Archive for August, 2011
As I’m writing this article the price of gold surpassed the $1,800 per ounce benchmark. Mainstream media claims that gold is in a bubble due to burst but how can that be? The fundamentals tell us otherwise. The answer lies in the strength or weakness of fiat currency. Do we have a sound currency to rely on, one based on a healthy economy and honest politicians? If you can’t answer “yes” to these questions then you may recognize that it’s still not too late to get on the train to protect your hard earned savings and maintain your purchasing power.
Why is gold today a reliable asset to own? I, for one, pay attention to what the central banks worldwide are doing. If you happen to wonder, these entities are quietly and without fanfare buying gold. China is not selling its mined gold anymore. Obviously, they keep it. Then, we may all have seen the gold commercials running at night – screaming about buying gold – but in reality most people don’t own it or if they do, they own the paper gold. While it’s always good to be cautious just observe what most people do. They’re still invested in Wall Street assets because their financial adviser had been educated in the Wall Street spirit. For example, it’s a common misconception among Americans that the only IRA investments allowed in a retirement account are stocks, CDs, and mutual funds. Most folks still lack the knowledge they could invest their IRA’s in broader investments such as precious metals or real estate. Why the confusion? Because the retirement industry has been dominated by large transaction-driven custodians who have focused on a narrow universe of investment alternatives.
Central banks and governments have set a long-term trend of currency debasement. How likely is it that this trend will be reversed anytime soon? Not that likely. Historically, gold has been an excellent way of preserving purchasing power over long periods of time. And did you know that today it takes almost the same amount of gold to buy a barrel of crude oil as it did 50 years ago? Can we say the same about fiat currency? Let’s see what the facts are. Today’s crude oil price is at $83 per barrel while in the summer of 1960 its value in dollars was at $3 per gallon. Sure, there have been events that contributed to the rise in price (OPEC, wars, increased demand, etc) but it’s not outrageous to say that inflation had also a major impact during the past fifty years (which was the direct result of fiat currency debasement.)
If you’re one of the few ready and willing to take action to preserve your standard of living you may be encouraged by the chart below. A $10,000 investment on January 1st 2000 in 3-Month US Treasury bills would have slightly decreased your purchasing power on 1 January 2011. A $10,000 conversion in gold or silver, however would have more than tripled your purchasing power.
During hard economic times liquidity is of primary concern. If you’re considering gold as part of your financial security plan keep in mind that age is an important factor. The older you are the more gold you should own for liquidity purposes. Start by deciding how much to allocate for gold through a dollar cost averaging program. If, for example, you’d like to buy $10,000 worth of gold divide that sum by the number of months you wish and have the ability to contribute. Say you’re able to contribute $1,000 per month determine the day of each month and stick with it. In this case in ten month you would have accomplished your goal.
Owning physical gold satisfies the need for liquidity. The most common form is the bullion gold such as the minted coins (American Gold Eagle, Canadian Maple Leaf, Australian Kangaroo, South African Krugerrand) and the bars (ingots). And don’t assume all gold is the same, as there is a difference between bullion and numismatics. The numismatics are un-circulated coins (collectibles) the value of which is determined by condition and scarcity. The price is higher and it may not represent a good buy especially during a crises.
There are advantages and disadvantages when owning physical gold and you may have to weigh them to determine what’s best for you. There are two ways to own physical gold. One is to store it yourself. Holding your gold in your own home gives you peace of mind that it’s in your possession. But there are certain risks that should be considered. The risk of theft can never be overemphasized. If you are to insure it, find out how high is the premium going to be or can you even get it? Next you may consider having it stored in a safe deposit box. If that is what you have in mind do remember that it also comes with a risk, the risk of confiscation. Back in 1933 the government decided it would be best that Americans don’t own any gold so on April 5 president Franklin Roosevelt signed Executive Order 6102 forbidding the hoarding of Gold Coins, Gold Bullion, and Gold Certificates within the United States. The order criminalized the possession of monetary gold by any individual or corporation.
Another way to own physical gold is to buy it and have the bullion dealer store it for you. The disadvantage is that you don’t have the gold in hand. When determining which program to select be sure you go with the allocated gold option. You may hear that unallocated gold is physical gold but that cannot be proven so why take a chance? I am no fan of the unallocated program since you don’t own a particular coin or bar separately stored on your behalf. Your unallocated gold shows up in the company’s balance sheet as an asset, and your claim to the metal as the corresponding liability. If the bullion dealer were to go bust, any of its creditors would have the first claim to those assets, leaving you with no access to the metal (liabilities) promised to you. Therefore a certificate stating you have a claim to gold is no assurance that your ounces of gold can be redeemed if you so desire. Unlike allocated gold there is no storage fee but the risk is much higher.
When it comes to allocated gold you actually own the physical metal. It is stored for you in a secure vault with insurance, thus a storage fee does apply. Unlike with unallocated gold, should the company face bankruptcy or other financial difficulties your metal ownership would not be in jeopardy because its creditors would have no claim to it. When choosing the provider be sure to verify its vault is insured and regularly audited by a reputable independent auditor. You may also consider a vault – outside the U.S. – in a country that has a stable political system and no history of prior confiscation.
Another advantage with allocated gold is that you can sell the gold you own at any time – at whatever the exchange rate will be between gold and your desired currency at the time – and have the money wired to your bank account. Thus you may sell a portion or all of your gold in the future to invest in undervalued better investments. Through one company (that I am familiar with) you will even have the ability to make online payments in goldgrams (gg) and mils (instead of dollars and cents) to merchants that accept gold as a form of payment and have holdings with the company. With the advent of Internet and the world’s desire (or need) to return to sound money this form of gold ownership may indeed be the Twenty First Century gold.
If placing all your precious metals eggs in one basket is not your thing then by all means, go ahead and add some silver to it. You can buy the “junk” silver in a bag (dimes, quarters, half dollars, silver dollars minted before 1968). They are 90% silver, could be used as legal tender and safer from confiscation than the bullion without nominal currency value. And just as with gold you can buy allocated silver and have the bullion dealer store it for you. Be sure to choose a bullion manager that allows you to exchange metals directly without having to sell them first.
In a future article I will discuss other ways to acquire vesting in gold and/or other precious metals. Remember that conversion of fiat currency into gold is not an investment like buying mining stocks, ETF’s or precious metals mutual funds. It’s an accumulation of hard assets that are liquid and will most likely help you maintain your purchasing power during the times when fiat currency had lost its reign.
The current U.S. real estate bear market comes with different perceptions. On one side are those – the majority – claiming the market is depressed and it’s “too risky” to invest in real estate today. On the other side are the few taking a bullish approach because of the great bargains, low prices and excellent monthly returns. Competition is minimal because most people wouldn’t endeavor to make real estate part of their investment. A good number of owner-occupant buyers, the largest segment of real estate activity has been eliminated. These folks won’t turn their credit, income, and savings over night. Banks will continue to “proceed with caution” thus keeping many Americans renting – instead of owning their own homes – while the concept of easy credit standards will soon be history.
To get clarity on the Boom and Bust aspects of real estate it’s essential to revisit last decade’s events from an economic standpoint. Back during the early 2000’s the real estate boom started as a result of the credit expansion policy of the Federal Reserve. Add to that the government’s intervention in the lending sector and the deregulation of Wall Street’s paper derivatives and you have the recipe for an “artificial” booming economy. I refer to it as artificial because it had no ingredient of a free market growth.
A bust was inevitable yet it was only foreseen by a few while everyone else was gambling on continued rising values. The first sign expressed itself in the form of sub-prime loans default, the catalyst for the banking chaos that eventually erupted. This event was followed by a chain of defaults in the prime sector causing the stocks of the many financial institutions react in a free fall. When Wall Street bailout was approved by Congress and used in response, the conventional wisdom was that it saved the entire economy from collapsing. That wisdom can definitely be debated. Whether it’s right or wrong to transfer the losses of Wall Street institutions onto the shoulders of the taxpayer is a topic I will leave for another article. For now I’ll just focus on whether real estate may be a potential investment to park your money.
Real estate activity along with market prices reached their peak in 2006 only to collapse in 2007. 2009 suffered a serious decline in activity while prices continued to decline. Relative to 2006 peak prices homes have dropped a stunning 45% but they have not reached pre-2000 levels. If you’re wondering what the future holds for real estate it’s possible that a healthy activity – resulting from an increased number of qualified buyers – may return within six to ten years but no inflationary boom for a very long time. I know it doesn’t sound very encouraging but keep in mind that buying low and selling high is only the speculative side of investing. If, for example, you’re currently invested in mutual funds or stocks enjoying dividend returns your real estate portfolio can generate – in many cases – better monthly cash-flow returns. Ten, twelve, or fifteen percent annual returns are quite feasible but chances are your financial adviser will not want you divested from Wall Street’s paper assets.
While Americans’ retirement portfolios will remain heavily invested in the volatile U.S. stock market, Australians, Canadians, British, and Asians are finding the American real estate to be appealing for their own retirement. Rather than looking at it as an inconvenient investment they are taking advantage of qualified professionals who handle everything for them including the eviction of undesirable tenants, making repairs, or whatever else is associated with the maintenance of the investment. These international buyers have learned that they can’t get similar rates of returns by investing in their own countries’ real estate. Whether leased-out single family homes or apartment buildings all the way to investing in bigger commercial projects via private real estate syndicate funds, they mean business and are unstoppable.
So, how does one assess the investment potential for real estate? First, ask yourself if it generates substantial revenues not only during good times but during hard times, as well. Today’s economic environment is not one that makes people cheer and if you choose carefully you’ll find that a ten to fifteen percent on your money is feasible. The next question to ask yourself is if it’s a real or a paper asset. Can it vanish and will it be there ten, twenty, thirty yeas down the road? Differentiate between owning the physical asset and the paper secured by a physical asset.
Does real estate lose its earnings potential with time? It could since there is no guarantee in life. But with a proper maintenance, the right team, and the fact that it’s an asset satisfying a human need (housing) the chances are diminished. Does it keep up with inflation? Its price may not go up soon but its value most likely will, and with time prices will follow values.
Finally, one of the well known rhetoric is that real estate is not liquid. That is very true. At the same time, unless you’re a short term Wall Street trader, how often have you liquidated your securities portfolio for a generous profit? My point is that if you have to sell your stocks, bonds, or mutual funds it usually is because you’re in a desperate situation and that translates, most likely, in a loss. Take this thought and apply it to a real estate investment that you hold free and clear. Its liquidation could be much faster when and if you’d be willing to take a loss. Reality is that there is no such thing as an absolute perfect investment. There are pro’s and con’s attached to each one of them. Your homework is to weigh them to determine the best fit for your investment needs. In his book “A Gift to my Children” Jim Rogers – who is one of today’s most successful investors in the world –
advises us to “Never ignore the bear market!” The one with an eye for profitable opportunities already knows it. The bear market comes with depressed values but the depression that prevails in most people’s minds represents the hidden treasure of opportunities for only a few.