case, it will take much, much longer. Everything keeps falling in the land of the rising sun. Exports have fallen 45%. And stocks are now at a 26-year low. If we follow that pattern, the eventual low in the Dow may not come until 2019...when stocks will be back to 1994 levels. And just look at what has already happened to some of America's leading companies. Citigroup is down 90% from its high. You can buy a share for just $2. But be careful. A government takeover could wipe out the shareholders. The Bank of America has lost 90% of its value. GM is only worth about 3% of what it once was. JP Morgan cut its dividend by 87%...to just 5 cents a share. Overall, dividends are being cut by a record amount. Yesterday, the Dow fell again - down 80 points. We have been estimating that it would fall to between 3,000-5,000. But we are eternal optimists. Always looking on the bright side - every glass has a silver lining...and every cloud is half-full! But if the stock market repeats the experience of '29, it will fall below 2,000. Frisby reminds us that Bob Prechter has been right about deflation, but wrong about how gold would react to it. Prechter assumed that the price of gold would fall along with everything else. Instead, gold resisted the general downtrend and now seems to be moving in the opposite direction. How come? We explained it yesterday. Investors aren't buying gold as a protection against inflation; they're buying it to protect themselves against deflation. Markets are always trying to figure out what things are worth. At times like this, it becomes obvious that they're not worth nearly as much as people thought. One company doesn't have enough sales to pay its overhead. Another can't make its debt payments. One counterparty fails. Another was counting on that counterparty to pay a third. When investors buy a stock...they wonder: does this company have unseen liabilities...hidden losses? How will it survive the financial crisis? Will it flourish in the post-bubble economy? Even if the company is solid...what about the firms that owe it money? What about the firm's assets? What about its bank account? What about the bank itself? Question marks had been unwanted and unloved during the boom period. Everyone was so sure of everything. Every sentence was declaratory - stating a fact: 'Stocks always go up in the long run.' 'You can't go wrong in housing.' 'America has the world's most dynamic and flexible financial system, where risks are spread thanks to the use of derivative instruments.' Now, suddenly, question marks are in demand. People are pulling them out of closets and desk drawers; there's hardly a sentence that doesn't seem to need one. Every one of them is an interrogatory: 'When will this bear market end?' 'What do you mean you can't pay me?' 'Are you doing any hiring?' Investors buy gold because they want something that doesn't have a question mark behind it. Does the yellow metal depends on its lenders? No. Are its earnings at risk? No. Does it have any toxic assets? No. Gold is what it is...and nothing more. Useless most of the time; occasionally indispensable. *** Uh oh... gold is putting in a "double top" says Frisby: "I remain convinced of gold's long-term future, but it looks like we are in the early stages of an intermediate correction. "I suppose a 50% retracement of the gains since October is not an unreasonable target. That would take us back to the $850 area. (It would also give us a superbly bullish, inverted head-and-shoulders pattern - more on that another day). I said in my new year predictions in MoneyWeek magazine that a retest of $1,000 was likely in the first part of the year, but that gold would not break through $1,000 until next autumn or winter. We still seem to be on course for that. For now though, the late February to March seasonal correction for gold is playing out to the script..." *** Gold is correcting from its recent high. It rose over $1,000 last week. Since then, it's been giving ground. Yesterday, for example, it lost $3 more...taking it down to $966. Colleague Byron King ruminates on the subject: "It's as if the ancient Chinese or Babylonians or Etruscans all figured out how things work in the universe of money, savings and exchange. The trick was to use gold as the key unit of monetary measure. They figured it out back in ancient days. They all had their own Galileo who explained the monetary equivalent of how planets orbit the sun, moons orbit the planets...how the universe worked...except it was that their Galileos explained the meaning of gold. When you have gold, you possess wealth. And it keeps your society honest. "And in the 20th century, along came the central bankers of the world... modern monetary Copernicuses, of a sort. 'No,' they said. 'Gold is irrelevant. It's a barbarous relic.' It's the monetary equivalent of saying that the planets all orbit around the earth. So no wonder that nobody in modern monetary theory can explain anything, or solve the current mess. Just as you can't explain the positions of the planets with Copernican methods, modern monetarism is unable to explain why the economy has frozen and won't get moving again. No one can trust the money. The modern financiers created so much fake currency, that nobody trusts anybody anymore." We follow Byron with an update. Prices may be falling, but not because U.S. authorities are sleeping on the job. They're creating new money as fast as they can... In the last three months, M1 has been increasing at a 34% annual rate. You can read more from our intrepid correspondent in today's guest essay. In the meantime, check out Byron's latest report - even though gold might be in for a short-term correction, in the long-run, gold still has quite a ways to go. Read it here. *** There are 19 million empty houses in America. In Maricopa, Arizona, you can buy a house for $69,000, says a news report. "Heck, you can buy good houses for just $50,000 in the Miami area," reports a friend. "I'm beginning to think that property is the best investment I can make now. Stocks could fall another 50%. I've got municipal bonds, but who knows what towns are going broke. I don't trust the dollar. What else can I do? "I buy a decent house and I know what I've got. And right now, I can rent those $50,000 houses for $1,000 a month. So, figuring I miss a few months, I'll get a gross return of 20% per year. I pay my expenses for half of that. So, I'm getting a very good yield. And I don't think they will go down much further." *** Want an even better yield? As you know, we try to keep up with events in Argentina. The country is a mess, of course...but it's always a mess. A major drought is killing thousands of cattle (we're selling ours as fast as we can find buyers). And the government is losing whatever little credibility it ever had. All of these factors, combined with the worldwide financial meltdown, hit Argentine debt like an Australian brush fire. Debt fell 58%. Yields rose to 30% in October '08. Since then, investors have calmed down. And now, analysts from Fidelity say they think the Argentine 8.23% bonds of 2033 are a good by. They say the government has enough money to keep going for a couple years. So, investors can collect a 25% yield while they wait for the government to go broke. Until tomorrow, Bill Bonner The Daily Reckoning --- Special Offer --- Save Your Retirement - With Plan B Pensions "Plan B Pensions" give you many, many times more options for rebalancing your portfolio in a shifting market than you'll see in either the classic plans or more modern versions, like the 401(k) approach. Don't kiss your dreams of an early retirement goodbye - keep reading to learn about the best 'little-talked-about' retirement secret out there. Guest Essay: The Daily Reckoning PRESENTS: Yes, the world economy might be in a recession. People across the world are worried about their job and security for their family. But other people with big bucks are scooping up gold and silver. Those buyers are looking for investment safety. Byron King explores... NOTHING SHINES LIKE GOLD by Byron W. King Asset classes go up and down. Precious metals are, of course, another asset class. They move with the economic tides. In the past 30 years, gold has rocketed up and plummeted down. At several points in the past 30 years, things were so bad that gold sellers were like the proverbial Maytag repairman. They led lives of quiet desperation about which no one cared. Because like the late Rodney Dangerfield, gold got no respect. Heck, between 1999-2002, the British government sold a large amount of its national gold, nearly 395 tonnes (metric tons), for about $275 per ounce. The Bank of England used the proceeds to purchase (ahem) "high- yielding" assets, like bonds. I suppose it seemed like a good idea to somebody. But really. In hindsight, how dumb was that? The British used to fight wars for gold (remember the Boer War, anyone?) Now they're selling gold to buy bonds? They used to hang people for lesser crimes. Last March 2008, gold sold for over $1,000 per ounce. Then the price retreated 30% as oil rocketed from about $100 to $147 per barrel. But even though gold fell back in price, it was still selling, on average, for almost three times what the Brits took in less than a decade ago. You didn't do that with bonds. So the lesson is that we have to keep our eyes open about cycles and trends, even with something like gold. Just in the past six months, almost every nonprecious metal asset class has been headed down. The stock markets have been tanking. Prices for everything from aluminum to zircon are way down. Oil has been bottom- fishing. The world is sliding downhill into deep recession. It's a long litany of bad news out there. Except for precious metals, which have held their own. Lately, precious metals have been in a stealth rally. It was not front- page news, until last week when gold touched the $1,000 mark again. But the operating gold miners in the OI portfolio, hit lows in October 2008. And they've all been rising in the markets ever since. What's going on? It's a worldwide trend. Investors have been flocking to gold and silver. There's a money migration going on. And I mean BIG money is migrating. It's like those herds of zebras or wildebeests or gazelles in Africa. When they migrate, the earth shakes and the ground is just a moving kaleidoscope of hides and footprints. The dust clouds blow high into the sky. Yes, the world economy might be in a recession. People across the world are worried about their job and security for their family. But other people with big bucks are scooping up gold and silver. Those buyers are looking for investment safety. Moneyed investors don't trust the world's governments or paper currencies. So they are going with gold and silver. The mines and mints are having trouble keeping up with demand. Exchange-traded funds (ETFs) are buying huge volumes of gold and silver. (And they ought to be buying more. At the margins, at least, it appears that even the ETFs are holding "paper" gold rights, as opposed to the real McCoy metal.) Let's look at silver. In January 2006, the total silver held in ETFs was about 40 million ounces. By January of this year, 2009, the total silver in ETFs exceeds 280 million ounces. That's an increase by a factor of seven in just three years. The story with gold is just as dramatic. Who ever heard of a gold ETF until just a few years ago? But by the end of 2008, gold holdings of ETFs reached a record level of 1,090 tonnes, according to the World Gold Council (WGC). Thus, ETF holdings now exceed those of Switzerland and many other large and important nations. (Check the listing below.) In the fourth quarter of 2008, investors purchased ETF gold interests representing 96 tonnes of gold. (Far more than the total gold reserves of Australia.) This followed the purchase of an unprecedented 145 tonnes (more than the reserves of Saudi Arabia) in the previous quarter, according to the WGC. These are astonishing levels of demand, where there was almost none just a few years ago. Much of the gold in the vaults of the worlds' central banks has accumulated over many decades. Much of the U.S. government gold reserve, for example, dates from the national gold confiscation of 1933 under President Franklin Roosevelt. Roosevelt had a compliant Congress to do his bidding. Eventually, even the Supreme Court backed him up. So what's that old expression? "It CAN happen here." Many other countries of the world are currently buying gold, fresh from the mine. Today, China is the world's largest gold-producing nation, and its central bank is buying and building reserves. Russia, too, has a tradition of holding gold and today is acquiring gold from its own mine output and via purchases on international markets. Or look at tiny Qatar, a small nation in the middle of the Persian Gulf. Qatar had only 8 tonnes of gold about three years ago. Now it has 12 tonnes, an increase of 50% in a very short time. What do the Chinese, the Russians or the Qataris know? They know that they want gold. They can buy it. They will hold it. And they are hoarding it. I've mentioned on many occasions that I like holding precious metals. I like holding metals as an investment and I just like the feel of the stuff. At the "elementary" level (yep, that's a pun), you can hold physical metals. If you've never felt the coolness and heft of a shiny gold $50 Eagle or a Canadian Maple Leaf in your hand - let alone a fine old specimen of a $20 coin from the days of old in the U.S. - you've missed something. Really, the only thing better than holding an Eagle or Maple Leaf is holding an entire roll of 20 of them. When I was in South Africa last year, I visited a refining operation and actually picked up a gold brick. It was almost right out of the melting pot. The brick was still warm, and the darn thing weighed about 75 pounds. That's what I call "useful weight gain." Too bad I couldn't bring it home with me. But the armed guards at the refinery might have objected. I've never made a formal OI recommendation for buying a particular kind of gold or silver coin, or ingots from this mint or that or any such thing. Those kinds of gold purchases are too hard to track in a newsletter like this. So I've recommended gold and silver miners and their shares. But over the past couple of years, I hope you've had the chance to acquire some real metal for your portfolio. Agora Financial has been banging the golden drum for at least 10 years. If you have never bought any gold, it's still not too late. I think that the recent visit to $1,000 is just the beginning of another great wave of gold buying. I won't be surprised to see $3,000 gold. Coins and ingots are the kinds of things you keep in your bank safe deposit box or in a well-hidden home safe. Some people keep them in their "second" home safe. Why a second safe? Well, the first safe is the one with a few hundred bucks of cash and some good-looking costume jewelry in it. You would open the first safe if a robber broke into your house and held a gun to your head. (Sorry, I'm not kidding. We live in a tough world.) And for as much as I urge you to own some gold or ingots, you should never talk about it. OK, you might tell a few family members or maybe a trusted friend or two. But the fact that you have a stash of real gold is too valuable to broadcast or advertise. As I said above, "It CAN happen here." It already has happened here. It might happen again, if things get too rough out there.