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Current Issue - May/June 2008 - Volume XXVI, Issue III |
Putting the Gold Price in Perspective
by James Turk
Copyright © 2008 by James Turk. All rights reserved.
The first thing people usually consider when buying gold is its price, but unfortunately, they are grabbing the wrong end of the stick. Price is of secondary importance. To explain why, one has to examine the reasons for buying and holding gold.
The motivation to buy gold is usually driven by the pursuit of some defensive financial strategy. For example, gold is a proven and time-tested inflation hedge, so people acquire gold if they believe inflation is likely to worsen. This defensive strategy aims to protect your purchasing power because with gold you hold sound money instead of some inflating national currency.
Another defensive motivation to acquire gold is its unique attribute of being money with no counterparty risk. This significance of this risk was highlighted by the bank-run at Northern Rock in the UK last year and more recently, Bear Stearns in the US. People withdrew their money from those banks because they recognized that their ‘money’ was only as good as the financial capability of those banks to make good on their promise. In contrast, gold is not dependent upon a promise because it is the only money that is a tangible asset, and not an I.O.U. of some financial institution.
Another reason people focus on the price of gold is because they consider it to be an investment, but it’s not. Investments generate rates of return because you put money at risk, for example, by lending it or buying equity in a company. If the investment is successful, you will generate a return, increasing your wealth. But gold doesn’t do this. Gold preserves wealth; it doesn’t increase it.
For example, one ounce of gold purchases approximately the same amount of crude oil today as it has at anytime over the past 60 years. Who would want an investment like that? Gold hasn’t generated any rate of return. It hasn’t given its holders the opportunity to buy more crude oil. But because you can still buy essentially the same amount of crude oil, an ounce of gold has done exceptionally well at protecting wealth by preserving purchasing power, which is what money is supposed to do.
Money is a temporary store of value where we place a portion of our wealth while we decide whether to spend, invest or save (hoard) it. So when we hoard gold, we are in fact saving money until that moment in time when we decide to spend or invest it, which brings me back to my basic point.
Does one question the price (i.e., purchasing power) of dollars before choosing to open a savings account? No, of course not. Savings represent the portion of one’s accumulated wealth held as liquidity (i.e., money) either for a rainy day, to accumulate before spending or investing it, or just to safeguard this portion of your wealth safely and securely. But an inflating dollar doesn’t achieve these aims. The dollar – and indeed every other national currency – has severe problems that undermine their usefulness. In contrast, protecting wealth is what gold does exceptionally well by preserving the purchasing power of one’s liquidity, not necessarily from day-to-day or week-to-week, but consistently and reliably over longer periods of time.
So instead of focusing on gold’s price when buying it, focus on what gold is, what it offers, and what it accomplishes for you. Gold is a form of savings that securely preserves that portion of your wealth that you choose to hold as sound money.
I recognize that it is difficult to view gold in this way and to give little regard to its price, particularly because we are so used to looking at prices of goods and services in terms of dollars and not gold. Also, we have been trained to think of gold as an investment instead of what it really is – money. But we can overcome these biases and incorrect conventional wisdoms.
One way to do that is to consider accumulating gold on a regularly monthly basis. In other words, save some money every month, but don’t save dollars, the purchasing power of which is being inflated away. Save sound money instead. Save gold.
When gold is viewed in this way, it is clear that even with the four-fold increase in the gold price since 2001, no one has ‘missed the boat’. Building savings by accumulating gold is always a good thing.
James Turk is the Founder & Chairman of GoldMoney.com www.goldmoney.com. He is the co-author of The Coming Collapse of the Dollar, which has been updated for a newly released paperback version, now entitled The Collapse of the Dollar www.dollarcollapse.com. q
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Currency
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YEAR AGO
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CURRENT
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| Swiss Franc |
$0.8292/Franc
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$0.9711/Franc
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UP
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| British Pound |
$2.0077/Pound
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$1.1.966/Pound
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DOWN
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| Japanese Yen |
$0.00843/Yen
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$.0096/Yen
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UP
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| Euro |
$1.3585/Euro
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$1.5757/Euro
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UP
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When Gold Is on Sale, Don’t Cry – Buy!
by Chip Wood
Ohmigod, gold’s dropped under $1,000/oz. Ohmigod, now it’s down over $150/oz! The cries of concern during gold’s latest correction sounded like a teenage girls’ birthday party run amuck.
I’m here to tell you, relax. It’s nothing to worry about.
In fact, you should be rejoicing you’re being given such a superb chance to buy gold on sale. It isn’t often that Mr. Market offers us a golden opportunity, if you’ll pardon the pun, to buy more of a favorite investment at bargain-sale prices.
Gold hit an all-time high of $1011 on March 18. Well, adjusted for inflation it really wasn’t an “all-time” high. Gold would have to be around $2200 an ounce, in today’s dollars, to match its previous record.
But let’s not quibble. Gold over one thousand dollars an ounce made a lot of gold bugs very, very happy.
Then the Midas metal began to drop. It went past $950, then $900, and $850. Ohmigod!, the faint at heart cried. What happened to our bull market?
The bull market is still intact. In fact, gold could fall a lot further (and it very well might), and the bull market would still be intact. Let’s look at the numbers.
Since the current bull market in gold began back in 2001, the Midas metal has dropped 8% or more nine different times. The worst was a 27.7% correction in 2006. The average of all nine corrections is 13.6%. So the current drop of 15.4% is right in line with what’s happened in the past.
Please remember that such corrections are a perfectly normal part of a bull market. Every once in a while, the market has to pause and catch its breath. And, mischievous rascal that he is, Mr. Market delights in testing the character of his customers. He’s learned that a drop of 20% or more is usually enough to cause consternation, if not outright panic.
So, yes, it could happen. Gold could even drop below $800 before resuming its rise to $1,000 an ounce and more. If it does, treat it as a twice-in-a-lifetime opportunity to buy the world’s most revered form of wealth at bargain-basement prices.
Of one thing I am certain: The current bull market in the metals has a long, long way to go. Gold is not just in an uptrend; it is in a mega uptrend that will last many more years. There are many reasons for this, including increased demand around the world and the difficulty in increasing supply. (It takes many years, and many millions of dollars, to get a new gold mine into production.)
But the overwhelming fundamental reason that the price of gold (and other commodities) will continue to go up is that the value of the dollar will continue to go down. Ladies and gentlemen, Washington is going to need a lot of dollars over the next few years. Just the unfunded liabilities for Social Security, Medicare, and other promises Uncle Sam has made come to over $500,000 per family. That’s half-a-million dollars for each and every couple reading this. Are you ready to have your taxes go up that much?
But it’s not just future promises to pay. There’s the war in Iraq, which has cost over $500 billion thus far. The final tally (if there ever is one) could be over $3 trillion. Then there’s the huge strain on the financial system we’re already seeing. A few more “rescues” of banks, brokerage firms, or mortgage companies, and we won’t be talking about billions in bailouts. No, the cost could easily pass a trillion.
And don’t forget the interest on the debt we already have. Please don’t say “we owe it to ourselves.” We don’t. We owe it to central banks and governments around the world. Today, interest rates are artificially low, as the Fed tries to keep our economy from going into the toilet. So interest on the national debt “only” amounts to a few hundred billion dollars a year. But what happens when interest rates rise again, as they must, and the debt keeps growing? What will a trillion-dollar-a-year expense for interest payments do to the federal budget?
So as I said at the beginning of this column, relax. If you’ve been exchanging paper for gold, you’re on the right side of what will turn out to be one of the most profitable trades in history.
W.W. “Chip” Wood is a frequent MC at investment conferences. A former radio talk-show host and newsletter publisher, he currently writes a weekly column, Straight Talk, which is free for the asking at www.straighttalkletter.com. q
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Metals
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YEAR AGO
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CURRENT
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| Gold |
$683.20/oz
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$921.40/oz
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UP
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| Silver |
$13.67/oz
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$17.73/oz
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UP
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| Platinum |
$1,300.00/oz
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$2,206.00/oz
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UP
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| Palladium |
$378.00/oz
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$458.00/oz
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UP
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Two Irons in the Fire
by Derek Sambrook
“A blind man in a dark room – looking for a black hat which isn’t there.” This is an apt description (courtesy of the English judge, Lord Bowen) of the confusion many Americans have about the use of offshore centres. Seeking reliable guidance can be difficult and there is a constant mix of fact and fiction.
What is fact is that although most traditional offshore structures comprising trusts, foundations and companies for US tax payers will be tax neutral, there are legal ways that they can be used for asset protection. I wanted to make the point about taxes crystal clear because a section of the US population believes, or has been led to believe, that one or more of the vehicles mentioned will guarantee tax savings. In certain cases this is true, but they are the exception.
The tax motive is becoming less of an issue because people (not just Americans) are seeking assurance that some of their assets will not remain within a domestic environment with its attendant restrictions, uncertainties and erosions of privacy, whether real or perceived. During a speech in the British House of Commons in November, 1783, William Pitt the Younger argued thus: “Necessity is the plea for every infringement of human freedom. It is the argument of tyrants; it is the creed of slaves”. Some of my clients feel they are slaves of the (government) system.
Civil lawsuits can annihilate wealth and are reason enough to place assets beyond the reach of avaricious plaintiffs. As recently as 2003 a report from the US Congressional Budget Office on the tort system revealed that only 46 cents of every tort lawsuit dollar was going to the victims with the remainder consumed by legal fees and other costs. If further proof was needed of the current craziness, consider a case near San Francisco where the Rubin family filed a $1.5 million dollar suit for damages against the New Haven Unified School District because their son was thrown off the high school varsity basketball team. The coach was blamed for ruining the son’s chances of winning a university basketball scholarship and thus the possibility of a professional career with the National Basketball Association. It has been said that civil suits have become a sport, but this is ridiculous.
Besides asset protection, there is privacy and probate. The former can be obtained in most cases and the latter can be avoided easily by using either a trust or foundation. A parallel offshore estate hedges your bets and it was Otto von Bismarck who recommended having two irons in the fire. Michael Checkan’s recommendation would, I suspect, include gold and silver
Times have changed and so have the principal reasons why assets are migrating offshore, often to be insulated within trusts and foundations. The motive is very clear to me, but then I’m not one of those looking for a black hat. My Panama hat fits me just fine.
Derek R. Sambrook, Managing Director of Trust Services, S.A., with over 25 years offshore experience. His international expertise is in the corporate, trust, insurance and banking fields and is the current Treasurer of the Panama-British Business Association. Website: www.trustservices.net or email: fiduciary@trustserv.com. r
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Offshore Life Insurance— the Last Best Tax Shelter
by Ben Cooper
Many investors feel they are losing too large a percentage of their investment gains to income taxes each and every year. These aggressive investors, whose portfolios turn over a number of times during the tax year, often loose as much as forty per cent (40 %) of their gains to a combination of federal and state income taxes. What investors really want are products that: 1) Grow income tax free; 2) Allow for all types of investments; 3) Distribute monies as needed without triggering a recognition of gain/taxes; 4) Never pay any tax on the investment growth; 5) Pass the investments on to the next generation without any income or estate taxes; and 6) Maintain privacy and maximum asset protection over their investment property. Sound Impossible? Let’s explore the Offshore/International Life Insurance Market.
For US Citizens/Residents who purchase offshore US compliant variable life insurance products, the possibility of all six (6) of the above criteria may well be attainable. First, investments that are properly wrapped in a US compliant variable life product do grow income tax free. The product simply needs to meet the definition of life insurance and the inside build up will be a diversified tax free protected asset.
Second, almost any type of asset may be wrapped in a variable offshore insurance product … these products have tremendous flexibility as to their choice of asset managers and their various investments. It is, indeed possible, that an insurance company may accept in-kind assets such as collectibles and real estate as premium(s) as long as the assets can be and are properly valued.
Third, variable life contracts may distribute monies to their owners up to the amount of their basis/investment in the contract without paying any tax and those same owners may also borrow additional monies from their contracts paying themselves interest. The key here is to be sure that insurance contracts operate within certain guidelines outlined in the internal revenue code and do not create an ugly insurance monster called a modified endowment contract.
Fourth, avoiding any income tax on the investment growth inside the qualified life contract is accomplished by holding/keeping the contract until the death of the insured … the investments i.e. the inside build-up in the contract will be transformed into life insurance proceeds with no recognition/no tax to the owner.
Fifth, the next generation receives the proceeds income tax free as life insurance proceeds paid to a named beneficiary, 101 IRC, and if the contact is properly positioned in an irrevocable trust, it should avoid any estate tax as well.
The last but not the least important criterion that many investors are seeking is a combination of asset privacy and asset protection for their investments. A number of offshore jurisdictions profess to offer this privacy and protection and a few actually do, but it is incumbent upon the investor to seek tax advisors who have the knowledge and experience to verify that these qualities truly exist in those particular jurisdictions. The offshore life insurance product possesses all of the creditor protections included with onshore life insurance and more - and is often enhanced by being owned in a foreign trust with additional protection granted by that trust’s governing jurisdiction.
In summary, the offshore customized variable life product is truly one of the most flexible and tax efficient insurance/investment vehicles ever conceived. But is it for everyone … clearly the answer is no. This last-best tax shelter is for those who need a tax efficient vehicle, can qualify for life insurance, can commit significant premiums, want to globalize their investments, and have significant net worth of three to five million and above. Indeed, offshore insurance often performs better than domestic policies based upon lower charges and loadings and is usually superior in the asset protection and asset privacy arenas. Potential US clients must be aware that offshore insurance may not be negotiated, solicited, underwritten, or placed within the US. The process must be initiated and managed from start to finish outside of the US. Consequently, anyone manifesting an interest in customized offshore insurance must contact and arrange to meet a representative of an offshore carrier outside of the US to receive all of the benefits of the offshore insurance products.
Ben Cooper is President and CEO of Karlsberg International Insurance Corporation, Ltd. He address is 402 Marina Towers, Belize City, Belize, or email him at Karlsbert@btl.net. His phone number is 011.501.223.0103. r
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Where's Michael?
by Michael Checkan
Indeed, "to travel is to live."
For the past 20 years, I have traveled the world looking with "new eyes" for investment and business opportunities and purely for the fun of seeing new and exotic places. This will continue for me later this year with trips planned to Outer Mongolia and China (North Korean Border and the Beijing Olympics) in August. Plus, a 7 week around the world trip in October/November 2008 to Zurich (to see the "Gnomes of Zurich") to Bhutan (100th anniversary of the monarchy), India, Singapore, Australia and New Zealand (Aussie/Kiwi Walk About).
I have traveled extensively over the years with The Oxford Club and The Sovereign Society. They organize wonderful investment conferences and I look forward to joining them on future trips. However, I feel that I am ready to begin doing ASI Expeditions to interesting places with clients and friends for the purpose of finding investment/ business opportunities and to just have fun too.
I have reached out to long time friend, Fritz Satran, President of AESU Travel in Baltimore, Maryland to organize the trips. I began traveling with Fritz and his outstanding team in the early 1990's when he was responsible for the travel arrangements for The Oxford Club. Eventually, in early 2000 he began to organize trips for The Sovereign Society.
Now, he has agreed to help me with ASI's Expeditions to the four corners of the world.
I worked with Fritz on my first "test" ASI trip in November of 2007 taking 20 clients/friends to Australia. The "Aussie Walk About" to Perth, Kalgoorlie, Adelaide and Sydney with an optional trip to Ayers Rock and Cairnes was successful. So, Fritz and I have now agreed to do four ASI Expeditions through 2009. In brief, here are our destinations:
· October 30-November 12, 2008, Australia, with optional trip, November 12-17, New Zealand
· February 21-March 5, 2009, Argentina: Buenos Aires, Salta/Cafayate, Bariloche
· May 9-16, 2009, Switzerland: Geneva, Neuchatel, Zurich
· September 12-19, 2009, Austria: Vienna, Salzburg
As I write this article, I am preparing to leave for a two week business trip to London, Vienna and Neuchatel to work on the meeting program. Fritz is responsible for the travel but it my responsibility to organize the expert speakers to share with you their best investment/ business ideas. Expect to hear more about ASI's Expeditions in the months ahead. r
Attention International Readers
by Elena J. Keller, Managing Editor
REMINDER: ASI’s goal is to provide Information Line to our global readers in a timely, efficient and cost effective manner. Effective July 1, 2008, we will no longer be mailing hard copies of Information Line via the postal service to our international readers.
As our way of thanking you for helping us help you, we would like to provide all foreign, and domestic, readers who provide us with their e-mail address a copy of our new Case for Precious Metals Report, Gold Report and Silver Report. These reports are only available via e-mail.
Please send your e-mail address to assetsi@assetstrategies.com to receive these free reports AND begin receiving Information Line electronically. r
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