Agora Financial’s Rude Awakening

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Hoi An, Viet Nam

· Gold storms past $985 an ounce, closes in on psychological $1K mark,
· Did you get Tuesday’s “sell half for 100% gain” email?,
· A look at the shiny metal’s performance over the past few centuries and more…

Joel Bowman, reporting from Hoi An, Viet Nam…

At the risk of preaching to the choir, we’re going to sing and shout about gold today, but not for the usual reasons. Sure it’s honest, owes no debts and leads an entirely pure, squeaky clean lifestyle…but that’s not why we like it today.

Today we like it because it’s putting money in our pocket…which is more than we can say for any CEO-tainted, politician-schmoozing stocks of late. [The reader may wish to insert his or her own grumbling profanity right about here.]

Hopefully, some of that well-deserved anger you have directed towards the market was somewhat mitigated by an email you received Tuesday morning from Alan Knuckman. If you don’t know him, Alan’s the new man at the helm of our wildly successful Resource Trader Alert. If you missed his email, here’s a snippet:

Dear RTA Reader,

Filled!

Good news if you placed the order to sell HALF of our December gold spread — we were filled this morning at 21pts!

That’s is a nice 100% profit with the gold market continuing to storm ahead. Our remaining half has plenty of upside as gold approaches all-time highs — and now that we’ve taken our 100% gain, we have plenty of time to hold on for more profits. These December spreads expired in November, as you may know.

Silver also has made a great run, so we’ll be keeping an eye on our spread there as well. A 4-to-1 risk-reward leaves significant upside as investors look for safe havens with the stock market uncertainty – As I type our spread is up 81% from where we bought it.

Before we get into today’s Rude commentary, also devoted to our favorite metal, we’d remind you that you have only a few hours left to grab a spot on the Resource Trader Alert mailing list, if you aren’t on it already.

We’ve attached Alan’s latest commodity investing report, which includes a discount sign up link at the end, for your perusal. If you’re interested, you can check it out here.

And now, over to Adrian Ash in London for a word on the shiny metal…

— Resource Trader Alert: Offer Expires Tonight* —

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How to Legally “Hack” Your Way Into the World’s Most Secretive “Millionaire’s Market”

Beginning tomorrow at 7:10 a.m. EST , you can legally “hack” your way into the financial community’s best-kept secret: the “Millionaire’s Market.”

Once inside, you’ll have a chance to legally “withdraw” $810 or more per week — and you’ll be able to deposit the money directly into your retirement account!

* Offer Closes Tonight At Midnight, February 19, 2009 . Read On Here

—————————————–

Gold Amid Inflation & Deflation
By Adrian Ash, BullionVault

The 1970s didn’t just curse the world with cheap German wine and the Bay City Rollers. That decade gave us soaring inflation, too.

Gold’s stellar run up to $850 per ounce, rising more than 24 times over, also came in the ’70s. So gold, therefore, must deliver its strongest returns when the cost of living shoots higher. Right?

Wrong. “In the long run, stocks have thrashed gold as great long-term hedges against inflation,” says Jeremy Siegel, professor of finance at Wharton University, Pennsylvania. What’s more, the eight-year bull run in Gold Prices so far this decade has come against the lowest average consumer-price inflation since the early 1960s.

In short, the common opinion of gold as first and foremost a defense from inflation is wildly amiss. Just look at the last 30 years.

Consumer prices in the United States, even on Washington’s data, have pretty much trebled since 1980. But starting at what was then an all-time high of $850 per ounce, gold simply failed to keep pace. In fact, it dropped half of its purchasing power (monthly data) over that time.

At its lowest point, back in 2001, gold’s loss of purchasing power for US investors reached beyond 85%. The broad S&P index, on the other hand, stood more than eleven times higher, even as the Tech Crash pushed US equities into a nosedive.

Sure, things have reversed a little since then. But not enough to reverse the cold fact of gold’s losses during the long inflation of the late 20th century. How can we square it with gold’s huge returns amid the inflationary ’70s?

“Well,” you might guess, “perhaps gold only responds to rapid inflation – the nasty kind we got 30 years ago, rather than the ‘mild’ case our money has suffered ever since?”

But again, you’d be wrong – or very close to it. Between 1980 and ‘81, consumer price inflation in the US destroyed 17 cents of the Dollar’s purchasing power, a severe depreciation by any reckoning. Yet the Dollar price of gold dropped 40% during that same period. Longer term over the 1980s and ’90s – a truly horrific period of sustained inflation, then averaging 4.6% per year and vicious by any historical comparison – the real value of gold sank by more than four-fifths.

Look further back – even to when physical gold stored in government vaults underpinned the Dollar, just as it underpinned all major currencies – and you’ll find that gold almost always made a poor hedge against rising prices. In the mid-70s, Professor Roy Jastram at the University of California at Berkeley found that gold failed to keep pace with the cost of living during seven inflations in Britain across more than three centuries. In the United States, Jastram spied six inflationary periods between 1808 and 1976. On average, they saw the purchasing power of gold fall by more than one-fifth!

Only the final period in Jastram’s study – beginning in 1951 – saw the metal gain value, and it continued to gain purchasing power for the next 30 years. By the end of 1980, the average annual price of gold had risen more than 17 times over. But right from that top it was downhill for the next twenty years.

How come?

What changed at the start of the ’80s? Two things in short order, which were entirely connected.

First, Paul Volcker – the famously tall cigar-loving chairman of the US Federal Reserve – raised Dollar interest rates to nearly 20%. So secondly, and as a direct result, the rate of inflation sank from that record peace-time spike above 14%.

Volcker’s strong medicine took nearly two years to slow the rate of inflation. But it killed the Gold Price almost instantly. Before Volcker hiked rates – and before he and his successors gained ample room to cut them year after year – “There was a kind of great speculative pressure,” as Volcker since said. The Fed noted how “speculative activity” in the gold market was spilling into other commodities. One official at the US Treasury called the gold rush “a symptom of growing concern about world-wide inflation.”

So yes, people piled into gold as double-digit inflation and collapsing bond prices destroyed their savings at the end of ’70s. And yes, it took a record return paid to cash for the devaluation of money to slow down, allowing a cautious return to risk assets like corporate debt, listed equities and new private ventures – assets whose long-term appeal rests on stable costs and expenses, rather than a speculative guess at how the central bank might set its interest rates from one month to the next.

But now, in contrast, Britain stands on the brink, the United States will likely confirm it on Friday, and Japan’s pretty much there – yet again – suffering the horrors of inflation’s bleak evil twin, deflation.

How come gold just keeps hitting new record highs?

Before the 20th century, short periods of falling prices were as common as scurvy, and just as harmless for the long-term value of money and assets. Indeed, deflation is a good thing, for savers at least. Provided their savings institutions stay solvent. And provided their cost of living actually goes down faster than the value of the assets they’ve saved. Which is not what’s happening today. And that brings gold’s other key feature – the one investors should note if they buy it as a tightly supplied metal that shot higher in price when inflationary panic struck in the late ’70s.

Because fact is, gold also offers a deep, liquid market (if held in its internationally tradable form of large wholesale bars) with no risk of counter-party default (if owned outright, rather than through a trust or a fund or a similar financial structure).

In our debt-deprived world today – where the outstanding value of what retirees and savers are owed is deflating much faster than costs – it’s this attraction of gold…it’s “off risk” advantage…which is fast-gaining appeal amongst large funds and private investors alike.

Inflation and deflation – both a crisis in money – both also force business and growth to give up. What remains, paying zero and promising nothing, is the need to simply store wealth and savings for a better future, whenever it shows.

Joel’s Note: If you want to get your hands on some of Adrian’s (and our) favorite metal, Bullionvault is a fantastic place to start. Adrian is the head of research over there and has kindly passed on this Gold Buyer’s Primer for you to have a look over.

Well, we’ve run a bit overtime again today, so that’ll have to do for now. As always, you can send us your thoughts and opinions at the address below. We can’t respond to every one, but we certainly read and appreciate them all.

Until next time…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

P.S. Remember, the special offer to Alan’s Resource Trader Alert ends tonight. We hope you can grab a seat before the next trade is closed. Check his report out here.