Investing in Precious Metals

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The Great Gold Bubble

Almost every day that I tune into CNBC I have to listen to someone warn Americans about the potential bubble in the Gold Market.  They have been calling it a bubble since gold was $850 an ounce.  With gold now closing in on $2,000 dollars an ounce, it is making headlines daily.   So what do you think?  Is gold in a secular bull market or is it in a bubble? 

I would like you to try to name five people who invest in physical gold or silver.   Notice I said physical and NOT precious metals stocks or exchange traded funds (ETFs).    A majority of stocks and ETFs mirror the metals’ spot prices but do not keep any physical metal in inventory.   I bet you were unable to think of three or more people investing in precious metals.   That is because almost nobody is buying physical precious metals.  I have noticed dozens of gold shops spawning up all around me but this does not suggest that gold is in a bubble.  This verifies my position, that the masses are still net sellers of gold and silver because they would rather have quick cash. You may be asking then who is buying precious metals that are causing the sky rocketing prices in the precious metals markets?  Answer:  Central Banks.  China, Russia, India, Mexico, and most recently South Korea have been buying tons (or tonnes) of gold at a staggering rate. 

Why do central banks hold gold?  Ben Bernanke said “because of tradition”, but I would say because gold and silver have been money since 7^th century B.C. when Greek city states first started bartering in coins.   Throughout history, gold and silver have remained valuable – serving as both jewelry and money.  Paper currency was first issued as way to exchange precious metals without having to carry the metals around.   Eventually, people became accustomed to exchanging the gold notes instead of physical gold and silver.   The price of gold provided an exchange rate between international currencies prior to 1945.  In 1945, the Bretton Woods System was set up and 29 nations agreed to accept the US dollar as the currency by which international business was to be conducted.  For example, if Britain was to purchase goods from Norway, they would settle in Federal Reserve Notes instead of Pounds.  At the time, the US dollar was a stable currency because it was still on a gold standard.  Thirty-five dollars equaled one ounce of gold.   However, in the early 1970’s the US economy was suffering from stagflation as we found ourselves in a never-ending conflict with Vietnam.  Low interest rates, rising military costs, and increased domestic spending (sound familiar?) paved the way for inflation and a loss in US Dollar confidence.  In early 1971 countries started to cash in some of their paper money for physical gold.  Switzerland traded in $50 million in paper for physical gold and France followed suit by redeeming $191 million for gold.    On August 15^th, 1971 President Nixon took the most drastic response and closed the gold window to prevent foreign countries from emptying Fort Knox.  Since that day, which became known as Nixon Shock, gold has been sky rocketing and the dollar has been weakening as a result of our growing trade deficit and the FED’s inflationary monetary policy.   So gold may be in a bubble, but we are only in the beginning stages!

USA's Boogeymen: The Battle Lines are Drawn

What do Osama bin Laden and Saddam Hussein have in common besides being boogeymen to Westerners?  They were both CIA assets at some point in their lives.

Saddam Hussein was a member of a small Arab nationalist party known as the Ba'ath Party.  In 1959, at the young age of 22, Saddam was part of a six person CIA operation to rout out the Iraqi leader General Abd al-Karim Kassim.  Kassim was an enemy of the US’s because in two short years he nationalized Iraq’s oil, threatened invasion of Kuwait, and shifted Iraq’s cold war position from US to Soviet.   Saddam was the gunman in the assassination attempt of Kassim, but he ended up botching it.  Kassim stayed in power for another three years while Saddam fled to Egypt for safety.  In 1963 Kassim was successfully assassinated and Saddam returned to Iraq.  He was immediately instated as the head the Al-Jihaz al-Khas, the clandestine Ba'athist Intelligence organization.  His cooperation and effectiveness in eliminating Communists allowed him to rise through the ranks until he became the leader of Iraq in 1979.  The USA and Britain allied themselves with Saddam’s Iraq during the 1980 Iraq-Iran war.  The western powers and Saddam Hussein were both fearful of the rise of Shi’a Muslims in the region, which may be why the US turned a blind eye to Saddam Hussein’s suppressive regime.  It wasn’t until Iraq’s invasion of Kuwait, a long time US alley, did Saddam step on the US’s toes.   Saddam’s betrayal was used to make an international example of what will happen to those who defy us.   We couldn’t get him the first time around (due to the elite Iraqi Republic Guard) and he wasn’t corruptible so it required a second attempt.  

Bin Laden grew up in an affluent Saudi family which made their money through oil and banking.  In 1979, he left his family to help fight against the Soviets in Afghanistan.  Osama bin Laden has always been an Arab nationalist, rejecting any sort of western guide to righteousness. Shortly after arriving in Afghanistan he became leader of an organization known as Maktab al-Khidamar (MAK), which was an Afghan mujahedeen [A group of guerilla Islamic fundamentalists].  Osama bin Laden’s money and connections to Saudi government and the Pakistani Inter-services Intelligence (ISI) allowed Arab countries to funnel money and arms to the rebels.  The CIA noticed the rise of these “Freedom Fighters” and helped train, fund, and arm the MAK and similar organizations in their fight against the Soviets.   Osama bin Laden did not shift his hatred to the western world until the first invasion of Iraq in the early 1990’s.  To throw salt in the wound, it was the royal Bin Laden family that permitted the United States to use Saudi Arabia as a launching pad for operations in Iraq. Feeling disowned by his own family, he shifted his anger and operations towards the new occupying power: The United States of America.

*Note: Shortly after news of Osama Bin Laden’s death.  China released a statement “Any attack on Pakistan would be construed as an attack on China.”

Mahmoud Ahmadinejad, may be the next boogeyman in line.   Will the US connect the dots between Afghanistan and Iraq?  Occupation of Iran would be a logistical boon to US military operations in the region.  Also, with access to the Caspian Sea and the Persian Gulf, there would be great possibilities for Government contractors to build the mother of all oil pipelines.  Motive for war is already being laid down; there are reports that Iran is developing excessive amounts of radioactive materials.  Iran claims that their nuclear program is strictly for bolstering electricity supply and to provide fuel for medical reactors.  The UN, Israel, and the USA are growing increasingly wary of the situation and may make a pre-emptive move.  There is only one little issue that stands in the way: Iran is China’s largest oil supplier.

Hugo Chavez, the current leader of Venezuela, has been drawing more attention recently.  Just last month, Chavez nationalized gold producers in Venezuela.   That same day he announced that he was withdrawing all of Venezuela’s wealth (cash & gold bullion) from western banks to keep Venezuela’s worth in “countries that have more solid economies.”  This move will transfer $12 Billion in gold and $6.5 Billion in cash from HSBC, JP Morgan, Barclays, and Bank of England to Chinese and Russian banks.   In my opinion this move makes perfect sense because Venezuela is China’s second largest oil supplier after Iran and before Sudan.    With growing tensions between China and the United States, other countries may follow Venezuela’s move and start securing their wealth through their allies. 

Kim Jong-Il, North Korean dictator and longtime ally of the Chinese government.  All I have to say is: Bat Shit Crazy. 

Warren Buffett: Quote of the Month

The Oracle of Omaha has become the Nutcase from Nebraska.  Warren Buffett, currently the third wealthiest person in the world, was once a voice of reason in the world of investing.  In January of 2004, he had an article published in Fortune Magazine titled “Squanderville Versus Thriftville.”  The article was widely acclaimed and is a must read for anybody trying to understand the economic relationship between China and the United States.  Simple and brilliant, the article displays that Warren Buffett had a sound understanding of macroeconomics to accompany his investing talent.  However, Warren Buffett now dances to a different tune.  He no longer warns Americans of inflation or a declining dollar.  He has become a confidence cheerleader. 

Following the S&P downgrade Warren Buffett came out and announced, “In Omaha, the U.S. is still triple A. In fact, if there were a quadruple-A rating, I'd give the U.S. that.”  This statement is a direct contradiction to his “Squanderville Versus Thriftville” essay.  Since his 2004 essay, the National Debt has ballooned from 7 trillion to 14.7 trillion, the dollar has continued to decline, domestic production is down, and consumption has risen.  So why would Warren Buffett do a complete 180 with his view on the trade deficit and how it affects our credit?   It doesn’t take a rocket scientist (or a Princeton Economist) to see that sovereign debt across the globe is suffocating what may be described as a comatose economy.   But this is AMERICA!  We are the most successful and powerful nation!  We will not admit to be being broke! We will continue to spend and ignore our debt until Daddy takes away our credit card!   Substitute China for Daddy and Printing Press for credit card.  

Maybe Buffett realizes the severity of the situation and is doing this to inject confidence in the domestic markets.  He has always kept his investments confined within the United States.  Soon he may be recommending specific American stocks such as GE, Goldman Sacs, and Bank of American.  All of which he is a large shareholder receiving  preferred stock at high 7-10% usury rates.