Taylor On US Dollar & Gold
Financial Markets
The "Greater Fools" Theory is back!
This past weekend, Mrs. Taylor, son Scott and I were having dinner at a
restaurant in Forest Hills, Queens, when we were spotted by a friend named
Steve Gofner. Mr. Gofner promptly entered the restaurant and walked over to our table to try to convince me to read this book titled, Buy High, Sell
Higher. Except just after gold hit $850 back in the early 1980s, Steve has
always rejected the notion that buying gold makes any good sense. And
whenever I see him, he has read another book and is in the process of
touting the idea from his latest read.
"Beggar thy Neighbor" policy continues
When it comes to keeping up with what is going on in the currency markets,
I find Chuck Butler, president of Everbank.com, to be invaluable. And his
service may be of interest to you as well. It is my understanding that at
Everbank.com, you can hold deposits denominated in various currencies and
enjoy FDIC insurance just as if you were holding U.S. dollar deposits in a
U.S. bank.
Mr. Butler provides a daily analysis of the currency markets and then
sometimes passes on special reports like the following additional e-mail
message he sent regarding the Thai baht.
"This just in!
"The Thai Gov't just announced some controls on the baht to limit the rise
in the currency's value. They first announced that they were going to stop
paying interest on foreign deposits, which wouldn't be that big a deal,
considering there was little to pay in the first place.
"But now, they've come out and said they are going to limit the size of
transactions on buys... That's not a good thing... This will limit
institutions and speculators from moving the market in the direction they
want it to go.
"I'm removing my call for a stronger baht at this time... It has already
lost 2 baht to 40, and I don't think it's finished there.
"Looks like the yen is the only play in Asia for now.
"Chuck Butler
"President
"Everbank World Markets
The Dollar as Reserve Currency? How Much Longer?
The almighty dollar. How much longer? There seems to be no historical
precedent for long-term survival of fiat currencies. Will the dollar
establish such a precedent? To do so it will have to overcome such matters
as Russia abandoning it for the Euro. When Saddam Hussein did that, we
invaded. When Chavez considered doing that in Venezuela, the CIA acted.
And now the first gold-backed currency in many years has appeared in the
world. What will be the future of the gold dinar issued by Malaysia? Will
good money drive out bad?
Why has China encouraged its citizens to buy gold? And why are the Japanese so interested in it?
Will Japan slow its purchase of U.S. Treasuries and let the yen grow more
expensive against the dollar? If so, who will buy our Treasuries?
And in the background, the relentless whir of the printing presses. The
money supply has been growing at an astounding rate lately, depreciating
the dollar. It is being ground down in a most serious way these days.
There is a growing perception from our trading partners that they need to
seek a medium of exchange that will have lasting value and they see the
dollar as being highly suspect in that regard.
Japan is competing with China for Russia's oil. They are offering to spend
billions to build a pipeline from Russia to Japan to ensure a supply of oil. But China wants and desperately needs this oil as well. Japan has trumped China's offer. Of course, both countries have billions upon billions of U.S. dollars with which to pay for such a project, or at least as long as the dollar has some value they have wealth with which to pay for a delivery system of Russian oil. Of course Russia is now opening talks about accepting Euros for payment of oil. They have also talked openly about their desire to build up their gold reserves. Do you suppose Russia sees the handwriting on the wall about the dollar's doom?
Using Gold to Enhance Portfolio Returns
As discussed above, I was scheduled to speak at the Flushing, Queens, New
York Library at 2:00 on Saturday. In preparing for this talk, I dusted off my Homestake/Dow Model and then updated it. I had Homestake stock price data through 1998. But since then Homestake was acquired by Barrick Gold,
so no price information is available in recent years.
So to update the model, what I did was use our average gold share gain/loss
from 1999 to the present. The model assumes ownership of the Dow and "X"
percent in gold stocks (Homestake from 1903 through 1998 and J Taylor's
average gold stock since then) with the portfolio being rebalanced at "X"
percent gold stocks on January 1 of each new year. Some conclusions of the
model:
- Assuming a 10% gold share allocation and a 90% Dow allocation, the portfolio with gold ALWAYS, from 1903 through September 2003, had gained more than a portfolio with only Dow stocks.
- Starting with a $1,000 investment in 1903 the portfolio with 10% gold share allocation (and hence 90% Dow) would have grown to $297,180 by the end of September 30, 2003, compared to $204,270 for a portfolio comprised exclusively of Dow stocks.
- At the end of September 30, 2003, a portfolio that rebalanced the portfolio with a 20% allocation to gold each January 1 (80% to Dow Stocks), would have grown from $1,000 in 1903 to $347,100, while the Dow-only portfolio would have grown to $204,270.
- However, a 30% allocation to gold and a 70% allocation to the Dow is less optimal at this point in time than the portfolio with 20% gold and 80% Dow. And if you were to increase the gold share allocation to 40%, the portfolio would have performed worse than the one with just a 10% gold allocation.
Obviously the amount of gold that should be allocated to your portfolio will vary with whether gold or stocks are performing well. Usually gold is negatively correlated with stocks which is why gold is such an efficient
asset to include in diversified portfolios. Arguably, if you are able to select the primary trends, you could make an argument that at times you would do best by owning practically no gold while at other times, like now when the primary trend is most likely bullish for gold, you would do better weighting your portfolio more heavily toward gold. For example our Model Portfolio, shown below, is now in excess of 40% gold. We have 17% in gold producers, 20% in junior gold shares, and 3% in gold and silver bullion. However, the Prudent Bear Fund allocates somewhere between 5% and 10%, and the Prudent Safe Harbor Fund holds a similar amount of gold bullion as one of its "foreign" currencies. When combining the gold exposure in these two
funds (which collectively comprise 34% of our Model Portfolio), we have a gold allocation in our portfolio north of 40%. But we think that makes good
sense based on our strongly held view that we are in a gold bull market.
GOLD
QUESTION: I need some advice. I have a fair amount of profit from stocks I sold thanks in part to you. Should I keep buying some of your picks or buy
gold coins? Thank you in advance and keep up the good work.
ANSWER: Given my belief that we are in a long-term bull market, I think it
makes excellent sense to keep buying gold stocks. As the price of gold
continues to rise, more and more marginal projects will become economic. And as those marginal projects suddenly become economic, very substantial
profits will be made in these shares of those companies. If I am right about this being the early stages of a primary bull market in gold, then this process will go on for several more years.
However, depending on how risk-averse you are, you may do well to take some of your profits out of the shares and buy more gold bullion because as
Richard Russell says below, gold represents the safest long-term investment
you can make in the current environment. It is less risky than owning mining shares, which is one of the reasons we urge people to buy a portfolio of gold stocks and not to put more than 5% in any one of them. We also like the content of your gold share portfolio to be geographically diversified, as discussed in the report on Centurion Gold below.
When we feel this gold bull market has reached some level of maturity, we
will begin to put more of our proceeds into gold or perhaps some other
currencies at the depths of the Kondratieff winter when all the excess air
from all the bubbles has been imploded out of the system. However, we think
more speculative investors should weigh their gold share exposure more in
favor of the shares until later in the cycle, much as we have in our Model
Portfolio.
The Safest Long-Term Investment - Richard Russell
A few years ago, my good friend Ian Gordon of Kondratieff Cycle fame,
introduced me to Richard Russell's Dow Theory Letter. I immediately became a Richard Russell fan. At that time, Richard had not yet become a gold bull. But that didn't matter to me because his writing style was
entertaining and more importantly his rational approach to markets combined with his experience and ability to think outside the main stream box told
me this guy was a must-read. I mean it sincerely when I say there are two
sources I try to read each day. First is the Bible. Second is Richard's
Remarks. Richard has really come around on gold over the past year or two. I'm sure what he is saying about gold is nothing new because this investment genius is pushing 80. He's been around these cycles before and another thing that makes him unique is that he learns from his experience. So I believe Richard's constant cheerleading for gold has become an everyday theme because he is very, very sure we are indeed on to a major secular bull
market in gold.
Here were some words of wisdom on gold from Richard Russell this past
Wednesday that I think need to be passed along to you.
"Now here's the irony, and the markets, of course, always provide us with
irony. The safest long-term investment today, in my opinion, is GOLD
BULLION IN THE FORM OF GOLD COINS. This is the "rich man's preferred investment." Why do I call it that? I call it that because gold pays no income, and the average investor needs income. So gold coins are most
favorable for the rich man, the man who doesn't need income -- or for the
brave, who can forego the income.
"Why do I pick gold bullion in the form of gold coins? I pick gold coins
because they represent timeless, totally safe wealth. The world is loaded with debt. The world is creating debts by the second, by the minute, by the
day. All these must debts must be either paid off or translated into
bankruptcies. If they are paid off, they will be paid off by additional
money created by central banks, and that's clearly inflationary.
"Thus the big picture is a global decline in the purchasing power of paper
currencies. Since gold can't be mined as fast as paper currencies are
created, the ratio of real money--gold--to paper currencies spins up and off into the wild blue yonder. Ultimately, when holders of paper realize the swindle that they've been caught in, there'll be a panic to transfer their paper "wealth" to real money. That's when the panic for gold will begin.
October 20, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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