HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
The Death of Cash
In “As Plastic Reigns, Treasury Slows Its Printing Presses” (New York Times News Service, 7/7/11) it was reported that the number of dollar bills being printed hit a modern low last year. Production of $5 bills dropped to the lowest level in 30 years, and for the first time during that period, no $10 bills were printed.
The article noted cash can’t be used for online purchases. In NYC last year 36% of taxi fares were paid with plastic. In 1970, the value of US currency in domestic circulation equaled 5% of the nation’s economic activity. Last year it was 2.5%.
A credit card is required to rent a car. When I travel, I use my credit cards and whenever a receipt is required, such as for tax-deductible/business expense, I prefer to use a credit card.
There are two problems with “flipping plastic” and decreasing the use of cash. The first is practical. Plastic is seductive; the spendthrift’s dream; it just makes it too easy to spend money. When you charge something, you are taking out a loan from the credit card company. Not many people are as disciplined as I am to use the credit card only when I know I have the money to cover it, and then pay the bill in full every month.
I submit that if people had to pull cash out of their pockets (or pay by check; the cash is already in your account), there would be considerably less problems with debt. Consider cash—as compared to plastic—as a method of system-imposed thrift
Several points about debit cards: Money has been paid up-front, so there is discipline. You are spending money you already have. I have never used a debit card, so I might not understand/appreciate all of the possible advantages.
Compare debit cards to cash. 1) Somewhere along the line, a fee is being paid for the debit card. Someone is making money when a debit card is issued and used. A $50 bill is $50 free and clear. 2) Cash is universally accepted. In an emergency, would you rather have a $50 bill or a $100 debit card?
Before proceeding on, let me remind you about gift cards. They are to be avoided. The fees can be high, bordering on obscene, and many are never completely redeemed.
My other reservation about more plastic and less cash: In the NY Times article sited above, it was noted: “Cash transactions are notoriously hard to track” It also notes “Criminals prefer cash”.
This is from The Price of Everything: Solving the Mystery of Why We Pay What We Do (Porter, Portfolio/Penguin): “In 2000, Amazon (AMZN) was caught offering the same DVDs to different customers at (different) discounts…It denied that it was segregating customers…(according) to their shopping histories on Amazon’s profiles…Consumer advocates have warned that the reams of personal information that people give away when they search, shop, and play on social networking sites online will allow companies to finely tune their prices to fit the profiles of each customer”.
RMD comment: Everything in writing, every recorded transaction, every time you use a credit or debit card, every time you do something online, every time you send an email; can be—and is—tracked. I’m not sure people appreciate how they are willingly compromising their privacy. Criminals prefer cash, but it is not criminal to use cash.
Could we ever have a cashless society? You better hope not, it would be Big Brother’s dream come true.
RMD
You must read the interview with Sean Egan, of Egan-Jones Ratings, in today’s Barron’s. If you don’t receive Barron’s, go out and buy this issue. “The sovereign-debt crisis (in Europe) is probably the biggest credit event faced since the decline of the Weimar Republic. Forget about post-World War II. This is bigger”. It perfectly sums up the concerns I have been trying to express to you over the last several years.
Gold broke out to a new high this week on good volume (see chart of GLD, p. 4). Royal Gold (RGLD, a royalty company), lead the move by one day. GDX (an ETF of the largest miners), GDXJ (the junior miners), silver and the silver miners broke to new recent highs.
The reason is the fragility of our financial system. Don’t be naive, and just hope everything will be fine. By paying a higher price for gold than they were ever willing to pay before, investors the world-over are telling you they have legitimate concerns.
It now takes only 7.8 oz of gold to buy the DJIA. In 1999, it took more than 43 oz. In 12 years, the Dow has lost 82% of its value in comparison to gold. I again remind you; the value of gold is not going up, the value of your (intrinsically worthless) paper money is going down. One US dollar now buys 19.6 mg of gold, an almost invisible fleck.
If you have taken my advice and already own gold, you have some nice profits. Hang on; don’t sell. If you wish to add to your positions, or if you don’t yet own the precious metals, now is the time.
Over the last few weeks, 3 people have questioned why I emphasize that the core position of your investment portfolio be physical gold in your personal possession as compared to “paper” gold, such as GLD (or even futures).
They rightly note that the commission/markup on paper gold is infinitesimally small in comparison to physical gold. For example; you can buy 1,000 shares of GLD ($155K worth of gold), for a commission of less than $10. The markup on 100 oz of US Gold Eagles ($159K worth of gold) is 4.5-5% ($7,155-7,950). The commission to trade SLV is similarly tiny, whereas the % markup on US Silver Eagles is even higher than on gold.
The “paper” precious metals, such as GLD and SLV, were a really revolutionary idea, allowing the regular guy to invest in gold and silver. They are perfect for your IRA/brokerage account. Likewise, these ETFs have expenses. Silver is currently $39.27, while SLV is $38.24. The longer you hold the physical precious metals, the more the upfront commission difference is negated.
The advantage of physical gold is that you hold in your hands something that is recognized the world-over as wealth. I recommend physical gold for two reasons:
1) Consider physical gold to be “insurance”. If you believe there is any chance of a financial meltdown or social unrest, you must own physical gold. It is portable wealth. I suggest you re-read Wealth, War and Wisdom (reviewed in Issue #41, 6/2/08). Bad things can and do happen.
2) I believe it is inevitable that taxes will rise. The Bush tax cuts could expire. If there are no changes, as of 2013, Medicare taxes will be added to investment income. The government can sap you of your wealth perfectly legally by inflation and taxes. You may have a better chance to preserve wealth by having it in “things”; such as physical gold, collectables, art, and a mortgage-free home, than in a pre-tax IRA.
One last point: Many people are hesitant to buy physical gold because they don’t understand how to sell it. All pawn shops buy gold. All coin dealers buy gold. Some jewelry stores buy gold. Gold dealers, bullion houses, whoever sold you the gold; buy gold. You should be able to convert gold to cash within 24 hours anywhere.
Quote of the week: From a post by Axel Merc of the Merc Hard Currency Fund on 7/13 at http://www.321gold.com. “Too many believe we can get through the financial crisis without anyone taking any losses, but make no mistake about it; errors have been made and someone has to pay”.
RMD comment: Governments made mistakes, banks made mistakes, people make mistakes. The longer we refuse to fess up, the greater the final costs.
Above I mentioned The Price of Everything. The book is practical and insightful. You know what can be most expensive?—things that are free.
Good friend Greg called the other night. Greg is one of the dozen or so original subscribers from when I started the newsletter in October, 2006. He had three comments:
1) Greg is as careful with his money as I am. He says my best message over the years has been to emphasize the importance of thrift and the malevolence of debt, which he calls “seductive quicksand”.
2) He noted I have been right on gold.
3) Greg points out there are many different styles of investing; many ways to make money. What is important is that whatever your style, you must be disciplined, to stick with it through good and bad.
Greg stays mostly fully invested. He is one of the very few who have the ability (the guts) to buy when things look really bad, when they are truly undervalued, such as late 2008/early 2009. I admit: I just can’t do that. When I think the market is due for a big pullback, I’m out (or go short). I also prefer to buy on strength, such as the breakout of gold to new highs.
I was in the bank the other day to get into my safe deposit box. The clerk was taking care of the man in front of me. They went into the vault and in about 10 seconds came back out. He had a perplexed look on his face. The clerk said “That looks like a house key. The safe deposit box key will be longer and narrower”.
RMD comment: It is not good to misplace a safe deposit box key. I couldn’t laugh because he is in my Rotary club.
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