What's Ahead: Crisis Investing

Gold prices eased on Monday after closing at a seven-week high last Friday, driven by record oil prices and tensions across the Middle East, such as intensified Israeli strikes against Lebanon, twin explosions in Nigeria, Iran's nuclear standoff, and last Tuesday's terrorist attacks in India.

"Where does smart money go in a crisis? On the defensive or bargain-hunting?", asks KNX's Business Hour with Frank Mollek. "Gold is the crisis super-metal. It's a classic hedge against uncertainty as well as a reliable store of value -- unlike all paper currencies. But never buy or sell in a panic, instead, get educated first, then put 5-15% of your assets into tangibles. We like investment-grade U.S. gold and silver coins, because they are less volatile than bullion based on their rarity", Mr. Smith told KNX Monday.

Gold grabbed global headlines on May 9th after crossing the $700/oz. mark What's behind the new global rush to gold and oil?

Craig Smith was recently a guest on "Making Money with Doug Fabian" radio show back on May 9th to discuss what's ahead -- and behind -- the new rush to gold and oil. The following is an outline of what they discussed. At the end of the story is a link to listen.

Doug: Today gold jumped $22 to $700/oz. Since you have been in the gold business for over 20 years, please give us some background. You have recent books out on both gold and oil, so later on let's cover the oil topic too.

CRS: Sure. During the last major bull market in gold in 1979-80 I remember you couldn't get people interested in buying gold at $300/oz. but you couldn't hardly stop them from buying when it hit $850/oz. Then gold dropped back to a low of $280 over the following 20 years. So it was a miserable investment, but a good insurance policy against crises. But now gold is considered a new "asset class" as I discussed with CNBC recently. I think we will see this grow because gold is clearly "money" in times of uncertainty.

DOUG: Tell us some more about Swiss America, based in Phoenix, AZ?

CRS: Swiss America, founded in 1982, is a full service brokerage firm specializing in early American $20 gold pieces and U.S. gold commemoratives and also gold, silver and platinum bullion coins. Our philosophy is simple: A well diversified portfolio should have some percentage in tangibles like gold -- no less than 5% and no more than 15-20%. With gold's meteoric rise many will be tempted to put in more, but I caution investors that balance is the key -- whether stocks, bonds, CDs or gold. We recommend that a core gold position should taken in physical delivery. Gold and silver ETFs, stocks or mutual funds may perform well, but they are not a substitute for good old fashioned gold in your hand.

DOUG: Give me the big picture, gold has gone from $280 to $700... why?

CRS: A primary reason is the systematic deterioration of the U.S dollar -- down 35% in the last eight years as a result of the $9 trillion debt the U.S. now carries. Huge trade and budget deficits point to Americans inability to stop spending money we don't have. Combined with the growing geopolitical uncertainty over oil, Iran's atomic ambitions and Mid-east volatility -- you have all the ingredients of higher gold prices. The fear of the future creates a flight to safe haven assets like gold.

DOUG: Gold has run up 35% so far in 2006. What should our expectations be and what are the risks?

CRS: Keep in mind that unlike the 1979-80 gold run up which happened in four months, this bull market has been building for over eight years. The prospects for gold going forward are still good, as you have more money switching out of dollars and into gold by central banks like Russia and China. So I think we are still in the early stage of a secular (or long-term) bull market.

DOUG: What should we expect in the way of volatility and corrections?

CRS: I think we are overdue for a 10-15% correction here which would be healthy. In Dec. of 2005 gold crossed $500, hitting $540, then backed down. In Feb. it began it ascent from $540 to $700. I don't try to time this market. I think this is a buy and hold market. If you only have 5-15% in gold it should be looked at as insurance against a drop in the other 85-95% of your investments. If it rises as it has over the long term, great, but I think people should be looking for safety, not profit.

DOUG: Tell us about your newest Special Report, which is available free today.

CRS: We put together a new report listing "Who expects four-digit gold... and why" which links to 19 respected financial experts who are forecasting gold to exceed $1,000/oz. in the near future. Experts like Jim Cramer, who says that gold should be the bedrock of every portfolio.

DOUG: Let's shift the conversation to oil, which is linked to gold. Your book "Black Gold Stranglehold" takes a position that is contrary to most of the other experts, can you explain?

CRS: That's only because they are wrong ... and I am right (ha-ha-ha).

DOUG: I love it!

CRS: I just don't buy into the theory that the world is running out of oil. Both science and our global oil reserves are proving every day we have more oil than we thought. Because so many have embraced this "peak oil" theory, many oil producing nations are getting tired of exchanging what is perceived to be a "precious diminishing commodity", oil for a not-so-precious multiplying commodity, the U.S. dollar. These counties are getting rich. We are sending $2.5 billion per day to OPEC! Keep in mind that oil prices traded at $6 a barrel in 1979, then went to $36 in 1980. Then it came back down to $10 in 1998, now it's at $70. So it could run to $100 tomorrow or fall back to $50... who knows?!

DOUG: Let's talk about the scams that will come out of this new gold rush. What should people be on the lookout for as they purchase precious metals?

CRS: I appreciate you bringing this up. Number one rule is never buy out of fear, or sell out of fear. Number two, make sure you take physical delivery of the product, don't let another company store it for you because you may never see it. Number three, be sure to buy from a reputable company with a 10-year track or more record -- that will not only sell it, but also buy it back from you. Number four, make sure that any investment-grade (numismatic) gold purchases are certified by an independent grading firm like PCGS or NGC. If anyone says they can sell gold below the market price, beware! Hundreds of millions have been lost with these types of scams in every type of investment.

DOUG: Thanks so much, we look forward to having you back on from time to time as our gold expert.

Listen to the 13 min. radio segment here
Read "Next Stop: $750 Gold" Special offer by Craig Smith
Visit Craigrsmith.com
Visit Rediscoveringgold.com