1987 Redux?

November 16, 2012

Many investors do not remember October 19th 1987.

That was the day the stock market crashed. The Dow fell over 500 points/23% in one day. The crash was a culmination of a decline that had started in August.

It is important to note that gold served as the best source of liquidity during that crisis and increased in price between October and the end of 1987.

We bring this up because there is an important article on Marketwatch that points out distinct parallels between the conditions that existed in 1987 and today:

Current drop echoes 1987 crash prelude

By Jon D. Markman

The Dow Jones Industrials have fallen 450 points over the past two days, and a lot of the blame has been placed on the re-election of the president. But anyone paying attention to the market over the past three months recognizes that the peak was actually made the week that the Federal Reserve announced a third round of quantitative easing. That was expected to be a positive event, but in retrospect, it ushered in a rolling thunder of value-eroding news events.

Soon after began a very underwhelming earnings reporting season, word of a deepening industrial slump in China, a broadening recession in Europe and the martyrdom of Spain. And then this week it suddenly dawned on people that if U.S. lawmakers can’t stop acting like stuck-up brats, then $1.2 trillion worth of ham-handed spending cuts and tax increases are about toplotzĀ on red states and blue states alike in the coming year.

Independent estimates suggest that would shave four percentage points off GDP faster than you can say “sequestration,” or “defenestration” for that matter, and lead to millions of lost jobs. It looks like the president would be OK with that, since he booked a tour of Myanmar for next week.

In short, the election put an exclamation mark on a parade of indignities, but it is far from the only proximate cause. Investors have liquidated U.S. assets for a while; it’s just more noticeable this week.



Gold Rebounds Going Into Election Day

November 5, 2012

The price of gold rebounded today headed into election day tomorrow. Spot gold rose $8.00 per ounce to $1685 as bargain hunters took advantage of Friday’s sharp correction to pick up gold at low prices.

Speaking of the election, now is as good of a time as any to remind investors that no matter who wins tomorrow, the US still has a $17 trillion debt and an economy that has been stuck in the doldrums for 5 years. Moreover, we have still come off of years of negative real interest rates, a scenario that eventually should energize the bull market in gold once again.

Who ever the president is the next 4 years, we can all wish him the best, but we must all take action to safeguard our wealth and, given the circumstances, gold is best positioned to to that.

Gold Hits 4-Month High On Predictions of Fed Stimulus

August 23, 2012

The price of gold has surged to a 4-month high in the wake of the release of Federal Reserve Open Market Committee minutes indicating that the Fed is nearly ready to turn on more stimulative policies in an attempt to boost economic activity in the US:


The policymakers at the Fed are clearly frustrated at the slow pace of economic activity and chronic high unemployment in the US and are also no doubt under intense political pressure from the Obama administration to act soon to boost Obama’s re-election chances in less than 3 months.

What all this really adds up to, however, is a further undermining of the US dollar. These types of stimulus packages have been largely ineffective at boosting economic activity and lowering unemployment to acceptable levels. But one thing is undeniable: they increase the supply of US dollars in a world that is already awash in dollars. This has the impact of reducing the value of the dollar.

That is why investors are moving back into gold in a big way. Gold has historically had a negative correlation with the dollar, so policies that undermine the value of the dollar tend to boost the price of gold.

Because at this point we only have an indication that the Fed has intentions of instituting such stimulative policies, investors have a window of opportunity in which to act. Buy gold investments now, before the dollar declines in earnest and gold prices are much higher.


Obamacare and Your Investments

June 29, 2012

By now everyone knows that the Supreme Court upheld President Obama’s healthcare program, known to many as Obamacare.

This story dominated the news yesterday, which is why we decided to take a step back and wait a day before commenting.

Our interest in Obamacare on these pages is strictly on the basis of its impact on the US economy and financial markets.

Some of that impact is unknowable at this time, but not all of it. We know that Obamacare will fundamentally transform the role of government in the everyday lives of every American. That requires infrastructure. Infrastructure requires people, i.e. bureaucracy.

And therein lies the biggest worry when it comes to Obamacare for investors across America: it’s truly profound fiscal impact on America’s already bleak fiscal condition.

The biggest fundamental factor likely to effect the US investment markets going forward is our huge national debt and ongoing deficits.

As of this writing, according to the National Debt Clock, the US National Debt is closing in on $16 trillion. And each year’s federal budget deficit adds another $1 trillion or more.

These are unsustainable figures. There is simply no way that the US can service this debt without resorting to the printing presses to pay off the debt with dollars cheapened by inflation. The future of the dollar is cooked into the books by our debt situation. The world is already awash in dollars. Printing more will continue to undermine its value.

Obamacare will add immensely to this debt burden. Estimates of the cost of Obamacare since it was conceived to today have gone from less than $700 billion to over $900 billion to now over $1 trillion. Obamacare won’t just transform the role of government in our everyday lives, it will transform our nation’s fiscal condition in ways totally unforeseen until it was dreamt up.

In other words, Obamacare means a much weaker dollar and future high inflation. As a result, investors must deploy assets into investment categories that actually benefit from high inflation and a weaker dollar. Gold is the ideal investment for such a scenario.