Mar 17, 2003
2002 was a terrible year to be a stock investor (as the
charts below illustrate) but gold bullion and especially
U.S. rare gold coins proved to be the best hedge on earth.
Wall Street managed to finish substantially lower for the third year in a row, in what may well be remembered as the largest con in the history of the world. Wall Street brokerages, investment bankers, corporate bond salesmen and the media created what appeared to a classic pyramid scheme, which drained over 8 trillion dollars from an estimated 55 million American investors.
In order to properly understand how to best position yourself for the next 3-5 years, you must have at least a basic understanding of how the worst bear market in the history of the United States has come about.
STOCKS FOR THE LONG TERM?
The now infamous "Stocks for the Long Term", written by Wharton Business
School professor Jeremy Siegel, claimed that as long as you held stocks
- any stocks - for the long haul, you would do well. This fatally flawed
theory was based on the idea that the Dow Jones Industrial Average was
priced much higher in the mid-nineties than it was in the decades
before. What Siegel failed to realize was the "Dow 30" was almost
completely comprised of different stocks in the-mid nineties than
decades previous, just as it is now different than 1995.
After the financial press, advertisers and Wall Street firms ran with the “buy and hold” theory, the new investment vehicle became 401K. This marked the starting point of the great bull market of the late nineties.
Before 401K's, companies offered defined benefit plans to employee's with the vast majority of the funds invested in bonds where the funds were safe. Once the public controlled their funds it was just a matter of time until the commercials and print ads began to tempt Americans into the most aggressive mutual growth funds with astounding performance numbers.
WHERE DID THE "NEW" ECONOMY GO?
The "New Economy" was upon us, with the advent of the Internet and the
Telecommunications Act of 1996, and technology stocks became the new blue
chip stocks to own. The public, buoyed on by the media then decided that
the days of 'brick and mortar' stocks, which paid dividends, were over.
The “New Economy” had arrived. Now it was Cisco, Microsoft, AOL, Global
Crossing and of course Enron which formed a "diversified portfolio."
With electronic brokers offering lightening fast executions the investing public was able to buy stocks with the touch of a button. And buy stocks they did. When capital became scarce Wall Street again rode to the rescue with margin lending. In order to keep up with the Jones', investors borrowed vast sums of money to buy stocks on margin. There were no traditional requirements either; if you could download a form and sign it you were in.
Mutual funds were the biggest beneficiaries of the 401k tidal wave. With new "Young Turk" managers in place, the mutual funds began chasing tech companies with 60, 70 or even 100 times earnings with reckless abandon. As record amounts of new money continued to roll in, fund managers simply pyramided into more and more shares at higher and higher prices.
PARTY LIKE IT'S 1999?
By the end of 1998, the tech stock boom was peaking. Companies were
coming out with IPO's opening in the teens and watching the stocks go to
$90 or higher by the close of trading the first day. But the Wall Street
machine understood that prices were just too high to be sustained. It
was getting to be time to make every last dime possible and prepare to
ride the "golden parachute" out of dodge. This is when the Wall Street
influenced television and print media began to put forth their "shills"
in the form of analysts like the infamous Jack Grubman who continued to
issue "Buy" recommendations televised on CNBC, CNNfn, et al.
The Federal Reserve then provided the market with the largest increase in money supply of all time to counter the percieved Y2K financial risks. This was closely followed by the rapid-fire increase in interest rates and tightening of the money supply once the Y2K crisis passed. This was the beginning of the "waterfall crash" which continues today.
After countless interest rate cuts, Greenspan and the Fed do not seem able to stop the market's momentum, which has destroyed stock accounts of an estimated 70 million Americans. The authors of the now infamous books; “Stocks For The Long Run” and “Dow 36,000” are now longer appearing on "bubble-vision" TV. Every so-called "investor" who came into the Nasdaq after 1997 has lost virtually every dime. The money now resides in the accounts of the very few, clever enough to rig the system.
WHAT TO DO NOW
1) FACE FINANCIAL REALITIES: Make a plan. Anytime you are planning your finances the first thing you should look at is not how much money you need in the future, but rather how much money you have now. That's right, you need an accurate picture of where you are today. What is left in your stock accounts, retirement funds and the amount of equity you have in your home. The final number is your actual net-worth. This is referred to as "liquid net-worth" in the financial planning community, but it is really your actual net-worth. Future earnings, growth on your real estate and any other forward-looking assets do not count, unless you are a corporate CEO who cooks the books.
Once you have come up with a net worth figure you have a starting point. It is amazing how many Americans have very little idea of how much they are worth. It sounds like a cliché, but you can never reach a goal without the first step and a solid plan or road map to guide you. This is what we have and will provide for our clients.
Your first priority is to protect what you have. We need to be assured that five or ten years from now, your net worth will be at least what it is today.
2) HEDGING YOUR POSITION: This is where owning gold comes in. One of the first things any educated gold Broker will explain to you is the concept of HEDGING. Simply put, you need an asset in your portfolio, which will rise when the other assets are falling.
If you owned a farm, you would be familiar with the idea of hedging your crop. You see, if you had 10,000 bushels of Soybeans in the field and could not harvest them until they matured in six months, you would have market risk in the interim. A commodity broker could initiate a position in the Futures market, which would make money if the price of Soybeans dropped, therefore offsetting your losses in the field. What you have essentially done is lock out your risk. The same concept can be applied to your finances.
Taking a look at the tangible market performance in 2002 (see charts),illustrates perfectly how gold can be used to hedge your exposure to the equity, bond and real estate markets.
Using the Dow as an example, let’s say that you started the year with $100k. Had you invested the entire amount in the Dow, you would have lost approximately $24,000. If however, you had invested 35% of your $100k or $35,000 into Mint State 64 Twenty-Dollar Liberty gold coins you would have seen an increase of 80% or $27,300 in your investment value. The idea here is very simple, by hedging your investment in the Dow with Gold, not only did you not lose any money, you actually came out ahead by $4300.
That's why every American should hedge their investments. What you lose in the right hand, you make back in the left. Will Rogers once said, “I am more concerned with the return of my money than the return on my money.”
Any type of investment portfolio can be hedged. It is simply a matter of accessing your net worth, categorizing your investments and implementing a plan to offset the downside risk the future may bring. Your particular situation may be quite complicated after listening to all of the so-called experts and suffering through the worst bear market in the history of the United States. But that can change.
3) PERCENTAGES OF GOLD: Figuring out what percentage of your portfolio should be in gold will vary but, there is one absolute; a portion of your portfolio needs to be invested in good old-fashioned physical possession gold and silver coins. They are the best-kept secret in the investment world. That is why central banks and large investors all have a portion of their asset base in gold coins. It is the ultimate hedge against all types of financial ruin, man-made and otherwise.
CONCLUSION: Insanity is defined as "doing the same thing over and over expecting a different result." You must change something. Now that you understand the value of hedging, wouldn’t it be a great time to hedge for the future?
Contact your Swiss America Trading Corporation broker today by calling 1-800-289-2646 to hedge your financial future.
