HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
The Precious Metals Have Broken to New Highs
Over the last several weeks, I have been alerting you to the strong action of the precious metals. First Silver Wheaton (SLW) broke to a new high. Then GDXJ (Market Vectors Gold Miners, an ETF comprising the “junior”, more speculative, miners) broke to a new high. Then silver (SLV) followed suit. I noted at the time it was very bullish that the more speculative issues were now leading the way.
Then last Tuesday it happened. Gold (GLD) and GDX (Market Vectors Gold Miners, an ETF of the largest miners) broke to new highs on good volume. There is a logic behind the bullish interpretation when something goes to a new high. Previously investors were not willing to pay $1,260 for an ounce of gold. Now they are willing to pay an even higher price (The same argument applies when something goes to a new low. People who were previously unwilling to sell will now accept an even lower price).
Nothing occurs in a vacuum. Gold has been going up for more than a decade because all paper currencies are losing value. But the trigger last Tuesday for this breakout appears to have been Goldman Sachs (GS) suggesting that because of economic instability and weakness, the Federal Reserve may undertake more “quantitative easing”.
It is essential you understand “quantitative easing”. When the Treasury takes on debt, they borrow real money (capital) that has already been created by the sweat of someone’s brow (as of late, usually the sweat of a Chinese or Japanese brow).
With quantitative easing, the Federal Reserve goes into the marketplace and buys Treasury Bills, effectively injecting money into the economy. Where did they get the money to buy these T-Bills? Well, that’s the thing. Nowhere. It was just created from nothing. This was previously called monetizing the debt. To make an analogy: Some of the negative stigma of a second mortgage was removed by calling them Home Equity Loans. Quantitative easing is no more than printing money.
If you do not yet have a position in the precious metals, now is the time. You might wish to procrastinate and say “I’ll wait for a pullback to buy”. There are actually multiple problems with that statement:
1) How much of a pullback, and how did you choose that number?
2) Very often when something breaks to a new high, what was previously the “resistance” level (in this case, gold=$1,260 per ounce), now becomes “support”, that is, it often does not drop below that level.
In fact I will make a bold statement: Until this bull market in gold is over, presuming there is no true catastrophe or a complete recalibration of the dollar, I think it is unlikely we will see gold below $1,000 per ounce.
3) In a true, secular multi-year bull market, as we are clearly experiencing with the precious metals, the only thing that counts is to buy. Gold started this bull market in 1999 at $255. If gold eventually goes to $3K or $4K or even more per ounce, it doesn’t matter if you bought at $1,270 or $1,220 or $1,300. All that counts is that you pulled the trigger and bought.
I again recommend you have at least 10% of your liquid net worth in the precious metals, with the core position being US-minted one ounce Gold Eagles in your personal possession.
There has been a lot of talk lately about what to do for income, considering that the return on fixed-income investments such as T-Bills and CDs is so low. How about this for a (radical) suggestion: Buy gold. Using the ETF GLD as an example, buy it now, and sell after a 10% move (I don’t think you should sell. This advice concerns only this paragraph). I think the chances are far higher you will make a 10% return on this before you make a cumulative 10% return on a continuously rolled-over one-year CD at your local bank. I admit this has a hint of momentum investing, but 1) I think you should buy gold anyway, and 2) the goal of investing is to make money honestly. A 10% return is a 10% return.
The implications of ever-rising gold are that the US dollar, all paper currencies, are continuously losing value. One gram of gold brings more than $40. Or try to picture this: One US dollar now buys one-one thousand two hundred and seventieth of an ounce of gold; a fleck you would need a microscope to see. Pathetic.
The longer you wait, the harder it will be to pull the trigger. If you don’t buy at $1,280, and gold goes to $1,300, then $1,350, then $1,400, you will dig your heels in deeper and deeper because you could have bought at $1,280 but didn’t. What you think something is worth, at what price you want to buy or sell, what you want the market to do, makes no difference to anyone else in the Universe. If you think otherwise, you are blowing mental bubbles. Buy some gold.
In the next issue, I will talk about the implications of this gold breakout to the general stock market.
RMD
Wall Street Journal, 9/15/10. South African gold miner AngloGold Ashanti (AU) will cancel the rest of its hedges. (Gold miners, as a routine business procedure, sell forward (short) some of their production. They agree to deliver physical gold at some particular price in the future).
RMD comment: AngloGold believes prices are going up. They spent more than $1B to cover (buy-in) their short positions. These are really the big boys, and they believe gold is going up. Note also that central banks, for the first time in many years, are now net buyers of gold.
There were 95,000 home foreclosures in August, the 9th straight month of increases, and the most ever. There was also a prediction that home prices will drop for three more years.
RMD comment: Ouch. It is a general principle that whatever experiences a bust following a bubble is slow to recover (tech after the NASDAQ bubble), if it recovers at all (tulips). Jumping in too early can lead to years of dead money, or worse, further losses. Wait for the turn in real estate to become obvious.
Another quote from Roger Lowenstein’s The End of Wall Street:
“The legacy of the bust…entailed, prospectively, a weaker dollar, a greater government presence, more joblessness, and higher taxes”.
RMD comment: Simple but elegant. This, unfortunately, is exactly what I see continuing for the next 5 to 10 years. Plan accordingly.
Forbes (9/27/10). “Buying an annuity is a way to make sure you don’t outlive your savings. Just about everyone over the age of 65 should be thinking about this deal (an immediate annuity).
Americans shelled out $2.1B in the last quarter for fixed immediate annuities. Pathetic…the sales number should be 10 or 20 times as large”.
RMD comment: I believe this is the worst advice I have seen in my almost 25 years of subscribing to Forbes. Do not buy an annuity. The only time you should ever consider an annuity is when recommended by an estate lawyer or as a charitable gift. The fees are rapacious and predatory; that’s why they are pushed so hard by the insurance agent. They are great for them, terrible for you.
If you are currently in an annuity, I suggest you see how you can best extricate yourself. Good luck; because it won’t be pleasant.
In all of my talks, one of the standard points I make is not to co-sign a note. You sign, you are liable. If the other person can’t pay, the bank comes after the person with the money=you.
This certainly makes common sense, but it is always nice to have a solid reference.
Proverbs 6:1,3. “My son, if you have become surety for your neighbor, have given your pledge for a stranger…then….save yourself, for you have come into your neighbor’s power: go, hasten, and importune your neighbor (beg them to take your name off the note)”.
Just about the only time you should ever consider co-signing a note for anyone would be for a student loan for your children, and then, only if they had shown they are worthy of your support.
Your intentions may be laudatory, but most of the time you are not doing anyone a favor, in fact, you are discouraging self-reliance, any reason for them to work things out for themselves. You are never doing yourself a favor.
Unfortunately, you can beg your neighbor all you want to take your name off the note, but it is very, very unlikely that the bank will agree.
This is from a physician who attended the MD Wealth Protector Conference in Fargo last weekend where I spoke.
“I grew up on a dairy farm in western ND, 9th of 12 children in a German Catholic family. I grew up milking cows, picking rocks, hoeing 4 acres of potatoes and hauling 18,000 square bales of hay each summer. Out of this I acquired the work ethic to complete my Masters and my MD. This allowed me to jump several social strata levels in one generation, which is highly unusual anywhere else in the world. With hard work and commitment, America the Beautiful can give anyone that opportunity”
JO, ND
RMD comment: There you go, and you heard it here; the secret to success. Work hard and save your money. The problem is most people aren’t willing to do it.
This was relayed to me second-hand, so I am paraphrasing. A physician, who is careful with his money, was commenting on the spend-thrift habits of many of his partners. “There is a difference between money and wealth. My partners have a lot of money but no wealth because they spend all of what they make (and more). I have wealth because I don’t spend all that I make”.
RMD comment: It just breaks my heart to see docs who have been in practice for 15 or 20 or 25 years, made millions of dollars, and are still in debt. The people who need to read my book and this newsletter the most are the ones who are least likely to.
The most important factor in building wealth is thrift.
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