Gold: The Anti-Investment

“Cut free from the world’s monetary system, gold is not listed as a currency by Bloomberg or Reuters. Instead, it has come to be classified as a commodity – ‘an article of commerce or a product that can be used for commerce,’ according to the National Futures Association.

“Does it make sense to lump gold along with cocoa, orange juice, lean hogs and zinc?  ‘The simplest definition of commodities is that they are raw materials,’ notes Katharine Pulvermacher in a 2005 paper for the World Gold Council – and raw materials, by definition, are used to make other products: Wheat into bread; copper into electrical wiring; crude oil into gasoline; hogs into bacon…gold into…?

Well, gold into what? The quick answer is jewelry. But gold is much more than simply the main ingredient in a wedding ring. It is much more than a mere commodity. In fact, as an investment, gold is very un-commodity-like.”

Adrian Ash
November 8, 2007

Now some more views from Short Fuse back in Baltimore…


Views from the Fuse:

We’ve made some real progress on our documentary lately…and now we’re just waiting to hear back from the necessary people to find out what our logical next step will be. Keep your fingers crossed for us…

If there were any time to make a documentary about the economy, and how our money is spent, it’s now. Every day, the story we are aiming to tell is splashed across the front page of the papers.

So, what’s going on today, you ask? Where to start…

Well, Big Ben came out today with a not-so-positive outlook on the U.S. economy – saying that he sees slower growth in this quarter…and that inflation is going to pose a risk.

Of course, stocks fell on these comments, as did the dollar, falling to the lowest level against the Canadian loonie (CAD) since 1950, the British pound (GBP) since 1981, and the Swiss franc (CHF) since 1995. The euro (EUR) rose to a new record, $1.4729, before retreating, reports the New York Times.

Also, for the first time in U.S. history, the average price paid by consumers for heating oil, gasoline and diesel all topped $3 a gallon simultaneously…thanks to the ever-rising cost of crude. Obviously, this is not happening at the most opportune time, as the Northeast starts to cool down – and heating bills begin to edge back up.

But this isn’t quite the season for high gas prices – and consumers could be feeling more pain at the pump during a clutch time for the American economy, as the holiday season looms just around the corner. The added strain on consumers is not good during the season to spend, spend, spend.

Mish tells us that in the next issue of The Survival Report, he’ll be focusing on the weakness in stocks that cater to discretionary consumer spending.

“Discretionary consumer spending is consumer spending on things that aren’t really necessary for day-to-day living, as opposed to things that are really necessary – think about a new flat-screen TV versus groceries for the family. One is a ‘nice to have,’ but the other is a ‘need to have.’

“Discretionary spending tends to rise and fall with the economic cycle and how people feel about their finances. During an economic downturn, slower spending on ‘nice-to-have’ things translates into falling profits at companies that depend on this type of discretionary spending.

“Fortunately for us, there is an exchange-traded fund that focuses exclusively on retailers in the discretionary category…”

The NYT reports: “Geoff Sundstrom, a spokesman for AAA, projected that average regular gasoline prices nationwide would be at least $3.20 by Christmas. Amanda Kurzendoerfer, a commodities analyst at Summit Energy Services Inc., an energy manager for large users of oil and natural gas, predicted a price as high as $3.50 by Christmas – which would be a record for any time of year.”

“The trends are definitely in our favor,” comments Addison from The 5 today. “With oil teasing the $100 mark, we couldn’t have picked a better time to be launching The Energy and Scarcity Investor.

“Our Harvard trained geologist, Byron King, has prepared a short list of high-end energy picks – too small and illiquid for our Outstanding Investments – that will help you stay on the right side of rising energy costs and developments in the alternative energy field. We begin accepting charter memberships to the elite ESI tomorrow. Stay tuned.”

Americans could definitely use the extra cash that they are dishing out in high costs right now – especially since it’s becoming increasingly difficult to use their homes as ATMs.

Many homeowners are finding that their houses are worth less than they were last year. How does that happen exactly? Did they rip out their newly installed granite countertops? Set fire to the basement?

Nope…the equity just ‘evaporated’…home prices can’t rise forever, after all.

This, along with high energy bills and rising gas prices, may be how the Grinch steals Christmas this year.

Well, you can’t complain that it is boring. Not any more. Things are getting interesting…very interesting…

Yesterday, the Dow took another 360-point hit. Gold soared another $10 to 833. And oil stayed at $96.

Yes, gold is finally in the news. People are catching on. Our Dear Readers have been buying gold since it was at $300. But now, everyone is getting in. Is it time to get out? More below…

Meanwhile, Xu Jian, vice director of the central bank, told the world that China was going to dump the dollar. “The dollar is losing its status as the world currency,” he said. Whoa…China has $1.4 trillion in reserves…most of it in dollars. You don’t want to be holding dollars when the Middle Kingdom bails out, dear reader.

General Motors (NYSE:GM) announced a $39 billion loss in the last quarter. In other words, in a single quarter the automaker lost an amount equal to twice its entire market value.

You can’t do that very often.

How come the big loss? “Tax charges” was the official explanation. As near as we can tell from the news reports, what really happened is that the company’s erstwhile very profitable finance arm – GMAC – didn’t make as much as it had planned. Then, GM’s attempts to cook the books blew up in the kitchen.

As you will recall, the U.S. economy made a huge shift over the last 50 years – from savings to debt, from manufacturing to finance, from making things to buying them. The rusty motto over gritty Trenton, NJ, still says “Trenton Makes, The World Takes.” But for the last few decades, the residents of New Jersey…and all the other 49 states…do more taking than making.

Likewise, on the shores of Lake Michigan, General Motors still makes cars. But in recent years, GM has made money by financing cars and housing. It became a finance company. Why? Because that’s where the money was.

Back in the ’70s, financial firms were only about 5% of total capitalization of the S&P. As the United States shifted from making things at a profit to buying them on credit, the percentage of the S&P represented by the financial firms rose to over 21% in 2007.

But now, finance seems to have peaked out. At least, financing housing purchases is not the velvet business it was two years ago. And people aren’t buying cars – especially not GM’s cars – the way they did back in the ’60s, either.

GM has had its day. And look at what is happening to the other finance companies. Merrill (NYSE:MER), Morgan Stanley (NYSE:MS), Citigroup (NYSE:C), Goldman (NYSE:GS) – the masters of the universe are getting beaten up! Not only are the stocks going down…the companies are taking write-downs almost as big as GM’s.

So far, about $40 billion worth of subprime related losses have been announced by the financial industry. A strategist from the Royal Bank of Scotland says he thinks the eventual total will run somewhere between $250 billion and $500 billion.

There’s a little more than a trillion dollars worth of subprime mortgages outstanding. We’ve heard that as many as one out of six of them is in trouble. And after you put these mortgages in CDOs…and embed some options in the derivative contracts…and get mathematicians to gin up models so you can leverage them to high heaven – there’s no telling how large the losses might go.

One news item from yesterday tells us that the money shufflers will be forced to write down as much as $100 billion from their ‘level 3’ assets. You might not know what ‘level 3’ assets are, dear reader. We don’t either. But we’ll pass along what we know about it from reading the paper.

Level 1 is stuff you can readily sell on the open market – stocks, bonds, and so forth. Level 2 is made up of stuff you can’t sell quite so fast, but you still have models in place to tell you what it is worth. And level 3 is the stuff whose worth you don’t actually know; it is valued according to “unobservable” inputs, the press tells us.

Whatever is in the ‘level 3’ category, Goldman has a lot of it – an amount thought to be equal to 185% of its assets. Wait a minute… You mean Goldman has almost twice as much in dodgy assets as in marketable ones? Yes, that is what we mean.

Do you mean that if the value of this stuff is cut in half…Goldman could be nearly wiped out? Yes, that is what it looks like.

But what do we know? We never believed these firms were as successful as everyone said they were. Now, we don’t believe they’re as desperate as the press makes out. The Goldman boys still have a few shekels in their pockets. And they know what to do with them. While they’ve been putting their clients into subprime derivatives, they’ve probably been buying gold for their own accounts.

You want a thought? We’ll give you a thought…

“Can you really run a great empire on borrowed money?” asked Richard Russell recently.

We can give you the answer here…or you can simply read the news headlines. Either way, the answer is the same: yes, for a while.

America has been the world’s leading imperial power for only three or four generations. It took over from the British in WWI. Since then, American military and commercial power have dominated the planet.

But the empire business, like any business, has its good points and its bad points. On the good side, you get to boss people around and feel important. On the bad side, it can be costly – especially if you don’t know what you are doing. And on the really bad side, it almost always ends in bankruptcy and military disaster.

We explained the phenomenon in our books, Empire of Debt (with Addison Wiggin)…and Mobs, Messiahs and Markets (with Lila Rajiva). Empires – like other grand public spectacles – make the news twice, we recall writing, coming and going. Most likely, the U.S. empire is on the ‘going’ side of the news. That is the meaning of Mr. Xu Jian’s comment…that the U.S. currency is yesterday’s world money.

The empire business is fundamentally a protection racket. The imperial power provides political stability and military protection. In return, the tributary or vassal states pay. But that is the fly in America’s imperial ointment. No one pays. The United States invaded Iraq. Cynics say it did so to get Iraq’s oil. At least, that would have made sense from an imperial finance point of view. Nothing uses more oil than the pentagon. And nothing is more costly than garrisoning troops all over the world and fighting ‘insurgents’ you’ve stirred up.

How to pay the expenses? Typically, an imperial power either forces subject nations to render up some form of tribute – gold, slaves, wheat – or, in the more modern variety, it insists on certain favorable trading terms.

But America never got the hang of empire; it invades countries but forgets to steal the treasure. It is so impressed with its own claptrap – “making the world safe for democracy”…”fighting terrorists” – that it forgets it has to pay the bills.

In its most modern form, the U.S. empire has one great advantage: the rest of the world looks to the dollar as a universal currency. Until now, the United States has been able to finance its imperial aspirations largely by paying in dollars, which other nations accepted at par. But no law says they have to continue to take them. And now, fashion models and foreign governments – including an up-and-coming rival, China – are beginning to raise questions. And now the U.S. dollar is in the news – going, along with the empire.

That is why, too, our old friend Jim Rogers says he going too. He’s selling out of America and putting his money in China. He’s even taught his daughter to speak Mandarin…

Jim is a visionary. He’s looking ahead, towards the next big imperial cycle. Already, China is in the news too of course…it’s making headlines coming while the U.S. is making headlines going.

Maybe we should do what Jim is doing. Maybe we should move to China? Maybe we should put all our money in the yuan (CNY)…

Nah, we don’t know anything about the yuan. We’ll stick with gold.

But hasn’t gold gotten ahead of itself? Isn’t it ready for a correction?

Possibly. Many experts expect a big reversal in gold, even experts who think it will eventually go over $1,000. They could be right.

But we don’t trade gold. We don’t even invest in it. We just buy it as a place to keep savings. We count our savings in ounces, not dollars.

Gold is like housing to us. We don’t buy houses as investments either. We buy houses we want to live in. We try to only buy ones that we want to live in for a long time. If their market prices go up or down, we don’t care. We have no intention of selling.

Likewise, we have no intention of selling gold. It is just a place to keep savings.

Where, then, do we invest? Ah, dear reader…you are asking tough questions today.

But what the heck, we will take you into our confidence. We don’t really believe in investing. That is, we don’t believe in the whole concept of getting something for nothing. Yes, we know people do it, but we’re not interested.

Fortunately, we don’t have to worry about it too much. We have six children…and one wife, who loves horses. We’re not sure which is more expensive.

The children all expect to go to college. Two have graduated. Two are in college now. Two are preparing to go in the next few years. We do not tell them where to go. But they tend to go to places that cost a lot of money – about $40,000 to $50,000 per year, including airfare, boarding, etc. That is after-tax money, dear reader. Multiply that times four years for each child…and then, times six children…and our excess capital problem is solved.

Then, there are the horses…

Still, a penny or two slips by occasionally and needs a place to rest. What do we do? We put it into gold – as savings. Or, we leave it in a money fund…or some sort of neutral account…until we can place it somewhere where we think we can add value by actively contributing to the business itself. What business do we know? Only publishing…and we are learning the cattle business. So, where do we want to place money? In publishing…or cattle.

Alas, in the worldwide run-up of asset values, the publishing industry was not left behind. We are offered opportunities to invest, but they are almost always at prices we consider too high to be of interest. So, we wait…and save…

We were having a metro-sexual breakfast at a café in Paris recently. That is what men on their own do…they sit in a café and have coffee and a croissant, while reading the newspaper. Elizabeth was out riding her horses. The children were traveling…or still sleeping. So we went out for breakfast on our own.

In walked a man of about 55, with white hair. He wore a pair of blue surfing trunks, a hooded gray sweatshirt, and a pair of hospital slippers.

The waitress looked at the barman.

Then, addressing the man:

“Not you again. I told you to get out of here yesterday.”

“What do you mean? I just want a cup of coffee.”

“Yes, but we only serve paying customers.”

“That’s discrimination…”

“No, that’s business…why should we give you a cup of coffee for free?”

“Because I worked for many years. I worked for the Bank of France. You don’t believe it, do you? But I know about money…how much do you charge for a cup of coffee?”

“Only 4 euros…”

“Well…if I give you a 5 euro note…what will you have? You’ll just have a piece of paper with printing on it. That’s all. I could tear it up. I could burn it up. It’s just a piece of paper printed by the bank of France. It’s worthless…”

“Well, so what…”

“Well, if it’s worthless…why do you care if I give you 5 euros…just give me a cup of coffee.”

“Get out of here…”

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Daily Reckoning