Riske Business: Gold Is Back!

WOW! What a year for precious metals prices. As we write this in mid-December silver is up 59% for ‘06, last year up “only” 34%. Don’t forget that the gold to silver ratio is still very high at 45, but historically that ratio has averaged 16, so it looks as though silver has a long way to go as gold continues to rise in this secular bull market for precious metals. As we write this we note that so far in ‘06 corn was up 64%, copper up 39.9%, wheat up 39.3% and aluminum up 19.4%. All in all, a spiky bull graph for commodities in general.

Ever since U.S. President Richard Nixon closed “the gold window” at Fort Knox and thereby decoupled the last hold on the dollar by gold, the U.S. dollar has been in a 35 year decline. The value of the dollar could decline another 29% in purchasing power before the dollar bear is over. Nixon closed the gold window because in 1971, during the guns and butter days of the Vietnam War and The Great Society, France decided it wanted fewer of U.S. dollars and would rather have the gold. Nixon said no and stopped the interchangeability of dollars for gold. President Franklin Roosevelt took away gold from the American people in 1933. The world’s powerful bankers formed the Federal Reserve Bank in 1913, enabling them to print money and charge the government interest on that money. Those were the steps taken to inflate the U.S. currency and thereby silently tax the American people in a new and profound way.

During the early ‘80s rise in gold to $850 per ounce and silver to over $50 per ounce, Paul Volcker came in as Fed chief and raised the Fed funds rate to peak at 14% in 1981 finally killing inflationary pressures and bringing value to the U.S. dollar and bonds once again. We are now ending the bull market in long term U.S. Treasury bonds. Americans must borrow more than $2 billion per day from foreigners to meet debt requirements while the U.S. government continues the latest guns and butter policy. Asians hold trillions worth of dollars and bonds and their appetite is declining for these increasingly worthless pieces of paper backed by debt. At some point the demand for payment in gold will come, except this time the U.S. may not be able to deny payment in gold. China’s Renminbi is not ready to replace the U.S. dollar as the world’s reserve currency, but the Euro may be. Remember that Iraqi President Saddam Hussein, America’s failed puppet, threatened to accept only the Euro in payment for oil just before Iraq was invaded by the U.S. and Hussein was deposed. Currently, trillions of U.S. dollars are held in central banks around the world waiting to pay for oil and other commodities. If another currency took its place, those trillions would come to the United States generating gargantuan inflation rates.

“I expect that the U.S. dollar will continue to drift downwards until there will be a change in the U.S. balance of payments....There has been some evidence that OPEC nations are beginning to switch their reserves out of dollars and into Euro and yen. It is imprudent to hold everything in one currency....That will be the experience of the next few years,” says former Fed Chief Alan Greenspan before a Tel-Aviv business conference on December 11, 2006. On December 7th, the European Central Bank raised its rate to 3.5% from 3.25% and the dollar, paying 5.25% fell .10 while the Euro rose .26 that day for a .36 spread. If you would like to diversify your currency holdings you may invest in FXE, an ETF that holds shares in the Euro currency. Or, visit www.everbank.com where you can buy CDs in foreign currencies. Two of our favorite closed-end funds holding high interest foreign currencies are FAX and GIM.

The U.S. dollar began declining once more in its long descent against the Euro in February and dropped 13.8% since then during what has been the worst American housing market in 15 years. The inverted yield curve, an historically reliable predictor of recessions, has produced interest rates in mid-December like this: yield on the 10-year T-note 4.59%; yield on the 30 year T-bond 4.71% and yield on the 91 day T-bill 4.81%; so you will be paid more to hold your money in short term bonds in this topsy-turvy world. Will the current inverted yield curve forecast a recession for next year? Maybe not. Sunil Swami, Chief Investment Officer of Alerus Financial’s giant $5 billion trust department, says the yield curve is now global and with Japan’s fed rate at .75% along with the U.S. Fed funds rate at 5.25% the global yield is not inverted. Sunil has an intriguing thought there and it’ll be interesting to see how this plays out. As long as Japanese rates remain low and the Japanese government floods the world with Yen liquidity, the carry trade can continue to borrow short on the Japanese money market to invest long in the U.S. bond market. We think U.S. rates will go up next year, or at least stay the same and U.S. bonds will begin a very long bear market along with the decline in U.S. dollar value. The carry trade made up of hedge funds and giant money managers will make their money on the Yen/USD interest rate spread. If the carry trade doesn’t offer enough liquidity to the U.S. government, our government will just print the money to buy bonds. At some point, interest on long term bonds will begin to go up while gold goes up simultaneously.

Gold is up 22% in 2006 and has had a 6 year streak of bullish surge. One hundred years from now, the U.S. dollar will definitely be worth less than it is today, but the value of an ounce of gold will still be the same. Gold has been climbing in value against all currencies since mid-2005 as world liquidity by central banks has been expanding. Amazingly, almost no one is aware of this generous bull market. Each year as all investment rankings become known, gold is at or near the top. At some point the general public will begin to demand that investment houses and trust departments react to this phenomenon by offering investment opportunities in natural resources funds. Alerus Financial, where our 401k is housed, allows us to have Fidelity’s gold fund FSAGX and Fidelity’s natural resources fund FNARX, so we’ve been participating in this bull for several years. See if you can put 10% or so in a precious metals and natural resources fund at your 401k home.

Gold is more than a metal. It is used principally in jewelry and tooth repair, but more than that it doesn’t tarnish or rust. Gold has been recognized as money for centuries. While gold doesn’t pay interest, it does hold its value against a declining paper money value and when inflation is higher than the interest paper money pays, gold goes up. When the great Constitution of the United States was written, our wise founders tethered U.S. money to precious metals. Powerful bankers and other interests slowly moved U.S. money away from the restraint of gold and silver so that wars could be fought without tax and deficit spending could go unabated. America’s vast middle class, savers and those on fixed incomes will now pay the price with a much lower standard of living.

Thankfully, free markets have introduced a way out: inexpensive Exchange Traded Funds (ETFs) that purchase the underlying metal as you make your investment. CEF has been around a long time and the new ETFs are GLD and SLV for gold and silver specifically. ETFs with precious metal stocks include GDX and IAU.

While trinket imports from China get the headlines, the biggest import deficit is in oil. The annual trade deficit with China is around $200 billion while the annual trade deficit with Iran, Venezuela, Nigeria, Iraq, Saudi Arabia, Canada, etc. is more than $500 billion. The biggest energy consumer in the United States is our own government and 97% of all that is consumed by the Department of Defense according to Dr. Ron Sega, Under Secretary of the Air Force in a report dated April 19, 2006. Just the U.S. Air Force burned 3.2 billion gallons of fuel in 2003. Every $10 increase in the price of oil translates to $600 million more in fuel costs to the Air Force per year. Wars with Iraq, Afghanistan & Columbia and the hundreds of U.S. military bases all over the world, ensure that the United States will continue to have a hefty trade deficit for years to come. Consumption of this magnitude together with a prayed-for soft landing in the economy means we have a long ways to go before we become net savers once again.

Next month, we’ll be talking numbers and how to define them. In the meantime, think about this: the largest population bubble moving though the U.S. economy is the World War II baby boomer. We just started retiring and there are 78 million of us. Twenty million of us have assets worth less than $50,000. At a 10% return every year without fail, these 20 million folks will have only $5,000/year income plus the declining value of Social Security. Our guess is, the deficit spending has only just begun.

Riske began his entrepreneurial career with a waterbed store in Grand Forks in 1971 called The Walrus. Walrus Waterbeds was sold to HOM Furnature in 1984. Currently Riske is owner of Take Two Video, Take 2 Express, MJ Capelli Family Hair Salons, VidCycle and Sunseekers Tanning Salon. Riske is not a licensed financial advisor and those seeking investment advice should consult with a licensed financial advisor. To contact Riske, email marty@fmbizjournal.com.

To read other financial and business news, visit http://www.fmbizjournal.com. The Business Journal is a locally-owned newspaper serving the greater Fargo Moorhead area and the Red River Valley.