Putting the pieces together...

Current Basic Reasons To Own Gold

A month ago I approvingly quoted David Einhorn on buying gold: "... I decided holding gold is better than holding cash, especially now that both offer no yield." I made the same decision and effectively doubled my gold exposure over the next two weeks, doing so with gold and silver bullion-holding stocks (CEF and GLD) and some gold stock index funds (GDX and GDXI). My main holding is physical gold, but buying now at much higher levels it is easier and quicker to get out of "paper gold" if necessary.

 

Paul Kasriel, chief economist at Northern Trust, made similar comments  on interest rates and gold on November 13 which I finally saw today. This cuts through all the BS we read about gold lately which Kasriel summarizes in a few sentences. Kasriel calls it as he sees it. He was one of the first to call for a recession and stock market top in 2000 and also in 2007 and for the following bottoms as well, so his credentials are superb.

 

All this reminded me of a paper John Hussman wrote on gold and the XAU Index in 1999. At that time he said,

 

"In the rare instances when 1) The rate of inflation has been higher than 6 months earlier, 2) Treasury bond yields have been lower than 6 months earlier, 3) the NAPM Purchasing Managers Index has been below 50, and 4) the Gold/XAU ratio has been above 4.0, the XAU has soared at an astounding rate of 123.63% annualized. In contrast, when none of these have been true, the XAU has plunged at -53.21% annualized. That's a gaping difference."

 

These are both simple basic economic and financial reasons for why and when gold is a good investment, which it is now. If the recovery really takes hold and taker off, and if interest rates on TBills rise, there will be a smaller incentive to own as much gold as at present.

Portfolio Update November 19, 2009

More on this later, but for now just a short note to mention that I have revised the "Hillary Portfolio" of two years ago, gold and munis, and replaced it (partly and  in progress) with the "Obama Portfolio", gold and cash.

 

There are just too many horror stories from state and local governments to own municipal bonds at this time. Even with most of the "stimulus" money and lots of those new Federal Munis going to city, county and state governments, they are all teetering atop the flag pole (except perhaps for North Dakota). The rates are too low to justify the continued risk

 

I had basically one-third of my total portfolios in munis, but I have been selling them off for weeks and got rid of all the rest yesterday. I'm going to miss all that lovely tax-free monthly income, but it's too risky now. I have been adding to gold holdings on pullbacks as mentioned recently with a good bit of the proceeds, and I will keep the rest in Vanguard's muni money market fund for now. Cash is truly trash now and pays virtually zero income as well as becoming more worthless each day the dollar falls, so gold is a must.

 

By "gold" I mean 1. real gold stuff in a US bank vault; 2. paper gold like CEF, GLD, and SGOL whose gold (and for CEF also silver) is stored in bank vaults in Toronto, London, and Zurich respectively; and 3. a smaller amount of gold stock index funds, primarily GDX and GDXJ. 2. and 3. are the new recent holdings and hedge me further into the market, but are easy to get into and out of. That's important when buying near new all time highs. If all goes well I may buy more of the "real gold stuff" and close out the paper gold. Meanwhile I have geographic diversification all within US  accounts.

 

This puts gold now near 25% of total managed portfolios, and all of it is in the taxable part. The IRAs have no gold, still mostly bond funds and some higher yield vehicles. I did sell LSBDX after a wonderful run this year again. I also sold some mortgage REITs not held very long, but with modest profits, and all of GIM, the Templeton Foreign Sovereign Bond Fund, which had a very good run for me as with LSBDX. Yields had dropped quite a bit on both. I kept CMO-PrB, a mortgage REIT preferred stock paying nearly 10%.

 

I keep looking and wishing for the "set and forget" retirement income deal which would be fully hedged against everything "forever". I remember from the nearly hyper-inflationary 1970's when accounts with gold and T Bills only were pretty good for about eight years, and now I'm headed in that direction again... I know some of you are interested in the late Harry Browne. His first "permanent portfolio" idea, not called such at that time, was gold and TBills. He and James Benham put together some investment programs to do that .

From the Horse's Mouth: Inflation Plan "A"

Debate has raged since the economic implosion last year about US inflation versus deflation as the ultimate outcome. Knowing that inflation was well underway for ten years into the 2008 implosion, it was a given for many that inflation would resume its multi-decade march. Since last year, the full-out FED and Administration pump priming with interest rates close to zero has guaranteed inflation, and gold has long since caught on. Gold is up $440 per troy ounce, nearly 65%, from the low a year ago.

 

 
The only confusion was about why US interest rates were going to be held close to zero seemingly "forever". The has fog lifted this month. "On November 2nd 2009, President Obama called for a new "post bubble growth model" with a greater focus on exports, and referenced thefact that Germany, which he called "a wealthy, highly unionized industrial nation," has been a very successful exporter.  It does not take a rocket scientist to understand that his goals include more unionization and more exports.  And because U.S. union workers are in general much more generously compensated than non-union workers, we believe that the only way that the U.S. can achieve higher exports is to devalue the dollar.  We therefore believe that it is a goal of the Obama administration to see the dollar decline." ( Guild Investment Management )

 

We can, and will, debate if this is simply an explanation by his advisers/handlers for President Obama to relate to for his own political (re-election) purposes: "We are trashing the dollar to help exports and the unions." It sounds better in some quarters than trashing the dollar ignorantly or trashing it to reduce the pressure of US Treasury debt. It also sounds better, in some quarters,than keeping rates down ostensibly to keep the economy from totally coming apart. Ignore the fact that there are a lot of reasons why trashing the dollar will not automatically make us into a 1980's Germany. The UK trashed its currency in the 1970's and didn't end up as a successfully greater exporter.

 

What's far more important than theory for personal and business planning is that this new admission by the President underpins the reality that the dollar is going, by design, to very low levels, say 40-50, from current levels near 75. The dollar index is already down 15% since last November. If your US dollar-denominated total portfolio is not up over 15% since a year ago, even before tax, you are losing on the year.

 

 

Gold, up nearly 65% in a year, is running at about fourfold leverage or gearing to the dollar loss, so gold should be at least 25% of your portfolio. My own gold percent was only about 12% and I am up across all accounts including cash about 14.5% on the year, so I have much more work to do, as do we all. Gold is up over fourfold since 1999-2001, but it could easily do the same same again if the dollar falls to 40. Keep in mind that most traditional alternative currencies are not in very good shape either, and emerging country currencies are not deep and liquid enough to serve as alternatives nor would their central banks want to. Many central banks in emerging markets have been buying dollars in the past week to prevent their currencies from flying up too high.

 

Think it through and get busy!

 

 

Roth IRA Conversions 2009-2010

Earlier this year I wrote several blog posts on Roth IRAs and/or simple close-outs of existing regular IRA retirement plans.

 

Roth IRA conversions have several new advantages beginning in 2010. The main advantage for people with large IRA balances and incomes over $100,000 per year is that the earned income limit is waived for 2010 and perhaps later. So even very large IRAs can be converted upon payment of the income tax on the amount converted.

 

A second very important 2010 advantage for all income levels is that the income tax owed on the conversion in 2010 can be paid one-half in 2011 and one-half in 2012. This entails some risks and means that one must be sure the money needed to pay the tax is safely available when needed in 2011 and 2012, but it can be a big tax-saver to spread the tax over two future years with no IRS interest charges on the tax deferral.

 

As the end of year grows closer there have been some better articles on Roths and 2010 opportunities. This past week Robert Powell of MarketWatch wrote a very short and good summary .

 

Powell lists several websites with calculators to give us ideas on the wisdom of converting versus doing nothing. A lot depends on how long the Roth will exist and what the estimated rate of return will be. For a decade or less of Roth existence the outcomes for income taxes taxes are virtually the same for regular IRA or Roth conversion.

 

But there are other advantages to Roth IRA conversion which are very well decribed by two Roth IRA experts whom Powell refers to. I would read this  article before even going to the calculators to see if your reasons for wanting or not wanting to convert really add up.

 

One last advantage of Roth IRA conversion is that you can back out of it and get your tax back up until October 15th of the year after you convert. Ed Slott, the IRA expert, calls this betting on the horserace after it's over. Let's suppose you want to put gold coins into your new Roth IRA because they will not be taxed when they are removed in the future. But if gold goes way down in price after you start the Roth IRA you have up to 22 months to "recharacterize" or reverse the Roth IRA conversion and get your full tax back. If gold goes way up instead you are way ahead. By October 15 of the year after conversion you'll know which horse won and can act appropriately.

 

There are a lot of issues to consider, including estate planning, death taxes, and much more, but the advantages under certain conditions warrant taking a good look while so many advantages still exist.

Great Opportunity or End-of-Series?

Going into the last two months of a memorable ten year span for US stock equities (and much else), we have heard the grim comparisons. Someone sent me this chart, origin unknown, which startled me. I believe the data are from the long term SP500 reconstruction which has been underway for decades.  

 

The bottom line is that not only has this past ten years produced a negative total return (with all dividends re-invested) for stocks but it is the worst ten year total return in US stock market history back to 1827!

 

Note, however, that at many of the ten year return low points--1842, 1876, 1896, 1921, and 1938--there are two or three years in a row very close together at the low point. Thus it's probably not necessary to rush into the markets fearing to be left compeletely behind. Only the 1974 low had a substantial initial rise, and even then, you may recall, there was a very large pullback ending in 1976.

 

It will be quite a long time before market and economic fear subsides. It took three years minimum after 1987 before risk appetite returned. There is always the argument that "it's different this time", and looking at the dates of lows on the chart, I imagine it always is different that time But the long data stream shown by this chart is persuasive that it's also always the same. Unless......unless it's "End-of Series" and the US stock markets and economy are never coming back.  Many non-main stream economic and market writers are making that judgment, among them the "gold and guns only" group. But I note that  main stream money managers, even those who are extremely negative right now, are still assuming markets will survive and be open for business.