April 11, 2009 – Safe Investment

Investors are beginning to wonder if anyone out there knows how to fix the US economy. The words coming out of the experts’ mouths often include phrases like, “It will take more….” And “We thought it would work…” It seems the economic stimulus package is not very stimulating. More and more banks and businesses keep approaching the US Congress in order to ask for more. It reminds you of the movie where the orphan boy dares to ask for more porridge even though only one bowl is allowed in orphanage.

Back in November the big three US auto makers showed up in front of a Congressional panel asking for a loan or a bailout or a mix including some of each. Congressmen and women huffed and puffed and blew the CEOs right back to their expensively decorated offices and told them to rethink their request.

So on 2/December/2008, they returned and asked again for a loan or a bailout or a mix of some of each. Sigh! What’s a Congress to do?

The fact is the US economy is receding fast and there is not much good news to tell. The equity markets are bouncing around like a rubber ball thrown against the wall. The only thing that is remaining fairly stable is the price of gold. Though the price was over $900 last week, it had dropped to $882.80 per troy ounce in US dollars as of April 11, 2009. This is a 2.98% decline but when you compare it to the 5% to 8% declines in the equity markets, gold looks safer by the moment.

The fact is that no one knows for sure what is going to stop the continued deepening of the recession. The financial markets are constantly poised right now to respond to even tidbits of news. Some analysts say that the bleak news is already built into stock prices, but if that is true, why are equity markets seeing triple digit decreases at this point?

So we are back to the question of who is minding the store. One of the reasons investors are turning to safe haven investments such as gold is because they simply have no confidence in the economy right now nor in the people like Secretary Treasurer and Federal Reserve Chairman to deal with the financial problems.

For example, why is the US government trying to stimulate consumer spending and employment with a stimulus package when the problem is in the banking system? Maybe the banks should be stimulated…or punished…depending on your viewpoint. Oh wait….the banks were supposedly stimulated with some of the original $700 billion bailout money from the US Treasury. Because of the determination of banks and loan institutions to create false value through paper transactions called mortgages, investors are now barely able to track equity or currency rate changes on a day to day business.

Then Austan Goolsbee, an economic adviser to the President, made the profound statement, “I don’t know what the number is going to be, but it’s going to be a big number. It has to be. The point is to, kind of, get people back on track and startle the thing into submission.” The “number” he is talking about the amount of stimulus funding necessary to get the US economy moving in the right direction. The “thing” is the economy itself. The “kind of” is somewhat of a mystery.

Reading those words, it is no surprise that investors are not really feeling a lot of confidence in the ability of the government to handle this national or global crisis.

With investors approaching the financial markets with no confidence, it is not surprising that equity and currency markets are jumping all over the place. The US dollar weakens and then strengthens and then weakens against other global currencies such as the British pound and the euro. Economies that seemed to be at least under control, like Japan, have announced they are officially experiencing a recession.

It is no wonder that commodities like gold look so safe. Gold is a precious metal that will always have value. A stock can suddenly lose value that makes it almost worthless. If you don’t believe that then consider how General Motors stock value fell below $5 a share. This is one of the biggest companies in the United States for Pete’s sake. It is sad when a company like this has stock that can be said to “gain” to $4.85 per share. When General Motors CEO Rick Wagoner submitted the company plan for spending the government’s money, he said the company would be out of cash by the end of this year. He also claimed the GM plan was for the good of the US economy and not just for GM.

You may or may not believe that assertion, but what you can believe in is the importance of keeping a portion of your investment portfolio in a safe asset such as gold. That way you can sit back and watch and listen as the saying goes. You can watch and see if anyone really has figured out how to manage this financial crisis, and you can listen to the theorists try to explain why their particular stimulus plan is the best.

And that takes us right back to the original question. Who is minding the store?

If you are one of the investors who is uncertain about how to answer this question, then you probably cannot get too excited about investing much money in the equity market. And if you don’t buy stocks, what are you going to buy that has the most potential to appreciate?

The obvious answer, of course, is gold. Gold prices are considered to still be too low right now, which means the latest drop in price is a great opportunity to invest in one of the safest commodities possible. Some investors are choosing to put their money into the ultimate safe investment of US Treasury securities, but the yields are so low to be almost embarrassing. The Treasury security yields are sitting near 1940 lows.

The too-low gold prices are not going to stay that way. That’s a promise. The price of gold is understated right now, but eventually investors are going to realize that and then begin buying this precious metal in large quantities. When the price begins its ascent, it is expected to experience a significant gain.

You may not know who is watching the Federal store, but you can certainly watch your own store by keeping an inventory of gold investments in any form.

Danny Burns

April 11, 2009

 

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