Gold vs. Stocks: Worst Yet to Come

The US just reached a tipping point in its new Greater Depression...

DOUG CASEY, chairman of Casey Research LLC, has spent significant time in more than 170 different countries so far in his lifetime, living in 12 of them (currently New Zealand and Argentina) to help identify the best investment opportunities he can find, says the Gold Report.

A guest of David Letterman, Larry King, Merv Griffin, Charlie Rose, Phil Donahue, Regis Philbin and Maury Povich, the author of Crisis Investing has been the topic of numerous features in periodicals such as Time, Forbes, People, US, Barron's and the Washington Post – not to mention countless articles he's written for his own various websites, publications and subscribers.

Now both Gold Bullion and crude oil lead the line-up of power players that Doug Casey thinks investors can count on as the world slips deeper and deeper into what he calls the "Greater Depression".

The Gold Report caught up with the peripatetic author, publisher and professional international investor between polo matches in New Zealand...

The Gold Report: You've been discussing what you're calling "crisis and opportunity", and in fact have a summit by that same name coming up in Las Vegas next month. Could you give us a high-level overview of what you foresee?

Doug Casey: We've definitely entered what I describe as the Greater Depression. It's not coming; it's here. It's going to get much, much worse as far as I'm concerned and unfortunately, it's going to last a long time. It doesn't have to last a long time, but the root cause is government intervention in the economy and everything they're doing now is not just the wrong thing, it's the opposite of what they should be doing. It's almost perverse.

The distortions and misallocations of capital and the uneconomic patterns of production and consumption that have been going on for over a generation need to be liquidated and changed, but everything the government's doing is trying to maintain these patterns. So it's going to be horrible. In addition, the government is necessarily directing more power toward itself with all of its actions. If I were you, I'd rig for stormy running for a good long time.

TGR: By "a long time", do you mean a couple of years, a decade, or a generation?

Doug Casey: This is, in some ways, uncharted territory. Let me say that for the long run I'm very optimistic. Why? Two things act as the mainsprings of progress.

Number one is technology and that's going to keep advancing, so that's very good. Second is capital and savings. Individuals will solve their own problems and, therefore, they will stop consuming more than they produce, which is what they've been doing for years, and they'll again start producing more than they consume. The difference is savings; that builds capital.

So technology and capital are going to solve the depression. But the government can do all kinds of stupid things to make it worse. Look at the Soviet Union. They suffered a depression that lasted 70 years from its founding. Look at China. The whole reign of Mao was one long economic depression. That could certainly happen in the US, too, where the government misallocates capital in such a way that technology doesn't advance as it could and people can't build individual capital the way they would. I'm optimistic, but anything can happen.

TGR: But didn't China and the Soviet Union have governmental structures very different from those in Western Europe and the US, and those structures allowed for more intervention? Are you projecting that we might slip into an era where Western civilization will allow their government to run themselves like the Soviet Union and China did?

Doug Casey: It seems to be going in that direction. Of course, Europe is going to be hurt much worse than the US Europeans are much more heavily taxed and much more heavily regulated. The average European is much more reliant upon the state psychologically as well as economically. So it's all over for Europe and this doesn't even count the problems that they're going to have in the continuing war against Islam, which are much more serious for Europe than they are for the US.

So, no, Europe is fated to be nothing but a source of houseboys and maids for the Chinese in the next generation.

TGR: So do you think that societies in Western Europe – and even the US – will allow themselves to be governed in the same fashion as the Soviet Union and China were during their depressions?

Doug Casey: Oh, totally. I don't see why that would not be the case. Even Newsweek says we're all socialists now. That seems to be the reigning ideology. In addition, psychologically, the average American – just like the average European – looks to the government to solve things. This is very bad.

Most people are unaware that Homeland Security, which is one agency that should be abolished post-haste, is building a 400-acre campus in southeast Washington, D.C., where initially they're going to put 25,000 employees. That's as many as the Pentagon has – and with 400 acres, Homeland Security has a lot more room to grow.

Ironically, the property is at the site of St. Elizabeth's Hospital, the first federal insane asylum in the United States. But once a bureaucracy has a piece of real estate and builds buildings, it's game over. They're just going to accrete and grow and grow, so that's one indication. The trend is clearly in motion.

It's all over for the US. In fact, let me say this. America doesn't exist anymore. What is left is not even these United States. That was decided in the 1860s. It's the United States.

America, which is basically an idea, a concept, is dead and gone. The United States is just another of 200 awful little nation-states that have spread across the face of the earth like a skin disease. There's no longer any difference that I can tell between the US and any other country.

TGR: How would you describe the concept that America was based on that is now gone? And is there another country in the world embracing that concept? Will there be a new America?

Doug Casey: No, there is no other place. I've been to 175 countries and lived in 12. My feeling is that the best thing that you can do is set your life up so that you're not to be considered the property of any one government. You might have a passport or several passports and, therefore, that government thinks they own you. But if you don't spend time in a country, practically speaking, there's nothing they can do about it.

So no, there is no real haven for freedom in the world today. The best you can do is go where the governments are so unorganized that they can't control you effectively. That's one reason I like to spend time in Argentina. They have an incredibly stupid government, but they're also very inefficient and ineffective. So it's wonderful as a place to live.

I also spend time in Uruguay, because it's a tiny little country with no ambitions to conquer the world. The nice thing about New Zealand, where I am now, is that it's a small country, only 4 million people, lots of open land. It's got some severe problems, but it's pleasant. I think the US is going to be the epicenter of a lot of problems in the years to come.

TGR: Few of our readers are probably in positions where they could live in 12 different countries, but they have amassed assets here in the United States. What advice would you give them to safeguard those assets?

Doug Casey: The key is to remember that we're going to have a long and deep depression, so most things that worked well over the last 20 years are unlikely to work well in the future. I'd been predicting the real estate collapse for a long time. It's still got a way to go, too, because a lot of real estate debt remains that has to be liquidated. There's a lot of leverage out there and there's been a huge amount of overbuilding. So it's far too early to get into real estate, at least in North America or Europe.

It's also way too early to get into the general stock market, for all kinds of reasons. Dividend yields are still extremely low. Earnings are going to collapse. Government bonds are perhaps the worst single thing to be in, because with the government printing up money literally by the bushel basket, the Dollar is going to start losing value radically and interest rates are going to start going up radically at some point. So you have to rule out most stocks.

I'm afraid that the most intelligent thing you can do is to own a lot of gold, including Gold Coins in your own possession. And I think speculation in Gold Mining stocks makes sense at this point, because gold stocks are about as cheap as they've ever been relative to other assets, really, in history. Now is an excellent time to do that as well. But that's in terms of speculation.

Investment risk is tough enough, but the biggest problem is political risk. That's what you have to watch out for. That means you have to diversify internationally. This is harder for most people, harder psychologically, and it takes more assets to make international diversification viable. But if you're in a position to do it, it's the most important thing you can do.

TGR: Are you recommending putting all of your investment in gold into the bullion or are you also recommending some portion in producing junior and exploration stocks?

Doug Casey: Both, but look at the stocks as being speculative. Most of your money should be in gold with a bit of silver, too. Silver is basically an industrial metal, but it has monetary characteristics. Now is the time to be very overweight in the metals and I think owning gold stocks is a good idea. They're very cheap.

TGR: Anything else investors can do to preserve whatever may remain of their wealth?

Doug Casey: Owning real estate in some foreign countries is a very good idea – from a lifestyle point of view, an asset diversification point of view, and a possible capital gains point of view, too. They can't make you repatriate foreign real estate. Having some US Dollar cash while we're going through this deflationary period is very wise as well, but that's not going to last. Eventually the US Dollar is going to reach its intrinsic value.

TGR: Not that you have a crystal ball, but how would you see the rest of '09 playing out?

Doug Casey: Nothing goes straight up or straight down, but it seems that '09 is going to see much higher Gold Prices and much lower stock prices and much lower bond prices, too. But remember, the worst is yet to come.

You haven't heard an awful lot about people losing their pensions yet, but that's going to happen because what are pensions invested in? They're mostly invested in stocks and bonds and commercial real estate. All three of those things are disaster areas, and bonds are the big disaster area yet to come.

So I think it's going to be nothing but bad news in 2009. What happened in 2008 was just an overture to what I think is going to happen in '09 and '10.

TGR: Even into 2010?

Doug Casey: Yes. This isn't going to be cured overnight, mainly because of what the government's doing. As I said, it's perversely exactly the opposite of what they should be doing, which is abolishing all the agencies and freeing up the economy. They're passing lots of new regulations, they're going to have to raise lots of taxes eventually, and they're inflating the currency. So it has to last, at least into 2010. It's going to be quite dismal, actually.

TGR: And what happens with the unfunded Medicare liabilities?

Doug Casey: They're not going to be funded. They're going to be defaulted on and, actually, that's the best thing that could happen. That's one of the things that should be done now; the US government should default on its debt. This is shocking for people to hear, but it wouldn't be the first time the US government has done that. It did that almost at its founding in continental days.

This debt represents a tax liability that's being foisted off on the next generations who have no moral obligation to pay and should not pay. I think as an ethical point, the US should default on this debt. It's impossible to pay it back, and it won't be paid back. It's more honest to acknowledge that bankruptcy now as opposed to pretend it's going to be paid back. Defaulting even might forestall runaway inflation in the dollar, which would be a catastrophe of the first order. So it's the smart and moral thing to do, and it's going to happen eventually anyway. All the real wealth will still be here; a lot of it will just change ownership. The big losers will be those who lent to the State, thereby enabling its depredations, and they deserve to be punished.

But even a default tomorrow will do no good unless you put the US government into reverse and disband all of these ridiculous, destructive agencies that have grown like a cancer for years. Taxes should be cut 50% to start with, just out of hand. And the defense establishment – it's a misnomer; it's not defense at all but rather foments wars around the world – should be cut hugely. Not with a butcher knife; but a chain saw. But none of this is going to happen; in fact, just the opposite. That's why I'm so pessimistic now that the tipping point's finally been reached.

TGR: Are we at the tipping point?

Doug Casey: Yes, we've absolutely gone over the edge. The consumer is no longer in a position to consume. Everybody is going to cut consumption to the bone and hopefully find something to produce instead. It would be better for people to start viewing themselves as producers than consumers. That would be a step in the right direction to get them psychologically more in line with reality.

TGR: In last fall's meltdown, Gold Bullion held up, but the gold-mining stocks didn't. Quite a few producers and soon-to-be producers, and some companies making discoveries, seem to have bottomed out in November and December. But worry persists in the market. Suppose another shoe drops or another black swan appears? Richard Russell of Dow Theory Letters and others have been talking about the Dow going down to 5,000. What would that do to the gold stocks?

Doug Casey: Gold Mining stocks are also stocks, and the best environment for gold stocks historically has always been when both gold and the stock market are going up. But since the last gold stock bull market came to an end, I think it's entirely possible to see a bubble develop in gold stocks with all the money being created. I certainly hope so. I'm actually optimistic for gold stocks just because they're so cheap relative to everything else.

TGR: They have been beaten down...

Doug Casey: Yes. And that fact, along with the waves of money being printed around the world and the much higher gold prices we are going to see, could cause a speculative mania to develop in the gold stocks. Nobody's even thinking about that possibility right now, because they're so battered. But this is the time to get into the right ones because it's likely to happen in the future.

TGR: The 1929 crash – which was really the preamble, because '30, '31, '32 and '33 were certainly bigger – is when gold stocks such as Homestake did their best. How do you see that playing out this time around? Is it different this time or do you expect a similar pattern?

Doug Casey: You know what they say, "History doesn't repeat itself, but it rhymes." I think that, first of all, the gold mining industry is a much worse industry now than it's ever been in the past, because just as all the easily defined light sweet oil basically has been discovered, all the easy-to-find high-grade gold basically has been discovered. Most mines that are going into production are low-grade, which means that you have to move a lot of dirt, which means that they're much more capital-intensive than in the past. So gold mining's a worse industry from that point of view.

Also, politically speaking, with the rise of the green movement, there are people who don't want any oil burned, any dirt moved, any trees cut. They don't want to see anything happen. This makes it much harder to do gold from a permitting and political point of view. We're in a much higher tax environment than in the past. So it's a tough industry. It really is. It's just a 19th century choo-choo train type of industry that interests me only as a speculative vehicle. You'll notice that gold went from lows of about $300 to highs of about $900 and none of these gold companies are making any money because their costs actually went up faster than the price of gold.

So I'm not saying Gold Mining is a great business. It's not. It's a crappy business. Still, we could have a bubble in the stocks. I'm hoping we do.

TGR: Aren't we going to see a change in that in '09? Oil, which is one of the large components of that cost, has come down dramatically. A lot of these producers must be locking in oil at these lower prices. Won't that translate into year-over-year earnings increases for the gold producers?

Doug Casey: That's possible. The producers actually may show increases for the next couple of years. I don't doubt that. But I don't think oil will stay where it is. I think oil's eventually headed back to $150 a barrel or more.

TGR: So why wouldn't you own oil as well as gold?

Doug Casey: It's a good idea, but we weren't really talking about oil. I'd say that oil is a good thing to own. Oil is a real buy now. It's as good a buy at $40 as gold is at $900 right now. Maybe a better buy; who knows?

TGR: If we go into worldwide depression, will oil continue to be a good buy or will it self-regulate around this $40 a barrel?

Doug Casey: I am bullish on oil. Although I'm philosophically not very sympathetic to the peak oil theory, I think it's a geological fact. Also, China and India and the other developing parts of the world don't use a whole lot of oil now. As they develop, they will to want – and almost need – to use a lot more oil. That's going to keep pressure up on the demand side. But the supply side actually finally is constrained, so it's going to mean higher prices. In a depression-type environment, US and Western oil consumption could drop a lot, but the third world would take up most of that slack. So I have to be bullish on oil.

TGR: Are you bullish on any other sectors or commodities?

Doug Casey: I'm bullish on agricultural commodities. They ran way up last year and then collapsed again. I think a good case can be made that most of the soft commodities are quite cheap and will go higher, so I'd look at those, too. I think gold definitely, oil in the years to come has the potential to go much, much higher, and the agricultural commodities have a lot of potential.

TGR: Gold appears to be uncoupling from the US Dollar. Historically, when the Dollar was strong, gold would be weak. But we've had a couple of recent instances in which both the Dollar and Spot Gold have been strong. Obviously, we've seen a total decoupling of gold from oil. It used to be when oil was running, gold was running and vice versa, but that no longer seems to be the case. Is that just an old wives' tale or is something going on?

Doug Casey: I've never seen any necessary relationship between gold and oil, just like there's no necessary relationship between rice and natural gas, or nickel and soybeans. All these commodities tend to move together, all the currencies tend to move together and stock markets tend to move together, but they all have their own dynamics. I think it makes sense to compare the relative prices of various commodities and see what may be cheap or dear relative to other things based on the fundamentals.

On any given day, somebody may have to buy or somebody may have to sell a huge amount of almost anything. It's unpredictable and you can't tell what constraints are out there in the market. I don't even pay attention to day-to-day fluctuations because they're just random noise. I watch the big trend. It's been shown that if you just made one correct trade and stuck with it at the beginning of every decade for the last four decades, you would have realized something like 1,000 times on your money. To me, this is the proper approach to the markets, not to try to second-guess from day-to-day what's going to happen. That's foolish because you get chewed up with commissions and bid-ask spreads and double-thinking your own psychology and so forth.

I really just like to look at long-term trends. In terms of long-term trends, you've got to be long gold, long silver, long oil; you've got to be short bonds. I think that's really all you need to know. The other things we mentioned such as agricultural commodities and so forth are worthy of attention. But, as I said, I'm not a day-to-day trader. I think that's very foolish.

Inflation? Deflation? Buy Gold

Devaluation ahead? Here's how to profit – again – says a '70s veteran...

CHRIS WEBER – a 16-year old paper boy from Phoenix, Arizona – had just been dumped by his girlfriend, writes Tom Dyson for Daily Wealth.

It was a hot summer that year, 1971, and Chris thought he'd stay at home and read books. The first book he read was Harry Browne's How You Can Profit from the Coming Devaluation.

This book was Browne's first book, and it went on to become a national bestseller. (Now entitled 99% of All You Need to Know About Money and Its Effect Upon the Economy this is an absolutely fantastic book. It's so enjoyable, I read it in three hours and then immediately re-read it.)

"It was a revelation," says Chris. "It is still the best explanation of what money is, and how it develops, that I have ever read. After that, it was 'off to the races...'"

At the time, the world was living in a fixed currency system. The US government had set the Gold Price at $35 an ounce, and foreign currencies were fixed against the dollar. The United States, therefore, had the wonderful power to print paper dollars and tell the rest of the world they were redeemable for gold.

The problem was, the government started abusing this privilege in the late 1960s, inflating the Dollar to pay for Vietnam.

Chris realized the system couldn't last, and sooner or later the country would have to devalue the Dollar against gold. So in July 1971, he bicycled down to the local coin dealer and spent $650 – all the money he had saved from his paper route – on British gold sovereign coins

At the time, it was still illegal for Americans to own gold. Collectors' coins were exempt. The coins cost $12 each.

Chris Weber's timing was perfect. By the end of the summer, foreign governments stopped supporting the Dollar and began asking for Gold Bullion instead. On August 15, 1971, President Nixon closed the "gold window". He cut the link between the US Dollar and gold. That December, Nixon devalued the Dollar against gold by about 8.5%.

"As the price started going up, I started trading. I still don't know how I did it, but when I thought the price was going up too far, too fast, and had gotten ahead of itself, I sold my coins. I waited until I thought the rise was going again...

"By the time I finished high school, I was rich," Chris says.

By the end of the decade, gold hit $850 an ounce and Chris' gold sovereigns were over $300 each. When he saw the crowd piling in, he knew the game was up. He dumped his coins and invested the profits in 20% Treasury bonds...an investment he still holds today.

The paper route was the last job Chris had.

Chris Weber has since made millions from his investments and spent his life traveling around the world. He thankfully records his thoughts on stocks, currencies, and commodities in his Weber Global Opportunities Report. It's a fantastic letter...and I can't recall a major market move Chris hasn't nailed.

So what's he doing with his money right now? One of my colleagues here at Daily Wealth interviewed Chris last week. In the interview, Chris says investors should have protection against both deflation and inflation and says he recently dumped all his stock investments except a few gold mining stocks. He now holds all his money in gold and cash.

"This continues to be a time to be safe and on the sidelines. I believe that the ultimate lows of the stock market are going to be much lower than even today's prices, but it may take years – and months of fake rallies – to get us there."

Gold: Reality vs. Liquidity

Deep thoughts from a long-time thinker on gold...

AS SOMEONE WHO'S BEEN interested in gold for the last forty years, writes William Rees-Mogg for The Daily Reckoning Australia, I have always been interested in the definitions which can be applied to gold.

Is gold money? It often has been, but it is not at present. I suspect it may become money again, but is gold also a commodity? I think the answer to that question is "Yes". Gold used in chemical reactions, or in jewelry, is plainly a commodity which can sometimes be replaced by another commodity.

However, the question I find most interesting is whether gold is a real asset.

One of the problems of investment is that there are two variables, reality and liquidity. Land or property are relatively illiquid, but are also real, in that they have a use which does not depend on their value in exchange. Gold is highly liquid, indeed it is more liquid than paper money. In extreme circumstances, paper money can lose all its value, but gold is still acceptable as payment.

In 1940, for instance, when the French Army was defeated, many French people took to their automobiles to escape the advancing Germans. They found that petrol stations would not accept paper francs, but would sell their petrol in exchange for Gold Coins.

Gold Bullion also remains an acceptable currency in periods of high inflation, when paper money can lose all its value. But what does "reality" mean, when applied to an investment?

Obviously we talk about "real estate" to describe the legal possession of property. I think that means property with a permanent character and at least a potential use. In the same way, the traditional theorists of the Gold Standard would say that gold was a real currency, because it has permanence and a potential non-monetary use.

I accept that reality in an asset is a relative factor. In an ideal world, we would all like to hold our financial needs in a currency with a high degree of permanence, strong alternative uses and high liquidity. We have to make do with currencies which fall short of perfect "reality", and fall short of perfect liquidity as well. We make do with imperfect currencies because we have no choice.

Gold Investment makes one think about these issues, but it makes one even more uneasy about electronic money. In book publishing, I am well aware of the library demand for archival books which can reasonably be expected to last for centuries, like the printed works of earlier centuries. We need also to have permanent money, which can be relied upon to survive, even it its value may decline over time. The historic value of gold has been astonishingly stable over centuries.

In an extreme example, one could be worried about the issue of money and about its preservation. Mr. Madoff has shown that fraud can reach the unbelievable level of $50 billion. Might there not be still larger frauds, so large as to achieve what the Nazi war machine attempted – the complete take-over of a targeted currency?

Suppose that Al Qaeda, instead of attacking the twin towers, had attacked the electronic systems which record all the monetary holdings of New York. No lives might have been lost, but an electronic pulse might have erased one of the central counting houses of world finance. And is there not already some element of this cyber-catastrophe in the present world crisis?

Reality may be a variable concept, with nothing 100% real and hardly anything zero per cent real. When I was born, in 1928, gold was money, and gold was over 90% real – the rest existing as paper certificates and bank-notes issued in excess of the full bullion backing. By 1970, when I was in my forties, money was paper, and even the convertibility into gold of the Bretton Woods Agreement was breaking up. Now money is a largely unidentifiable electronic pulse, itself vulnerable to attack by electronic means. Virtual money has very low reality, much lower even than paper.

Surely this is a system which could be blown away because there is nothing in it to gain confidence. Even a return to paper money would raise the level of reality attached to world currencies. There is a problem of raising the reality level of all currencies – a problem which nineteenth century economists solved by convertibility to gold.

Inflationary Fire Insurance

Inflation now looks a near-certainty. The only unknown is its timing...

THE FLAMING EMBERS of inflation have already landed atop the thatched roof of American finance, writes Eric Fry in the Rude Awakening.

And yet investors can still buy fire insurance on the cheap.

In the next 1,373 words, we'll examine a few of these "inflation insurance policies" to assess their virtues and drawbacks. Because a powerful new inflationary trend is very likely to occur, and the prudent investor should probably take steps to guard against it.

"But wait a second!" some readers may say. "What if a powerful deflationary trend occurs first?"

Good question. Because it might. But we'd begin preparing for inflation anyway. Its arrival is near-certain. The only real uncertainty is its timing. Imagine an infallible clairvoyant told you that your house would burn down in one of the next five years, would you say to yourself, "Gosh, maybe I should try to figure out which year it will be and not buy fire insurance during the other four years."

You might actually guess correctly, in which case you would have saved yourself four years worth of insurance premiums. But you might guess incorrectly, in which case you would have lost your house.

Your call.

To this market observer, inflation seems like a near-certainty. Not an absolute certainty, mind, you, just a near-certainty, sometime within the next three years. So why not beat the rush to buy inflation insurance? Why not buy some now?

The nearby chart displays a sampling of inflation hedges, and how they performed during the last eight years of the infamous 1970s. Gold was clearly the standout winner. But we'd put an asterisk next to this result, due to a performance-enhancing assist from the US government.

You see, during most of the preceding four decades, the US government had been artificially suppressing the Gold Price at $35 an ounce, while also forbidding private US citizens from owning it. Therefore, once the government removed it cap – and removed the exchange controls on owning Gold Bullion – the price partied like a teenager whose parents had just left town.

Aside from Gold Investing, very few assets managed to keep pace with inflation as measured by the Consumer Price Index (CPI).

Hard assets like the CRB index of commodity prices and the Swiss Franc did outpace the CPI, but stocks and bonds both lagged miserably.

Skipping ahead about 30 years, we can see that the modern versions of the 1970s inflation hedges have performed quite poorly during the last 14 months. Clearly, inflation is not a widespread concern. But that's part of the reason it concerns us, and also part of the reason why we'd be inclined to take action now, while inflation hedges remain relatively cheap.

Our contrarian instincts lead us – rightly or wrongly – to distrust the consensus, especially when the consensus trusts in an idea like deflation. We don't think deflation is stupid, just unlikely. More precisely, we suspect that deflationary indicia will be seasonal, like daffodils.

For a while, they will seem to be everywhere. Then, just as suddenly, you won't be able to find a single one.

So with that biased and unscientific preface, let's sweep through a Reader's Digest review of ETFs that might provide some kind of hedge against inflation:

Gold: The "Old Faithful" of hedges. It's always worked before. Enough said. Exchange-traded funds like the SPDR Gold Trust (GLD) provide easy access, but without any actual ownership. With a $30 billion market capitalization, the "Spider" is now the go-to Gold ETF for big institutions. The next largest entrant is the iShares Comex Gold Trust (IAU) with a market cap of $2 billion. Both ETFs enable an investor to buy gold with a mouse-click. No muss. No fuss. But purists may wish to buy bullion coins like Krugerrands or Maple Leafs. As a gold investment, bullion coins have the advantage of being shiny, pretty and portable. But they have the disadvantage of costing 6% to 10% more than bullion itself, while also being so shiny and pretty that someone might want to steal them. [Ed.Note: Investors looking to square the circle, taking ownership but slashing their costs, might want to consider BullionVault...]
Gold Stocks: The bastard brood of gold and the stock market. As inflation hedges, Gold Mining stocks can be somewhat unpredictable and capricious. Over a multi-year span of time, they tend to reflect the gold side of their heredity. But during shorter time spans, gold stocks can behave much more like stocks than like gold...and that's not always a good thing. That said, ETFs like the Market Vectors Gold Miners (GDX) provides a handy way to buy a basket of gold stocks.
Commodities: Like gold, a basket of commodities that includes crude oil, copper and wheat tends to provide a very reliable hedge against inflation. Unlike gold, a basket of commodities provides diversification across multiple assets and – therefore – much lower volatility than gold alone. The largest commodity ETFs available are the PowerShares DB Commodity Index Tracking Fund (DBC) and the iShares S&P GSCI Commodity-Indexed Trust (GSG). DBC holds only six commodities: Crude oil, heating oil, aluminum, corn, wheat and gold. GSC holds a much broader collection of commodities.
Commodity-Focused Stocks: See comments on #2 above. The iShares S&P North American Natural Resources Sector Index Fund (IGE) provides broad exposure to commodity-focused stocks. Alternatively, the DWS Global Commodities Stock Fund (GCS) is a small closed-end fund that holds a similar portfolio. But GCS is selling 12% below its net asset value, which means that a buyer at the current quote controls one dollar worth of resource stocks for only 88 cents.
Non-Dollar Bonds: The Swiss Franc performed quite admirably during the last Great Inflation in the United States. But we are hesitant to bet on a repeat performance. Indeed we are hesitant to bet on ANY foreign currency as a way to hedge against US inflation. The Swiss economy, for example, no longer features a bunch of pocket-watch-toting gnomes doing nothing but guard vaults full of Gold Bullion. Instead, the modern Swiss economy also features pocket-watch-toting gnomes masquerading as hedge fund managers. The predictable result is that Switzerland's two largest banks have amassed questionable derivatives exposures that exceed the GDP of the entire country. Many other bankers speaking many other languages have achieved equally enormous feats of stupidity. No one knows how these feats of stupidity will influence the values of their native currencies. Not knowing, therefore, we are disinclined to guess. But those readers who suspect that the Dollar will be one of the first currencies to go down in flames, rather than one of the last, might be interested in the one of the many ETFs that hold foreign currencies. The CurrencyShares Swiss Franc Trust (FXF), for example, holds Swiss francs. Alternatively, the Dollar-phobic investor could purchase the SPDR Barclays Capital International Treasury Bond ETF (BWX) that holds a basket of bonds issued by foreign governments. Its largest allocations include a 23% weighting in Japanese government bonds, 12% in Germany and 12% in Italy.
TIPS: No discussion of inflation insurance would be complete without mentioning TIPS, short for Treasury Inflation-Protected Securities. Investors may purchase a basket of TIPS by buying the iShares Barclays US Treasury Inflation Protected Securities Fund (TIP). In theory, TIPS provide a direct and reliable hedge against inflation. But like so many other seemingly brilliant ideas, TIPS work better in theory than in practice.
The first risk to a TIP is an overt one: Deflation might persist for longer than expected (by us). In which case, the principal value of a TIP could decline below par. And even though the holder of the TIP would receive par at maturity, the interest payments that the holder would receive between now and maturity would decline in concert with the declining principal value.

The second risk is a covert one: The federal government controls the calculation of the Consumer Price Index (CPI). Therefore, if the CPI, as currently constructed, were to get out of hand and produce very high inflation readings, the government's bean counters would probably spring into action to create a "new and improved" CPI that would deliver much lower inflation readings. It has happened before. We all know it could happen again.

Thus concludes our review of inflation hedges. We hope all readers will utilize the delightful deflationary interlude we are now enjoying to prepare for what may lie ahead. Hostile inflationary forces may be amassing their forces at the borders of our economy at this very moment.

In short, we think it's a good time to risk being paranoid about the threat of inflation.

Euro Collapse, Gold Surge

Political unrest & financial crisis drives European investors to Buy Gold...

THE EURO has suddenly become a risky currency, writes Gary Dorsch of Global Money Trends, since the financial crisis in Eastern Europe could rival the destructive power of the US sub-prime debt bomb.

Western European banks have an estimated €1.6 trillion extended in Eastern Europe, two-thirds denominated in Euros and Swiss Francs, to borrowers whose incomes are paid in Hungarian Forints and Latvian Lats, and already stretched to the limit.

The Polish Zloty has dropped 29% against the Euro, the Hungarian Forint is 20% lower, the Romanian Leu down 17% and the Czech Koruna is 12% lower against the Euro, since the September collapse of Lehman Brothers, making their debts unaffordable and subject to default.

Emerging European currencies plunged on March 2nd, led by a 2.5% drop in the Hungarian Forint, after a summit of European Union leaders rejected a €180 billion bailout plan for the region.

The EU summit participants were unable to agree on any concrete measures to deal with the European credit crunch, the much-feared collapse of east European banks, or a pan-European stimulus program.

Hungarian president Ferenc Gyurcsany warned that failure to offer bigger bailouts "could lead to massive contractions in eastern economies and large-scale defaults that would affect Europe as a whole."

The result, he continued, would be increased political unrest and immigration pressures.

As such, investors have turned to gold as a "safe-haven" hedge against the possible default by Western European banks or emerging nations on their outstanding debt. Since July, the yield on Hungary's 10-year bond has soared from +335-basis points over the German bund, to +845-bp today.

Likewise, the Gold Price has been closely tracking the yield spread, reaching a record 230,000 Hungarian Forints per ounce last week.

Simply adopting counter-intuitive logic, however – that negative data on the US economy is bullish for the Dollar – still leaves the currency trader without the key explanation as to why a depression is bullish for the greenback.

Can China Rescue the World

Can Beijing rescue the global economy? Can it do it without sparking inflation?

CHINA'S SPECTACULAR double-digit economic growth this decade would not have been possible without massive debt-growth in the United States and Eastern Europe, writes Gary Dorsch of Global Money Trends.

But this growth of debt, which has sustained global demand for the longest period since World War II, has now resulted in a colossal financial crisis. At the same time, the exploitation of cheap labor in China by global industrialists has led to the destruction of four million US factory jobs over the past eight years.

The mirror image of America's industrial decline was the vast expansion of financial speculation, which ultimately led to the stock market crash of 2008 and the loss of another 2.6 million jobs so far. The flow of low-priced goods from Asia helped the Federal Reserve maintain a low interest-rate policy, thus providing the basis for Wall Street to create ever bigger debt and credit bubbles, all in the pursuit of fabulous profits.

Meanwhile, some 26 million Chinese migrant workers have lost their jobs and 670,000 businesses have shut-down, because of collapsing export markets for Chinese-made electronics, toys, apparel, and other consumer goods.

China's Politburo now fears growing social unrest and there is increasing popular demand that Beijing's $2 trillion foreign currency stash be spent at home to alleviate deepening social misery.

China has already launched a 4 trillion Yuan stimulus package, equal to roughly 15% of the country's GDP. While an 8.8% economic growth rate is needed just to generate sufficient jobs for the 24 million new workers who enter the Chinese labor market each year, latest forecasts project 5.5% growth or worse in the year ahead.

Thus Beijing might decide to boost its stimulus program this year. Japan has also approved ¥5 trillion for economic stimulus, and Australia approved A$42 billion.

China's official manufacturing index jumped sharply in February, gaining for the third month in a row and suggesting the country could be on the brink of a recovery despite a slump in global demand.

The official purchasing managers' index (PMI) rose to 49.0 from 45.3 in January, and far above the record low of 38.8 reached in November. Every sub-index in the official PMI rose in February. Output and new orders climbed to 51.2 and 50.4 respectively, returning to mild growth (as shown by any reading above 50).

Shanghai copper soared for a second-day on March 5th to 30,310-Yuan per ton, supported by the surge in the factory PMI and speculation that Beijing would boost spending on infrastructure and manufacturing, on top of the 4 trillion-Yuan stimulus package unveiled in November.

China's $200 billion sovereign wealth fund also said it saw investment opportunities in the natural resources sector, lifting base metal miners who may make attractive takeover targets.

Of course, China's national statistics have long come under skepticism and suspicion of outside analysts, who say the country manipulates its economic numbers to mask bad news. The official PMI jumped well ahead of a similar private survey, which registered 45.1 in February. Also raising a red-flag, China said new export orders rose to 43.4 last month, a 9.7-point leap from January, which is doubtful, while the rest of the world economy was sinking deeper within a synchronized recession.

But China's State Reserves Bureau bought 100,000 tons of zinc at 11,500 Yuan per ton last week, the second purchase in less than two months, and it has also contracted to buy 240,000 tons of copper as well as 300,000 tons of aluminum.

Copper inventories at LME warehouses have declined 23,000 tons over the past two weeks, the first noticeable drop in nine months. About 55,000 tons of copper are earmarked for delivery to warehouses in Shanghai, where copper supplies are at the lowest in a decade.