HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
A $20 Gold Piece Then and Now
The other day I was holding a $20 gold piece. It contains 0.9675 oz. of gold. With gold at $1,820 per ounce, that’s about $1,750 of gold.
Then I thought about Henry Ford’s revolutionary labor-relations idea in 1914, when he doubled the salary of Ford employees from $2.50 to $5 per day. He got the best workers, they worked hard, productivity went up, and the Ford employees made enough to purchase the Model Ts they were making.
Federal income tax had just come along the year before; it was 1% on an income of 0-$20,000 (Note three things: 1) You made any money, you paid income tax. You benefitted from our great system, you helped support it. It was very egalitarian. 2) The tax was the same for single or married. 3) $20K was very, very serious money in 1914. $5 per day was only $1K per year). Also remember there were no state income taxes, no FICA tax, and very few other taxes. Ford workers took home essentially all of their wages of $25 per week=one $20 gold piece and one $5 gold piece.
Today, at $1,820 per ounce, those two gold pieces equate to approx. $2,275 US dollars. Now factor in federal income tax, state income tax, FICA, and all of the other taxes, for a total tax rate of (you wish it was only) 25%. A worker would have to make more than $3K per week to take home $2,275 to be able to buy a $20 and a $5 gold piece.
Do the math yourself. In August, 2011, a worker in the United States would have to make $150K per year to buy the same amount of gold that one of Henry Ford’s line workers could buy 97 years ago. Many of Ford’s workers in 1914 probably had only a 4th to 8th grade education. In 2011, a college-educated nurse or teacher makes less than half of $150K per year. Some pediatricians, internists and psychiatrists (the people who need to know the most and often work the hardest) only make $150K per year.
I would like to make five points from this short discourse. 1) The standard of living in the US is falling, and has been for years. I believe this will only worsen. 2) The rich will do well, because they can take steps to preserve their wealth. That’s why they are rich. It is the middle class that has been getting, and will be, hosed. 3) Since the creation of the Federal Reserve in 1913 (Is it a coincidence this was the same year as the ratification of the Sixteenth Amendment to the Constitution, allowing the taxation of personal incomes?), the US dollar has lost 98.8% of its value. 4) We elected the politicians that have done this to us. 5) In 1914, in 2011, you can hold gold coins in your hand that represent eternal wealth, the toil of a hard-working man. Buy some gold.
RMD
Gold suffered a “brutal beat” last week. (A Texas Hold’em term describing when you have a powerful hand, yet the other person has a more powerful hand, or worse, “draws out”, catching a miracle card, to beat you). Tuesday was nasty. Wednesday was obscene, with gold down a cool “C-note” ($100).
RMD comment: This appears to be the start of a correction of unknown depth and duration. An article in today’s Barron’s suggests gold could correct 33% from its recent highs, down to about $1,250 per ounce. Anything is possible, but that seems a little drastic to me.
The recent blast-off started the first week of August, when GLD gapped-up from 162 to 165 (see chart, above). This would equate to a gold price about $1,680. The 150-day moving average of gold, currently about $1,500, has routinely provided strong support. This is also the price where gold broke to new highs in mid-July. It is not uncommon for the previous resistance level to then become the support level.
You may wish to take some profits on your paper gold, but do not sell your physical gold. If you were waiting for a pullback to add to your positions, this is it. Rather than try to pick a bottom, average your purchases, buying so much every day or every week.
The bottom line is that no matter how deep the correction, I believe we are still in a bull market in the precious metals that has years to run. Do not be shaken out of your core positions.
This is an interesting question from older son John in Connecticut.
“There’s really no other alternative up here for heating our house other than heating oil. It is hard to predict prices and it is hard to compare prices across (delivery) companies. The companies will offer you either a fixed price, a price ceiling with no floor, or a floating price at the time of delivery.
This year I got the price ceiling, but there is a 35 cent per gallon fee. I will not come out ahead unless the price goes up by more than 35 cents a gallon from where I locked it in.
So, here’s my question: Do you think a more effective price hedge next year will be to hedge with futures or an oil ETF, or in a more complicated way with puts and calls”?
RMD comment: Now try to run an airline.
1) By taking the price ceiling option, my son did limit his price, but it is unlikely he will beat the market. The fee allows the company to hedge.
2) The oil ETF has not tracked the price of oil well. I would avoid them.
3) I have thought about this in my personal situation: How can I hedge the price of gasoline and natural gas? If you believe the cost of energy will be going up, then invest in the energy companies. The profits from your investments, including the dividends, will help cushion the increased price you pay. Consider XLE (an ETF of the largest energy companies, such as Exxon-Mobil (XOM), Conoco-Phillips (COP), etc.), or OIH, an ETF for the largest oil service companies, such as Schlumberger (SLB), National Oilwell Varco (NOV), etc.
4) Without a doubt futures are the best way to invest in commodities. Nothing goes up or down in a straight line, but if you think the general direction of heating oil is up, just go long (buy) an appropriate number of futures.
The problem here is the capital you must keep on deposit with the broker to trade in futures. My son uses about 1,300 gallons of oil per winter. One full-size heating oil future is 42,000 gallons. At $3.00 per gallon, to be unleveraged you would have to deposit $126K. Even 3 to 1 leverage would require $42K. This is really not practical.
My final recommendation: Probably the best option (aside from just paying the spot price at the time of delivery) is to overweight energy companies in your stock portfolio. I believe this will be a solid investment anyway (see immediately below). I would appreciate any feedback on this issue from subscribers.
Also note it is thinking through situations such as this that you encounter in everyday life that separates those who can accumulate wealth from those who just limp along.
I have talked frequently about the gold to silver ratio; that is, how many ounces of silver it takes to buy one ounce of gold, and the DJIA to gold ratio; that is, how may ounces of gold it takes to buy the Dow. The utility of such ratios is that they provide perspective; when a ratio strays too far from its historical average, it will eventually regress to the mean (often with an overshoot in the opposite direction).
Since WW II, it has taken on average 15-16 barrels of oil to buy one ounce of gold. The range (the extremes) is about 6 to 25. Last Monday, with gold at $1,900 per ounce and oil at $84, it took almost 23 barrels of oil to buy an ounce of gold.
Consider: 1) The ratio could go to 25, or even a little further, but if it does, it will be a spike; and it won’t stay there for long. 2) Gold could stay where it is, and oil increase. 3) Oil could stay unchanged; and gold drop. 4) Any combination of the above.
I would like to make two points: 1) Regression to the mean is important, and will help you determine when something is mispriced. 2) I can’t say where the absolute numbers will go, but the gold/oil ratio suggests that energy is currently cheap and/or gold is expensive. In fact, gold started to “regress” just the next day, and by Thursday morning the ratio had dropped to 20.
On Tuesday (8/23), a commentator on CNBC was talking about TIPS (Treasury Inflation Protected Securities). “Real returns are negative for as far as the eye can see. This is due to monetary policy holding interest rates artificially low”.
RMD comment: The almost zero interest rates on bonds and CDs are stealing your wealth, year in and year out.
I was talking to the local coin dealer last week. “Doc, I consider what I hear as a good measure of public sentiment. You don’t know how many people have come in and said “I’m 70 years old. I never thought I would be buying gold”.
RMD comment: If you want to get a good measure of public opinion, talk to taxi drivers, bar tenders—and coin dealers.
Most people become more set in their ways as they age. For people in their 70s to completely change their attitudes about where to invest their money is significant.
Wall Street Journal (8/23/11). “The Obama administration will release final plans Tuesday for ending or cutting back hundreds of regulations, an effort to reduce the burden on business and counter criticism that the White House is tone-deaf to business concerns…
“The changes are welcome, but don’t appear to go far enough”, said Bill Kovacs, a Sr. VP at the US Chamber of Commerce. “Each of the proposals seems to be efficient, technical changes, but it doesn’t make any impact on the overall regulatory burdens that exist on the business community”.
RMD comment: The US is the greatest country in the world because our system allows and encourages people to succeed: The more government regulation; the less resilient our system.
Kovacs (with an acute accent over the “a”), pronounced Koh-vach (In Hungarian, the accent is always on the first syllable), is the most common Hungarian name. It translates as smith. Many of you may remember the 1950s cigar-chomping TV personality and comedian Ernie Kovacs, married to Eddie Adams (the “Hey Big Spender” poster girl for Dutch Master Cigars).
Quote of the week: by Steven Romick, manager of the $6.7B FPA Crescent Fund (FPACX), which has beat the S&P 500 by an average of 6.6% annually over the last decade, in today’s Barron’s.
“Nothing about this political process really invites confidence”.
From Machiavelli: A Biography (Unger, Simon & Schuster):
“The caricature of Machiavelli as a sneaky, conniving fellow, cynically using every tool to further his own ends, comes largely from passages (in The Prince) extolling the virtue, or at least the efficacy, of deception. But, in fact, Machiavelli himself was the least Machiavellian of men. What has tarnished his reputation is not any dishonesty on his part but his candor. Everyone knows that politicians often employ deception; that in fact they could hardly function without resorting from time to time to prevarication, half-truths, and outright lies. Few, however, are so open about this particular tool of statecraft as (Machiavelli), whose reputation as an evil man is due in large part to admitting what everyone knows to be true”.
RMD comment: Machiavelli was the ultimate pragmatist; and one of the most astute observers ever of human nature. He thought the most important quality for a “Prince”, his term for a leader, was decisiveness. His model was Cesar Borgia, the original Valentino, son of Pope Alexander VI.
It would be interesting to know Machiavelli’s impression of Obama, Sarkozy, Merkel, and Putin (especially Putin).
The subject of next week’s letter will be how to take profits. Buy and hold forever is a
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