Curried Wealth Building
Finding an Edge

If you want help with your finances, give me a call at 703-791-3243.
October 16, 2010
Issue 118  -  Let's Talk About Gold
 
 
 
There is a lot of talk recently about gold being "due" a correction. (By the way, that's a picture of the largest gold coin in the world, and weighs 220 pounds)  Now we could very well get a correction, but I would argue that when too many are calling for something, it typically doesn't happen.  I'm also hearing more and more people describe gold's rise as exponential.  This is WAY off.  If you look at the chart:
 
 
This is not a crazy looking chart.  In fact, it's almost a normal uptrend.  What's truly amazing is that if stocks had been up for 10 years like this, everyone would be clamoring that you need to get in that market.  Gold does this and everyone yells, "bubble!" 
 
This chart gives you an idea of how far away from a bubble we are: (from Sprott Asset Management)
 
 
Does that seem like a bubble?  Even though gold is getting more air play and there are, in fact, some people actually buying it, we are just at the beginning of the last phase.  I believe we are probably at least 5 years from a peak in gold.  We are probably in 1995 in relation to the stock market bubble which peaked in 2000.  As the dollar collapses, gold will be like a meteor. 
 
Also arguing against a top in gold is this:
 
Zero Hedge reports:

Edwin Truman, a senior fellow in the Peterson Institute, who is of course a former Fed member, and of course a Yale Ph.D., writes in the FT, suggesting the brilliant idea that it is high time for the US to sell its gold. In other words do precisely what Gordon Brown did a few thousand percent ago, and now has to defend against allegations he did so merely to protect the LBMA cartel which was on the verge of being margin called into oblivion. And even if one ignores the fact for a minute that there has not "really" been an audit of the US gold holdings in who knows how long, who is to say that Goldman, of all people, may not be right and gold will be at $1,700 in a year? Or Dylan Grice for that matter, and it will be about 10 times higher. One thing is certain: converting real hard asset value into paper to patch up 2.25% of government debt as a % of GDP is easily the dumbest idea we have ever heard. Especially, since as we disclosed yesterday, the Fed will have to force Congress to increase its deficit, and thus debt funding needs, simply so that there are enough Treasuries for the Fed to monetize. We hope Mr. Truman is in the contention for next year's economic and peace Nobel prizes, because with articles such as this he has certainly proven he belongs to that unique category of brilliant economists that only Princeton, Yale and Harvard can produce.
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Now this is exactly the kind of idiot that will be buying gold for himself when we are at the top of the market.  This clown is advising the U.S. to sell it's gold (if it's even there) to help the budget?  2.25% of the budget!  Wow, brilliant idea.  I'm sure that would help.  Imagine you're advising a family in debt who makes $100k and is in debt to the tune of $500k, which is not too far off from the state of the U.S., and you tell them to sell their gold which is worth about $2k to help?????  No, Mr. Truman will be a buyer before I'm a seller.
 
As another example, I was watching a television show on Fox Business, that was an hour about gold.  This was amazing in and of itself, and would normally be a huge warning of at least a temporary top in gold.  However, there was a business owner of a pawn shop which specialized in buying gold and he was asked if the public was a net buyer and seller.  He answered that there were way more sellers.  That's all I need to hear.  It's not a top.
 
On another front, the continued fleecing of the average citizen by the big banks:

Ben Bernanke Money Printing Ends Up as Wall Street Bonuses

WSJ is reporting that bonuses on Wall Street this year are expected to be around $144 billion. How big is that relative to the overall economy?

ZeroHedge cranked out the numbers and it is 8% of the total money supply (as measured by M1). Got that? Investment bankers will control 8% of the entire money supply once bonuses are paid.

Now, there is nothing wrong with bankers earning good change as a result of dealmaking, but a good portion of the bonuses are the result of money being shoveled to bankers by Fed Chairman Ben Bernanke. Where's Bernanke getting the money to shovel to Wall Street? Why he is just printing it, that's what he does.

Over the last three months, M1 money supply has increased by 9.1% on an annualized basis. Got that? Investment bankers will get bonuses of 8% of the money supply, Bernanke is increasing the money supply at just over that amount. There is no better evidence that it is the crony part of Wall Street that is benefiting from Federal Reserve activities, and no one else.
Think about this for second.  These thieves paid out bonuses almost equal to the growth of the money supply in the last three months.  But Bernanke et al., are trying to protect us???????  Suuuuuuuurrrrrrrrrrre they are.  They could give two figs about you or me. 
 
This is clearly demonstrated in the way they manipulate statistics and reported figures.  I was listening to a podcast with James Turk on Financial Sense and the subject of gold's price in inflation adjusted terms was discussed.  Inflation adjusted prices for the old gold and silver highs of $850 and $50 would translate today to $2400 and $140 per ounce.  James Turk then mentioned that if we take the method of computing inflation during Carter, which has been drastically changed to make things look better, than we would have prices of $7400 and $452 per ounce.  I believe these prices will be seen at some point in the future and is why I recommend you have at least 20% of your net worth in the precious metal area.
 
Where else would you want to put your money?  How about following a guy who predicted the mortgage debacle, what's he doing?
 
 

Burry, Predictor of Mortgage Collapse, Bets on Farmland, Gold

By Jon Erlichman and Dakin Campbell
 

Sept. 7 (Bloomberg) -- Michael Burry, the former head of Scion Capital LLC who predicted the housing market’s plunge, talks with Bloomberg's Jon Erlichman about the Securities and Exchange Commission's lawsuit against Goldman Sachs Group Inc. in April and the role of derivatives in the financial crisis. (This is an excerpt. Source: Bloomberg)

Michael Burry, the former hedge-fund manager who predicted the housing market’s plunge, said he is investing in farmable land, small technology companies and gold as he hunts original ideas and braces for a weaker dollar.

“I believe that agriculture land -- productive agricultural land with water on site -- will be very valuable in the future,” Burry, 39, said in a Bloomberg Television interview scheduled for broadcast this morning in New York. “I’ve put a good amount of money into that.”

Burry, as head of Scion Capital LLC, prodded Wall Street banks in early 2005 to create credit-default swaps to bet against bonds backed by the riskiest home loans. The strategy paid off as borrowers defaulted, letting his investors more than quintuple their money from 2000 to 2008, according to Michael Lewis’s book “The Big Short” (Norton/Allen Lane).

Burry, who now manages his own money after shuttering the fund in 2008, said finding original investments is difficult because many trades are crowded and asset classes often move together.

“I’m interested in finding investments that aren’t just simply going to float up and down with the market,” he said. “The incredible correlation that we’re experiencing -- we’ve been experiencing for a number of years -- is problematic.”

Still, it’s possible to find opportunities among small companies because large investors and government officials focus on bigger ones, he said. He is particularly interested in small technology firms.

“Smaller companies in Asia, I think, are neglected,” he said. “There are some very cheap companies there.”

Investing in Gold

Gold is also a favored investment as central banks issue debt and devalue their currencies, he said. Governments haven’t adequately addressed the causes of the financial crisis and may be sowing the seeds for future problems by borrowing, he said. In the U.S., lawmakers showed they didn’t understand how to prevent another crisis when they gave the Federal Reserve and Chairman Ben S. Bernanke additional authority, he said.

“The Federal Reserve, in my view, hadn’t seen this coming and in some ways, possibly contributed to the crisis,” he said. “Now, Bernanke is the most powerful Fed chairman in history. I’m not sure that’s the right response. The result tends to tell me they’re not getting it right.”

The Dodd-Frank Act, signed by President Barack Obama on July 21, creates a consumer bureau at the Fed to monitor banks for credit-card and mortgage lending abuses. The bill also gives the Fed chairman a seat on a newly created Financial Stability Oversight Council, which is supposed to spot and respond to emerging systemic risks.

 
He's betting on gold and farmland.  Farmland, as food prices go higher in years ahead, will be a great place to be.  In case you didn't know, food and other agriculture crops have recently skyrocketed in price:
 

Corn, Soybean, Cotton Futures Increase by Limit in China on Dollar, Supply

Corn, soybean and cotton futures in China surged by exchange limits today, tracking gains in U.S. markets, as a weaker dollar boosted their appeal as haven assets and on concern that global demand will outstrip supply.

This will only get more intense in the future as world populations start to eat a diet closer to ours.  If you are looking for place to put money, you could do far worse than farm land, and I think it will far outpace residential real estate in returns.
 
This week I am adding a section on my current investments, sort of like scoreboard for those who want to know what I'm doing.  I won't be including any retirement account positions.
  
Positions:
 
Goro  (closed at $22.70, up 12 cents, average price paid, $6.10)
  
Mexus Gold  (closed .28, up 4 cents, average price paid, $0.16)
 
Silver Wheaton Jan 11, call options, strike $27 (closed $3.05, average price paid, $2.70)
 
New position added this week as the stock exchange starting trading Goro options.
 
GORO June 11, call options, strike $20  (closed at $5.50, average price paid, $5.90) 
 
 I'll close with a video that's a Honda commercial that was shown in Europe.  It's a Rube Goldberg machine using only parts from an Accord.  It only took 606 tries to get right!  Have a great week!