Debt Ceiling Shouldn’t Cause Market Failure

If congress does not raise the debt ceiling there will be winners and losers in the stock market, but since low interest rates can be helpful to a short sited consumer spending driven economy there will be more losers than winners. While interest may raise, the United States may not pay off its debt obligations so it would not really be prudent to sell shares of profitable companies with low debt in exchange for notes that may or may not be paid off. The value of the dollar is bound to drop if the debt ceiling is not raised, however it is uncertain whether or not there will be deflation if the ceiling is not raised. There may be inflation either way. The only certain thing that has been happening throughout the debate is that people have been buying up gold and silver in mass quantity. The price of gold has risen to over $1,600 per ounce while silver has risen to over $40 per ounce. Oil is also on the rise, after Europe bailed out Greece and demand in the U.S. remains high. If the raise in debt ceiling results in a plan to raise taxes, the market will most likely react negatively. Regardless, in the age of reckless spending and lack of thought on the debt issue, I’m sure a plan will be devised in the last minute which will make sacrifices on both ends – an increase in taxes plus a reduction in spending. However, if the reduction in spending does not exceed the amount of ceiling increase the debt problem will only get worse. Raising the imaginary “ceiling” is an imaginary move that will have a placebo like effect. Long terms changes must be enacted before default is necessary or inflation skyrockets through the roof (which if you use the price of gold to gauge inflation it already has). Pay close attention to what comprises consumer price index, as the basket used to determine this has been changing over the years to help make it look like inflation is lower than it actually is.

Gold at New All-Time High

Just last year I posted about gold being at an all time high, once again it is at an all time high of $1,240. Many cite double-dip recession fears for the increase in price, while others mention international powers hoarding the stuff as a hedge against fiat currencies of the West (the USD and Euro).

If you were to buy gold just 4 years ago you would now have doubled your money. This is unlike historical gold price performance, as you can see for the image below:

The past ten years has been a blast for gold prices, and whether the price will continue to rise depends on a variety of factors especially the interest rates and inflation. I think the main reason gold jumped to an all-time high today is because of the lag on raising the prime interest rate and Bernanke’s talk of a slow recovery today. Regardless, precious metal investors are sure to be satisfied with the recent turn of events, especially European investors who saw their own currency fall within recent months.

Will the Dollar Die?

The question is looming, and if you haven’t heard by now the US is deeply in debt. While this is called the ‘public debt’ most rational people I know would not have wanted it to come this far, but it did.

Let me summarize a few key points that will often be brought up in these grim yet true commentaries and tidbits. Public debt is another name for government debt, and the debt I refer to is that of the Federal government. It is called public because the government traditionally draws income from the public through taxes. Of late the government has had to draw upon other sources for money including loans to other countries accomplished through treasury bills and other instruments where the government promises to pay interest provided they are loaned the money.

The national deficit, which is the difference between Federal government revenue and spending, was $1.4 trillion dollars for fiscal year 2009 – the largest on record and in terms of purchasing power the largest any country in history has ever overspent. The deficit is possible through the trust of the dollar and the US government – yet history has shown that national debt and high deficits are rarely actually paid off through painful budget adjustments and shrinkage of government.

In fact quite the opposite is true, the government will actually either destroy its own currency or heavily increase taxes – the first of which will be good for manufacturing yet destroy whatever wealth families have accumulated over the years in order, and the second of which stunts growth and would result in less jobs locally.

Let us hope the less trodden path is taken and prudent budget adjustments are made and expensive and useless wars are avoided. In this way the dollar may survive and people wont be forced into bartering for goods and going back to the financial stone age.

Another important point to bring up is the actual production of goods and wealth. If the US was able to increase economic output in areas which haven’t already succumbed to the manufacturing advantages of certain Asian countries it could also reduce its deficit via a shrinking trade deficit (which I should are proportional to national debt). As it stands, each working person in the United States owes over $60,100 if the national debt was evenly distributed amongst them. Over 10% of 2009’s tax income will go towards paying public debt, the amount of debt the U.S. bears is around four times its annual income (compare that to a person who makes $100,000/year whos debt is $400,000). Another interesting blog I read puts the US in the ‘subprime’ category for buying a house.

How can you protect yourself from this? Aside from education, I would suggest either buying silver, owning land, steer clear of keeping large amount of money in low-yield bank accounts or checking accounts, and most importantly invest wisely. Of course spending money, while ironic, is one of the best ways of not accumulating it. Spending it on things that retain value is also a good idea. If you have any more ideas feel free to comment.

Don’t Order Gold Online

Gold, who’s popularity and value is ever increasing, is being sold on-line by retailers who are out to scam the vulnerable. They will trick you into believing you need to buy ‘premium’ coins in order to avoid being forced to forfeit your gold to the government should the time arise. They say that coins with ‘collectors value’ will be spared. However, they simply order thousands of identical coins and have them all graded by the same company and then charge a 30% premium over the spot price.

Local dealers, on the other hand, will most likely mark you up only $50 to $100 above spot price (5 – 10%).

It is for this reason I recommend, if you are to buy physical gold, to go to your local dealers and gold shops and buy it from them. This also excludes the shipping fees and also potential loss or damage during shipping.

Does the following look familiar to you? If you were a Goldline customer they will say this is a collector item yet they ship them to every single customer and when the price was under $1000 / ounce they were charging more like $1300.

Gold Prices Depend on Trade Balance and Government Budget

The price of gold in terms of US dollars relies primarily on the inflation rate of the US dollar which in term is largly affected by the US trade balance and whether or not the US Government carries a deficit (which in the past decade has always been the case). Central banks buying up large sums of the element both nationally and internationally also cause the price to rise. Recently India and China have been on a gold buying frenzy. Indians in particular love gold, not only wearing it but keeping it locked away in safes. China has been campaigning to its citizens to buy gold, and both India and China have in recent months been buying as much gold as possible at the $1000 / ounce mark. Gold, which has been a historical measure of wealth, now has little industrial use except for marginally increasing performance on audio cables, and other electronics.

In essense, a bet on gold is a bet against the US dollar, which has been severely weakend by a couple of multi-billion dollar bailouts and of course some very expensive overseas engagements. A lower dollar, on the other hand, promotes local manufacturing and decreases the incentives to outsource.

Gold at $1100

The pressures of projected inflation and the Chinese and Indian demand for gold as a stable store of wealth is culminating in the historical ‘gold bug’ fever, and prices are going through the roof. Today, one plain gold coin of one ounce will get you five and a half new ipod touches, one high performance desktop PC, or 354 gallons of milk (using $3.10 / gallon milk).

Following the gold surge will most likely come the oil and metal price surge, and then food and drink surge. Personally, I only value gold in it’s investment value as I think the metal is dull and boring and less desirable than steel, but investors around the world often rely on this ancient money when governments bombard them with tons and tons of freshly printed paper labeled ‘money’.

Investments in gold will yield limited profits though, as historically speaking investing in the stock market yields better results. Investing in today’s stock market is risky, but historically speaking if the companies you invest in today can survive and prosper tomorrow you will get a lot more returns than if you invest in gold or other precious metals. That being said, a moderate investment in gold (hopefully when it was below $800 / ounce) is not a bad idea ‘for the rainy day’, or you could invest in cultivating a garden or honing skills in what you do (be it engineering, craftsmanship, building, etc.) so that you can always have what the Chinese call a ‘tie fan wan’, or ‘iron rice bowl’, meaning a steady source of income.

Is Gold Overvalued?

Gold is currently trading at around $1040 per ounce, meaning a mere three gold coins will get you a decent used car. Only one gold coin will get you a shiny new state of the art PC, and just 100 ounces of gold will get you a nice house in the suburbs (depending of course where you live). So is it too far fetched to say that gold is overvalued?

The rate of gold production is much different than that of oil, as it has been increasing steadily for the past 100 years while some experts warn of ‘peak oil’, or the soon to be realized time of worldwide peak oil production and the eventual inevitable decline in oil production.

woldgoldproduction

One can also look at the US gold production and notice a sharp increase and contrast this with the decrease in production of oil.

US gold production

US Oil Production

US Oil Production

Resources:

Recent Gold Production

http://minerals.usgs.gov/ds/2005/140/

Historical Gold Production

US Census Bureau (1960) Historical Statistics of the United States, p.371.

Gold Price Rises with Vigor

The price of gold as of right now up $11 to $1007, thanks to not only a weaker dollar but stronger demand especially from China who is trying to slowing lessen its addiction to the US dollar. Silver is up $0.17 to $16.83, as another store of value besides gold. Platinum has seen the largest gain of almost $35 today per ounce to $1321. The weakening dollar comes with a five day streak in the stock market, as the Dow Jones Industrial Average reached its highest point in 2009 yesterday. Below is a Kitco chart of historical prices of gold:

1975 To Present

1975 To Present

On the street, however, poverty is at its eleven year high and unemployment is the highest in over 27 years [1]. It is certainly bad news for those without investments, as their earning power has decreased. The USD was worth 107 Japanese Yen just a year ago, it is now just worth 90. Today’s drop in value of the USD versus the Yen was over 1.5%! For currency traders, some interesting currencies to look into include the Singapore Dollar (SGD) which has gained 20% on the dollar in just five years, or the Japanese Yen or Euro which has gained the same percentage in the same time period. One must also consider which government programs have been enacted in recent months or years that will effect the value of these currencies, such as the the US, Chinese, and EU stimulus packages which have drastic differences in allocation.

For example, so far the US stimulus package spending breakdown and status can be found here, and details on the China’s 586 billion dollar (USD)  stimulus package are still fuzzy but presented to some degree below:

Chinese Stimulus Breakdown

Chinese Stimulus Breakdown

[1] Civilian Unemployment Rate, Federal Reserve Website

Gold Price Back to $1000

gold
The price of gold per ounce regained its $1000 status today, after news from China that it would start to more aggressively buy gold especially during price dips. This is something that follows naturally from China’s vocal resistance to US monetary policy, and may result in a global gold frenzy. However, many doubt the merits of buying gold, as the element has limited usefulness and utility compared to its price.

In the Long Term, Many Stocks are an Obviously Sweet Buy

Background
Looking at long term charts of virtually any mentionable stock on the market will most likely yield the same result, a glaringly obvious BUY. There are other reasons to get your money out of hard currency, such as the impending unprecedented inflation that will follow the Bush and Obama administration reckless handling of our economy and outsourcing to the Federal Reserve. The Federal Reserve, shrouded in secrecy, is a private organization which needn’t reveal its inner workings or meetings to the public, yet is in charge of the creation of currency and the interest rates.

Watch Out for These
Some stocks need to be watched, however, that they correspond to corporations that are safe from new legislation. Some of these may include arms manufacturers, as the future of the right to bear arms is possibly under threat under Obama’s administration and new Justice. Another potential victim is the health care industry, which include pharmaceutical companies. Add on to this military contractors, as so far the track record in the administration is we are already paying too much for heavy machinery (take for example the reduction of F-22 orders from Lockheed Martin).

Look Into These
Some strong stocks to look into for real returns over the long run are stable bank stocks, or banks that cannot go under without cataclysmic consequences to the economy (we know the US Gov’t wont let another Lehman Brothers fail). Among these are Citigroup (NYSE:C) and Bank of America (NYSE:BAC). A good example of an already partially recovered bank stock is Wells Fargo (NYSE:WFC). As you can see Wells Fargo underwent a reclaimation of value much earlier than C and BAC. My personal opinion of the two is that Citigroup will undergo the largest percent increase of the three. 10 year charts of these banks are shown below:

c

bac

wfc

Don’t Like Bank Stocks?

If you’re looking for a safer investment than bank stocks, then you might try chemical companies such as Dow Chemical (NYSE:DOW) or Huntsman (NYSE:HUN). In the last six months Dow has risen from less than $7 to today’s price of $21.10.  Huntsman has risen in the same period from the low 2 dollar range to $7. This is a 200% increase for Dow and 250% increase for Huntsman. They still have potential, though, as Dow was trading in the 40’s in 2007 and Huntsman in the mid 20’s in the same period. Both pay dividends and are profitable with a small P/E ratio.

If you hate stocks in general then I suggest putting money into cheapened real estate, precious metals, or even oil futures. Keep in mind all contents in this entry are speculative and no responsibility of loss is mine.

Gold Over $1000

I took a look at the gold charts today and noticed it once again is above $1000, and like I said in November, it has been a great place to keep money.

However, if the recession widens it is possible that deflation will curb the rise in the gold price, making the dollar worth more. But because of the stimulus packages and massive government debt, it is unlikely that deflation will be a huge problem.

Will The USD Ever be Worth Nothing?

I don’t quite agree with the outrageous statements in the beginning, but I think the second speaker has some good points. If you aren’t familiar with the people in the video the first person is Robert T. Kiyosaki and the second is an unnamed financial expert.

An interesting thought presented:

You don’t want to hold on to gold and silver forever you want to hold on to gold until a medium priced single family home costs less than 40 ounces of gold or 500 ounces of silver.