A Gold Buyer’s View of the Lopsided Risk-Reward Ratio

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What a beautiful city! We’re talking about London. It was all dressed up for Christmas last night. And we got to see quite a bit of it. Student protestors blocked the streets around Trafalgar Square…and there was so much snow and ice…taxis must have stayed home. We walked from Mayfair to Southwark, using one of the pedestrian bridges to get over the river.

It was snowing – large flakes floated down and settled on the sidewalks. There were Christmas trees and toys in the shop windows…along with the usual fashions, paintings and jewelry. People gathered in warm pubs and cafes to escape the cold; they looked so inviting, we wanted to stop in each one and have a drink. The Royal Festival Hall was brightly lit up…as were all the major buildings along the Thames.

We’ve never seen it so lovely. Too bad we’re leaving town this morning…on our way to Mumbai (aka Bombay.)

Uh oh… What’s this? Gatwick Airport is closed. Our flight is delayed. Well…more time to reckon!

But what are we reckoning with…oh yes…money. Alas, the world of money looks much less attractive than the world outside our snow-bound window. In fact, it is downright ugly.

The stock market seems to be rolling over. Yesterday, the Dow fell 46 points, not enough to make much of a difference.

Gold rose $18.

Here’s what we see – Big Risks/Little Rewards. That is probably what gold market buyers see too.

You’d expect gold to rise when there is consumer price inflation. And there is quite a bit of it. But not in the US…nor in most of the developed countries.

Maybe some people are buying gold to protect themselves from inflation, but it looks to us as though they are buying it for another reason – because they are fearful that something is going to go wrong.

Right now, world financial authorities have a number of balls in the air – China’s property bubble…its excess capital investment…its rising inflation; Europe’s collapsing bank debt…the euro…government funding problems; America’s continued housing decline…high unemployment…overpriced stocks and bonds…Ben Bernanke and QE2.

Gold market investors are betting that the authorities are going to drop one of these balls. Maybe more.

Remember, these are the same klutzes who saw no trouble coming…and then misunderstood it when it arrived…and made things worse.

And in Europe alone, they will need more than two hands. Here’s the latest from the Telegraph:

Contagion strikes Italy as Ireland bailout fails to calm markets

Spreads on Italian and Belgian bonds jumped to a post-EMU high as the sell-off moved beyond the battered trio of Ireland, Portugal, and Spain, raising concerns that the crisis could start to turn systemic. It was the worst single day in Mediterranean markets since the launch of monetary union.

The euro fell sharply to a two-month low of €1.3064 against the dollar, while bourses slid across the world. The FTSE 100 fell almost 118 points to 5,550, while the Dow was off 120 points in early trading.

“The crisis is intensifying and worsening,” said Nick Matthews, a credit expert at RBS. “Bond purchases by the European Central Bank are the only anti-contagion weapon left. It needs to act much more aggressively.”

And more thoughts…

Meanwhile, in Ireland, the public mood is turning as dark as December.

Irish voters are threatening to turn away the rescue boats and instead throw the bankers overboard. The Telegraph report continues:

One poll suggested a majority of Irish voters favour default on Ireland’s bank debt. Popular fury raises the “political risk” that a new government elected next year will turn its back on the deal.

Premier Brian Cowen said there was no other option. “We are not an irresponsible country, ” he said, adding that Brussels had squashed any idea of haircuts on senior debt. Irish ministers say privately that Ireland is being forced to hold the line to prevent a pan-European bank run.

There is bitterness over the EU-IMF loan rate of 5.8pc, which may be too high to allow Ireland to claw its way out of a debt trap. Interest payments will reach a quarter of total revenues by 2014. Moody’s says the average trigger for default in recent history worldwide has been 22pc.

*** If Ireland shirks its debt load, others will too. And then, the euro will collapse. (It fell below $1.30 yesterday.) And if the euro goes…so does world trade. And if world trade collapses so do the US stock market and the US economy.

And remember, that’s just one of the risks. There are more.

So what should you do?

Easy. Buy gold on dips. Sell stocks on rallies. Don’t worry. Be happy.

*** “Should I buy farmland,” asks a Dear Reader.

Answer: yes and no.

There. Always trying to be helpful. Farmland has been a great investment for many years. But yields – from renting out farmland – are near record lows. This suggests that capital gains will be low over the years ahead. There’s a time for every purpose under heaven; this is probably not the best time to buy farmland.

On the other hand, farmland isn’t going away. And over the long-term it is likely to hold its value…and perhaps increase. Here’s a report sent to us yesterday from the heartland of the homeland:

(Globe Gazette) – Mark Newman of Forest City has been an auctioneer for farmland auctions since 1981, but never has it been as exciting as it is now.

“The atmosphere is just electric,” said Newman referring to public auctions. “It’s fantastically exciting for buyers and sellers.”

The current market for farmland is exciting because farmland values have gone up at least 13 percent in Iowa since October 2009, according to a recent survey by the Federal Reserve Bank of Chicago.

Specifically in the North Iowa area farmland values are up 11 percent, with the western part of the area seeing a 17 percent increase, according to the report.

“I think we could safely say that report from the Chicago Bank is pretty indicative of what’s happening here in North Iowa,” said Sterling Young, farm manager and farm real estate broker with Hertz Farm Management Inc., Mason City.

Farmland prices in North Iowa have ranged from $3,000 an acre for poorer land and up to $7,000 an acre for really good land, said Young, Newman and Fred Greder, owner of Benchmark Agribusiness, Mason City. Average farmland has been in the middle at around $5,000 an acre, the three men said.

Farmland values in Iowa declined for the first time in 2009, according to an annual survey released by Iowa State University Extension in December 2009.

However, it began to rally at the end of 2009 and has been doing so since then, Greder said.

The rally began because there wasn’t very much land for sale and investors were looking to land as a more stable investment, he said.

“People that have cash are finding CDs and savings account interest rates aren’t strong,” Young said. “The return from land investments is better. They feel more comfortable with placing it there.”

Farmland values have also gone up because of commodity prices.

“It really started to take off mid summer 2010, and it’s not a coincidence it’s at the same time the grain prices started to go up,” Greder said. “I’ve always been surprised that the long-term investments like land is so responsive to grain prices.”

North Iowa sellers have definitely decided to take advantage of the higher prices.

“There have been quite a few auctions and quite a few yet to come before the end of the year,” Greder said.

Newman, an auctioneer and attorney at Newman Law Office PC, Forest City, agreed and said there is a big push right now not only because of the prices but because capital gain tax rates are expected to increase next year.

“For some of those sales we have significant penalties if they fail to close by the end of the year,” he said. “It can mean $15,000 on a somewhat typical farm or $20,000 on a better farm if it closes after Jan. 1.”

While many people are pushing to sell yet this year to avoid higher capital gain tax rates, farmland values might increase even more next year.

“I think the best is yet to come,” Newman said.

His reasoning is that more people will hold onto their land because of higher capital gain tax rates, which will create a shortage in land and drive up the prices.

However, as Newman admitted, it’s always hard to know what the markets will do.

“Then again I don’t have that crystal ball,” he said.

Regards,

Bill Bonner,
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. I’ve read your protecting against inflation report. I have to say, I don’t think you are taking a big enough perspective on this.
    Let’s go back to basics – Maslow’s Hierarchy of Needs. Humans
    need air, water, food, reproduction and shelter as the absolute
    foundations of life. All human constructs stem from these. Here in the
    west, we’re mostly having these needs met for us so we don’t pay them
    a lot of attention, but they remain the only essentials. Further up
    the “pyramid” that Maslow uses to illustrate his theory we find
    companionship, recognition, adornment etc. Nice to haves, but not
    essential. The original value of Gold was primarily due to the
    scarcity and perceived beauty of the metal, i.e. adornment. You certainly can’t breathe it, drink it or eat it. If you have enough, you can build a shelter with it but there are many far superior materials for that.
    Money is a representation of an ability to get work done. Money is
    only truly valid when it retains this direct relationship with energy. So, while a currency backed by gold is better than a fiat currency, it
    is still inferior to a currency backed by potential energy. After all,
    gold is only a convenient type of currency that has value because
    people are willing to work to obtain it. But if those people are
    starving they will instead work for any direct outcome that produces
    sustenance. Backing a paper currency with a gold currency still
    doesn’t get to the root of the problem:

    We live in a closed system (planet earth) where there are finite
    resources and the only real input is solar energy.

    The recent wealth of western nations compared to other nations is due
    to a head start in the ability to harness cheap and abundant energy.
    First this was in the form of coal, then oil and gas. No other source
    of exploited energy in human history has ever been as abundant and
    concentrated as that provided by these fossil fuels. But it has taken
    a very long time to build these reserves of fossil fuel, which are
    actually just very concentrated stores of solar energy in the form of
    fossilised plant matter. Before humanity learned to exploit these
    fossil fuels, we had to make do with real time solar energy harnessing
    and less than 1 billion of us in total were living sustainably on the earth.
    You can take the conventional economic view that the GFC was caused by
    the US residential property market bubble bursting. Or you can use the
    correct definition of money and see that western currency has
    completely lost it’s direct relationship to an ability to get work
    done via potential energy. Oil reached US $150 a barrel and it caused
    the GFC. Whether you believe that we are running out of oil or not,
    you cannot deny that in a closed system we have to run out eventually.
    Here’s an alarming statistic. Imagine for a minute that the entire
    volume of this sphere we live on was comprised of oil. At the 2005
    rate of extraction, we would use up the whole world in just over 100
    years. Oil extraction rates peaked in 2005, which means for the first
    time in human history we do not live in a time when we can continue to
    access increasing amounts of energy. We’re not going to run out of oil
    tomorrow, but if extraction volume is decreasing year on year and
    demand continues to grow we are looking at price increases and supply
    shortages at any price.

    So, people in the western nations will be forced to live on less
    energy. Have you heard the term “energy slaves”? This relates to how
    many people you would need as your slaves in order to continue living
    the way you do today. In Australia this figure is 200 slaves each!
    (http://www.manicore.com/anglais/documentation_a/slaves.html) These
    slaves take the form of burning non renewable fossil fuels.

    With this in mind, what now is your definition of wealth? Surely not a
    surplus of currency. Gold is a currency. The only definition of wealth
    for free market capitalists should be “the ability to get work done,
    as measured against your peers”. But I contend that the only
    sustainable definition of wealth for all of humanity is “the ability
    to get work done, by doing it with your peers in small closed loop
    communities and in so doing provide for all of the essential needs of
    Human physiology and for as many of the nice to haves as possible
    within that closed loop”

    The best way to protect true wealth is to completely exchange it out
    of any currency that isn’t directly linked to the ability to get work
    done. What does that mean? Obtaining clear title to arable land where
    there is a sufficient supply of drinking water and resources to
    provide shelter. In Australia that probably means 5 or more acres (we
    have poor topsoil compared to more recent volcanic countries) in a
    place where rainfall is 400mm per annum or higher. If you still have
    currency left, spend it on building a solid, high thermal mass,
    correctly solar-oriented dwelling and establishing infrastructure like
    poly pipes, windmill and solar PV pumps, water tanks on hills,
    permanent agriculture and extensive reforestation for woodlot and food
    supply. Start saving seeds and learn to grow your own food. Keep
    chooks and a few sheep.

    One of the wealthiest people in Australia by this standard is David
    Holmgren. (www.holmgren.com.au)

    Admittedly, it’s hard for a corporation such as yours to make currency
    by offering this kind of advice, but if you’re only going to use it to
    buy gold, what’s the point anyway? Come and see me in 5 years when you
    can see your kids’ ribs and your stockpile of gold glistens in the 40
    degree heat… I won’t want your gold but I will happily share my seed
    bank with you.

    Nathan Chattaway
    December 2, 2010
    Reply
  2. Well I would be concerned at the way central planners have turned people into farm stock dependent on the farmer for daily feeding. What if the farmer becomes disabled? But after you feed yourself Nathan you find that the world needs money to enable commerce. At present the world is choosing PMs which history shows provide superior utility to all else as money. Not that I’m necessarily predicting a return to PMs in common use.

    Reply
  3. I agree Nathan, permaculture is the way to go. Always thought if the wheels really fell off, i would rather have my gardens and my chooks and ducks than try and hoe into a lump of gold.

    Reply
  4. But will Moreton Bay Regional Council want their rates bill paid in duck eggs or bullion Annie? :)

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  5. Ha Ha ned, if things get really bad I doubt the council is going to throw everyone out on the street for not paying rates. Won’t happen.

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  6. My rates are pretty low anyway as I don’t have a reticulated water service, so no water charges at all for drinking or sewerage.

    Reply
  7. Have been reading Holmgren’s articles in Grass Roots for decades, but didn’t realise he’d acquired material wealth…

    Reply
  8. Well, we have 3km of underground reticulation*… and no water bills.
    (Mine dew, the rentals all do… .)

    * Paid the kids $1 per metre to bury it, before they were teens… ;)

    Reply
  9. Slave driver BP. That’ll learn em. Well done ;)

    Reply
  10. Holgrem has written a lot of books and does a lot of lectures around the place, but I think Nathan is saying he is wealthy in sustainable way, not monetarily (but I could be wrong). The father of the movement is Bill Mollison and there are a lot of permies that are doing well financially, mainly by doing courses and writng books. I’m a fully qualified permaculture designer but usually just do it for friends.

    Reply
  11. Yes, I assumed that the wealth of which Nathan spoke _might_ be terrestrial rather than financial, Annie. We too believe the soil is our real wealth. We have a couple of Mollison’s books and the homes on our main property could be worthy inclusions with his writings.

    We have good friends who are into biodynamics. We are not really into Steiner, but their (intensive) produce is superior to ours (on a larger holding) so it’s difficult to argue that their science is illusory!~

    The boys were pretty keen, Lachlan. They dug the trenches with mattocks (still rated high in our top ten handtools.) After twelve they were creating websites (some with over 10,000 hits per day) and lost interest in my comparatively limited ability to pay!~ :D

    Reply
  12. Without reference to human nature we are exploring utopian impossibilities. Without governments or personal armies (ie you ..are.. a gov) we cant have any secure title to land etc. With govs we will always have currencies because they demand their pound of flesh through tax and sometimes inflation (human nature). Sometimes they want more, even taking away what we have previously had title to (human nature again). And between ourselves we act the same as governments taking what we did not earn and disrespecting the property of others. People sometimes expect govs to be different…like gods maybe.
    If currencies vanish then so has government and social order with it (i doubt it here in Oz in the foreseeable) then how could a food bearing paradise belong to its owner much longer? It will belong to someone with a gun or a bigger gun or an army.
    If society finds a way to store wealth which is not being taxed then governments will eventually move to tax that or they cease to be.
    Gold traders are taxed too when they convert :(
    Get over it :)

    Reply
  13. We probably live in the best period of time possible. My grandmother related seeing public tooth extractions (1884) in a London square (accompanied by the magician’s trick of extracting a wriggling worm) with pliers. The child ceased crying on seeing the worm… . Applause followed.

    And I believe we’re in the right place. We enjoy freedoms few before us could ever have imagined possible.

    You really can turn a small property into a private paradise. Our distance from the northern hemisphere really is a blessing. It’s unlikely I’ll see it in my lifetime, but if Armageddon moves south, we’ll have to deal with it when it comes. Meanwhile, let’s enjoy the moment.

    (Nathan, I’ve read and reread your long piece several times. Each time I get to readjust my bearings a little. It’s an excellent piece, which I’ve printed off, in case it gets lost in the ether. Utopian perhaps, but a big improvement on Metopia.)

    Reply
  14. ” It’s an excellent piece, which I’ve printed off, in case it gets lost in the ether”
    It certainly was BP and with the rain keeping me home and mostly indoors I couldn’t stop thinking about it.
    I hope you havent perceived I’m against self sufficiency/grow your own because the opposite is true and I am often thinking about how to live independently of the system/status quo. Especially when I’m bushed. At those times you become acutely aware of how soft we live back in the hub. Bush survival is another interesting discussion because in a worst case scenario you may need it a short while. I’m betting against that however. Fun topic but.

    I think the value of home grown from a personal angle is in the chemical free and high diversity of food which it brings to your life. Its hard to replicate that through purchase in the market place without large expense.
    I have to limit my time in home growing though BP until I can live on my own land. I will lose money for every hour I spend and those hours definately add up quick. So gotta work for da man (myself..then gov) and pay into the system. Its just reality. Self sufficiency is fun, a pleasure and a privelage I hope to spend more time on later.
    This year BP I worked my gardens quickly by hand after rain, direct seeded, hand weeded post germ and organic fert and then walked away. No touch since except to harvest little bits for kitchen and give aways. During the week presently I’m mostly not here and these hardened plants just fend for themselves. Some did well others dragged on a bit.

    Gardens look daggy but I always have something healthy to eat even though life is hectic at present.
    “but if Armageddon moves south, we’ll have to deal with it when it comes”
    Certainly. Lifes too short to hunker down with a fixed view, waiting for whatever to happen. The GFC has played out already much differently than I predicted (slow motion) and I’m just making hay while the sun shines. My back up ideas are there and hopefully wont need them but stiff bikkys if I do I guess.

    Reply
  15. No, I wasn’t rejecting anything you said, Lachlan. I’m aware that you’re ‘in the journey’ and that some of your actions (like your seed bank) are better developed than my own.

    Just spent the week pruning our home orchards. Finished a third of the trees, mainly because I kept discovering those which have ‘learned’ to dismantle an 8L/hr dripper, with their root systems, to deliver 50L/hr. Mainly olives, which then engulf the dismembered tube within their massive trunks. Digging the tube out, to refit a new dripper, diverts me from the main task… but has probably saved me 50,000+ litres… .

    Reply
  16. Crumbs BP you’ve got your setup well and truly established. To be honest mate my own ideas of what to do in this regard just keep evloving/changing because I’m pushing into new areas with my work all the time. With those experiences comes new realisations/knowledge of the on ground realities with each place. I learn more not just about local conditions etc but about myself and how I want to fit in to the world and what is likely to be important to me in longer term after emotions have waned. Then a broader view of people and the system is developing which has an effect. So I am expecting to see a lot of new country in the next couple of years also after noting changes in longer term weather. By the way..when is it gonna stop raining? Crumbs mate.
    I tried to base myself on a property on the Western Downs this season but it just is not going to work out. I need to work and camp on the go…like a little hobo ;) But then I’m lean and hungry. That will change too.
    Gonna have to keep my options wide open regarding land aquisition. When where why how the whole deal.
    I gotta get going now. Kiddies here on weekend. catch ya round BP.

    Reply
  17. Meanwhile the Australian Bureau of Statistics reports a price increase of Perth homes of 9.4% October 2009 – October 2010. Greg Atkinson certainly was correct about the diversity of property marketS, wasn’t he?

    See yourself in a $7 mil beachfront palace, do you Steven? How long before you’ve saved the other $6,850,000.00? I’d have thought $795,000.00 might be just a little rich for a one-bedroom apartment.
    It’s not like it’s Sydney, is it?!~

    Reply
  18. Yes Biker I can quite easily see myself sitting up there in a beachfront palace sipping rum whilst watching the meter maids do the rounds…

    Was that the answers you wanted to hear?

    Reply
  19. Biker Perth prices also rose a massive 0.4% from Jun Qtr 10 to Sep Qtr 10.
    That is before the interest rate rise of November

    Reply
  20. Yes, I figured that was your plan, mate!~
    You’d actually have a place to bring ’em home to… :D

    “Perth prices also rose a massive 0.4% from Jun Qtr 10 to Sep Qtr 10.”

    They rose, Steve#2. Wasn’t Steve#1’s plan to have them down 40% by now? ;)

    Reply
  21. yes biker you are absolutly 100% correct it was MY plan to have prices down by 40% minimum nation wide
    What can I say we have too many greater fools in this country

    Reply
  22. Ive confused you BP.
    I live on a farm about an hour from the coast. In January last, its a long story but kids went over to their mum for majority of care. It wasn’t my plan but thats how it went. On weekends I have to be here for them but also to feed the cattle (2 x stud properties about 2km apart) and poultry. During the week the owners son is here most of time but we do swap jobs occasionally. Its a fantastic setup actually, I do feel lucky. So this last ten months or so has been unlucky in one sense (kids situation) but on the other hand I have a freedom now to do whatever. Re-invent myself. I’m getting my business off the ground and its allowing me to see the place. So I still have a general idea what I want but I guess the detail has been thrown into disarray. I’m glad actually. The end result should be much better thought out.
    So I’m a happy vagrant seed collector during the week but the travelling aspect is mainly a seasonal Spring Summer phenomenom.
    Its bucketing rain here and have had only two full days of sun last 6 weeks. I have a contact in Perth says its very dry there.

    Reply
  23. Reinventing ourselves is a necessary part of our evolution, Lachlan. If we didn’t change, how could we progress? I think I may have some idea where you are in that process/progress.

    Unlike many people, you have a strong persistent idea of what you want. Most drift along without any idea, goal, or aim.

    Looking back over the years, I think that written, visible goal helped us get almost everything we need. No fancy cars, but complete freedom to do exactly what we want, when we want. If you make achieving those kinds of goals a priority, you will get there.

    A week of rain at present. The tanks are all full, but it’s nice to see our place looking so green in early December…. .

    Reply
  24. http://www.bom.gov.au/products/national_radar_sat.loop.shtml
    Ha ha the suns out..not sure how long.
    That rain you just experienced will be here soon. This little travel bug will be clubbed into submission. I’ll take credit for the WA rain next time I email Perth…they asked me to send over a bit, said I’d see what I could do.
    Kids are waking.
    Cheers BP

    Reply
  25. there’s a sweet point for the green livvers (I am one, except that the knees have given out on me and Im drreaming of selling out and going back to ciilisation for a cushy sit down job – the grass is always greener no?). if there’s pandamonium or even high level discontentment in the city, then the limited supply of appropraite land will make rural holdings more valuable (once the fake debt driven and oil dependent city/suburb lifestyles are degraded). rising sea levels might also drive them from the shores. (Im missing the point of lifestlye for its own life, and drumming on about competitive monetary values). but if it gets too bad (like Lachlan said) its mad max time, and youve got “The Road” for a movie to watch for that. meanwhile, theres only one lifetime for everyone and theres something sicko about thinking too much about the price of everything and the value of nothing. on the other hand, real estate is such a huge cost and the biggest of all decisions for most people, of whom there are many (its not the wild west anymore, anywhere, and that was taken from the natives.)
    one a final note, if the Steiner poo buried in the cows horn to make enough fertiliser for many acres is true, then thats the real gold, to make soil. shit for gold, pure alchemy, figuratively speaking.

    Reply
  26. Yeah, thanks for the rain, Lachlan!~ Great satellite imagery… .

    Meanwhile, one for you, Ned:

    http://video.theaustralian.com.au/1603575564/A-star-is-born

    Reply
  27. My Fletcher Christians have doubled in value… 100% in a couple of weeks..
    Dammit.. What was I thinking, should have bought a house in Perth instead ;)

    Stillgotshoeson
    December 6, 2010
    Reply
  28. Nah, wait a coupla months… .

    WA is talking about a $20K FHBG. Other Lib states may just catch on… :D

    Reply
  29. Biker 4 Decemeber 2010: “We probably live in the best period of time possible. My grandmother related seeing public tooth extractions (1884) in a London square (accompanied by the magician’s trick of extracting a wriggling worm) with pliers. The child ceased crying on seeing the worm… . Applause followed.”

    Aussies have gotten to be such sooks – I removed my last two teeth at home – A front one and a back one – Saved the best part of $150 bucks on each I’d guess? The secret is patience! But don’t effing leave them ’til they start to hurt you dill – You might have to rush the procedure and that will probably hurt a lot? “Time and patience” said Kutuzov prior to falling back before Napoleon at the gates of Moscow in 1812 … ;)

    Reply
  30. Western history is SO bloody false – It was Kutuzov who crushed Napoleon. And Stalin who crushed Hitler. No big deal – As I’m just saying??? Whilst shaking my head at the same bloody time … Rock on Wikileaks!

    Reply

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