“I think not owning gold is a form of insanity, it may even show unhealthy masochistic tendencies, which might need medical attention.” – Robin Griffiths, Cazenove Capital
How we wish we’d said that.
You can watch the video clip here.
Sometimes we have a tendency not to say what we really think.
I know that seems odd considering some of the things we write. So let’s just come out and say it. To avoid confusion… for the love of God, buy gold.
If you insure your car against a crash, and you insure your house against fire, why wouldn’t you insure your money against devaluation?
It’s a no-brainer to me.
How much “insurance” you take out is up to you – 5%, 10%, 20% or more. Make up your own mind. It depends how much insurance you want.
And how you do it is again up to you. Physical gold, gold certificates from the Perth Mint, or even buying the Gold exchange traded fund on the ASX. These are all viable options.
It’s just a matter of whether you think the global economy is about to go elbow-up tomorrow – in that case buy physical gold now – or whether you think it won’t happen for another couple of years. In that case you could just buy the gold certificates or ETF to quickly get an exposure. And then buy the physical stuff later on.
Whatever you do, you want to do something about it.
Commodity prices are on the up. And the Aussie dollar – at least in the short term – is on the way down.
Gold, rare earths and veggies higher
Today’s Australian Financial Review (AFR) tells readers:
Ginger is up 145% since September.
Broccoli is up 222%.
Pumpkins are up 93%.
And cauliflowers are up 192%.
Not forgetting a 198% increase in tomato prices in two weeks.
We’re sure some of these changes are seasonal price adjustments. But if the price changes from September to December 2010 are anything to go by, they’ll be nothing compared to the price increases you can expect this year.
Although we’re surprised the mainstream press is even reporting this. They’ve always told you fuel and food are volatile items and should be ignored when looking at price inflation.
You and I know better.
Add in a surging oil price and the picture for the consumer looks even worse. Brent Crude is trading at USD$97.51 a barrel, and West Texas Intermediate at USD$91.11 a barrel.
But don’t think the oil price rise will stop there. According to a recent article in the Wall Street Journal:
“Rare Earths Shortage Becoming Problem For Refiners”
If you don’t know the story, rare earths are a bunch of crazy little elements usually found squatting beneath the main part of the Periodic Table:
Source: Corrosionsource.com
The funny thing is, despite their name, rare earths aren’t that rare at all. In fact, they are quite abundant in the earth’s crust.
As an example, rare earth Cerium has a presence of 60 parts per million (ppm) in the earth’s crust. That’s compared to 55ppm for Copper and 75ppm for Nickel.
The difference is that rare earths aren’t usually found in large enough quantities in one place. That means it’s just not economical to mine most deposits of rare earths… not at the current price anyway.
So, what do rare earths have to do with crude oil?
Fuel crisis back on
Simply this, as the WSJ article points out:
“Rare earths, elements that go into high-tech batteries, television sets and military technology, are also used in the catalyst component of refiners’ gasoline-making fluid catalytic cracking units, or FCCU’s. Although rare earths account for only up to 4% of catalysts used in these units, their recent price increase has added as much as an extra 25% to catalyst costs, according to the National Petrochemical and Refiners Association.”
And the problem could get worse.
China controls about 95% of the world supply of rare earths. And it’s doing its darnedest to restrict it.
This has seen the price of rare earths take off over the past year.
To show you what I mean, take a look at the rare earths prices according to Lynas Corp [ASX: LYC] - a former Australian Small-Cap Investigator stock pick until we sold out for a 200% gain last October:
Source: Lynas Corp
Note the price increase in the dark blue row across the bottom.
In the last four months, the price of rare earths has doubled.
Since 2007 the price has increased by 510%. You can see why the Lynas share price and other rare earth stocks piled on big gains late last year.
But for now we’re out of the stock… and all other rare earth stocks.
Sure, there’s a chance these things could go higher – much higher – but at the current price and after such a huge rally, I’m happy to have locked in the gains for my readers. Right now I’m assessing the market from the sidelines.
Besides, given China’s dominance of these elements there’s the risk China will relax its export quotas and flood the market with more rare earth’s than manufacturers can eat.
The point is, everywhere you look price pressures are high. Consumers are being force-fed higher costs. Whether it’s higher interest rates from banks, higher prices from retailers, or higher commodity prices due to natural disasters, the story is the same.
And on top of that you’ve got government and central bank manipulation.
Kids creating money from nothing
This last cause is the most evil of the lot.
All the others you can say, well, that’s markets and nature folks. You can call it supply and demand. You even can say its businesses making profits… good luck to them.
But with the central bankers it’s different. That’s purely about saving their bacon and trying to postpone the inevitable – the Great Depression MkII… perhaps we can start calling it GD2.
And if you want to see the culprits in action, just pick up a copy of today’s Australian Financial Review and turn to pages 18 and 19. There you’ll see a syndicated article from the New York Times. Or better still, just click here and read the original article for free.
It’s the sorry tale of the “inflationistas” in action.
The article dramatically states:
“On one recent Tuesday morning, what Mr. Frost and his five young colleagues did over a 45-minute period might have unsettled even a seasoned Wall Street hand: they bought $7.8 billion of Treasuries.”
Just like that. Easy isn’t it?
Here’s how it works:
“On one recent morning, trade one was Tiffany Wilding, 26. While she reviewed the stream of offers and then the prices finally accepted by the algorithm, trader two, Blake Gwinn, 29, double-checked her decisions and trader three, James White, 29, made a duplicate of everything in case the computers crashed.
“All the while, Mr. Frost stood behind his colleagues, ready to intervene – and even cancel the Fed’s purchases – at any sign of trouble.”
It almost sounds childlike. Young kids playing with their computers while the teacher looks on.
Good old Tiffany, Blake and James. Creating billions of dollars and then spending it. Pushing more dollars into the economy to boost prices and cripple the wealth of individuals… most individuals anyway… except the bankers. They get their greasy hands on the cash first and can spend it before prices move higher.
This handy graphic from the New York Times helps explain everything. We especially like the following quote:
“The Federal Reserve creates money and credits it to its own account.”
Source: New York Times
And so the inflationary spiral continues.
Australian food riots?
It’s why you’re seeing soft commodity prices reaching multi-year highs. And it’s why you’re seeing headlines in the mainstream press such as:
“Food crisis fears as global prices hit record high”
Unfortunately, most in the mainstream are too dumb to put one and one together. They see the Fed creating billions of dollars’ worth of new money, and they see food shortages in the third world.
But they fail to connect the dots. As far as they’re concerned they’re unrelated events. I assure you, they aren’t.
And if the floods in Queensland continue to impact not only agriculture, but the mining sector too, then it’s possible – just possible – that food shortages and even higher prices will reach these shores too.
We’ll have more to say on this. If you’re content to sit on your hands and let government, central bankers and bankers grind your wealth into the ground then do nothing.
But if you prefer the idea of living a comfortable lifestyle. And if you think it makes sense – as I do – to insure your wealth against the inflationary actions of Ben Bernanke, Tiffany, Blake and James, then I suggest you do something about it.
One of those things is to buy gold.
If you’re sane you’ll do it.
If you’re insane or a masochist then you won’t – just make sure you know where to get some good medication, because boy will you need it.
Regards,
Kris Sayce
For Money Morning Australia
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Drew @ 90
I believe that CB was referring to the amounts spent on other investments during a particular tax year.
Eg if you purchased $10 000 worth of shares that year as well as $10 000 worth of bullion – say for arguments sake both on 1 July, then from what i understand CB is saying, you would then have a legitimate tax deduction claim of 7.5% of $20 000 – which is $1 500.
Even though you may not have physically withdraw this money out of your mortgage account, the deduction is still applicable.
the logic would be that you COULD HAVE paid this $20 000 in on your mortgage, but you decided to purchase investments instead, so the tax deduction for the interest is still allowed.
CB – do i understand this correctly?
JB – I can actually answer this, because it happened to me exactly the same way. You can make those claims retrospectively, not a problem. But, you would best talk to your accountant whether that would be best done year by year by relodging your earlier tax returns, or it is just as good to claim it all in one hit in your current or the next tax return. This will depend on things like what your marginal tax rate has been in each year, so s/he should be able to tell you the right option at a glance. It is best to make such retrospective claims through a qualified accountant, so as to be on the safe side with the way it needs to be done. So, that is good news for you, my man. You should get some tax refund soon in yer hot lil’ hands and back up the truck for some more bullion.
cb @ 92
thanks for confirming that…
i guess there are pros and cons in this approach though.
i can claim back interest deductions based on the cpaital outlay for bullion purchased, but in doing so, i am providing the ATO with a detailed inventory of all the bullion i purchase.
if i dont claim the interest deductions, and just “cop it” then they dont know about the bullion i may have in my possession.
which is as it should be in my opinion…
what are your thoughts?
Drew @ 90 – It does indeed apply to your mortgage, but only to that portion of it, which you can show to have been invested in other, recognised investment vehicles, such as a business, shares, bonds or bullion. The remaining part, which can only be shown to be borrowed for purposes of purchasing your home in which you live, is not tax deductible, but any part of it which you effectively use for other, recognised investments, is effectively borrowed for the purpose of securing those investments, and so this part of your mortgage borrowings are EFFECTIVELY treated as business borrowings for investment purposes by the ATO.
And if your outlays in investments in other assets are greater than your mortgage borrowings from the bank, then you can claim all interest paid to the bank on the basis of these alternative investments, even if the money for them never hit or seen the morgage account. The principle is that if you have any sort of borrowings, the interest on these can be written off to the extent that you can show to have other investments that would qualify for interest expense deductions if you had taken out another, special purpose, investment or business loan specifically for them.
I sort of know what your reaction is, because I had the same reaction to it at the time: This surely cannot be true. Why would the tax man be so generous? But the answer is that it is not that generous, really, because it is only fair that they do not force you from a deductability point of view to take out more expensive loans than necessary in order to acquire wealth building and preserving investments.
Plus, I suppose, since the entire system is based on debt money, the system provides various incentives for people to borrow money for purposes of business and investment. This is one of them. For example, I would not take out a special purpose business loan for purchasing bullion at some ungodly interest rate, but I am willing to increase the balance of my mortgage borrowings at a more reasonable interest rate, given that I can make this portion of the borrowings deductible a deductible expense against current income at my top marginal tax rate.
So, there is an incentive, you might say, to borrow and speculate. Or you can see it in more generous terms as an incentive to borrow and carry on some wealth generating business. Either way, the bankstas are the only sure winners, coz they get their interest money on all the fake currency they conjure into existence on no greater strenght than your credit worthiness and ability to service the loan.
JB – BINGO!!!
But then again, I would take the view that I would rather be on the right side of the law than the wrong side, and since concealing capital gains from the tax man could lend you in hot water down the track, and would still be liable to pay them, you might as well do it all above board and claim whatever perks and benefits they offer you in return.
Besides, as one saying goes, better a bird in the hand than three in the tree, so I would grab NOW whatever I can, and worry about capital gains implications down the track. And as far as potential confiscation concerns you might have for having your bullion showing on your balance sheet, well, this is understandable but the risk is not that significant. Besides, if push comes to shove, all kinds of things happen to people, including theft and accidental loss, and if none of these befall you before the government comes knocking, you can always be frank and tell it to their face: From my cold, dead hands!
cb
thanks for confirming that.
well, you certainly have taught me a tremendous amount about tax which i didnt know! your contributions – as always – are invaluable.
JB, cb – I think we should all check with our accountants because I don’t think that’s right.
I’m pretty sure you need to actually borrow money and incur interest in order to claim it.
So you would need to pay your $20,000 into your mortgage and then re-draw it to make the investment.
No, Drew, that’s wrong. Such as exercise in money shuffling is unnecessary. All the same, you should always check with your accountant.
Cheers, JB. It is always a good day when we share and learn something new and valuable.
I was interested to see the diagram showing how the Fed prints money for its own purpose.
Has Australia done that I don’t think so but I don’t know, we haven’t here in New Zealand, but we are sitting in the basket, we are a basket case,and please God can Australia take us as an orphan eighth State.
I see here that the advise is to buy Gold as a hedge rather than other minerals.
I understand the cultural significance of Gold as an alternative currency, but in a difficult world, useful things are useful.
Maybe like Copper and the other metals.
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