March 23, 2009 – Gold Investments

The economic picture is grim no matter how you look at it. You can stand in front of the picture, stand off to the side, or stand on your head, and you get the same view. It is a view of a global recession that has not hit bottom yet.

If you are an optimist, your happy thoughts are probably being thoroughly tested. The news in the last week alone has been very bad with global wars, deepening recessions, and weakening currencies. In the US, 2.6 million jobs were lost in 2008 and more are yet to claim unemployment. The number of new claims was lower than expected in December 2008, but realists are quick to point out that many people have already given up even trying to find a job or have fallen off the unemployment rolls and are no longer counted.

Speaking of unemployment, there are numerous US states that are telling the Federal government their state unemployment coffers are already broke. This means they have no way to pay unemployment claims unless they take money from other accounts such as education or health care or get Federal bailout money. Great choice they have to make, isn’t it?

The banks have had a rough year around the globe too. The collapse of the subprime mortgage industry followed by extensive government bailouts has created a whole new bubble analysts are just now beginning to talk about. This bubble is caused by bailout assets on bank balance sheets that now must either work to stimulate the economy or become a nonworking loan. From the other side, the governments are now faced with owning private assets as a result of the emergency bailout purchases and really have not thought much about what this means for the future.

The equity markets did not fare any better. Millions of people are now trying to figure out if they can retire due to the loss of as much as a third of their retirement accounts when stock markets fell. Around the world, the story is pretty much the same. There has been economic dislocation of a proportion not seen in history. Equity and currency markets are still unpredictable as a result of this dislocation.

Enough (Loss) is Enough!

So where does this leave the average investor? It seems the typical investor right now has two goals that must work in tandem. First, he or she wants to prevent further losses in portfolio value. Second, the average investor wants to recover, over time, some of the value already lost. These are two goals that are easy to put into words, but they are sure hard to meet in times of such economic turmoil.

A few weeks ago there was speculation the triple digit stock market swings were coming to an end. So what happens? the Dow Jones Industrial Average (DJIA) market dropped! What’s an investor to do?

To answer that question, ask yourself another one. Why is it that conversations always turn to precious metals as safe haven investments when the rest of the financial markets are going sour? The answer is that people get nervous about the stability of currencies in the foreign exchange market.

Whoa! What does that have to do with the US dollar which is considered the most stable currency in the world? The US dollar is the world’s benchmark currency after all and is the one against which other global currencies are paired when it’s time to measure stability and value. But even the US dollar, for all of its stability, is proving to be susceptible to market forces which are causing unpredictable strengthening and weakening based on the day’s news.

Don’t misinterpret this statement though. The US dollar remains the benchmark currency because the US has the most economic power to control and recover from even a severe recession. But one of the consquences of the global recession has been investors fleeing to safe haven investments. Remember the two goals listed earlier? The first one is to prevent further losses in portfolio value which means putting money into mostly safe assets.

Who Wants to Make Zero Percent?

The equity markets sure aren’t safe right now. In 2008, equity markets around the world lost $32,000 billion. US Treasury securities are safe, but you might as well hide your money in a mattress for all you will earn. The US Treasury yields are at zero on the three-month securities. You could trade on the foreign exchange, but that is risky right now because it requires a paired exchange. So you will you choose the euro which doesn’t know whether to stay up or down or the UK pound which recently was predicted to reach parity with the euro in 2009 and then suddenly strengthened but only after weakening for weeks?

The point is that predictable financial models are not working well right now. The economic crisis was caused by a never-before-seen mortgage calamity and so the “fixes” are not certain to fix anything. Even the most seasoned analysts and government experts, such as the ex Federal Reserve Chairman Alan Greenspan, have found themselves apologizing for not seeing this crisis forming and then not knowing for sure how to fix it. There have been massive stimulus packages issued by global governments and no knows for sure to this day if they are going to work, and if they do work, what kind of long-term impact they will have on the future economies and financial markets.

So what is a stable investment? A stable investment today is the same stable investment for last year, ten years ago, 30 years ago and earlier. It is precious metals and most specifically gold. With the uncertainty in the equity, mortgage and government markets there is no real stability in any investment except the one that has proven itself to be reliable, liquid, and profitable.

The Language of Profit

Gold is also the perfect hedge against a declining currency. The US dollar buys less now than it did just 6 months ago thanks to ongoing devaluation resulting from the recession. Everytime bad news is published about the economy, the dollar value drops. Gold values are not directly tied to the value of the US dollar or the value of any other currency. That is the primary reason why it makes such an ideal hedge against such an unstable market.

If you think about it, it doesn’t make sense to buy more currencies before buying gold. The value of the US dollar in the currency market is related to its pairing with another currency. Yet other currencies are facing the same problems as the US dollar. But when currency weakens, the price of gold, silver and platinum rises.

In an unstable market like this one, where large portfolio values have been lost and the market remains unstable, investing in gold simply makes sense. As people look for a safe haven asset they can count on to hold its value and appreciate over time, they only need to look to gold. As banks fail, equity markets drop, recessions deepen, and interest rates fall, it is gold that comes out of the fray still shining. While investors were losing up to 30% of their equity values in the stock markets, gold investors saw a 5.8% appreciation in 2008.

When the economists are talking “doom and gloom”, gold is speaking the language of profit.

Stewart Lawson

March 23, 2009

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