NEWSLETTER ARCHIVES

To fund the war with Britain, the Continental Congress made a classic error and issued fiat money. This currency became in its own way synonymous with governmental blundering.  The survivors coined a phrase "not worth a Continental" to describe its value.  Sailors returning from the naval battles in the final years of the war received their pay with good humor and sewed thousands of these worthless notes into suits of clothing in which they paraded down the streets of many different towns.  After this experiment with fiat money-- money made valuable by decree and rapidly made worthless by subsequent decrees-- the Americans realized that gold and silver coins were a key attribute of their future prosperity.  They understood that gold and silver coins were the money to use if they wanted to be independent, not just of Great Britain, but independent from each other.

Self reliance was a big thing in those days.  Men could take an ounce or two of lead and a contraption of wood and steel out into the woods and bring home dinner for a family of eight.  Women could take a large pot, a bunch of fruit or vegetables, fire, and some masonry jars and put up jam or veggies to last through winter.  Thomas Jefferson wrote eloquently about the yeoman farmer living on his own land, paying rent to none, and passing down a legacy of independence and responsibility to generations yet unborn.

Frittered away today, much of that independence has eroded.  Self reliance is not highly rated as a character trait.  Dependence on government for everything from pre-natal care to posthumous survivor benefits is the norm. Yet, there exist many here among us, many of the readers of this very newsletter, who continue to value independence and self-reliance. Some of you gentle readers look about you on the Fourth of July and wonder what "independence" it is that these neighbors of yours are really celebrating.

It is a curious fact that the average American adult over the course of a forty-year career will earn a total well in excess of one and a half million dollars.  You can do the math yourself by referring to the average annual income quoted by the US Federal government.  

Yet, dying in their sleep forty or eighty years from now, most of these Americans will remain utterly dependent on government charities for their survival.  All that money they earned will be taxed, will be spent, or will be paid out in interest payments.  The wealth they have worked so hard to produce will be frittered away, in much the same fashion that the individual liberty which was won from the British crown hundreds of years ago has been frittered away.  Only a few will have much to show for it.

BUY AN OUNCE OF GOLD

Your opportunity to be among those happy few is here today.  You can firmly establish a habit of buying an ounce of gold every month.

Currently, a one ounce gold coin from Goldfinger Coin and Bullion costs about $378.  Perhaps your personal income is above average, and you'd rather express your savings program more often.  Excellent! Buy an ounce of gold every payday, or every week.

Perhaps your means are somewhat more constrained, or your obligations limit your savings program. Fine. Buy an ounce of gold every quarter - four times a year. Or even once a year.

By putting aside this gold as a savings program, you can ensure that you'll regain some of your hard won independence.  By the time thirty years have past, you'll have a considerable pool of wealth.  That capital can keep you happy in your sunset years, it can provide for the prosperity of your children and grandchildren, and it can be your legacy of independence.

GET STARTED TODAY

Want results? What will it produce?

After thirty years, the monthly buyer will have 372 ounces of gold.  His more wealthy cousin who buys weekly will have 1,612 ounces.  His less fortunate neighbor who buys quarterly will have 124 ounces.

Presently, we are seeing a secular bull market in gold.  For various fundamental reasons, having to do with the gold market itself and also having to do with the external economy, I believe this bull market should last for fifteen years or more.  Even assuming a very conservative 12.5% annual growth rate in the price of gold through 2016, followed by a decline of 2% per year until 2033, the results are staggering.

The quarterly buyer will have salted away $146,403 in 2003 dollars.

The monthly buyer will have $439,209 in today's dollars.

The weekly buyer will have nearly two million dollars!

In all three cases, the buyer will have a significant portion of the wealth he created in his lifetime.  He'll have something to show for all that work.

STOCKS SLIDE, GOLD ZOOMS

Since peaking in real dollar terms in 1999, the major stock markets in the United States have lost about a quarter of their value.  Trillions of dollars of wealth have been removed from the stock markets.  For many investors, that wealth has been lost forever.

At the ends of the years 2000, 2001, and 2002, the stock markets have been lower than they were at the beginning of those years.  For three years in a row, stocks have been down.  In the last sixty days, stocks have staged something of a come-back.  We'll consider that rally a little later on.

One of the interesting relationships in the economy is the price of the Dow Jones Industrials average priced in terms of ounces of gold. Five times during the Twentieth Century, this relationship reached a value very close to one. In other words, it cost the same number of dollars to buy an ounce of gold that it cost to buy the basket of securities called the Dow.  As well, before the Dow reached any new high after recovering from a secular bear market, it always re-set to this price of one ounce of gold or less.

Bear market rallies did not result in new higher values for the Dow.  Rather, they were merely stair steps on the meandering path to that one ounce price.

Clearly, the price of an ounce of gold rises and falls during the same period that the value of the Dow rises and falls.  For today's price of gold to equal today's Dow, the price would have to be over $9,000. However, before that meeting point is reached, quite a bit more value is likely to come out of the stock market.  Perhaps as much as 40% of the value of the Dow will be removed, for reasons addressed later.  If so, then the Dow will likely fall to perhaps 3,712 in today's dollars as early as 2005.  Gold in other words, would increase by ten times its current price.

It is interesting to note that if gold stabilized at that high a price, the value of your monthly buyer's 372 ounces of gold would be worth nearly $1.4 million in today's dollars.  For reasons discussed below, that price is by no means an upper bound.

BEAR MARKET RALLY

But, the prices of stocks are on the rise once again! Why not get in on a good thing?

We can tell that the current rally is a bear market rally by examining the price to earnings ratio.  This key ratio tells us something important about the value of the stocks.

Traditionally, manufacturing sector companies have been priced at about ten times their annual earnings per share of stock.  The earnings per share of stock is the after tax profit divided by the number of shares. A price of the stock roughly ten times that number represents a sort of net present value calculation.

In other words, the investor expects the company that is profitable to continue to exist in the future.  Demand for its products will continue unabated, perhaps increasing or decreasing.  The future stream of earnings represented by the continuing profitability of the company is worth more than the earnings per share this year.  A price of ten times earnings would represent a general belief that things can go on for at least another ten years with the same company continuing to make profits.

High technology companies and those involved in distributing content (movies, software, etc.) often have a higher price to earnings ratio, on average.  Fifteen is the value of this ratio.  So, one can expect these companies to be more profitable because they enhance productivity with technology, and the demand for their products or services is expected to continue generating profits for them further into the future.  Thus, a higher earnings per share ratio.

If we are to look at the current price to earnings ratio, though, we see values for many companies in the twenties and thirties.  At the height of the bull market in 1999, price to earnings ratios of sixty or more were noted for certain companies.  Amazingly, some companies with very popular stock had infinite price to earnings ratios, since they were in fact not profitable at the time.  The fervor of a speculative bubble can be very strong.  That fervor lifted the values of unprofitable ventures like Amazon to amazing heights.

But, every trend tends toward its mean value.  For well over a century, price to earnings ratios of Standard and Poor's 500 (S&P 500) companies were around ten.  Lately, for reasons related to productivity enhancements and a larger global market, some economists have posited that the price to earnings ratio may have had a structural change to a level of fifteen or eighteen.

Even so, the average price to earnings ratio of the broad market index S&P 500 is currently over twenty-eight.  So, even if the structural change just alluded to has happened, the price to earnings ratio has to drop by 36 to 46% in order to return to a range of fifteen to eighteen. To return to a trend line of ten (price to earnings ratio of ten) the broader stock market would have to drop 64% of its value.  Or earnings would have to dramatically increase.

However, when I say that a trend returns to its mean value I don't mean that it goes to that value and stays there.  It wanders around that value.  It dips below that value.  In previous secular bear market periods, the average price to earnings ratio has dropped to values like five or three.  So, in the worst case scenario, the market would have to delete over 89% of the current values of stocks.  The Dow would scream down to a value less than 1,000 which it hasn't seen since the early 1980s.

Earnings from Where? In considering the price to earnings ratio returning to its trend, we can create a much rosier scenario if we postulate much higher earnings. The price of stocks is one element in the ratio.  The earnings of those companies is the other.  So, let's go find some earnings.

Where? The larger global market has already been addressed by most of these companies.  Tellingly, the rest of the world is not in a hugely prosperous condition.  Japan has endured tremendous drops in its stock market for over a decade.  Europe has seen a long bear market, too. China has seen steady growth, but also has developed its own companies to meet internal demand.

Nor is the condition of the American economy enhanced by the current war on terrorism.  Tourism is down sharply because domestic air travel was clearly unsafe on 11 September 2001.  Enhancements to security have discouraged many travelers who find the process of travel much more tedious, and who still don't feel entirely safe at airports.  Worse, politically motivated changes to things like the issue of tourist visas now compel, for example, Australians seeking a tourist visa to be fingerprinted at the American Embassy.  I'm not saying that such measures are not justifiable given the current climate of terror.  I do say that the indignity of being fingerprinted has deterred significant numbers of tourists.

I've taken tourism as a fairly obvious example.  Tourism is down dramatically.  Thus, orders for jet fuel and orders for new jet aircraft are down.  Demand for hotel rooms is down, so building of new hotels has all but ceased.  Workers in a broad array of industries are being laid off.  Yes, many of these are finding other work in different fields. Yes, the restructuring of the economy by free market forces during a recession has tremendous value in spurring future growth.

But, the basic fact is that earnings for most companies are not going to rise.  They are going to fall.  Which means that my previously stated worst case scenario, that to return the trend line of price to earnings ratios to its mean value by crossing over into territory like three or five imputing an 89% drop in the value of stocks is simply not the worst we can expect. We can, in theory, over the next two to three years, expect values to drop by more than 95%.

EXPECTED VALUES

The last time a major stock market bubble of similar proportions was created was in the period following the late Seventeenth Century fiat money inflation in France and England.  In the 1680s in France, John Law created a fiat money ostensibly "backed" by the value of land in Mississippi.  Across the English Channel, the Bank of England set about introducing a paper currency, ostensibly backed by British sterling silver.  In neither case was redemption a serious function of the currency.  Fiat money inflation led to the so-called South Sea Bubble.

Incredibly talented and intelligent men like Sir Isaac Newton observed that stock prices were going up without any rhyme or reason.  Newton himself sold his entire portfolio of stock in the South Sea Company quite near the top. However, as the price continued to rise, he bought back in.  By 1722, the stock was worthless.  Moreover, on the broader markets in Paris and London, 90% of listed companies had ceased to exist and 95% of the value of the stocks of the survivors had been eliminated.

Since 1971, the US dollar or, more accurately, the Federal Reserve Note has not been redeemable for gold.  At that time, the dollar was redeemable for one thirty-fifth of an ounce of gold upon demand.  Today, the total gold reserves claimed by the US Treasury (which includes gold actually in storage and gold lent out to bullion bankers) could only redeem the existing supply of dollars at the rate of one dollar for one thirty-two thousandth of an ounce of gold.  In other words, in thirty-two years, the value of the dollar itself has deteriorated tremendously.  Worse yet, there is no arrangement for redemption. Federal Reserve Notes are backed by nothing and represent a promise to be paid only in other paper dollar bills.

Given these facts, what are the expected values of that private stockpile of gold which the intrepid Americans in our earlier examples set aside on a weekly, monthly, or quarterly basis? Would you expect that value to be greater or less than the value of the stocks now in their portfolios? Would that be true in five years? In ten years? In thirty years?

The future is unwritten.  I don't believe in predestined fate.  I can't tell you how things are going to turn out.  However, I expect stock prices to drop and the gold price to rise.  Therefore, if I had a large stock portfolio, I would use today's bear market rally as an opportunity to sell those stocks at a better than expected price.  I would also look very seriously at some of the stocks which already have price to earnings ratios of around three.  I would take keen interest in stocks of mining companies, about which more in another newsletter.

DIVERSIFY

If your portfolio already includes significant gold, you may wish to add to it.  Adding an ounce of gold per week, or month, or quarter should enhance the value of your portfolio years down the line in ways that adding a basket of securities modeling the Dow would not.  Further, there may be tax advantages to buying and holding gold that don't show up in the strategy of buying and holding stocks.

Nevertheless, you might say to yourself, as a person able to purchase an ounce of gold every week, "Where would I store one thousand, six hundred and twelve ounces of gold in thirty years?" Since there are twelve troy ounces to the troy pound, that's 134 and a third troy pounds.  There are about 14.5 troy ounces in the pound avoirdupois, which is the pound that is used on your bathroom scale.  In those pounds, you'd have over 111 pounds of gold. Very nice.

One of your opportunities is to buy gold at a price very close to the spot price of gold, as close as 1.5% above spot for small amounts like one ounce. You can buy e-Bullion®.  The people here at Goldfinger Coin and Bullion have created e-Bullion as a service to help you obtain gold for your portfolio. Rather than storing that gold yourself, e-Bullion has arranged to have it stored in secure, insured vaults in different parts of the world.  You can create an e-Bullion account and manage it yourself anywhere you can connect to the Internet.  You can safeguard that account with a CryptoCard® which provides high level security based on large prime number encryption algorithms.  The security of the CryptoCard is completely independent of the Internet, so there can be no password sniffing or keystroke logging to interfere with your control of your gold.

Nevertheless, computers are not always available.  Earthquakes, hurricanes, and wars have been known to interrupt communications networks for days, weeks, or months at a stretch.  During that time, you should have access to some portion of your wealth in order to survive. Gold coins are a very good way to store a portion of that wealth.  Why? Gold is remarkably dense.  In scientific terms, it has a very high specific gravity.  Until platinum was refined in the early 18th Century, no other material was known with a higher specific gravity.

By all means, in diversifying your portfolio you may wish to consider buying an ounce of platinum on the same schedule that you buy gold. Since platinum is much more valuable at present, you might wish to have a schedule of buying an ounce of gold every month and an ounce of platinum every other month.  When you convert your portfolio of stocks to cash, consider investing directly in metals.

SELL AT ANY TIME

Presently, the value of stocks on the broader markets may be expected to dwindle.  Yes, there is a temporary bear market rally.  You may be taking advantage of that rally, and there may be rallies in the future you'd like to take advantage of.  There will be stocks and other securities which are temporarily undervalued by market forces.

In five or ten years, the trends may reverse.  Gold may start to lose some of its recent gains, and stocks may recover significantly.  For reasons of my own which we'll examine in future newsletters, I think these gains are not going to be substantial for over a decade.  There are many fundamental difficulties which the current market will have to work through before it can reach for new high ground.

However, that's the great thing about owning gold.  For the last ten thousand years, humans have valued gold.  It has been the basis for trade and commerce from Egypt to Siberia, from the Andes to China, in all kinds of cultures.  It is recognized as the real stuff.  Thirty years ago, men even put small amounts of refined gold on the Moon!

At the end of the American Revolutionary War, an ounce of gold would buy a good tailored suit, a pair of shoes and a belt.  At the end of the Spanish American War, an ounce of gold would buy the same items.  At the end of the Second World War, the same.  Today, well after the end of the Cold War, the same.  It has been proposed by one author that at the time of Caesar Augustus, two thousand years ago, an ounce of gold would buy a toga, sandals and a sash.  In other words, in terms of buying power, gold retains its value.

Those who had gold during the fiat money inflation of John Law survived and prospered.  Those who had gold during the era of the worthless Continental survived and prospered.  More recently, Vietnamese who held their wealth in piastres did not prosper as those who held their wealth in gold.

You can sell an ounce of gold for ready money wherever you go and whenever you choose.  It is highly liquid wealth.  It is a better store of value than most currencies.  

With e-Bullion® you can sell any portion of an ounce of gold, or use it in exchange for goods and services at one of more than two thousand online retailers.  You can quickly convert your e-Bullion gold to dollars on a debit card available from e-Bullion, which works at cash machines and many store locations.

CONSIDER HYPERINFLATION

The conditions which led to the hyperinflation in the early Eighteenth Century in France and England, in the late Eighteenth Century in France and America, in the early 1920s in Weimar Germany, and in other places at various times are fairly well understood.  Inflating currency is one way to handle a large amount of debt, and it is a sore temptation for politicians.

Presently, the value of the national debt of the United States, including the debt that is understood to be owed by the government (some six trillion dollars) and including the un-funded obligations of future payments to Social Security recipients and the like, is well over forty trillion dollars.  The temptation which prompted the fiat money inflations of the past - to pay off current debt with inflated (worthless) currency - is very much with us today.

Economists like Alan Greenspan have noted that gold and silver redemption features of currencies in the past have functioned as a sort of market discipline.  Central bankers and state bankers have, when required to redeem their paper money for gold or silver, not been able to inflate as rapidly or impose undervalued currency on the market nearly as much.

Unfortunately, as noted above, the gold reserves in the US Treasury would have to be valued at over $32,000 per ounce in order to provide meaningful redemption to the dollar.  Put another way, in the ninety years since the Federal Reserve was created by an act of Congress in 1913, over ninety-six percent of the value of the dollar has inflated away.  The same goods and services that are bought for $100 today would, if they were available then, be paid for with $4 in 1913.  Your dollar isn't worth a 1913 nickel.

Indeed, when the dollar was taken off its modified gold standard in 1971, prices spiraled out of control.  The annualized inflation rate for some quarters of 1979 was running at 20% or more.  While inflation has been significantly lower, averaging more like 2.5% since 1982, there is no way to know if political expedience might call for a higher rate of inflation in the future.  Your best hedge against inflation is gold.

Place your next gold order today.  Then when you celebrate Independence Day, it'll mean that much more to you.

Goldfinger Coin & Bullion, Inc. buys and sells gold, silver and platinum coins; bars; ingots and shot. Goldfinger Coin & Bullion is located in Camarillo, California and delivers precious metals anywhere in the continental United States. Click here to view our catalog. To obtain current prices or to place an order, please call us at 805-482-4425 or send an email to sales@goldfingercoin.com.

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