Gold Insurance or Risk Asset ?

"...Could the trend of gold up, everything else up, have just reached its end...?"

IT TOOK A WHILE for the financial media to catch on. "Gold funds fattened on war, global instability and a falling Dollar in 2003," said USA Today as the next year began.

The paper failed to note that none of those calamities had stalled the equity markets ongoing recovery. "Gold bugs hope that 2004 will be even better," it went on, "but an outbreak of good news could dash those hopes."

Oh really? Good news for global stock markets collided with great news for bond prices, real estate and emerging markets in 2004. Oil traders grew rich as well, but all this good news for financial markets failed to stop the bull market in gold. The metal rose more than 10% by the fall of that year.

"At $420 an ounce," said USA Today as 2004 drew to a close, three years after the bull market in gold had begun, "gold has become a fairly expensive insurance policy." But by the end of 2005, golden insurance cost more than $500 per ounce – a 23-year high – and few people buying the new exchange-traded gold funds such as StreetTracks GLD seemed to worry about just what it was they were insuring.

The insurance policy of tracking the gold price kept paying out without any awful calamity striking the planet. Or rather, nothing awful enough to derail the rally in world stock markets was needed to keep pushing gold higher. Equities and the gold market just kept rising together.

"There are serious drawbacks with gold investment of any kind," warned a professional financial advisor to the BBC in London in late 2005. "Except for the past three years, the price of gold has been on the slide after a peak in 1980."

"Investors have piled into gold in recent months," added the Financial Times, as if aghast. "Many are betting on rising prices."

Just imagine – betting on gold because you think it's going to go up!

Sure, as an insurance policy, then perhaps gold looked expensive. But the old investment saw advising you to "Put 10% of your money in gold and just hope you don't need it," became out-moded as the metal rose alongside stocks, bonds, junk, real estate, credit derivatives and oil prices alike. Who cared if nothing bad happened – or nothing bad enough to derail the boom? As a risk-capital play, just another hot snack in the lunchbox of tasty reflation treats, gold just kept rising on the tide of money pushing all boats higher.

Hell, by late 2006, the uptrend starting amid the Tech Crash's worst months of 2001 continued to run higher as the Dow approached its own former highs, too. Real interest rates had turned negative, helping to destroy the Dollar and making borrowing to speculate smell like a no-brainer. And all this time gold itself, a losing investment for the two decades to 2001, remained a classic "buy" on the charts.

Spot gold prices have since continued to rise above their 200-day moving average – itself rising strongly – giving a classic if crude signal for chart-minded traders to stick with the trade. And so far this month, gold has been rising even as global stock markets have turned south.

Could the trend of gold up, everything else up, have just reached its end?

Last week saw the price of gold rise 2.3% for US Dollar investors, while the broad S&P equity index lost 1.1% of its value. Gold also gained nearly 2.1% against the Euro, while the EuroFirst 300 index of European stocks lost 1.7% for the week. British investors saw gold rise 1.4% against the Pound Sterling, while the UK's leading 100 shares dropped 2% of their value on average over the week.

Does this mark a new departure for that investment insurance known as gold? "Of late," notes Wolfgang Wrzesniok-Rossbach in the latest metals report from Heraeus, the German refining giant, "when the financial markets came under pressure, gold also found itself losing ground."

Indeed, since 2003 the gold market has risen – and fallen – in lock-step with the world's major stock markets. By the end of 2006, as James Grant has noted in Grant's Interest Rate Observer, the correlation between gold and the S&P500 had shot higher, very nearly reaching the magical "1.0" reading that would signify a perfect arm-in-arm relationship.

Hence the comments littering Bloomberg and Reuters earlier this year whenever gold took a hit. "There's a flight from risk assets," said pundit after pundit, all noting a drop in both stock markets and gold.

"But [now] this time around it seemed to react inversely," says Wrzesniok-Rossbach. Gold so far in July has jumped higher; the S&P – along with global stock markets – is barely treading water, albeit near new record highs.

"Even so, to make a qualified assertion that gold has re-discovered its traditional role as a 'safe haven' is perhaps a little too early," warns Wrzesniok-Rossbach, which perhaps will prove true. But for now, as the S&P and Dow tiptoe away from their latest all-time record highs, an insurance policy owned outright – rather than held in trust through the complex legal contracts of exchange-traded gold funds – might mean gold could look cheap.

"Gold is still not getting the headline space it will in the next year," says John Dizard in the Financial Times, "but it has broken out of the desultory downtrend that began in April 2007." With the ongoing collapse of complex credit derivatives now threatening to knock out the support of mergers & leveraged buy-outs from under the stock market, "the perception of underlying systemic risk is not going away," says Dizard. Indeed, "this trend also seems to be supported, so far, by the European national central banks, who aren't selling as much gold as they were."

Gold up, everything else down? Stranger things have been known...such as the four years of strong correlation between gold and the stock market starting in 2003.

Adrian Ash

BullionVault

Gold price chart, no delay   |   Free Report: 5 Myths of the Gold Market

City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at BullionVault – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2007

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Gold Rises as Stocks Slip, "Actually Insurance" Says Euro-Pension Fund Ordered to Cut Position

London Gold Market Report

DOLLAR-PRICED GOLD held onto this week's 1% gain in London trade by Friday lunchtime, holding steady against the rising US currency as bonds pushed higher but world stock markets headed for their first weekly loss in three.

"Euro denominated gold has now convincingly broken back above the €1000 level" per ounce, says one London dealer in a note.

The gold price in Sterling today rose above the £852 level it touched four times in the last three weeks.

"We expect all the Chinese to be back in the game on Monday" says Swiss-based MKS Finance, echoing comments from many Hong Kong and London dealers, after the long Lunar New Year holiday extended into this week.

"Activity in China remains muted [but] there is evidence of strong interest for silver," says Standard Bank.

"China's recent rate hike is also fuelling these inflation worries."

Silver prices ticked lower Friday morning in London, but neared their third week-on-week gain in succession – adding some 14% against Dollars, Euros and Sterling alike from end-Jan.'s two-month lows.

"With inflation in China expected to be above 5% for much of the early part of 2011, [its rising] rates are not yet at levels that offer an attractive opportunity for savers," says Nic Brown and the commodities team at French bank Natixis.

"But with each rate increase the opportunity cost [in missed interest payments] of holding gold rises."

South Korea's central bank surprised the market on Friday by keeping its key lending rate on hold. Vietnam meantime devalued its currency, the Dong, by 9% vs. the US Dollar – the second such move in 6 months – after the Communist Party's recent 5-year congress ordered the central bank to "stabilize the macroeconomy".

"Demand from China, India and central banks has been strong over the last year," says Natixis. But "if western investors become net sellers of gold the market may find it difficult to sustain the current elevated prices," it adds, noting early 2011's strong outflows of metal from the large exchange-traded gold trusts.

The giant SPDR gold ETF shed another tonne of bullion on Thursday to near January's 9-month low of 1224 tonnes held in trust.

Following a week of strong earnings results from publicly-listed gold mining companies in North America and South Africa, slack investor interest last night forced Severstal to pull the £441 million ($709m) float of its Nord Gold division on the London stock market – "the fourth Russian offering in the City to be hit by emerging market outflows in less than a week" says the Financial Times.

Mid-sized Dutch pension fund SPVG was meantime ordered by its regulator to sell three-quarters of its 13% allocation to gold, because that level is not "prudent".

SPVG is 85% invested in Dutch and German government bonds, says SPVG – which runs €300m for employees of glass manufacturer Vereenigde Glasfabrieken – adding in a statement that "The fund has its formal obligations secured in Euros.

"But the Euro is actually secured by trust in government...[and] the decision to invest in gold is actually an insurance."

Reporting a 67% gain since its 2008 purchase, "This [insurance] is also the same argument of central banks and the IMF for holding large gold positions," says SPVG, vowing to appeal the judgement but accepting that it may have to sell down its gold allocation.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen's Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Gold As Insurance

Rick’s Picks

Monday, July 13, 2009

“Phenomenally accurate forecasts”

(Following is the third installment in a series of articles by Chuck Cohen, a seasoned and highly successful investment consultant from New York City. We will be featuring Chuck’s thoughts regularly at Rick’s Picks in order to expand our coverage, in particular, of junior mining shares, a core area of his expertise. In the coming weeks, Chuck will take up the topics of gold as a core investment, and gold as a speculative vehicle. Today he discusses gold’s usefulness as insurance against financial calamity. RA)

No One-Size-Fits-All Strategy

In spite of the sharp drop in shares over the past nine years or so, most investors remain firmly committed to common stocks. Mutual fund statistics show that very few holders have pulled their money out of their funds. And the recent “Big Money Poll” in Barron’s shows that the big guys are even surer than  they were even at the very top.  It is clear that investors have been stirred, but far from shaken, by the decade’s decline and by our faltering economy.

And gold? To many investors and even professionals, buying gold is like traveling to Myanmar or northern Pakistan: Few dare to venture there. The truth is, that to our Ivy League and Keynesian educated financial community, gold is viewed as a superstitious relic.

I don't seek to persuade you to sell everything you own, put it all into gold and gold shares, and then buy guns and ammo before retreating to a barricaded cabin in the Ozarks. Instead, I hope to try to make you understand that gold investments come in different sizes and shapes, with varying degrees of risk and reward. It’s not an all or nothing choice. The better you understand gold, its attributes and how it fits into your financial planning, the more you should feel more comfortable with it. You might then want to take bolder steps that can protect you more fully against the enormous unknowns facing us. 

I believe that in spite of a huge move since 2001, gold is still very early in a generational bull market. Bob Hoye, one of the most astute market analyst around, believes it will last for 15-20 years. That gives us 7 to 12 more years to ride it. Remember, the recent bull market in stocks lasted almost 18 years. The gold fundamentals continue to get more and more compelling, and technically gold is rapidly approaching an amazing liftoff stage.

But back to the three approaches towards gold.  I have put them into an ascending order of risk and reward:  1) gold as insurance; 2) gold as a core investment, and 3) gold as a speculative vehicle. Today we will discuss the first approach. 

Protecting Against the Unknown

What is the purpose of insurance? Of course, it is to protect you against the unknown and the unexpected. You can't risk not having it in your life, even if you never have to use it. One disastrous episode, even if you had nothing to do with it, could totally change your life.

If you own a house, you undoubtedly carry property, theft and fire insurance. In spite of the onerous costs, you must have life and health insurance. You can't legally drive a car without adequate property and liability coverage. But strangely, when in comes to finances, most people handle things differently. They tend to be careless without giving any serious thought as to how or where they should put their money. Remember the dot-com era? I don't know a single person who doesn't have his tale of woe from it. And to prove that this wasn't an accident, many then threw the leftovers, plus what the banks and mortgage companies shoveled their way, into the great American housing disaster.

But when it comes to gold, after nearly nine consecutive years of higher prices, a great majority of Americans don't have one cent in a gold-related investment. And even after watching the government inject trillions of governmental monopoly money, most Americans continue to shun it. Incomprehensibly, most Americans still put their trust in stocks and real estate. And the financial media think that "gold bugs" are weird.

Getting Started

Here is what I am getting at. If you are one of those who feel as though gold is too mysterious or too risky to get involved with, then I want to present the first step to getting comfortable with it.  Approach gold just as you would with the different types of insurance you carry. You can get more deeply involved later. Your mindset has to be that if things don't get much worse, gold may not do much. Although, considering its performance over the past nine years, even through some good times and rising and falling consumer prices, it should continue to do well.

But, if things hit the proverbial fan, gold, like a comprehensive car or property policy, will bail you out, or at least greatly help you in your time of need.  Don't you think that those who really got rocked after 2000 wish they had bought some gold insurance instead of gambling it in those supposedly safe places?

Without going into great detail, there are several ways to buy the insurance. I don't want to pose as an expert in these areas, but they are simple to buy: coins or some other small amounts in bars, or through the various ETFs or gold funds. Personally, I would start with coins purchased through one of the reputable online dealers, or if you have a coin store nearby that others can recommend, that would be okay. Given my expectations for the future, I am not comfortable with owning gold through a paper deed, especially if there is no formal audit procedure to verify your share. This may ultimately prove to be an important concern. We can get delve into this at another time, or you canemail me and I'll get you a good source of information.

Next week: Gold as Insurance, Part 2. 

***

Rick's Picks publishes a daily trading newsletter for gold, stock, commodity, and mini-index traders 240 times per year. Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers' initials will be used unless express written permission has been granted to the contrary. All Contents © 2009, Rick Ackerman. All Rights Reserved.www.rickackerman.com

John Williams Eyes Gold as Insurance Against Armageddon

John Williams Eyes Gold as Insurance Against Armageddon

Stronger corporate balance sheets, tighter reins on costs and better stock performance in 2010 haven't swayed ShadowStats Editor John Williams' assertion that the bottom-bouncing economy is weaker than ever, with specters of hyperinflation and systemic financial collapse on the not-so-distant horizon. As he says in this exclusive Gold Report interview, the yellow metal is his "insurance against Armageddon"—or at least the single best asset that people can use to ride out the storm.

The Gold Report: In our last two interviews, you noted that based on the contraction in the M3 in 2009, you anticipated a resulting contraction in the general economy six to nine months later. Are you seeing that impact yet?

John Williams: Just to be clear on what's involved. . .I continue to track M3, the Fed's broadest measure of the money supply until it ceased publication in March of 2006.Generally, the broader the measure of systemic liquidity, the better it serves as a predictor. In terms of giving a signal for the economy, you have to adjust the growth for inflation. What's happened historically is that every time the year-to-year change in the inflation-adjusted M3 has turned negative, the economy has followed in a recession or if already in a recession, the downturn has intensified.

Those signals don't come very frequently; but when they do, they are extremely reliable. There have been cases where a recession was not preceded by a contraction in the money supply, but whenever you contract liquidity, you can contract the economy.

We had a signal in December of 2009 that indicated an intensification of an already extraordinary downturn six to nine months down the road. I think we started to see this in the economy last September. Payrolls peaked and started to turn down again in that timeframe. That's adjusting for the massive benchmark revision that will be published in February. Although industrial production had been rising, it looks as if it also peaked and started to turn down again in September/October. I'll contend that consumer confidence is more a coincident indicator than a leading indicator, but it peaked in the July/August timeframe.

The way I describe the economy is that it started turning down in 2007, plunged throughout 2008 into 2009. Basically, it has been bottom bouncing ever since. I'd caution anyone that we're seeing extraordinary distortions in economic reporting, due primarily to the system never having been designed to handle a downturn of this severity. Post-WWII economic reporting is based on the presumption of ongoing economic growth and is seasonally adjusted. In tracking payroll employment for example, the assumption is that if a reporting company doesn't report, it is still in business, so the government will impute what they think would have been reported. They theorize that any jobs lost through companies going out of business generally are more than offset by jobs being created by the companies that haven't reported.

TGR: Isn't it a zero-sum game, then?

JW: It's more than a zero sum. They end up adding maybe 200,000 extra jobs per month that don't exist. The last time the government went back to benchmark its numbers, they found that they'd underestimated the decline by something over a million jobs by the time they published the benchmark revision. They've announced that the benchmark revision for March of 2010 (to be published with the January 2011 payroll numbers) will be a downward adjustment by something like 370,000 jobs. The point is that if you put those numbers in you end up with a much weaker employment picture than popularly gets reported.

TGR: If we add those numbers, where does unemployment stand?

JW: This is the payroll survey; unemployment is a separate number from the household survey. If you totaled up all the people who think they're unemployed you'll come up with a much higher number than the government reports but that's because of definition. The government publishes six levels of unemployment. To be counted as unemployed by the government's U3 headline number, you have to meet several criteria in addition to being out of work: you have to want a job, must be willing and able to work, and must have actively looked for work in the last four weeks. On that basis, the Bureau of Labor Statistics works out the unemployment rate.

The problem is that people who can't find jobs where they live give up looking even though they're still willing and able to work. The government counts these as "discouraged workers" if they've looked for work in the last year and adds them into a broader measure. The government's broadest measure, U6, includes the discouraged workers as well as those who are marginally attached to the workforce, such as people who take part-time jobs because they can't get full-time jobs.

TGR: How do the unemployment figures vary from level to level?

JW: The official number at the U3 level is around 9.8%. The U6 level is up around 17%. Adding in my estimate of long-term discouraged workers gets you up to around 22%. That startles people because they remember hearing that unemployment hit about 25% during the Great Depression. Estimates of unemployment in the Great Depression were all done after the fact, because the government didn't start surveying unemployment until 1940. The estimate for 1933, which is viewed as the worst year of the Great Depression, was around 25%—and that was in an environment where 27% of the population worked on farms. A lot of people went to live with relatives and help on their farms. Because today less than 2% of Americans work on farms, I think a comparable number for the Great Depression would be the non-farm unemployment estimates—which hit about 35% in 1933. In terms of historical comparisons, my 22% range may be the worst of the post-WWII era, but it's not at a Great Depression level at this point.

TGR: Getting back to your economic outlook, what else do you foresee in 2011?

JW: Eventually, the continued economic decline will be recognized officially, but people will be talking about the second leg of a double-dip before it gets any official recognition. I don't see any economic growth ahead. In fact, I see a pretty bad further contraction. For instance, as bad as it's been, if you look at housing starts, the housing market never really had any bounce-up from the stimulus (except maybe a little bit in the home sales numbers tied the expiration of tax credits), and it's actually started to turn meaningfully to the downside again. That's bad for the banking system. It's not good news for anyone.

The problem is we have a solvency crisis and an economic crisis that are ongoing simultaneously. If you go back to when the crisis broke in late 2007 and the panics in 2008, Treasury and Fed actions were aimed at preventing a systemic collapse. They have not solved the banking system's solvency issues. Short-term credit to consumers and business from banks is still declining, both month-to-month and year-to-year. That's a sign of a banking system in trouble. In the last five or six months, there may have been a bit of an uptick in M3, but it looks like that's turning down again. That's another sign of an unhealthy banking system.

Weaker-than-expected economic activity not only will intensify this systemic solvency crisis, but also has all sorts of other implications. It will increase the federal budget deficit, with a lot more spending than people have been anticipating. At the end of the year, for instance, we saw some of this in more bailouts for the unemployed. Going forward, we easily could see some potential failures in a number of states and municipalities that are in serious trouble. I suspect that the Fed and the Treasury will continue to create whatever money they have to spend to prevent a systemic collapse, but the process builds up inflation, and we're already beginning to see that.

TGR: Last year, many companies managed to strengthen their balance sheets and cut a lot of costs. Many are now able to self-finance. In addition, the Dow increased 10% or 11% over 2009. How do you reconcile those rather positive economic indicators with what you see happening?

JW: Most of that is triage as opposed to healthy economic growth. Businesses are always creative and have a lot of flexibility on what they can do to enhance their finances. Cutting employment through the muscle into the bone is not necessarily a long-term healthy approach, although the way they handle the accounting can produce a short-term boost and some gain in the stock price. Keep in mind that corporate America has a planning horizon of the next quarter. Both corporate America and the banking system use all sorts of accounting gimmicks.

When I see strong revenue growth and healthy profits without operations being lopped off and without one-time charges, I'd be willing to consider something more is going on than I'm looking at. It's similar to what the Fed's up to, with Mr. Bernanke now pushing his second version of quantitative easing. He's saying he's going to stimulate the economy by creating inflation. Higher inflation often accompanies strong economic growth, but it is the economy-generating inflation—not the other way around. If the economy's booming and demand is strong and supply's not keeping up with the demand, you can have inflation—in many ways a healthy inflation, if there is such a thing.

But inflation also can be driven by currency and commodity price distortions. Higher gasoline prices translate into higher inflation for the consumer. But it's not because of strong oil demand or strong gasoline demand. It's due to weakness in the dollar and the Fed's policy trying to debase it. You can see it coming in other commodities, and in food. We're going to see higher inflation down the road that is a result of a weaker dollar—not a strengthening economy. All the Fed can do with the inflation they're creating is push an ultimate day of reckoning into the future a little bit.

TGR: Would you agree that the correct approach is for the Fed to do what it needs to do to avoid the collapse of the banking system even with the unfortunate outcome of creating this inflation?

JW: There is no happy exit. The correct approach would have been to avoid the circumstance in the first place, but it's the nature of the political system always to take a gain in the immediate future regardless of the expense over the long term. There have been many years of conventional wisdom that the deficit and the U.S. dollar don't matter. They both do. There comes an eventual day of reckoning and that's what we're facing.

I think they'll continue to do what they're doing, and I can't blame them. They have a series of devil's choices. We've gone too far to bring things into balance.

TGR: What might have been done differently to avoid this mess?

JW: The current circumstance could have been avoided decades ago with prudent management of the government's finances. Now, given the choice between immediate systemic collapse and printing more dollars, I likely would do what the government is doing, because printing money at least buys a little more time.

If I had control of the system, however, in an effort to right fiscal conditions I would attempt to slash spending, particularly making the necessary cuts in the so-called entitlement programs. I do not see this as politically possible. On the other hand, the negative political and social consequences, the short-term damage to the economy, and the public's financial pain could not be worse than what would happen with a hyperinflation or outright systemic collapse.

TGR: Damned if we do, damned if we don't.

JW: The only other option, although I just don't see it happening unless as I' just suggested—and it's a big unless—is to bring the federal deficit under control. I'm talking about the true deficit, of course, not the cash-based deficit we see month-to-month and year-to-year in the popularly published numbers. We're seeing ongoing annual deficits of $4 trillion to $5 trillion. That's beyond sustainability. The government can't raise taxes enough to bring the GAAP-based deficit under control. We'd still be in deficit if they took 100% of people's wages and salaries and 100% of corporate profits. Short of slashing Social Security and Medicare—where we have problems with long-term unfunded liabilities and present value of same—and reversing the trend toward funding a lot of social programs on the backs of taxpayers (including increasing numbers of aging baby boomers), there's no way they can balance the budget. There's no political will whatsoever in Washington with the current administration or any recent administration to bring that under control.

My views haven't changed since we last talked. The ultimate result here is the government printing money to meet its obligations. The Fed effectively is funding the government's borrowing. But as the economy continues to weaken, as the deficit worsens, as the Treasury funding needs increase, quantitative easing and monetization of U.S. Treasuries will have to increase. We're going to see more and more foreign holders of dollars sell their dollars. I think there's high risk in the next year of a panicked sell-off, a panicked dumping of USD-denominated paper assets. All of that will cause the Fed to continue to flood the system with liquidity, to buy up unwanted Treasury debt and stimulate inflation. As people increasingly don't want to hold the currency because of the inflation, we'll start to see higher inflation that quickly can evolve into hyperinflation.

TGR: When do you anticipate that major rush to sell dollars?

JW: I can't tell you for sure that's going to happen, but if I'm right about what's happening with the economy and how the Fed will respond—with more, not less, quantitative easing—the general response in the world markets will be to dump dollars, and there is high risk of that in the year ahead.

TGR: Will anything specific trigger that rush?

JW: It could be anything. Something like that's almost impossible to predict. It probably would be a confluence of factors.

TGR: You indicated that we'll start to see hyperinflation when enough people don't want to hold dollars because inflation's eroded their purchasing power. Any idea when that will be?

JW: We could see hyperinflation breaking in the next year or two. I put an outside date on it of 2014. I'm talking about a hyperinflation in which the USD becomes virtually worthless, which means all kinds of unstable markets, unstable times politically over the long haul. (Check out what John has to say about hyperinflation. His website still carries his original Hyperinflation Special Report, published in 2008—after the Bear Stearns implosion but pre-Lehman, pre-TARP and pre-Obama. John revised and republished it in December 2009, and updated it again last year—Editor.)

As an economist looking at the broad trends—I'm not an investment advisor—people in a USD-denominated environment will need to try to preserve their wealth and assets and protect the purchasing power of the dollars they have. That means holding some physical gold, physical silver, getting some assets outside the U.S. dollar. I still like the Australian dollar, Canadian dollar and Swiss franc, and I think they will come out of this relatively unscathed versus the USD. Over the long haul, gold really is the preeminent asset, with a history of holding its purchasing power over time.

TGR: Looking to another distressed currency for a moment, what do you make of the Chinese government coming forward to essentially become the creditor country for the European governments?

JW: I was never particularly fond of the euro. The Bundesbank was still afraid of inflation due to the horrors of the Weimar Republic inflation and all the politics that followed for decades after that. I didn't think it would work well to try to combine into a single currency the fiscally conservative policies of Germany—the major trading power there—with the liberal policies of countries such as Italy or Spain or France. I think the problems they've run into were foreseeable.

As for extending credit to Europe, from China's standpoint the U.S. is the elephant in the bathtub. China knows what's happening, and certainly has expressed it pretty clearly. They have a rating agency that has detailed the problems with the USD and how the outlook for U.S. creditors is dimming. If I were China, I'd also be looking to do something like this to try and get out of dollars as much as possible.

TGR: A moment ago, you described gold as the preeminent asset. You've cited some interesting statistics about gold relative to the Dow over the last seven consecutive years. Would you elaborate on that?

JW: Let me start by saying that although I have a number of gold bugs as clients and I love gold bugs, I'm not one myself. As I've indicated, I'm just an economist looking at the broad picture. From that perspective, gold is probably the single best asset to help people ride out the storm, based on what we're facing, and I would contend that there's been an increasing view from that perspective in the global investment community over the last decade.

I hadn't realized it until I was putting together some year-end numbers and noticed that every year since 2004, gold has outperformed the Dow Jones Industrial Average in each year. I'm not talking a cumulative number, but year-to-year. We've certainly seen a lot of volatility in gold prices, but gold hasn't had a negative year, while the Dow was down 33% in 2008. Wall Street pooh-poohs gold as a fringe investment, but its performance suggests quite the contrary. It's one of the historical world-class assets, and over the millennia has been fairly consistent in terms of preserving purchasing power.

TGR: In fact, many people call gold "the insurance."

JW: It is. Insurance against a financial Armageddon. Gold's over $1,400 an ounce as we speak. When it gets up to $5,000 people will say, "Oh my goodness. I bought it at $1,400. I can sell it at $5,000 and make a lot of money." That profit may be there, but the way to look at gold is that it anticipates the inflation ahead and preserves the purchasing power of your paper assets. Even if gold gets to $100,000, it's not that you've made $98,600 profit, it's just that you still have the purchasing power you did with your $1,400 gold.

TGR: You're looking at gold as a wealth preserver. Do you see any way to accumulate or increase wealth during these inflationary times?

JW: People always see opportunities and, again, are very creative. But I see this as a time to batten down the hatches, buy your insurance and lock in your wealth and assets in terms of purchasing power. If you come out of the storm, you'll have some of the greatest investment opportunities that anyone will have ever have seen. If you can get through the difficult times with your assets and maintain liquidity, you'll be able to take advantage of those opportunities.

Along the way, unusual circumstances certainly will arise. You can expect a lot of volatility; but, generally, you'd also expect gold to at least maintain its value so that you could take advantage if an unbelievably good opportunity came along.

TGR: Any final thoughts you'd like to give to our readers?

JW: Well, as I indicated, from an investment standpoint, you have to look at preserving wealth and assets. Once you're beyond the point of healing the system, you have to look at the personal level—protecting yourself, your family. I'd also build up a store of goods that could carry your family for a couple of months, stuff that you could recycle or roll over, because there's danger of disruptions to the food supply chain and grocery stores; for example, if a hyperinflation breaks.

Regardless, I see very difficult and dangerous times ahead. It's going to be very painful. If there were a way I thought the government could work its way out, I'd be advocating it strongly. But I just don't see that as a political practicality.

TGR: Thanks. This has been very enlightening.

Walter J. "John" William, is a Baby Boomer who has been a private consulting economist and a specialist in government economic reporting for 30 years, working with individuals and Fortune 500 companies alike. He received his AB in economics, cum laude, from Dartmouth College in 1971 and earned his MBA from Dartmouth's Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. John, whose early work prompted him to study economic reporting and interview key government officials involved in the process, also surveyed business economists for their thinking about the quality of government statistics. What he learned led to front-page stories in the New York Times and Investor's Business Daily, considerable coverage in the broadcast media and a joint meeting with representatives of all the government's statistical agencies. Despite a number of changes to the system since those days, he says that government reporting has deteriorated sharply in the last decade or so. On the bright side, it keeps John and his economic consultancy, www.shadowstats.com , in the limelight. His analyses and commentaries have been featured widely in the popular domestic and international media.

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