Q&A: Why is Gold Increasing?

I received the following question today, and I thought that the question and my reply would be a good topic for a posting:

"Randall, I know you won't agree, but to me it looks like gold is the next bubble. It's value has increased 6 times faster than the SP500 (sic) over the last 5 years." - Jonathan 

(Note: $1,236.50 - Gold Price 5/14/10)

Jonathan, the price of gold is an inverse indicator of the strength of the currency that you will use to purchase it. Gold has skyrocketed of late, because countries are printing fiat currency, as if no day of balancing will ever come.

Let me put it to you this way: If you have an eight-slice pizza that is worth $8, and a case of Pepsi is worth $8, you could conceivably trade one for the other, right? It's an even exchange.

Now, let's say you cut that pizza into 16 slices, but you still claim that the pizza is worth $1 per slice, rather than $8 in total. Nobody in their right mind is going to let you eat half that pizza and give you the case of Pepsi in exchange for the other half, right?

Well, this is exactly how the USD and Gold interact. The government prints more bills, and tells you that they are still worth the same amount. The person selling Gold is on to the game, and makes you pay more dollars to buy the gold.

As long as countries continue to print fiat (counterfeit) money, with no value increase to justify the expansion in the supply of currency, gold and other raw commodities will continue to increase in value.

With all of the additional debt that the US is accumulating through increased spending (e.g. Bailouts, Health Care, Fraud), the only way it will ever be repaid is through the continual printing of new money to pay old debts.

This will cause a dramatic up-tick in inflation, as the costs of all goods will sky-rocket in order to adjust for the diminished value of the dollar. Interest rates will also increase as a result.

Gold is not an item subject to bubble. It has a fixed value. If Gold decreases in value, that is only because the USD has become stronger. Gold is an inflation hedge. It helps you to maintain the purchasing power you had on the day you purchased it.

If Gold increases in value, you still have the same purchasing power as when you started. If Gold decreases in value, you still have the same purchasing power as when you started.

By purchasing Gold, you are stating that you expect the value of the USD to decrease. By not purchasing, or selling, Gold, you are stating that you expect the value of the USD to increase.

Does it make more sense to you now? The hard part for most Americans is coming to the realization that the current administration is hell-bent on destroying our country from within.

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Dear Readers:

You may have noticed a lack of frequency in my postings over the past year or so. I have been quite busy, and I have not made this blog a priority.

Hopefully, I will soon be able to start posting on a regular, even weekly, basis soon. In the meantime, I am working with a number of high-liquidity, high-return investment projects overseas.

If you have an interest in investing in projects with very high returns (5% monthly to 300% annually), please post a response to this blog. All responses are moderated, and your personal information will not be publicized.

Stop HUD From Eliminating Seller Financing!

Every once in a great while, the government steps in to fix a problem, and actually gets the job done. With the proposed changes in HUD's interpretation of the SAFE Mortgage Act, the government again shows that it just does not understand how to fix the problem that the Fed created. HUD proposes to severely limit or eliminate seller financing by placing the following limitations:

1. Limit to five the number of seller-financed loans that one can give, unless one attains a lending license (Attention investors, this means you!)
2. Disallow entirely any partial seller financing for FHA loans (no more 5% seller carry-backs to handle closing costs and/or down payment requirements)
3. Eliminate all seller financing for non-owner-occupied homes.

I have posted my personal opposition to these proposed rules, and my comments to HUD are as follow:

I'm sure that like all Americans, I just love when the government steps in to fix the problems of commerce. Well, not all the time. In the instant case, the proposed regulation goes too far to fix a problem that doesn't really exist, and it does so at the expense of exacerbating the problem it is attempting to fix.

Please, allow me to explain. While everyone understands that something went horribly wrong in the mortgage industry, which led to the financial meltdown of our nation, no one seems to have the spine to direct the problem where it truly lies: At the feet of the Federal Reserve. The Federal Reserve Board is charged with monitoring the lending practices of its member banks, and it also sets primary interest rates, upon which all other lending rates are eventually based. If one wants to get to the heart of the problem, correct the Fed's lack of oversight and the loose banking practices that it promoted that led up to the present crisis. Predicting the outcome from keeping rates at an artificially low level, and lending money, as if it was free, to people that could never qualify for loans under traditional underwriting (i.e. 100% LTV, No Income/No Assets, Neg-Am and Variable Mortgages, etc.) was a recipe for disaster. When the Fed raised rates in order to stave-off the inevitable inflation that arises from a loose monetary policy, the resulting drop in home values and increase in mortgage payments was a given. If I could see that, why did these so-called "experts" not see this coming? As for the proposal at hand, eliminating seller financing will take away from the market one of the strongest forces that is allowing properties to sell. Many people still cannot qualify for loans, and the knee-jerk increases in underwriting standards have made it near impossible. Seller financing is involved in many transactions, and helps with hard-to-finance properties such as vacant land, mobile homes, distressed properties, and more. Please keep it in place!

Now, you can also comment, but the deadline is Tuesday, February 16, 2010, which means you must take action immediately, if you want your voice to be heard. In order to comment on this proposed regulation, please follow the instructions below:

1. Click on the Title of this blog to get to the regulations.gov website.
2. Review the document by clicking the link or just click on "submit comment."
3. Complete the form providing required information and your comments and then submit

I hope that you will take this opportunity to comment on these proposed rules. The quicker the housing market can recover, the sooner that the rest of the economy may follow.

I have serious doubts about the integrity of the U.S. Dollar, and I am recommending investments in hard assets (i.e. Real estate, gold, silver, and other precious metals) as well as investments in foreign currencies and foreign stocks.

If the return on your current savings is not up-to-par, I have a limited-time opportunity in which you can earn a fixed 4% monthly (48% APR) return on a six-month investment of $1,000 to $10,000. This is a securities-backed investment and is highly secure. You must act quickly, because when the capital requirement is filled, this opportunity will be gone.

If you need more information on how to attain maximum results on your investments, in spite of the current economic situation, please comment to this post. All comments are moderated, so your personal information will not be displayed publicly.

Blog to you soon!

Happy New Year - Time to Catch-Up

Please allow me to begin by apologizing for the severe lack of posts over the past six months. Between a major move, having my first child, taking on two new administrative positions, several consulting projects, the college football season, my mother's moving and health issues, and more; things have been quite busy for me lately. I have also taken responsibility as co-owner for two CBS Sports Official Fanatics sites as indicated below:

CBS' Official USC Football Fanatics Group


CBS' Official CSU Bakersfield Basketball Fanatics Group

Please click on the links above to join each site.

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OK, now that we have all of that out of the way, let's get on to real issues. Apparently, this may not be the best design for a blog site, as I know that a lot of you have commented, but approved comments do not appear to be showing on the site. Perhaps, I am doing something wrong or the design is flawed, I'm not sure. Please, continue to post your comments, so that I can keep up with what you are doing, and so that I am able to help. If you would like your comment to appear, do not place any personally identifiable information in the comment (i.e. Real name, phone number, email, SSN#, etc.). You may make two comments, one with your public comments and the second with your contact information, if you would like a response. I will ensure that your personal information does not appear on the site.

State of the Economy (How Did We Get Here?)

We are SCREWED! OK, well maybe it is not that bad for everyone, but we certainly have issues, and our government can't seem to get out of its own way. One of my biggest complaints about the educational system in the United States is that we do not teach our own system of economics to our young people. Columbus and the Pilgrims did not board wooden ships, and sail half-way around the world (and risk going over the edge) in order to set-up camp and find jobs at the local 7-11. The early settlers to our country left their birthplaces to avoid persecution, prison, to gain religious freedom, and to have the freedom to choose their own type of work and profession. In the late 18th Century, most women did not work outside the home, 95% of men who worked had some kind of a trade or profession, and the 5% or so who did work for someone else were generally working in some sort of an apprentice capacity in order to learn a trade or skill, which would allow them to become self-sufficient and self-employed. Towards the end of the 19th Century, the golden spike was driven into the East/West railroad, and our economic system changed forever. Up until that point, every community had to be largely self-sufficient. That means that anything needed by the town had to be grown or produced there, or brought in by inefficient means, such as carriages, carried on foot, or horseback. That limited the availability for many products and materials. It also created opportunity for those within the town or village to provide services or manufacture products for the town. We had tailors, seamstresses, metal workers, printers, hobbyists, carpenters, etc. serving the needs of the local town. Now that the railroad was in place, enterprising souls could take these seamstresses, carpenters, and other tradespeople from the small towns, move them into a factory setting, and mass-produce these same items for a fraction of the cost. The rail system could then distribute these goods nationwide, and make them available to towns that did not have locals to produce them. In some cases, the local providers were displaced by this competition (way before Wal-Mart, folks!). As manufacturing companies proliferated, they realized that they needed an educated labor pool in order to ensure that those incoming employees had at least the ability to read, write, and calculate (Think Reading, 'Riting, and 'Rithmetic). Prior to this time, most education was handled by churches or community centers that providing a "School Marm" to teach all grades on a daily basis. Watch some old episodes of "Little House on the Prairie," if you would like to see an example of this. Since education had to be made consistent nationwide, the government (God Bless Them) stepped in and created our current educational system. Curricula were decided, teachers hired, and funding provided to establish schools across our nation. Education was made compulsory shortly thereafter. The problem with this whole scenario is that the schools were not created to promote our system of economics (Capitalism), but rather to train students to become employees of these new factories and other centralized companies (Socialism). The new mantra became, "Get a good education and go to college, so you can get a good JOB!" (Many thanks to Dave Severn, who provided a similar historical account years ago on a mass-produced tape entitled, "Pigs Don't Know Pigs Stink!") This brings me back to my point. Since we have systematically destroyed the system of economics upon which this country was founded, and we have spent over 100 years not teaching the fundamentals of capitalism, we find ourselves at a point where the electorate (We the People) have no clue about whom we should elect to office, and the fools that we do elect have no clue about fixing the problem.

How Do We Fix It?

The only way to fix the problem now is to allow everything to crash, and let private businesses find the solution to prop it back up. This whole situation was caused by unrestrained greed. If we bailout the idiots who got us into this mess by providing capital to them, we only exacerbate the problem. Giving more money to banks will not fix things at the consumer level. Giving more money to auto makers will not give them an incentive to correct their issues. They need to be allowed to go bankrupt, reduce their liabilities and labor costs, and then give money to consumers to use for down payments, so that the public may choose which automaker should survive based on their ability to serve the demands of the consuming public. Better yet, just give out $700 billion in tax refunds, and let the consumers make all of the decisions as to whom should survive. I was disappointed with the $700 billion bailout. I understood the argument that providing $700 billion was better than allowing the market to lose trillions in market capital by allowing things to fall, but before the first dollar of the $700 billion was advanced, the market had lost $6 trillion dollars already, and the real estate market has lost over $2 trillion more. If the bailout is not going to fix anything, recall it! It is now too late for that, as much of the money has already been advanced. No matter what method is used to try and correct this situation, we are all going to feel some pain. The only answer that I can provide is how to protect and enhance your own (or your family's) situation. Unfortunately, I am going to make you wait one week for the answer. In the meantime, I will ask you to spend this week analyzing your current financial position. Gather together all of your investment account statements, your tax information, your banking and savings information, and all of your bills. Then, start a fire (just kidding). Bring all of this information together. Have it ready by the time my blog posts next week, and I will tell you how you can get rid of all of your debts and be on your way to financial recovery in the next five years. No fooling! Now, is the best time to take advantage of this situation, and to use it to your advantage.

Investment Opportunities (By Popular Request)

With the current economic meltdown, several of you have asked me for specific investment advice. While I refrain from making global suggestions for individual stock issues, I do have some worthwhile opportunities on my desk for the right investors. If you have interest in seeing these, and the ability to act quickly (i.e. Be able to wire money within two business days), you may place a comment here with your contact information, and I will forward information to you. These are private placement opportunities available only to accredited investors. Minimum investment is $25,000 and maximum investment is $10 million. However, you will not be allowed to participate if your participation constitutes more than 25% of your invested assets (not including your home).

That's all for this week. Happy New Year! See you next week, for real!

Special Edition: Philippine Peso vs. Dollar Valuation

I posted this information in response to a question posted in Yahoo!Groups, "LivingInThePhilippines3." I thought that it would be appropriate to share here. Enjoy!

The peso and dollar should fluctuate within a narrow range for the rest of this year, at least through the time of the American election. The worst of the sub-prime mess is over now, but corrections continue in the real estate sector. Housing prices bottomed-out in many traditional markets in November, but other areas are still seeing fallout. The main reasons that real estate is still falling in certain areas, and will have a long climb back in others, is due to the high vacancy rates of homes (bank owned), tightly enforced requirements on borrowing (which are starting to ease), and a general credit crunch that is now shifting towards consumer borrowing. Average credit scores of Americans are dropping due to foreclosures, short sales, and Deeds in Lieu thereof, as well as people renegotiating their upside-down mortgages.

Higher interest rates, higher fuel prices, and an increase in unemployment are causing more credit card defaults as well, while banks are trying to raise interest rates into the stratosphere on credit cards (up to 30% or more)! Bankruptcies are also on the rise, and this trend will continue into the foreseeable future. Some banks will still incur multi-million or multi-billion dollar write downs (B of A/Countrywide $2B for renegotiations), and a couple of major bank mergers are on the horizon yet. All of this will eventually settle down, and we will have an American real estate economy again. This total recovery will take at least two years to get back to the price levels of 2006, but five to seven years to get back on track to long-term average year-on-year returns. Real estate is still a great investment if you are a buy-and-hold investor with enough liquidity and good enough credit to qualify for a mortgage.

The rental market prices are increasing, due to high numbers of recently-displaced families, so CAP rates in the multi-family housing sector remain low (gradual increases in CAP rate, but good increases in cash flow), in spite of the recent fall-out in values. Commercial credit is still surprisingly easy to attain for real estate or unsecured obligations.

In addition to the sub-prime mess, the peso has enjoyed certain benefits over the past couple of years. First, the economy has improved, so rather than the cheese heads in government taking all the money for themselves, they have chosen to try to balance the budget. This still doesn't help that poor family of 16 on the corner who can't afford rice, but the country looks better (on paper) to the rest of the world.

The improved credit rates achieved by the Philippine government have allowed fewer pesos to go farther with regard to reducing debt. The BSP's (Bankgo Sentral Philippines - Central Bank of the Philippines) policy of hoarding dollars has created an effective, although limited, hedge against fluctuations, but has put the country in the position of having to reverse itself in order to reduce inflation. In other words, they over-bought dollars, and inflation is already starting to affect the average Filipino. Over the past two years, only we (who get paid in dollars) have noticed the double-digit inflation rate, as peso-denominated prices didn't change, but our purchasing power dropped like a rock!

The Federal Reserve Boards' actions in keeping interest rates low (2.00% as of today - Don't expect it to fall any farther), as a hedge against both inflation and a total meltdown in financial markets, has fueled an exodus from investments in the dollar, as higher interest rates are to be found elsewhere. Just look in the newspaper at the difference in interest rates offered by banks for the dollar vs. the peso. European banks give higher rates for Euros as well. If the demand for dollars was higher (usually meaning a lower trade deficit and/or more foreign investment streaming into the country), interest rates would have to rise, and the currency would do the same. (Side Note: Local banks have now adjusted CD rates on peso and dollar accounts to about the same rate, whereas the peso paid much more for the past few years This is an indication that the dollar and peso are expected to hold steady for the next year.)

If not for the sub-prime mess, we probably would have seen the dollar recover to at least 45:1 by now, with a target of 50:1 possible within the next 12-18 months. As it stands, 42:1 or 43:1 is the best it is likely to get by the year-end, unless some major breakthrough happens in the world. Unfortunately, big news is usually negative, so don't hold your breath for this one. The good news is that the dollar is unlikely to fall any lower against the peso, as Malacanang is not going to be able to balance the budget this year. Rising gas prices, a worldwide food shortage, and tightening of financial markets have served to rein in the currency exchange markets, and reduce volatility. In English, this means the exchange markets should be pretty stable the rest of the year, and trade in a narrow range.

Barring any terrorist attacks on US soil, the nuking of any rogue state, global warming putting us under water, or the Lord returning to take over, the exchange rate should be within 41:1 to 43:1 the rest of the year. In sum, a peso:dollar rate of worse than 40:1 is highly unlikely, as is 45:1, in the next six months. We could get to 45:1 by this time next year, if the world economy improves and fuel prices drop (they actually should), but don't expect to see a ratio of 50:1 or better anytime soon (perhaps never).

If you are looking for ways to increase the total return to your portfolio without taking on aggressive risk, please contact me regarding solid investment opportunities in the Philippines.

Received this the other day from a client. (Thank you, Samantha!) I think you might enjoy it:

I had a bunch of Canadian dollars I needed to exchange, so I went to the currency exchange window at the local bank. Just one lady in front of me, an Asian lady who was trying to exchange yen for dollars and she was a little irritated.

She asked the teller, "Why it change? Yesterday, I get two hunat dolla fo yen. Today I get hunat eighty? Why it change?"

The teller shrugged his shoulders and said, "Fluctuations". The Asian lady said, "Fluc you white people, too"