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March 22, 2005

Gold - The Forgotten Asset Class
by Richard Greene

Put 10% of your assets in gold and pray it doesn't work.

It has been over two decades since gold was widely referred to as an asset class by Wall Street and the media. It would probably be generous to say that even 1% of American investors have an adequate understanding of why at least a 10% portion of their assets should be safeguarded in gold and silver, primarily in bullion. An even smaller percentage understands that they must have physical possession or a custodian that can prove that they are holding their purchased gold in a segregated account.

When our forefathers founded this country, it was for good reason that they demanded that money only be backed by precious metals. They understood well that putting the wealth of the nation in the hands of politicians and private bankers was equal to handing an automatic weapon to an assassin. The United States Constitution specifically states that the act of attempting to change the backing of money by precious metal is punishable by death. Why would they demand such a harsh punishment for such an act? In the years ahead we are about to find out why, and when we do, the raped public will be looking for some heads to roll.

Shockingly, it becomes apparent that national heroes such as Abraham Lincoln and Franklin Roosevelt were key figures in setting the US on a path to economic ruin. In fact, no figure in history has been more responsible for catapulting us toward the day of reckoning than current Federal Reserve Chairman, Alan Greenspan. In the cases of Lincoln and Roosevelt; when Lincoln printed paper money to fight the Civil War without gold backing, and Roosevelt made it illegal for individuals to hold gold; their level of economic training and knowledge can be open to question. In the case of Greenspan, however, there is indisputable evidence that he has full awareness of the consequences of his actions. In his own words, "In absence of the gold standard, there is no way to protect savings from confiscation of wealth. There is no safe store of value. Deficit spending is simply a scheme for confiscation of wealth." There it is. No one can say it better than the man himself, even if he said it 40 years ago. Well, this is exactly what is transpiring today. It is probably a good thing that Greenspan is of an advanced age; for when the masses understand what he has done, they may well call for his neck as has happened in ancient times to a central banker. Clearly, Greenspan has assisted the banks and the Government in confiscating the wealth and savings of the people.

The average person is blind to what is happening. Most believe there is not the slightest of problems with our financial policies and economy. They are being bribed by unlimited consumer goods with no money down or payments for several years; and below market interest rates to purchase homes that are in the midst of an unprecedented bubble. Although homeowners in the US are at record levels, they own the smallest percent of equity in their homes of all time while foreclosures are at record levels. They are encouraged to continue to draw equity out of their homes to spend, weakening their ownership position. In actuality, banks wield control over home ownership, especially in consideration of the state and local deficits that will require continuous increases in property taxes. With only the slightest of increases in interest rates, banks will own more and more foreclosed homes over time. Even homeowners with 100% equity in their homes could face hardships to pay increased property taxes in the future as the true unemployment rate already approaches 10%. Real wages are down since year 2000 while home prices have soared, a key factor in housing affordability. The reality is banks lend to anyone now and care little whether they will be paid back or not in the long-run. They know the dollar is being devalued to worthlessness so as repayment they will seek out your possessions, particularly your home instead. People have been lulled into a false sense of security because they have been led to believe that their assets such as real estate have no where to go but up. You would think that sheer common sense alone would alert enough of the population that borrowing and spending beyond one's production, both individually and nationally, is an unsound policy that will entail repercussions.

The belief of endless upside in asset bubbles is perpetrated by a subterfuge of economic statistics that border on comical. Among the more obvious are: the Consumer Price Index, Producer Price Index, unemployment numbers, and GDP statistics. It is unlikely that professional observers really believe that the CPI releases have any relationship to the real world after the substitutions, manipulations, and statistical maneuverings that are performed to make the outcome digestible to the market. For example, new cars are moved with 0% financing, weakening used car prices where such financing is not offered, so, the Government tracks used car prices for the CPI. The Federal Bureau of Labor Statistics (BLS) decreased their estimate of households even though population was rising steadily in early 2004, with the effect of making the unemployment rate decrease despite employment decreasing from mid-2004. Such statistics are readily accepted by the market as long as the long-only bias of the market is satisfied.

The corporate world has followed the Government's poor example with an incredible amount of financial engineering that makes a mockery of financial statements and results. The more financially oriented that companies become, (e.g., GE, GM, JP Morgan, AIG), the less confidence you can have in reported earnings. The January 31^st issue of "Barron's" reported on the inappropriate use of finite-risk reinsurance which borders on criminally fraudulent misrepresentation of financial results. In effect, they were selling "insurance" to companies to retroactively "insure" away incurred losses to remove them from the latest quarter. This is the type of accounting trickery that leads to sudden bankruptcies with little advance warning such as in the cases of Enron and Worldcom. The Government in an effort to make it look like they are doing something and that they don't condone such widespread behavior, throw the book at an insignificant character such as Martha Stewart to make headlines. Meanwhile, at many of the old line corporations mentioned above that work closely with the US Government, far greater crimes and misrepresentations are allowed as the Government looks the other way. Recent headlines regarding Fannie Mae and AIG are shocking with huge implications, yet the stocks magically rally shortly after such revelations leading investors to shrug off the news with claims that "it was already discounted by the market".

You simply can not make the masses recognize what is right before their eyes until they are ready to see. If you can recognize the importance of these events and the implications for the future you probably already have a healthy allocation in gold, silver, and related equities. Unfortunately, we have found that the vast majority that has moved to protect their portfolios with investments in the precious metal sector are foreigners. Americans are woefully under protected with a gaping whole in their portfolios. Also, we find the majority that invest in the sector since the gold bull market started in 2001, are mostly just looking to jump on a hot sector rather than taking advantage of the overall portfolio protection aspects of precious metals which are so desperately necessary today. This is apparent in that we see more interest after strong runs when you should be lightening up than during sharp sell-offs which should be looked at as fantastic buying opportunities. The really sad part is investors from China, Japan, the Middle East, and India are taking advantage of any pullback to keep adding to their gold and silver holdings. India has regularly paid up to $10 per ounce and more in premiums to get enough gold in the country to satisfy demand. At the current pace, the high physical demand for gold will not take long to overwhelm efforts by the Gold Cartel to cap prices which they do to legitimize their inflationary economic and monetary policies. The keepers of the fiat money system have gone forward with acceleration in money creation that borders on insanity. Greenspan recently claimed he manages the fiat money system similar to a gold standard. Nothing could be further from the truth; you can't manufacture gold from thin air and that will eventually be the undoing of the fiat money system as it always has in the past.

Among the major reasons why gold should be an important part of all portfolios are:

1. Out of control government spending with budget and trade deficits;
2. Negative real interest rates;
3. Tremendous leverage coupled with misallocated capital;
4. Continual importation of deflation, killing pricing power and jobs;
5. Demand is rising while production is declining;
6. Gold has a negative beta which should offset times when stocks decline;
7. We are in a war environment which has historically been very inflationary;
8. Financial derivatives are out of control and hiding huge financial failures;
9. Energy prices are hitting all time highs as well as many other commodities;
10. The relative size of the gold market is tiny with the bulk of inflows yet to come;
11. The biggest growers and savers (Asians) are already moving into gold;
12. Huge short positions in gold and silver that may not be possible to cover; and
13. Foreign buying of US debt is waning which should exacerbate money printing.

Monetary inflation in excess of real production is theft. Alan Greenspan admitted his understanding of this concept many years ago which is probably why gold was his favorite indicator for many years, until recent times. Protect yourself. The fundamentals for gold get better every single day as money expansion continues. Use declines in the prices of metals and the stocks to build a position as part of your portfolio. It could well protect everything else you own.

Richard J. Greene CFA
Thunder Capital Management

More articles by the author can be accessed by the "Research Articles" choice at: www.thundercapital.com

Copyright © 2004-2008 Richard J. Greene

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