2003: NOT JUST STOCKS, GOLD! - Craig Smith, SATC

12/11/2002

"If Not Stocks, What?" -Kiplinger's, January 2003

"If you're looking for winning alternatives to Wall Street, you'll find slim pickings," writes David Landis, in the January issue of Kiplinger's magazine.

"Instead of buying stocks or bonds, investors are drifting toward such exotica as hedge funds, commodities, real estate, coins and fine art. Go ahead dabble, but be forewarned: We think that a migration toward offbeat investments is misguided--and just what you would expect when the stock market is at or near a bottom."

Question: After three years of hearing permabulls on Wall Street tout the wisdom of owning virually nothing but equities and debt, when will they ever admit that investors should consider alternatives?

Answer: Never. Not even in 2002, despite the gold and real estate market's outperfomance of equity and debt markets by double digits.

Kiplinger's asks, "As the economy picks up speed, are you on the right horse? Don't bother reading further, unless you have a strong stomach for spin ... "The economy is growing... stocks are fairly priced, perhaps even underpriced..." writes Jeffrey Kosnett.

"Fairly priced? Underpriced? According to the mainstream, "Happy days are here again"... the fabled "recovery" is right on track. Right?

Wrong! 2003 might turn out to be the fourth straight year of woefully errant forecasts from the pin- striped prophets. Wouldn't it be interesting if the stock market fell for an unprecedented fourth straight year?

Time will tell. In the meantime, the biggest problem with bear-market rallies is that there's no good reason for them. So they tend to disappear as abruptly as they first appeared.

Late last October, I took a call from David Landis who said he was writing a new article on investment alternatives to Wall Street for Kiplinger's. A hour later I hung up and hoped that I'd given him a clearer picture of how U.S. gold and silver coins can compliment a portfolio by offering tangible asset diversification and balance to a portfolio.

It appears that I was wrong. The only thing Mr. Landis chose to report to the public in his article was the "huge spread" between wholesale and retail prices of rare coins compared to stocks, concluding "we'll take our chances with stocks."

Incidentally, the writer did not seem to find many redemptive reasons to invest in anything except paper assets. All of the alternatives that he reviewed were knocked, including; art, rare coins, collectibles, grain, oil, livestock, precious metals, hedge funds and real estate.

True, all investments have risks that should be disclosed to investors before they jump into any market, including U.S. rare coins. And also true, the 14% to 28% wholesale to retail spread for investment-grade U.S. rare coins may seem high compared to stocks, bonds or mutual funds, especially to those with a short-term or "trader" mentality.

Keep in mind, rare gold and silver coins can serve multiple purposes in a portfolio (insurance, privacy and growth) and when held a minimum of 2-3 years, often provide above average net returns.

For example, I recently spoke with a client (Mr. Redinger) who purchased a Walking Liberty Half Dollar in June 2001 for $900 net. In December 2002, he liquidated the same coin for $1,800 net. That is a 100% net return over 18 months. So, the 28% spread was of little concern because he bought the right coin at the right time and then sold it for a nice profit.

Many other examples of excellent growth can be found in the coin market today, like U.S. gold commemoratives (1903-1926). As a whole this market is up 75% since 1999, that's an average growth of 15% per year after all commissions/spreads. I need not remind you of the miserable performance of stocks over the same three year period... do I?

Other clients are more concerned with hedging their other paper assets (stocks, bonds, funds) and may not sell their coins for many years ... or decades. Do the "huge spreads" for high quality collectible coins bother them? Rarely, because they view their coin portfolio is a fire insurance, in that if their other assets perform well, they're happy, but if a protracted bear market or recession zaps the value of their paper assets, they're very happy that they hedged themselves with tangible assets like gold coins which usually move up.

For those who are scared of the "huge spreads" I also recommend buying gold and silver bullion coins, which have a small spread of just 5% or less. These products still offer a hedge from paper assets, but do not offer the same type of asset privacy and profit potential as rare coins.

The bottom line: Own stocks, bonds, mutual funds, bonds, CDs AND gold in one form or another, just in case. So, in answer to Mr. Landis' question, "If Not Stocks, What?" I say "Not Just Stocks, Gold!"

P.S. Here are just a few of the wild cards that could send gold coins into the stratisphere and stocks into the toilet...

IRAQ WAR
Further polarization from the Islamic world is guaranteed in 2003. The fear of post-Saddam scenarios must also be considered before taking Saddam out. Does the threat of Saddam's rule outweighs the threat of its dissolution? Yes, but it will cost the US.

TERRORISM
The threat of increased terrorism targeting the U.S. is growing, not shrinking. The best personal protection individuals can take is to become a vigilant citizens -- keep your assets and your family well hedged.

JAPAN BANKING CRISIS
Japanese banks are in danger of imploding, nearly half of their core capital derives from the tax credits they expect to receive after they write off the bad loans on the asset side of their balance sheets. Japan is mired in its third recession since 1990. Prices have fallen four years in a row, including each of the past 37 months. Downward spiraling deflation ... could it happen here?

GOLD MARKET MANIPULATION
Richard Russell (the famed Dow Theory Letter editor) has finally said he agrees that the gold market is being manipulated...'It's obvious that someone, some group, does NOT want gold above $320/oz. reported CBSMarketWatch. The resulting 'goldgate' scandal will dwarf Enron.

2003 U.S. DEFICIT
The US Current Account Deficit is now above 5% of GDP. More Federal money demand (Homeland security bill, and Iraq war) and less Federal income (tax cuts, slower growth) along with a declining U.S. dollar will expand the deficit in 2003.

2003 PENSION FUND CRISIS
Has your 401-k now fallen to a 201-g? Illusory pension profits may have contributed to the late 1990s stock bubble, distorting the price-earnings ratio of many stocks. If the E isn't right, how can we judge the P properly?

2003 DERIVATIVE CRISIS
JPMorganChase management has leveraged its shareholder equity ($42b supporting $26,276b of derivatives - 626 to 1) 50% more than Long Term Capital Management ($3b in capital supporting $1,250b of derivatives - 417 to 1. We all know what happened to LTCM.

2003 ISLAMIC DINAR
Wouldn't it be a tragedy if America, a nation that founded it's monetary system and "dollar" upon a gold and silver standard were to be brought lower by the new gold/silver based currency (the Dinar) launched from Malaysia in 2003?

2003 U.S. BICENTENNIAL
The bicentennial celebration in 2003 of both the Louisiana Purchace (1803) and the launching of the Lewis & Clark Expedition (1803) offers the perfect environment to learn more about historic U.S. gold and silver coins and begin a new portfolio allocation strategy that includes some of these investment quality specimens. Read the Reseach Report








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