Harry Newton's In Search of The Perfect Investment
AM EST, Monday, December 1, 2008: My successful investor friend
has started buying gold, again. His theory is simple: the world is imploding.
Currencies are going to hell in a handbasket. Hence, there'll be a flight
usually happens during financial crises. But hasn't this time. This time,
everyone flocked to the dollar. Not because the dollar is A1 -- but because
it's A1 relative to most other currencies. Especially Europe and England
where the banks got themselves into a bigger mess with sub-prime than the
American banks. (Yes, it's possible.) And Australia, where the commodities
drop has hurt exports.
Here are the
two charts of the gold EFTs. They follow the same pattern:
My friend explains
his gold buying logic:
buying gold stocks and futures lately on some of the same sort of thinking
(see the next article). Even though we are clearly at risk of deflation
at this point and are clearly in an asset deflation, gold is looking strong
relative to other commodities. I've been thinking for some time the real
risk of what our government is doing is the ultimate devaluation of U.S.
currency and perhaps other currencies. There is also concern in some quarters
that the Euro ultimately will have to be abandoned because there is no central
Euro bank or fiscal or monetary authority. Different needs of various Euro
countries could cause some to decide they have no option but to back away
from it. And as the Citi commentary notes, even if the current strategies
of flooding the markets with currencies does manage to "right the boat"
it will likely result in inflation. So I think that it behooves investors
to have at least some gold in their portfolio at this point.
He is referring
to a piece I sent him by respected English journalist Amrose Evans-Pritchard
writing in the British Telegraph:
says gold could rise above $2,000 next year as world unravels
Gold is poised for a dramatic surge and could blast through $2,000 an ounce
by the end of next year as central banks flood the world's monetary system
with liquidity, according to an internal client note from the US bank Citigroup.
The bank said
the damage caused by the financial excesses of the last quarter century
was forcing the world's authorities to take steps that had never been tried
was likely to end in one of two extreme ways: with either a resurgence
of inflation; or a downward spiral into depression, civil disorder,
and possibly wars. Both outcomes will cause a rush for gold.
are throwing the kitchen sink at this," said Tom Fitzpatrick, the bank's
chief technical strategist.
world is not going back to normal after the magnitude of what they have
done. When the dust settles, this will either work, and the money they have
pushed into the system will feed though into an inflation shock.
will not work because too much damage has already been done, and we will
see continued financial deterioration, causing further economic deterioration,
with the risk of a feedback loop. We don't think this is the more likely
outcome, but as each week and month passes, there is a growing danger of
vicious circle as confidence erodes," he said.
will lead to political instability. We are already seeing countries on the
periphery of Europe under severe stress. Some leaders are now at record
levels of unpopularity. There is a risk of domestic unrest, starting with
strikes because people are feeling disenfranchised."
happens if there is a meltdown in a country like Pakistan, which is a nuclear
power. People react when they have their backs to the wall. We're already
seeing doubts emerge about the sovereign debts of developed AAA-rated countries,
which is not something you can ignore," he said.
are playing close attention to reports from Beijing that the China is thinking
of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to
diversify away from paper currencies. "If true, this is a very material
change," he said.
said Britain had made a mistake selling off half its gold at the bottom
of the market between 1999 to 2002. "People have started to question
the value of government debt," he said.
said the blast-off was likely to occur within two years, and possibly as
soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off
its all-time peak of $1,030 in February but has held up much better than
other commodities over the last few months reverting to is historical
role as a safe-haven store of value and a de facto currency.
Gold has tripled
in value over the last seven years, vastly outperforming Wall Street and
I haven't made up my mind. I was an economist before I became a businessman.
On pure economic theory, America has been the classic wastrel -- spending
for too long way more than it should. Ergo, its currency should be in the
toilet and gold, the alternative, should be through the roof. But, not so
a difficult science. Only hindsight works. The Telegraph follows their $2,000
an ounce gold piece with a piece on Ten ways to invest in gold. Remember gold,
for the English, is more expensive than for us, because the British pound
sterling has declined relative to the U.S. dollar.
to invest in gold
The price of gold itself has fallen, and is now trading in a range around
$720 to $750 an ounce, having peaked at more than $1,000 in the summer.
Nevertheless, this reflects a dramatic rise from a bottom of $270 in 2001.
However, the gold price has increased only modestly once inflation is taken
into account; current prices match those of the late 1980s and early 1990s
in real terms. But the gold price story is more complicated, particularly
for sterling investors. As it is priced in dollars, it has proved a good
hedge against a falling pound, and protected their savings from the currency
investors, the price remains at an all-time high, because of the slide in
the pound," said Sandra Conway of ATS Bullion.
If you want
gold that has an intrinsic and potentially rising investment value, your
first options are gold bars or coins, which can be bought over the counter
at a gold or bullion dealer (such as Baird & Co; www.goldline.co.uk),
by post or over the Internet. The World Gold Council's investment marketing
manager, John Mulligan, said: "Go to Switzerland and you'll find bank
vaults full of gold. It is not uncommon. But it can be arranged in the UK
Gold is a
classic safe-haven asset hence the pick-up in demand. Here are 10
ways to buy gold.
in metric sizes, and are based directly on that day's gold price, plus a
premium for manufacture and marketing. The smaller the bar, the bigger the
premium. According to ATS, a one-gram bar would cost £24 but has an
immediate underlying resale value of only £16.20, giving a markup
of 48pc to the retailer.
The 5g bar
costs £100, with an underlying gold value of £81, reducing the
markup to 23pc. A 1kg bar costing £17,035 has an underlying value
of £16,140, making the markup 5pc.
way to own gold is by buying gold coins, with 22-carat gold sovereigns the
favourite with British investors. Sovereigns dating from about 1887 and
up to 1982 are currently the best bet. Although their face value is only
£1, they cost £136 to buy but have an immediate resale value
modern coins dating from 2000 cost more, at around £160, yet their
intrinsic value as an investment is the same £118. Coins from before
the late Victorian period are even more desirable, but they have much greater
rarity value and are therefore more expensive.
option is to buy South African Krugerrands. The smallest is a 0.1oz coin,
which might cost £70 and have a resale value of £50. A 1oz coin
costs £567 at the time of writing and has a resale value of £512.
4. Exchange-traded funds
are not technically funds because they follow a single security. ETF gold
securities are traded on the London Stock Exchange. They essentially track
the gold price and can be traded daily all you pay is the dealing
charge of around 0.4pc. They are also regulated financial products. Visit
www.exchangetradedgold.com or www.etfsecurities.com for more information.
enjoyed a record quarterly inflow of 150 tonnes between July and September.
The peak in inflows occurred in late September, triggered by the collapse
of Lehman Brothers and a fear of further failures in the banking sector.
Net inflows surged by an unprecedented 111 tonnes, equivalent to $7bn, during
five consecutive trading days.
5. Unit trusts and investment trusts
few and far between, the most popular being BlackRock Merrill Lynch Gold
& General, which invests in the shares of gold mining companies as well
as other commodity businesses. Advisers reckon general commodity funds could
also do the job for private investors as they dabble in gold-related stocks
JPM Natural Resources and ACDS Australia Natural Resources remain
popular. Gold mining equities tend to be more volatile than the gold price.
6. Gold accounts
banks offer two types of gold account allocated and unallocated.
An allocated account is effectively like keeping gold in a safety deposit
box and is the most secure form of investment in physical gold. The gold
is stored in a vault owned and managed by a recognised bullion dealer or
With an unallocated
account, on the other hand, investors do not have specific bars allotted
to them. Traditionally, one advantage of unallocated accounts has been the
absence of storage or insurance charges, because the bank reserves the right
to lease the gold out.
7. Gold shares
You can of
course buy individual shares of companies that either trade or mine gold.
Evy Hambro, who co-runs the BlackRock Gold & General fund, recently
said the discount between the price of gold and that of gold shares was
the greatest he had known. Meanwhile, Mark Harris of New Star said gold
shares continued to look cheap and remained a decent portfolio diversifier.
shares include Highland Gold, the London-listed miner partly owned by the
Russian billionaire Roman Abramovich, and Peter Hambro Mining, whose share
price recently halved.
of items of gold jewellery will change hands this Christmas, they are not
considered serious investments. Jewellery accounts for more than 60pc of
total demand for gold, which was estimated at around 3,547 tonnes in 2007.
800 tonnes of bullion, more than 30pc of annual global gold mine production,
mostly as jewellery. But although over the long term these jewels should
hold their value and rise in line with inflation, manufacturing costs and
the jewellers' markup mean they would sell for a fraction of the purchase
price for the first few years of ownership.
9. Gold certificates
gold certificates were issued by the US Treasury from the Civil War until
1933. Denominated in dollars, the certificates were used as part of the
gold standard and could be exchanged for an equal value of gold.
gold certificates offer investors a method of holding gold without taking
physical delivery. Issued by individual banks, particularly in countries
such as Germany and Switzerland, they confirm an individual's ownership
while the bank holds the metal on the client's behalf.
avoids storage and personal security problems, and gains liquidity by being
able to sell portions of the holding by simply telephoning the custodian.
Mint also runs a certificate programme that is guaranteed by the government
of Western Australia and is distributed in a number of countries (www.perthmint.com.au/investment_certificate.aspx).
10. Structured products
A number of
structured products linked to commodities have been launched. They are either
baskets of commodities or individual commodities such as sugar, oil, platinum
products are typically five-year plans that aim to pay you a set return
and limit your downside risk. For example, Quantum Asset Management's Protected
Gold Portfolio offers a minimum capital return of 100pc at maturity plus
100pc participation in the rise of the underlying assets over the investment
period, subject to an overall maximum capital return of 165pc.
products can be complicated so ensure you read the small print, or preferably
get expert advice.
And now for
my latest research on gold: The Australian newspaper recently carried this
suspends orders amid rush to buy bullion
Fears of the
unknown long-term effects from the global financial crisis have sparked
a new gold rush. With retail and wholesale clients around the world stocking
up on the precious metal, the Perth Mint has been forced to suspend orders.
As the World
Gold Council reported that the dollar demand for gold reached a quarterly
record of $US32 billion in the third quarter, industry insiders said the
race to secure physical gold had reached an intensity that had never been
sales and marketing director Ron Currie said the unprecedented demand had
forced the Mint to cease orders until January, with staff working seven
days a week, 24-hour days, over three shifts to meet orders.
He said Europe
was leading the demand, with Russia, Ukraine, Middle East and US all buying
-- making up 80% of its sales.
have never seen this before and are working right at capacity. And we are
seeing it from clients in the shop buying one ounce, right up to 30,000
ounces from overseas clients, Mr Currie said.
under fire, defends his role at Citi. That
is the headline on the Wall Street Journal's piece. The first paragraphs are
for his role in the near-collapse of Citigroup Inc., Robert Rubin said its
problems were due to the buckling financial system, not its own mistakes,
and that his role was peripheral to the bank's main operations even though
he was one of its highest-paid officials.
was prepared for this," Mr. Rubin said in an interview. He cited former
Federal Reserve Chairman Alan Greenspan as another example of someone whose
reputation has been unfairly damaged by the crisis.
senior counselor and a director at Citigroup, acknowledged that he was involved
in a board decision to ramp up risk-taking in 2004 and 2005, even though
he was warning publicly that investors were taking too much risk. He said
if executives had executed the plan properly, the bank's losses would have
have put the former Treasury secretary in the awkward position of having
to justify $115 million in pay since 1999, excluding stock options, while
explaining Citigroup's $20 billion in losses over the past year and a government
bailout of at least $45 billion.
salary made him one of Wall Street's highest-paid officials -- and a controversial
figure among Citigroup shareholders and some executives, who questioned
whether his limited duties justified the big paydays.
best reading on the meltdown. Here are the
four best articles on the present financial crisis -- how it happened and
how the various players -- specially Paulson, Bernanke and Greenspan -- played
out their roles. The saddest parts of it all (at least to my mind) are:
How bright they were and how little they knew. How their forecasts of what
would happen were so wrong. How they never saw it coming, and in fact publicly
said all along that the crisis was over. To me, that's all the more surprising
given the immense data collecting resources of the Reserve Bank and the
How they figured their responses as they went along. They put out brushfires,
but have never really addressed the underlying problems -- the big ones
and the little ones (like leaving in place the bank executives who caused
How their ideology of ultra-free, regulation-free financial markets led
to their blindness of (and inaction to) to the disaster that was brewing.
Blame Ayn Rand, amongst others.
How the consequences of that inaction has now burdened the Federal Government
with so much toxic debt -- the national debt has more than doubled -- that
our financial future as a nation is now affected in ways we have zero way
friend and reader, you are living through historic times. You owe it to yourself
to read these four pieces:
"Anatomy of a Meltdown" by John Cassidy in the December 1,
"The End" by Michael Lewis in the December 2008 issue of
"All Fall Down" by Thomas Friedman in the November 26, 2008
issue of the
New York Times.
"The Reckoning: Citigroup Saw No Red Flags Even as It Made Bolder
Bets" by Eric Dash and Julie Creswell in the November 22, 2008 issue
of the New
advice from investment banks... an apt comment.
some good news.
A Jewish man was sitting in Starbucks reading an Arab newspaper.
A friend of his, who happened to be in the same store, noticed this strange
he approached him and said: 'Moshe, have you lost your mind? Why are you reading
an Arab newspaper?'
'I used to read the Jewish newspapers, but what did I find? Jews being persecuted,
Israel being attacked, Jews disappearing through assimilation and intermarriage,
Jews living in poverty.
So I switched
to the Arab newspaper. Now what do I find? Jews own all the banks, Jews control
the media, Jews are all rich and powerful, Jews rule the world. The news is
so much better!'
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
I make my daily column -- Monday through Friday -- freely available for three
reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
Investment." Third, I encourage my readers to send me their ideas,
concerns and experiences. That way we can all learn together. My email address
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