The Golden Rule

Safe Strategies of Sage Investors

Jim Gibbons

• Publisher: Wiley
• Year: 2010
• Print ISBN:
  9780470538753
• eBook ISBN:
  9780470630945
• Edition: 1
• Topic: Personal Development
• Subtopic: Personal Finance

Everything the independent investor needs to know to effectively invest in gold

With today's increasing economic uncertainties, a strong investment strategy is to put a portion of your net worth in gold. However, given investors' overall lack of knowledge about gold as an investment, as wealth insurance, or as a store of value, many are hesitant to enter this arena.

That's why Jim Gibbons has created The Golden Rule. This book answers many questions, including: How do you purchase gold and in what form? Why gold now? When should you buy? And, most importantly, from whom? Throughout the book, Gibbons puts gold in perspective and shows you why it belongs in every investor's portfolio.

• Provides practical gold investment insights from New York Times bestsellers Peter Schiff, William Bonner, Doug Casey, Addison Wiggin, and James Turk as well as from leading experts in this field including: Congressman Ron Paul, Rick Rule, Adrian Day, and many others
• Demystifies gold by putting it in the context of twenty-first century economic realities
• Highlights a variety of ways to invest in gold-from mining stocks to buying gold coins and bullion

With the financial markets more erratic than ever, gold appeals to investors looking for a safe haven for their assets. With The Golden Rule as your guide, you'll quickly learn how to make the best decisions possible with regards to this precious commodity.

PART I

BROKERS/MONEY MANAGERS

“Do not trust all men, but trust men of worth; the former course is silly, the latter a mark of prudence.”

—Democritus, philosopher (460 BC-370 BC)

My broker, Rick Rule, enjoys an intellectual debate as much as I do. In that vein he and I have been exploring the issue of how much one should rely on investment advisors versus making your own investment decisions. Rick is on record as saying that no one can do a better job of managing your investments than you, and that a person will always be better off the more he or she educates him- or herself about investing. However, I’ve now come to the conclusion that a trusted and sage investment advisor trumps investor self-education every time.

In 1984, when I was a Merrill Lynch stockbroker advising my clients, my viewpoint was similar to Rick’s. Back then I even remember commenting to my father-in-law, a surgeon, that there seemed to be a certain amount of irony in the fact that he had spent tens of thousands of hours practicing medicine and had managed to build a small investment portfolio through his long hours of work, yet was spending no time educating himself about investing so that he could keep his hard-earned savings, let alone grow them. I recommended several financial planning books for him, but like most people, he just did not have the time or inclination to read them. My message to my father-in-law was basically the same message I’ve often heard Rick give.

However, even if an investor were to make the effort to educate him- or herself, they will not be able to develop the industry contacts and the wealth of knowledge that a trustworthy broker or investment advisor can. Assume we have two groups of 50 investors each. One group knows virtually nothing about investing and follows every piece of advice my broker, Rick, gives them. The other 50 investors try to educate themselves about investing on a part-time basis, studying as much as they can, but selectively follow Rick’s advice, using their self-taught knowledge and experiences to override his advice when they think it appropriate. My contention is that the investment results of the completely uninformed investors will be far better than the self-taught investors.

I think Rick has reluctantly come around to agreeing with my point of view but adds one very big caveat, one I am totally in agreement with. That is: Trusted advisors will be able to do a much better job for their customers when their customers are informed and able to converse knowledgeably about investment preferences and risk alternatives.

I’ve not asked all the money managers below if they agree with my point of view. But judging by the prolific amount of writing they do, I would have to believe they consider investor education is very important.

• Eric Sprott: One of Canada’s most successful resource investors looks at gold’s upside and explains why “gold remains the one and only go to investment.”

• Adrian Day: After reviewing the financial crisis, deficit spending, and central bank money printing, Adrian then states that he’s fond of StreetTracks Gold ETF, the exchange-traded fund that seeks to reflect the price of gold bullion. But he also reviews some gold mining stocks that he likes as well.

• Peter Schiff: No investment advisor was more vocal in forecasting the current financial crisis nor more emphatic about protecting your investment portfolio with gold.

• Rick Rule: Bear markets and rising gold prices go hand-in-hand, and Rick tells you about his favorite bear market investments. His number one favorite being “PIPE” investing, making private investments in public equities, oftentimes in undervalued and undercapitalized gold mining companies.

• Michael Checkan: An expert on asset diversification who knows that “gold protects wealth” tells you how to legally purchase and store gold offshore.

The following contributions come with one caveat. In a few cases the timeliness of specific recommendations may date some of the information. However, with regard to the primary message of the book, that everyone should own gold, the message is timeless. More important, with regard to the primary purpose of the book, allowing you to get to know and understand how the sage investors introduced in this book think, the message is also timeless.

CHAPTER 1

GOLD REMAINS THE STANDARD²

Eric Sprott
Sprott Asset Management

“Give me control of a nation’s money and I care not who makes its laws.”

—Mayer Amschel Bauer Rothschild, banker (1744-1812)

Eric Sprott is a Canadian money manager who manages over $4.5 billion through various Sprott companies, mutual funds, and hedge funds. Having heard Eric speak on numerous occasions and having read a great deal of his written analysis, I can say that his numerous awards for investment analysis and fund management over his 35-year investment career are richly deserved. While the amount of money Eric manages as well as his long investment career may make Eric look like a Wall Street regular to some, his unconventional and contrarian thinking, as well his views of the important role that gold plays as wealth insurance, clearly put him on the outside.

Eric coauthors a monthly investment strategy article, “Markets at a Glance,” where he discusses his views and expectations regarding global financial markets and economies. Looking through the archives of his newsletter contained on the Sprott Resources website, www.sprott.com, one can’t help but be impressed by Eric’s forecasting abilities and the investment results he’s realized. To cite just one example, as of October 2009, the Sprott Canadian Equity Fund had achieved a 10-year return of over 23 percent per annum.

Although the article below was written over four years ago, I included it in this book because it explains why you should invest in gold. An understanding of Eric’s timeless messages—“gold is the ultimate flight-to-safety investment vehicle” and “the upside for gold is quite tremendous”—are essential to any investor.

There were a couple of interesting headlines this week singing the praises of our favorite metal. On the front page of Wednesday’s Investor’s Business Daily was the headline: “As Gold Nears an 18-Year High, Some See Signal of Inflation Rise.” Similarly, in Tuesday’s Wall Street Journal was the headline: “Stocks Fall Amid Auto-Sector Woes . . . Gold Price Shines.” Indeed, during times of financial anxiety and strain, signs of which are becoming increasingly apparent to everyone, gold remains the one and only go-to investment that can protect people’s otherwise heavily weighted paper portfolios. With the price of gold up $40 per ounce since the end of August, it would appear that gold is once again starting to gain traction not only in the media, but in the hearts and minds (and safety deposit boxes) of investors.

All this, of course, makes perfect sense to us. In our view, gold is the ultimate flight-to-safety investment vehicle. We won’t be going into all the reasons to own gold in this article. Seventeen such reasons can be found in our “Fundamental Reasons to Own Gold,” written by John Embry, which can be found on our website at www.sprott.com. Rather, we would like to dream a little and speculate on what the price of gold could be if a financial crisis/panic were to ensue. Although our analysis is not rocket science, it does show that the upside for gold is quite tremendous given the troubles in the financial world we see developing.

FINANCIAL CRISIS

The first question that needs to be asked is: Is a financial crisis likely? To this we would answer: Most definitively yes. Furthermore, it’s not necessarily a crisis per se that is needed to send gold soaring; but rather, just the fear of one is sufficient. We see many reasons to be fearful in this environment. Many stock indices are now down almost 10 percent from their highs of a few weeks ago. Interest rates have been on the rise, with 10-year Treasury yields up almost 50 basis points in the past six weeks. Corporate yield spreads are widening due to the well-publicized bankruptcies in the auto and airline sectors. Energy prices are high and likely to go higher. Retail sales have been coming in weak. The real estate market is starting to crack. The consumer is spent, and sentiment numbers have been horrid. Plus, to add insult to injury, everywhere there are signs of inflation. Let’s face it, the current macroeconomic environment is not conducive to rising asset prices—quite the contrary. Except for gold, one of the only asset classes to have a negative beta to the broader markets.

For those witnessing how their portfolios are performing in September and (so far in) October, suffice it to say things haven’t been pretty in the paper world lately. So what’s an investor to do? Many advisors and influential letter writers are now recommending a gold weighting of 5 to 10 percent in portfolios. This is something unheard of in the past 20 years, a time when financial (paper) assets held sway, and gold was trashed as a “barbarous relic” of medieval times that serves no useful purpose in a modern technologically advanced society. But the times they are a-changing! Slowly but surely, and in spite of efforts to suppress it, gold is starting to acquire mainstream appeal. A testament to this is gold’s recent run up in price against all currencies, not just the U.S. dollar. It is no longer the case, as it has been in the past couple decades, that gold’s desirability was only in the eyes of the gold bugs. But we ask: Is it even possible for everyone to have a 5 to 10 percent weighting in gold? Is there enough gold to go around to meet such a demand? Not by a long shot, but with one caveat: only if the price of gold goes up by multiples from here. We’ ll run some calculations by you later to show what we mean.

TURNING BACK THE CLOCK

But first, let’s turn back the clock to 1980. For those of us old enough to recall, this was the last time there was widespread financial panic that led to a frenzied flight to gold. Back then inflation was on the rise. Interest rates were heading skyward. Geopolitical risks were aplenty, once again centered in the Middle East with Iran. The prospects for the economy were dim. There was stagflation (weak economy and rising prices). Sound familiar? Stock markets were mired in a prolonged bear cycle. Last but not least, the gold price spiked above $800 per ounce. Greed and fear were in the air.

Some may think we’re cheating by using 1980 as our reference point, given that that was the all-time high for gold. True, we’ve had financial crises since then, namely the crash of 1987, the savings and loan crisis, LTCM, the Asian flu, and the tech/telecom bust. But none of them really led to a flight to gold, thanks to the copious amounts of liquidity generated by central banks the world over. With all the inflationary pressures that exist today, such a nefarious liquidity injection can no longer be attempted without severe consequences to global currency values. Not to mention the fact that nothing kills the real value of financial assets quicker than inflation. It is our opinion that both scenarios (central banks print to save the day, or they don’t and let the financial bubbles unwind) play into gold’s hands and are highly bullish for gold going forward.

So could history repeat itself à la 1980? If it does, the gold price is unlikely to stop at just $800. $800 goes nowhere near as far today as it did back then. Let’s dream a little and compare some financial metrics of today versus then. Needless to say, the paper world has gotten a lot bigger since 1980. According to the Federal Reserve website, money supply as measured by M3 has risen from about $2 trillion in 1980 to $10 trillion today. That’s a fivefold increase. For gold to hold its stature relative to money, it is similarly likely to increase by fivefold from what it was in the 1980 financial panic. That implies a price of $4,000 per ounce. Not bad!

Housing prices are another indicator of the mound of paper built over the years. According to the OFHEO housing price index, U.S. housing prices have tripled since 1980 (with some markets such as New York, California, and Massachusetts going up by a factor of five). This index understates the true appreciation in housing prices because it is based on mortgages issued by Fannie Mae and Freddie Mac, which have upper limits. Be that as it may, for gold to keep pace with housing prices as measured by this index, it needs to go to $2,400 per ounce. We’ ll take that, too.

Now here’s where things really start to get interesting. The size of global equity markets in 1980 was $1.4 trillion. Today that value is in excess of $30 trillion! Global equity markets have grown over 2,000 percent in the past 25 years. What would the price of gold need to be to have kept pace? $16,000 per ounce.

GOLD IN THE FUTURE

Finally, let’s see what happens if everyone tried to have a 5 percent portfolio weighting in gold. As we already mentioned, global equity markets are about $30 trillion. The bond and fixed income markets are twice that at $60 trillion. Then we have bank assets of $40 trillion. (These numbers are from the IMF’s 2004 “Global Financial Stability Report.”) This equates to a total investable pool of some $130 trillion, 5 percent of which is $6.5 trillion. The gold equity market is currently a paltry $50 billion, so right off the bat we note that it’s nigh impossible to have gold stocks comprise 5 percent of even the global equities portion. To do so, gold equities would need to increase in value by a factor of 30. Even we aren’t that bullish!

What about gold bullion itself? Here’s where it gets tricky. The value of all above-ground gold is roughly $1 trillion. However, not all of it is for sale. Much of it is tied up in the vaults of central banks or lent out and thus owed to central banks. There is also much gold (the vast majority even) that has been “consumed” in the form of jewelry and thus is also not readily for sale. But let’s assume, for the sake of argument, that all gold ever produced is made available for sale (i.e., Fort Knox gets gutted and everybody melts wedding rings). Even under this conservative scenario (let’s call it the low case), the price of gold will need to increase by 6.5 times to $3,000 per ounce in order to comprise 5 percent of all financial assets. In the high case where only the 80 million ounces that are mined in a year get put up for sale (not realistic but let’s just go there), then the implied price of gold needs to be $80,000 per ounce.

It only gets better if people decide to have a 10 percent weighting in gold . . . but let’s stop there! Doubtless the gold bugs are already excited as is.

This may all seem a little cheeky—we’ve already admitted to not being rocket scientists. But taken for what it is, the analysis does seem to show that gold could have explosive potential from here...

Table of contents

• Title Page
• Copyright Page
• Dedication
• PREFACE
• Acknowledgements
• Introduction
• PART I - BROKERS/MONEY MANAGERS
• PART II - INVESTMENT NEWSLETTER WRITERS
• PART III - COIN AND BULLION BROKERS/DEALERS
• PART IV - THE MINERS
• PART V - GAME-CHANGING EDUCATORS
• CONCLUSION
• AUTHOR’S NOTE
• ABOUT THE AUTHOR
• ABOUT THE CONTRIBUTORS
• INDEX