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Peter Schiff, renowned financial analyst and author, appeared on CNBC yesterday to give remarks about the dollar’s latest rally:
“The dollar has moved up about 1 point from the lows and I guess if you are a daytrader that means something but for everybody else it’s insignificant. The trend hasn’t changed, nothing has changed, the fundamentals haven’t changed, if anything they continue to get worse day by day. So I would continue to be out of the US dollar, I will continue to be on the anti-dollar trades, gold, commodities, foreign stocks. Nothing moves in a straight line, the dollar is always going to have some rallies but you know, don’t be fooled by them.”
Schiff still stands by his statements of the last few years that we are in for a commodities boom. Whether it’s a bullion bar or a gold coin, the dollar’s current rally makes this week an excellent time to begin easing into diversifying your wealth to prepare for any future upsets in the economy.
Half of US households lack the funds to retire by age 65. Will it be you or your next door neighbor?
Boston College’s Center for Retirement Research released a study that shows 51% of US households simply do not have enough savings in their retirement funds to exit the work force at 65. This is an increase from 2006’s study which showed that only 44% of households were in the same ugly financial position. The current financial crisis has hit those near retirement age doubly hard. Namely, their dismal 401Ks and the decreased value of their homes.
While the stock market and real estate are in bear markets right now, commodities are actually moving up. Some people have waited a long time to diversify and figure right now may be their best chance to recoup this year’s losses by purchasing precious metals while they are on a bull run. Did you know you can even buy gold through your retirement fund? It’s true, you can legally hold all or part of your 401K or IRA or 403B in precious metals. Its one option to consider when half of Americans will be punching the clock for a lot longer than they planned.
Dr. Marc Faber was interviewed on Bloomberg TV yesterday. Calling Fed Chairman Bernanke nothing else but “a money printer,” Faber is bracing himself for a disaster
“The dollar will become worthless when people eventually realize the fiscal situation in the US is a disaster. It will go to a value of zero eventually, but not right now. Looking at Mr. Obama’s administration, it should already be there…In my opinion about 50% of tax revenues will be used just to cover interest payments on the government debt. That’s unsustainable. Then you’ll really be forced to print money. The best investments right now are foreign currencies, commodities, and equities.”
Peter Schiff explained his logic behind his exuberant prediction a month back that gold would hit $5000 an ounce in the next couple years. He compared the current administration’s government spending to that of the 1960s. Lyndon Johnson’s Great Society was a massive government spending program that supported the president’s noble war against poverty and reforms to eliminate racial injustice. The program had beautiful aspirations and directly helped a lot of people, but it also paved the way for the inflation of the 1970s and gold’s massive rise in value in that decade. The all night dollar printing press appears to be running on energizer batteries because the US Treasury announced another $123 billion will be injected into the economy this week (hey, a new record!).
The 1970s culminated in an all time high for gold in January of 1980 when gold made an unheard of at the time record of $873 an ounce. Using the U.S. Department of Labor’s inflation calculator, in today’s dollars that would be $2,287. Gold appears to be sitting at a bargain price today.
The story of the blue collar American worker whose job has been outsourced is one that has received much coverage in the media over the last decade. From Michael Moore’s documentaries to 60 Minutes, the emigration of factories to countries with cheap labor is not a hidden phenomenon. Under the radar though is the number of white collar jobs that are being outsourced. Customer service call centers have sprung up all over India. Architecture and engineering firms send their hand sketches to China and Columbia to have blueprints drawn at a tiny fraction of the cost. And the number of jobs that have permanently been lost in the United States is the highest it’s been in 30 years. This number can only increase as corporations try to cut costs and globalization has made hiring cheap educated workers as easy as hiring cheap uneducated workers.
This fascinating post from Calculated Risk examines the hard data within the unemployment numbers. Unemployed workers fall into several categories. Either they quit, were temporarily laid off, have reentered the labor market, are entering the labor market for the first time, or they were permanently separated from their prior employer. The final category occurs when a job has been eliminated completely and an employer has no intention of refilling that position. And at 56%, most unemployed workers right now fall into this last category.
How can we be seeing any sort of economic recovery right now when so many Americans have permanently lost jobs and new jobs are not being created? How can we expect to stop foreclosures if the people holding mortgages are losing their income? These numbers suggest that any recovery we see now may merely be the eye of the hurricane. Historically, the Fed waits 19 months after unemployment peaks to raise rates. With no peak in site, how long will this easy credit last? If the rates are raised too soon, the economy could plunge into a deflationary spiral. If the rates aren’t raised at all, we can expect rampant inflation. According to Credit Suisse, the Fed Funds rate is the most important factor that drives the price of gold. While frustrated workers have little job security or control of their income, one thing we can control is our personal savings. Luckily, as we have previously written about, gold performs well in both times of inflation and deflation.
The tide of commercial real estate foreclosures will soon become a full blown tidal wave. One of the largest US commercial real estate lenders, Capmark Financial Group, has filed for bankruptcy. Capmark listed total debt of $21 billion and assets of $20.1 billion in its bankruptcy filing. This upset will only serve to heighten fears for the real estate market. It comes on top of the huge losses in commercial real estate reported by GE and Bank of America in their third quarter statements.
Driving down major boulevards or visiting shopping centers across America, one can clearly see the gaping storefronts of vacant retail suites. Tenants in office buildings have downsized and need less space for their disappearing workforce. They are trying to renegotiate leases, and when that’s not possible, some simply walk away to avoid paying for space they can’t use.
If commercial real estate losses continue to rise, it will put even more pressure on the FDIC’s ability to cover deposits should more banks fail. And according to a report from Creditsights, we are only 10% of the way through this cycle of bank collapses. Their analysts forecast a total of 1,100 bank failures will occur during the period from 2008 to 2011. That means we can expect 13.4% of all US Banks to fail.
“Another wave of prolonged losses driven by weakness in commercial real estate could prove catastrophic to many of these weakened banks,” according to Creditsights.
The data behind Creditsights report shows that commercial real estate loans make up 50% of the loans of 80% of the banks that fall into the “troubled” category. The FDIC is preparing for more bank failures, and has identified more than 400 “problem institutions.” Are you prepared for the next wave of bank failures? Would you feel more prepared if you were portfolio was backed with gold?
While governments around the world have conducted stimulus plans for their economies, including bailing out banks, it is still extremely difficult to get loans and raise capital for a number of companies. The latest victim is mining and metals companies, who are burdened with a “wall of debt” according to a report from Ernst and Young released this week. The inability to raise money is severely restricting the operations of these companies, which will also limit the supply of commodities, and could drive up the price of gold and other metals.
Capital is necessary to mining companies because of the long lead time required to actualize gains. It takes about 10 years after a body of ore is located before actual production of gold occurs, as mapping and permitting are time-intensive processes.
Jewelry sales are climbing to double digit profits in China according to gold company Hong Kong Resources Holdings, Ltd. The Chinese middle class is driving the shopping spree. The nation’s economy grew 8.9% in the third quarter alone, and these real, actualized profits are allowing the middle class to grow larger than ever when most countries are losing their middle class and seeing huge wage gaps between the very rich and the very poor.
Every year, 10 million couples marry in China, and analysts are expecting even more jewelry purchases in the fourth quarter because it coincides with the wedding season. Jewelers have been speaking to the press about expanding their retail store presence by the hundreds in mainland China. Gold and silver jewelry sails in China have gained 16% already this year, despite record highs for the price of bullion.
The bad news is piling up. And it’s going to get worse. If you’ve been counting, the number of failed banks this year has climbed to 106. And the banks that needed a massive bailout of taxpayer money because they were too big to fail? Well, now they are bigger!
This week, Neil Barofsky, responsible for overseeing the Troubled Asset Relief Program told CNN that the government’s action have placed the US economy in a hazardous position.
“Government has sponsored and supported several mergers that made them larger and that guarantee, that implicit guarantee of moral hazard, the idea that the government is not going to let these banks fail, which was implicit a year ago, is now explicit, we’ve said it. So if anything, not only have there not been any meaningful regulatory reform to make it less likely, in a lot of ways, the government has made such problems more likely…Potentially we could be in more danger now than we were a year ago.”
Part of the problem is that the Treasury and the Fed are not being transparent enough in their policies.
“I think this cynicism, this anger, this distrust of government that’s born in part from a lack of transparency could have far-reaching ramifications, whether there’s a next crisis or when anytime the government is going to call on the American people, the taxpayer, to support necessary programs.”
The FDIC has not used any taxpayer money to cover the bank failures so far, but instead its own insurance fund. Yet many Americans are worried about the safety of their money and if eventually taxpayers will be on the hook for this cost, too. While government policies are out of the control of the average citizen, we all have control over our personal savings. Take steps to ensure that your cash savings in your bank are within the insurable limits of the FDIC. If you are worried about the dollar itself and holding cash, period, move some paper assets into gold or other precious metals to hedge your wealth.
Russia had planned to sell 20 to 50 tonnes of gold this year, but someone from the Kremlin leaked the information early and the nation has decided to hold its reserves. Such a large influx of supply into the market, if announced, could cause a drop in the price of gold, and thus Russia would not be able to profit as much as they planned (the gains realized could have been $1.7 billion). There is also much anticipation that the spot price of gold will rise and greater returns will be realized is the bullion is sold later.
Russia has a pattern of strategically selling off bullion reserves for the largest possible profit. The delays in export of palladium from the nation in 2000 caused a panic in the demand for the bullion and drove up the price of palladium to an all time high of $1100 an ounce in early 2001.
Similarly, between 1999 and 2002, Chancellor Gordon Brown sold off 400 tonnes of the UK’s gold bullion when the price was at a 20 year low. He announced the venture, first, and the market dropped. Brown still proceeded with the sale, perhaps an embarrassing lapse of judgment considering how high gold is sitting today. The potential revenue loss was £2 billion.
If you’ve already diversified with gold, you can soon expect company! A number of large pension funds will soon be moving significant amounts of capital into gold. Shayne McGuire, a director at the Teacher Retirement System of Texas, publicly announced the launch of $250 million internally managed gold fund within the pension fund’s holdings. The gold fund will be made up of physical precious metals investments, such as coins and bullion, as well as ETFs and mining company stocks.
At 1.3 million public educators and retirees participating in it, the fund is the seventh-largest in the US. While McGuire believes gold will rise in the next few years, he stated that the motivation for such a large move is primarily diversification and worries about the dollar, which is losing ground against other currencies at an alarming rate.
McGuire stated yesterday, “I don’t think the question is really what is gold worth but what are currencies not worth. Consider the tremendous fiscal excess that major governments have made to prevent the world economy from collapsing.”