Market Review: A Hedge Against Hard Times

One would hardly expect to get a history lesson in Las Vegas. But, of course, little gems and nuggets of wisdom were liberally dispersed here at the gold and precious metals conference that took place at the Mirage this week.

One of the high points of the conference for me was the panel discussion with some of my favorite resource gurus, "Asset-Based Investing; A Hedge Against Hard Times. The panel was moderated by Al Korelin from the Korelin Economics Report, and joining him were Doug Casey, Rick Rule, Bart Kitner from Kitco.com, and Pamela Aden.

There were a lot of familiar arguments for gold, namely, as Pamela Aden put it, gold is the "ultimate currency."

"For gold to be the ultimate currency," she went on, "it has to be the strongest currency." Pam looks for a gold to make a new high about $456 by this time next year.

"But was Katrina bullish for gold?" Al Korelin asked.

"Yes," Doug answered.

"The war against Islam is going to go very badly. What makes you think these people can run a war on the other side of the world when they can’t even get to New Orleans?"

Understated as always, Doug pointed out that to the extent that the government response to Katrina (local, state, and Federal) was botched, it would not exactly inspire confidence in the United States.

"And confidence," Doug continued, "is the only thing standing behind the dollar in a fiat currency world. Watching what happened in New Orleans can only decrease the value of the dollar."

All of the panelists agreed that what’s bad for the dollar is good for gold. But they did not entirely agree on the best way to own gold for those investors who’ve yet to begin hedging against what Doug calls the "unbacked liability of a bankrupt government."

"All investors should own some bullion," Bart Kitner said. "But be aware that bullion doesn’t give you an leverage. If gold goes up $5, you’re up $5. If you own gold shares, then you’ve got some leverage."

"Start with bullion," Rick suggested, "And if you’re not a speculator, stop with bullion. You want to buy junior resource stocks in a bear market. You don’t want to buy them in a bull market, after 80% of the crowd is already in. But if you’re going to buy at all, buy the hoarders and prospectors."

"What I mean by that," Rick elaborated, "is buy the companies run by guys who aren’t going to go mine all their gold now and leave themselves with a big hole in the ground."

"I like what Warren Buffet said," Doug added. "Put all your eggs in one basket…and watch that basket. Of course, that won’t do you any good if the bottom falls out of your basket. But in a bull market like the one I think we’re going to see, you want to put as much sail to the wind as you can. It’s a once in a lifetime opportunity to take a kick at the cat."

"And don’t forget cash," Rick Rule added. "Cash is good for the nerves."

Regards,

Dan Denning
for The Daily Reckoning

September 11, 2005

— Daily Reckoning Book of the Week —

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THIS WEEK IN THE DAILY RECKONING: The last seven days were chockfull of interesting facts and tidbits – and in case you missed an installment of The Daily Reckoning this week, we have them all catalogued for you below…

Wealth, Poverty and Blithering Idiots 09/09/05
by Bill Bonner

"Among the sea of those who believe the government dropped the ball in the aftermath of Katrina – there is one man who points out that we put way too much faith in American politicians. See what the ultimate contrarian has to say…"

Ready to Run 09/08/05
by Justice Litle

"Should we care that China has revalued its currency, the yuan, by approximately 2.1%? And if we should care, in what fashion? Justice Litle explores…"

What’s Holding Gold Back? 09/07/05
by Doug Casey

"After the price of gold spiked over $850 in January of 1980, gold production increased substantially – and it stayed up, even with the steep falloff in gold prices. Doug Casey explores…"

The Wrecked Techs 09/06/05
by Chris Mayer

"Since the tech bubble burst, there are a number of cash-rich busted-up and bombed-out tech stocks lingering around. Chris Mayer gives a lesson in how to sniff out the ones worth looking into…"

Killed by Inflation 09/05/05
by The Mogambo Guru

"When you have a fiat currency, sooner or later you get deficit spending, and that means that inflation is guaranteed, and it will devour the purchasing power of every dollar you own. Read on…"

FLOTSAM and JETSAM: If OPEC changes oil to, say, a basket of currencies, the way China just changed the peg of the yuan, then crisis time for the greenback may come round at last. The Sovereign Society’s Sean Brodrick explores…

A CURRENCY CRUNCH
by Sean Brodrick

Weighing on the greenback are, as you probably know, the federal deficit and the U.S. current account deficit, which includes the trade deficit. Let’s leave the tub of arsenic that is the federal deficit alone for now. Of current account deficit:

1. The U.S. current account deficit — what we owe the rest of the world — is running at a record pace. In the first quarter of 2005, the current account deficit hit $195.1 billion, up from $146.1 billion in the year-earlier period

2. In fact, we have to attract about $2.9 billion in foreign capital each and every business day just to keep the value of the dollar steady. Stop and think for a second about just how much freakin’ money that is

3. Part of the trade deficit is due to rising oil prices. In June, the trade deficit hit $58.8 billion, $3.4 billion above May’s number. Imported crude oil and petroleum products accounted for fully HALF the increase.

Rising oil prices also weigh on GDP growth, giving foreign investors less reason to invest in America.

Now let’s tackle the budget deficit. A jump in tax revenues — likely a one-time jump, but take good news when you can get it — should shrink the budget deficit to $331 billion this fiscal year, down from a record $412 billion last year, according to the Congressional Budget Office.

Still, we have to borrow money to pay for the budget deficit. Treasury debt held by the public will total $4.6 trillion this year, up from $4.3 trillion last year. Looking ahead, if things don’t change, it will climb to $6.3 trillion in 2010.

And that doesn’t even take into account the tsunami of debt that is Medicare and other government-funded programs racing toward us.

So what is holding up the dollar? U.S. GDP growth is higher than sad-sack Europe. Rising oil prices will likely lower GDP here and across the pond. Also, U.S. interest rates are high (3.5%) relative to places like Europe, Japan, and Canada and rising, with at least two more hikes expected this year. That attracts the international flow of funds.

So what if rising oil prices slow down GDP growth enough that the Fed stops raising interest rates –or cuts them? Then we’d have a one-two currency punch of falling GDP and slipping interest rates.

In that scenario, as a great philosopher once said, "We’re so screwed."

Sean Brodrick
for The Daily Reckoning

Editor’s Note: The Soveriegn Society’s Sean Brodrick says that even if there is a massive tectonic shift in store for America’s economy and society, you can protect yourself, and profit, too.

Mr. Brodrick has written a 30-page energy crisis report outlining the four forces bearing down on energy-dependent America, forces that could wash over our economy like a tsunami. In this report, he describes the six likely consequences of the next oil shock, and tells you about ten energy companies you may want to add to your portfolio immediately – plus, a widely held stock you should sell or avoid at all costs.

Follow this link to read Sean Brodrick’s energy crisis report right now.