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Sunday, October 26, 2008

Preserving Wealth

The name of the game has shifted from profiting from change (Bull or Bear market) to preserving wealth. With the chaos the world is seeing in the financial markets, its hard, if not impossible to know what is the safest thing to preserve wealth.

Buy gold?
Well, gold in itself is a play, as gold bugs have found out as gold plummeted from 1,000 an once down to 690 an once this past week. And it could go down to 400 an ounce, but I think this is unlikely, but possible.

Buy US bonds? I have emailed, blogged, and discussed US Treasuries are safest parking spot for wealth. The interest rate doesn't mater, the name of the game is to NOT lose money. However at some point, next week, next month, 2 years from now, Interest rates will rise, and I believe rather sharply. If your in a 1 year bond at 1% return, if interest rates skyrocket you will be losing wealth by not keeping up with inflation and interest rates. Worse yet, if the US Dollar collapses, your wealth relative to the world will be greatly diminished.
US Bonds at interest rates of 1% are an excellent "parking spot" for wealth, but not for preservation.

Buy Stock? As I have blogged, I don't believe the US is out of this downturn, not by a long shot. Housing has not yet stabilized, every business sector, not just financial are looking for hand outs from the government. Car Manufacturers, Insurance Companies, Banks, general companies like GE, and a long line of additional companies are going bankrupt, cutting forecasts, cutting dividends, etc. The market will go up, the market will go down, but the TREND is what you want to be on the side of, and trend is still DOWN. See entry on when to buy US stocks.

Buy commodities? Oil, Steel, corn, etc where stellar plays in the summer as everything shot to the moon. All have since collapsed. Commodity prices are driven by a wide variety of factors, but the largest one is demand. As the world economy cools, demand for resources turns down. At some point, Commodities will be the play for the next decade as China, India, and the world population wants what Europe and America have. That will need ALOT of resources. But for next month to year, it doesn't currently look like a growth area.

Buy Real estate? The US Market (if not world) has seen the greatest bubble in real estate in the last 6 years ever, and therefore the greatest downturn is now occurring. How quick and deep this falls is unknown, especially with the government working with companies to slow the decent. Unless you can buy a house at 1/4th the list price, its difficult to recommend trying to buy into the collapse. Check out Sherrif Sales. A possible good investment is buying a 500K house in the Bahamas and gain citizenship, but that's a different play. :)

Safest play is still Cash (US Bonds). I don't recommend shifting out. But I DO recommend starting to diversify out of bonds. If the dollar does tank, or interest rates skyrocket, it will be difficult to act. I have had it happen to me a dozen times in the last two years. When things shift quickly, you become a deer in headlights trying to decide what to do.
By scaling in now, (say 5-10%) you will be better prepared to move quickly if the time comes.

The one play I like is buying GOLD MINERS, notice not gold directly? I have no clue if the near term (next 6 month) bottom for gold is 690, 600, 550, or 400. If gold ever breaks below 400, or OIL below 40 bucks a barrel, either is probably best to go 100% into for the foreseeable future.
But I digress, GOLD as a commodity is high risk = high reward. It's not for the faint of heart.
Stocks are pummeled in the USA, including Gold Miners. If the stock market does rally, the Gold miners will rally. If Gold rallies, the miners will rally. If the USD collapses, gold and implies miners will rally.

Also the price for gold miners as compared to gold is completely out of wack. Gold miners have been CRUSHED in this last dowturn. Why? Gold and stocks declined at the same time. That isn't typical. And not-typical brings opportunity.

Also in the last great depression gold miners did fantastic. (quotes around 500% return) Doesn't mean this will repeat, it was during those circumstances not current, but still nice to know.

To me, Gold Miners is a way to capture market rally, gold rally, USD Collapse, World panic (if Russia and other countries default), while taking less risk (and less gain) than buying gold (GLD) on the stock market. Some Gold Miners to look at as individual stocks:
AAUK, ABX, AUY, FCX, GG, GSS, HMY, IAG, NAK, NEM, PAAS, RGLD

Below is a graph of the gold miner index GDX, on Friday it hit 15.80 as a low. Assuming (and it may never) hit 15 bucks a share, whats the risk? The GDX could go to 10, maybe 7.50, but I can't see how it can go less than that. Afterall, they mine gold! Whats the upside? Easily could go to 50, if not much much higher.
UPDATE: As of 1/2/09, GDX hit $34 dollars a share, a clean double from this posting on 10/26/08 when GDX was $17

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