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June 05, 2009

Traditional Holders of Dollars Begin To Diversify
by Daniel Aaronson and Lee Markowitz

This week, Bloomberg News reported that Northwestern Mutual Insurance had bought gold for the first time in the Company's history.

Bloomberg.com: Northwestern Mutual Makes First Gold Buy in 152 Years

Bloomberg - June 1, 2009

Northwestern, the third-largest U.S. life insurer by 2008 sales, has bought gold for the first time in 152 years to hedge against further asset declines.

"Gold just seems to make sense; it's a store of value," Chief Executive Officer Edward Zore said in an interview following his comments at a conference hosted by Standard & Poor's in Brooklyn. "In the Depression, gold did very, very well."

Northwestern Mutual has accumulated about $400 million in gold, and Zore said the price could double or even rise fivefold if the economy continues to weaken.

This story is remarkable for many reasons.

First, an insurance company buys cash-generating assets to match future cash payments, whereas gold does not produce cash flows. Northwestern has been in business during wars, recessions, boom times, high inflation and deflation, yet never before has the Company bought gold. The 152-year period also includes the devaluation of the Dollar in 1933 and the elimination of the gold standard entirely in 1971. However, now that the Federal Reserve is printing money, leveraging its balance sheet and monetizing debt to manipulate interest rates, Northwestern has made the decision to buy gold.

Second, Northwestern's decision demonstrates its concern about the US Dollar. If Northwestern was only worried about inflation it could buy Treasury Inflation-Protected Securities (TIPS). TIPS will protect against inflation (if inflation is calculated correctly), but leaves an investor open to currency risk. Gold provides Northwestern protection against the falling Dollar as well as inflation.

Lastly, insurance companies (as represented by Northwestern Mutual's $114 billion of bonds and mortgage loan portfolio) are traditional buyers and providers of credit to the US financial system. By the Company using $400 million to buy gold, Northwestern Mutual is not only taking money away from the US credit markets and US consumers, but it is also selling Dollars, which in turn positively reinforces the buying of more gold and selling of more Dollars by other investors.

Northwestern's decision to own gold cannot be ignored because it is another sign of a traditional owner of US Dollars losing faith in the value of the Dollar.

Daniel Aaronson
Lee Markowitz CFA
Continental Capital Advisors, LLC

Continental Capital Advisors, LLC was formed to offset the destruction of wealth caused by the global devaluation of currencies by central banks. The name Continental Capital symbolizes the 1775 US Currency, "the Continental", which was backed by nothing and quickly became devalued.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Certain statements included herein may constitute "forward-looking statements" with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Any action taken as a result of reading this is solely the responsibility of the reader.