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The Daily Reckoning Weekend Edition Saturday, March 6, 2010 Baltimore, Maryland --------------------------------------------------------------- One question every gold investor ought to ask before buying, Weighing up a few ownership options for the debtless yellow metal, Plus, all the reckonings from the week just gone for your leisurely afternoon consumption... Joel Bowman, reporting from Baltimore, Maryland... You could call it a kind of “Reckoning Reunion.” Your wayfaring editor spent the past week or so here in ol’ Charm City, where both The Daily Reckoning and Agora Financial are headquartered. It’s a rare treat indeed when members of our global reckoning team find themselves in the same zip code, what with Bill Bonner popping over to Europe every so often, Dan Denning situated down in Australia, Eric Fry doing the hard yards out in Laguna Beach and Addison Wiggin gallivanting around the world, from Dubai to China to Nicaragua and everywhere in between. As you might expect, we took advantage of the situation to discuss the goings on of the world over a couple (of dozen) bottles of wine and a few tasty steaks. We’ll have more on the ever-changing state of the world in your next Weekend Edition but, today, we’ve got something a little different for you. In last weekend’s issue we touched on the theme of world war...both those fought in the past, and those we suspect may be on the horizon. The seeds of discontent, from which military conflict historically emerges, are alive and well just about every nook and cranny around the world. Just take a look at the growing economic and, therefore, social unrest in Europe...the continually deteriorating state of the union...charged political exchanges between the US, China and Japan (see arms sales to Taiwan for the latest verbal sortie), the list of possible battlefields goes on... To be sure, our beat here is not necessarily a geopolitical one, though with the exponential growth of state power around the world, the line between economics and politics is becoming increasingly blurred. In any case, we received a few emails during the week from readers who wanted to know how best to secure their assets in the event that history does, indeed, repeat itself. Typically, governments finance their despicable actions abroad through a combination of means. They might tax the pants off their citizenry, for example, or peddle war bonds. We would recommend avoiding both, to the extent you can manage to do so. The astute investor might prefer, instead, to store a portion of his or her wealth in the only currency who don’t owe nobody nuthin’: Gold. In today’s guest essay, Jeff Clark from Casey Research provides some thoughts on one of the age-old questions gold investors ponder. Please enjoy... What’s More Important: Price Per Ounce or Ounces Owned? By Jeff Clark, editor of Casey’s Gold & Resource Report In a recent conversation with a fellow gold analyst, he was emphatic that the price one pays for physical gold should be ignored. “What’s far more important,” he insisted, “is how many ounces I own in relation to the total value of my assets.” 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. Regards, Jeff Clark for The Daily Reckoning ALSO THIS WEEK in The Daily Reckoning... China: No Shortcut to Greatness By Vitaliy N. Katsenelson Denver, Colorado The Chinese economy must be getting out of control, because the Chinese government is doing the unthinkable: It is desperately trying to put the brakes on the economy. When you pump a stimulus package that represents 14% of GDP through a fire hose into an economy, which was already on shaky bubble foundation, in a very short time you’ll have some serious unintended consequences – you’ll get super bubbles. Don’t Bet on a Recovery By Peter Schiff Westport, Connecticut It is astounding how many economists, government officials, and Wall Street strategists construe the current economic conditions as evidence of a bona fide recovery. It is a testament to the power of the rose- colored glasses handed out by our nation’s leading universities that such a feeling could be widely held despite the clear and present danger that compounds daily. The myopia leads us to enact policies that actually exacerbate our problems. The “remedies” are postponing, perhaps indefinitely, a true recovery. Dodge Taxes Legally... Become Treasury Secretary By Ian Mathias Baltimore, Maryland If you don’t want to pay capital gains taxes, work for the President...or have lots and lots of kids. In the biggest stock sale of his life, former Treasury Secretary Hank Paulson didn’t pay one dollar of capital gains tax. Nearly $500 million worth of Goldman Sachs shares – a profit of hundreds of millions of dollars – and not a red cent went to the IRS. Paulson’s Treasury predecessors Robert Rubin and Paul O’Neil enjoyed a similar tax dodge themselves...as did many other familiar Washingtonians over the last 20 years, like Donald Rumsfeld and Donald Evans. Investing in Aviation Growth By Chris Mayer Gaithersburg, Maryland The economic center of gravity will not always reside in the United States. In fact, it’s already in the process of shifting from the US to Asia and the Middle East. Forward-looking investors cannot afford to ignore this trend. One of my favorite ways to invest in the rapidly growing emerging markets is through the back door, so to speak. Invest in companies, wherever they are, that have what these economies need or want, but don’t have. Airliner production is a classic example. Zombieland By Bill Bonner Baltimore, Maryland The world’s largest shopping mall is almost entirely empty,” says a headline now making its way around the internet. The mall is not one of America’s consumer emporia. It is not in the US at all. Instead, it is in the Middle Kingdom...and twice as large as the “Mall of the Americas.” The world did not end in 2009. Two things are widely reported to have saved it – stimulus in the West and China in the East.--- The Weekly Endnote: Well, that about wraps it up for another week. We’re off to dinner here in Baltimore tonight with a few of our fellow reckoners. And yes, we’ll have a drink for you too. Until next time... Cheers, Joel Bowman Managing Editor, The Daily Reckoning P.S. If you haven’t done so already, be sure to get yourself on the “beta test list” for Addison’s new research service, Apogee Advisory. Here’s a short, one-page information sheet with all the details you need.     The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.