Understanding the World Economic Crisis What does the future hold for precious metals & rare coin investors? - by Barry Stuppler (Nov 18th) - The pundits who said that the current economic crisis would be restricted to sub-prime mortgages (or, later, to mortgages of all categories) or would last just six months (or, later, 12 to 18 months), or would affect only the US (and certainly not China) have changed their tune. Virtually all now agree that the current recessions in the US and the EU (which are stopping or slowing economic growth in Brazil, Russia, India, and China) will be the widest and deepest since the Great Depression of the 1930s, with significant increases in unemployment continuing at least through 2009. The International Labor Organization has predicted a loss of up to 210 million jobs worldwide in 2009. You have seen the prices of many commodities and products fall with decreasing consumer demand, most notably gasoline and everything else based on the price of oil. Retailers, from department stores to car dealers, desperate to attract customers, are slashing prices long before the Holidays. While some prices continue to rise, such as health care, college tuition, and state and local taxes and fees, I believe that in the short term, deflation will rule. Prices on consumer-discretionary products will continue to trend lower. So will commodity prices, barring a significant interruption in the flow of oil. Gold, primarily because of its special status as an investment vehicle, will be the exception: I believe gold will continue to trade between $700 and $900 during this deflationary period. Deflation, however, will sooner or later give way to hyperinflation, probably within 12 to 18 months. Gold will be among the commodities most affected by hyperinflation. In June 2008 I published an article entitled "Gold: $2011 by 2011." For all the reasons given in that article, plus the strong likelihood of hyperinflation, I continue to believe that gold will rise to at least $2011 by 2011, if not sooner. Why hyperinflation? Why do I expect hyperinflation? Because global financial bailouts + government stimulus packages = an enormous, sharp increase in deficit spending by world governments. At the G-20 meeting in Washington Nov. 14, 2008, it was clear that more stimulus packages will come after a system for international oversight is agreed upon. The Financial Times estimates that deficit spending related to bailouts and stimulus packages will reach over $10-trillion (or the equivalent in euros, yen, and other currencies also backed by nothing but faith in the governments that issue them). It is simply not possible to pump that much money into the global financial system, on top of other increases in debt over the last several years, without launching an inflationary spiral. That this can happen simultaneously with massive unemployment has been proven many times, including in Germany in the 1930s, in the US in the 1970s ("stagflation"), and in Argentina in 2002 and, again, today. In the US alone, the federal government has made or proposed the following bailouts: Economic stimulus (tax rebate). $146 billion. JP Morgan takeover of Bear Stearns. $29 billion financing by Federal Reserve. US Treasury takeover of Fannie Mae and Freddie Mac: up to $200 billion. Assistance package to American International Group. $150 billion (so far). Bush-Paulson-Congressional bailout of financial institutions. $700 billion (some or all of AIG bailout may be included). General Electric Co. Agreement to insure up to $139 billion in debt for GE Capital Corp. Proposed assistance to auto industry. $25 billion or much more. Proposed second stimulus package, including infrastructure and other assistance to states. $200-$300 billion. More? Proposed restructuring of mortgages to prevent foreclosures. ???? Proposed tax cut to families making less than $250,000 per year. Bailouts for state and local governments. This list, which probably represents just the beginning of the US bailout/stimulus program, totals almost $2 trillion-not including the GE guarantee, the tax cut, or bailouts to states. (The current US federal deficit is $10.6 trillion. The debt for the 2008 budget year was a record $438 billion. The 2009 debt, with the bailouts, stimulus packages, and reduced revenue, is likely to be two to three times higher.) In addition to the bailouts, President-elect Obama has identified housing, energy, health care, and unemployment as high priorities for social and economic reforms during his administration. He has also called for adding 92,000 troops to the nation's armed forces. Acting on these priorities will add to inflationary pressure by pushing the federal deficit even higher. "It's going to be very important for us to provide the kinds of assistance to state and local governments to make sure that they don't compound some of the problems that are already out there by having to initiate major layoffs or initiate tax increases."-President-elect Barack Obama. Why hasn't the price of gold increased? A number of clients have asked me variations of this question: Given the actual and projected enormous increase in global deficit spending, it's not hard to predict that inflation will follow. So why hasn't the dramatic increase in demand propelled the price of gold above its record high of over $1,000 in March 2008? I believe the answer is short-term forced selling. Hedge funds and other financial institutions have had to raise money quickly to cover losses and redemptions. Strapped with billions of dollars in illiquid, toxic assets (mortgage-based securities; securities based on car loans, student loans, and credit-card debt; collateralized debt obligations, commercial paper), they sold assets that were still liquid and could still get a good price, such as gold. Based on reports coming out of London, I believe that one or more of the G-7 nations and/or the IMF have been selling gold into world commodity markets, putting additional downward pressure on the gold price. If so, we should receive confirmation in early 2009. This forced selling should subside as more and more bailout and stimulus package money works it way though the system. Gold prices could hit $1,500 as global plans to rescue the financial industry are set to increase inflation pressures, according to analysts led by Francisco Blanch at Merrill Lynch. "The unintended consequence of the ongoing financial bailout will be a return of inflationary pressures to the commodity markets," wrote the analysts in a note released Monday. The analysts didn't say when gold would hit the price target. They also predicted oil prices will rise to $150 a barrel. -Market Watch, Oct. 14, 2008. Buy $20 Gold Saint Gaudens Now The popularity of gold bullion 1oz coins has grown dramatically. US and Canadian Mints are backordered from 4-6 weeks, driving the premium on Canadian Maple Leafs, US Eagles and Buffalos, and other popular bullion coins ) to over 12% in the secondary markets, 3x higher than normal. As mint production is ramped up these bullion coins should lose 5-8% in premium within the next couple months. Therefore, I feel strongly that right now your best gold investment is certified US $20 Gold Saint Gaudens, graded MS63 to MS66 by the PCGS or NGC grading services. Continued demand should drive the premium for US $20 Gold Saint Gaudens up a minimum of 20-30% within the next several months. Remember, unlike bullion coins, investment coins such as $20 Gold Saint Gaudens are no longer manufactured and, therefore, supply is limited. Plus, Saint Gaudens are not subject to US Internal Revenue 1099 reporting like bullion coins. I believe that certified US $20 Gold Coins will offer a substantially greater return on investment than any bullion coin. Another factor that is likely to cause the price of $20 Gold Saint to increase is the issuance of the new 2009 US Gold Ultra High Relief. This beautiful coin, which will be offered to the public beginning in January, has the same design as the 1907-32 Gold Saint Gaudens. The US Mint has scheduled an aggressive marketing program for the new coin and sales are expected to be high. When the US Mint issued the Gold Buffalo in 2006, it substantially drove up the price of Buffalo Dollars and Nickels. I anticipate a similar effect on the Saint Gaudens from the Ultra High Relief issue.