Inflation Kills Wages

First, how does this inflation thing work?

Inflation is the decrease in the purchasing power of a currency (the dollar here in the good-ol- U.S. of A). How does it usually play out?

Currently interest rates, set by the Federal Reserve are unnaturally low to keep the economy afloat – hovering around 0%. But this coupled with the trillions of dollars recently pumped into the economy may soon spell rapid inflation – same amount of goods in circulation, a lot more cash, and prices mysteriously begin to rise (because that $buck$ is inherently worth less).

In order to offset this large increase in money supply consumer prices will inevitably rise, and when they do the Federal Reserve will most likely increase interest rates to put the reigns on inflation. The increase in interest rates will almost immediately bring down the value of bonds you own. Current or new bonds will look better compared to your current portfolio or even your shares of common stocks, making them too look less attractive.

Investors like yourself have already started looking for and getting into securities whose goal is inflation protection, and that has already propped up their prices. Unfortunately this can have an adverse affect as this fear shifts many investors into ever increasing hedges that then become overvalued themselves. If enough people get into any particular vehicle, it becomes over stuffed with a mini bubble and eventually isn’t worth the terrific premium you have to pay.

Commodities: Profiting from rising costs

MMMM Coffee

Again, inflation is the decrease in the purchasing power of a dollar, or whatever currency you happen to have in your country. So a cup of joe that once cost $1 every morning, now costs $2. One key point, prices AREN’T higher! Most people see this situation not as a decrease in the value of the dollar they are handing to their barista, but instead as a terrible, vicious increase in prices. Although this argument is somewhat based on semantics, it is only through understanding how inflation works, and how to avoid it, that you truly realize, your coffee doesn’t cost more, your paper bill just has less power.

With that said as these prices mysteriously seem to rise, one way to hedge your self again inflation is by getting into things that intrinsically rise with the prices. They can go down, but typically don’t because of scarcity. For example Between 1973 and 1981, when inflation averaged 9%, the Goldman Sachs Commodity Index, which tracks oil, metals and food futures, averaged a 13% annual return. During the last half decade (of which I’m sure all too many of you had your 401k’s and portfolio’s slashed by double digit percentages) commodity-based mutual funds have gained an annual average of 30%.

What Are Commmodities?

Commodities, explained by Wikipedia are: “some good for which there is demand, but which is supplied without qualitative differentiation across a market.”

Commodity Examples:

• Oil
• Coal
• Salt
• Sugar
• … AND GOLD!!!!

Moral of the story is, by doubling the U.S. money supply IN LESS THAN A YEAR, the fed has severly increased the chances of inflation in order to prop up the failing credit-based economy in the United States. This may soon spell rapid inflation so you need to protect yourself!

Scrooge McDuck - Gold Investor

Are you thinking about investing in gold. Great! But STOP and don’t go any further until you read our top 10 gold coins investment questions. We’ve answered all of the most important questions you need to consider before investing in gold, gold bullion or gold coins. If you have any more questions please comment below!

• #1 – You hear gold is a good “hedge” or “insurance” what does this mean?
• #2 – What type or kind of gold should you buy?
• #3 – When should you buy?
• #4 – Shouldn’t you just wait to buy gold, when it becomes necessary?
• #5 –  How much should gold should you own?
• #6 – What is the typical gold investor like?
• #7 – Who or where should you buy gold from?
• #8 – If the time comes to sell, where do you sell your gold?
• #9 – What is the biggest mistake gold investors make?
• #10 – Should you invest in gold stocks?

Read the rest of this entry »

Found a great article over at GoldPrice titled: “Trash the U.S. Economy or Trash the US Dollar.” The article quickly and clearly highlights our (the United States) current economic debacle. We are in the midst of crisis, but our policy makers and the Fed (Federal Reserve) are trying to solve this problem by pumping more money into the system (generating more money in order to stave off an even greater downward spiral). Unfortunately, this addition of new capital into the system is only delaying the inevitable and is ultimately just killing the dollar (the more we print, the less its value).

If the US Treasury and the Fed create too many US dollars (that do not represent any new wealth what so ever, just increased US Treasury and Fed debt) to try to fend off (delay) the decent into the Greater Depression, they will trash the US dollar. If they do not do that (stop increasing the debt build up in the system) they will crash the economy. Actually, it is crashing already. They would just allow it to crash faster and not as badly as it would if they try to artificially prop it up (increase the debt in the system). The economy would also recover a lot faster than if they did not interfere. Plus, the US dollar would not be devalued as much.

The article is enlightening and features truly staggering and mind-blowing facts about how much credit/debt has been pumped into the system in less than a year:

The US Treasury/Fed combo [has] spent… over $13 trillion in less than a year. [This has doubled] the US dollar supply in less than a year. Most people need serious protection from this, in the form of gold and silver, but still do not realize it.

A great article, that quickly gets to the core of the dangers of a Fiat Based money system and a good advocate for saving yourself from the declining dollar within a wealth preservation tool like gold and other precious metals.

The Chinese Gold Panda, produced and minted in The Republic of China has been around for nearly 30 years and was one of the most successful coins since the 80s. The U.S. response to the cute and cuddly little panda’s featured on the coins was overwhelming. With the introduction of the Chinese Gold Panda the concept of a premium-priced bullion coin was established.

Because of the unique imagery, this smooth-faced gold coin, China was able to create a constant demand for the coins.  Regardless of market price, the Chinese Gold Panda sales remained steady in part due to the yearly changing design. Additionally, the Pandas are not only used as bullion; they are also often set inside necklaces and bracelets and used as jewelry centerpieces.

Because of its success over the last few decades Pandas are issued by China at a high rate over-and-above other gold bullion coins and the actual spot market price for gold.

First issued in 1982 the 1987 collector interest was so high that some of the original one ounce coins minted in 1982 trade for over $3,000.

The (Austrian Gold) Vienna Philharmonic was first minted by the Austrian Mint in 1989. Shortly after its creation and first minting, the coin became one of the best selling gold bullion coins in the world. It was the best selling coin in 1992, 1995, and 1996 according to World Gold Council.

Many hold its best-selling status as a testament to its beautiful design and craftsmanship as well as its honorary meaning. The Austrian Gold Philharmonics were designed to honor the Vienna Philharmonic, which has been a part of the Austrian national identity since its inception in 1842.

As with many other nationally minted gold bullion coins, the Austrian Gold Philharmonic is gauranteed by the Austrian Mint. The coins’ weight and purity in gold, backs its monetary face value. At initial minting the Austrian Gold Philharmonic was the highest of any gold bullion coin.

Design

The front of the coin depicts a great organ at the Golden Concert Hall (Musikverein). The Vienna Golden Concert Hall is where the Philharmonic Orchestra is housed and performs.  Also stamped on the obverse is the face value 2000 Schillings, year of mintage, purity (.9999 fine), and weight.

The reverse or backside of the coin features the following instruments:4 violins, the cello, a harp, a bassoon, and the Vienna horn. These instruments are arranged underneath the German name of the orchestra: ‘WIENER PHILHARMONIKER’.

The Australian Gold Nugget coin is one of the most popular coins created by the Perth Mint in Western Australia. Perhaps the most diverse of any nation’s bullion coinage, the Gold Australian Nugget is minted in eight different sizes from 1/20th of an ounce all the way up to 1-kilogram.

Design The obverse of the coin features a profile view of the face of Queen Elizabeth II, as designed by Ian Rank Broadley. She is surrounded by her name, the denomination of the coin, and the word “AUSTRALIA”.

The design on the reverse originally depicted natural Australian gold nuggets (example right), with different designs for various sizes. The design theme changed in 1989 to feature the most recognizable animal in Australia, the kangaroo (example above). For this reason, the coin is referred to both as an Australian “Nugget” and “Kangaroo”.

The Australian Gold Nugget / Kangaroo is currently the only legal tender, pure gold bullion coin to change its design each year and limit its mintage annually. Each size from 1/20th-oz. to 1-oz. receives a new design each year. New designs are introduced each year to the proof coins and these designs are then used for striking the bullion coins the following year.
The Perth Mint, located in East Perth Australia, produces the gorgeous and popular Australian Gold Nugget coin. The Gold Australian Nugget is one of the most diverse gold bullion coins as it is minted in eight different sizes from 1/20th of an ounce all the way up to 1-kilogram (2.2 lbs).

Design

The front of the Australian Nugget features the face of Queen Elizabeth II, as designed by Ian Rank Broadley. The Queen’s name, the demoniation of the coin size purchased/owned, and the word “Australia” surrounds the queens profile on the obverse side of the coin.

The back of the coin initially depicted gold nuggets (pictured at the top right), with varying nugget designs for different sizes of the coin produced. In 1989 the Australian Kangaroo, one of the most recognizable animals in Australia, replaced the nugget design on the back. Because of these two designs, and the changes over the years the coin can be referred to either Kangaroo or Nugget.

Of all of the gold coins and bullion available throughout the world, the Australian Gold Nugget / Kangaroo is currently the only legal tender, that changes its design each year and the Perth Mint also limits its yearly production. Every size of the coin, from tge 1/20th-oz. to 1-oz. receives a new design each year.

Watched a video this morning on youtube, of Peter Schiff on Glenn Beck. Okay, Glenn is annoying and usually crazy, but besides fainting he ocassionally has some great guests on. And that was the case on July 31st when he featured EuroPacific Capital President, Peter Schiff. We’ve mentioned him before, but I wanted to extract some great quotes/information from the video and embed below. Check it out:

The video beings with Peter mentioning the following: “the recession might be coming to an end. The problem is the depression is just getting started.”

Then Glenn and Peter review a chart on screen of the nation’s (United States’) debt against GDP (gross domestic product). The chart reveals that currently our debt is at 110% of our GDP both men point out. Peter goes on to reveal:

“So much of our GDP is phony. 70% of it is consumers spending money. Well where are they getting that money? They’re borrowing it.”

“We’re toast if we keep spending. The only way to get a real recovery going is to do the opposite of what we did to get into this mess. We have to start saving, we have to start producing, and we can’t do that if the government is force feeding more debt into the economy.”

Peter Schiff is an interesting character because he was almost singular in his believe (and trumpeting) of the current crisis, years before the crisis. Although I’m not sure how credible he is completely, one thing is for certain, more of the same will lead to more of the same.

I found this fascinating quote today:

The effect of today’s Farm Payroll Data cannot be underestimated for several reasons and proving once and for all the cat’s cradle that is the financial markets.  Should the numbers come in better than expected then this will prove beneficial for equities as the market has proof positive that the worst is definitely over and the recent rally has been founded on solid fact rather than sentiment and wishful thinking.  This would also confirm that the worst of the downturn in the housing sector is over and the great American consumer is now ready to start spending once again.  The consequence of this scenario is that the US Dollar will continue to weaken and commodities, such as spot gold, will surge higher.  However, if the number is worse than expected then the worst is not over, consumer spending will still be in the doldrums and equity markets may suffer a correction.  This could lead to a bounce back in the US Dollar and a consequent fall in the price of gold.   All about will be revealed in the next 90 minutes.  Meanwhile from a technical perspective yesterday’s candle on the daily gold chart gave us a very clear and decisive signal ending the day with an almost perfect long legged doji, indicative of indecision and a potential turning point in the recent rally for spot gold prices.  Naturally we need to wait for this signal to be validated (or ignored), but when read in conjunction with Wednesday’s hanging man candle, coupled with three failed attempts to penetrate the $970 level it seems that we may have to wait a little while longer for a run higher through the $1000 per ounce level.  The $955 price level now comes into play as an intermediate support, and should this be breached then the next price point is $950 followed by $935.  Should we see the doji confirmed then the depth of any move will be dictated by the support levels coupled with any breach of the moving averages.spot-gold-price.org, My Sites, Aug 2009

You should read the whole article.

Although there have been many kinds of Krugerrand’s issued, both silver and proofs (collector’s items) the most common Krugerrand is the Gold South African Krugerrand gold coin used as gold bullion the world over. The Krugerrand’s backside or obverse was designed by O. Schultz, and features the first President of the South African Republic, Paul Kruger.

Although highly valuable because of their minting and gold content, the coins are the least expensive of all of the major gold bullion coins because of President Paul Kruger’s involvement with Apartheid. On the coins President Kruger is surrounded by the name of his nation in Afrikaans and English, two of South Africa’s eleven official languages: “SUID-AFRIKA • SOUTH AFRICA”.

A springbok (a South African antelope) prances across the reverse, as designed by C.L. Steynberg. On the same side as the springbok the date of issuance as well as the amount and purity of the gold are listed. Because it is primarily used for trading outside of Africa – per its weight value in gold, the Krugerrand does not have a face value on the coin.

Minting Information

Every Krugerrand gold coin (sometimes misspelled as Kruggerand , or Krugerand) is minted using approximately 91 2/3 parts gold and 8 1/3 parts copper. Because South Africa is the world’s largest mining nation, especially for Gold the South African mint Mint is never at a loss for producing these gorgeous coins. The official South African Mint has undergone many changes over the years and was privatized in 1988. The South African Mint Company (Pty) Ltd. was established that year as a full subsidiary of the SA Reserve Bank and is the current producer of the coin.

We offer the Krugerrand in 4 different sizes: 1 oz, 1/2 oz, 1/4 oz & 1/10 oz

I was just reading a book, not particularly centered on economics or personal finance, but I got to a chapter this evening with some information I’d like to share. I’ve been reading “Nudge: Improving Decisions About Health, Wealth, and Happiness,” written by Richard H. Thaler and Cass R. Sunstein, the past few nights and have been enjoying it tremendously. Although it primarily centers around policy making – really things we (probably) have little or no control over – it does highlight some interesting facts about how you and I humans make decisions. It goes on to explain, in great detail and depth how those decisions can be (and some cases SHOULD be) heavily influenced, not by removing choices or restriction, but simply through format. For example, the book begins by highlighting the case of a woman in control of a group of schools’ lunches. This woman dictates not only what is served, but also how it is presented. As a little experiment she decides to regorganize the food at every school, NOT CHANGE THE CHOICES, and is able to increase or decrease certain eating and purchasing decisions up or down 25%. For example, putting healthier choices at the beginning of the line and at eye level (an upper shelf) at an elementary school increases the purchase rate of those healthier items. If they are placed at the back of the line, and at the back of the display case, these same options or often swapped (in terms of difference in purchases) with the unhealthier dessert-style items that have a better place at the beginning.

So anyway, I stumbled upon a chapter on finance this evening and it highlighted some astounding facts. First, and really unrelated to what I eventually (I know it’s taking a while to make a point) want to say, I didn’t realize how incredibly profitable student loans are and some of the “predatory” practices that student loan companies and colleges go through in this industry. For example, it is highlighted in the book that many times student loan companies will solicit schools, and loan offices specifically and offer money or donations to the college in exchange for a “preferred” reputation. IE, when students inquire about loans, a loan company that has agreed to these terms before hand will be presented to the student first (sometimes schools have even given lists to students that say only preferred loans are excepted, even when that is completely not the case). Shocking!

But, what I really wanted to get at was personal credit, particularly credit cards. According to the book:

• The Census Bureau reported that there were more than 1.4 billion!!!!!! credit cards in use in 2004 for only 164 million cardholders (average of 8.5 cards/person)
• Currently 115 million Americans carry a balance
• Some research suggest that American households carry an average of $12,000 in credit card debt. At a typical interest rate of 18% that’s over $2000/year in interest payments (just on credit cards) alone!

Astounding. And after crunching some numbers, if the above estimate is true, that’s nearly $2 Trillion dollars in credit card debt. In total if these numbers are correct, we are spending a total of $328,000,000,000 (that’s just a billion mind you) in credit card interest payments alone. What does all of this mean?

Well, it is even more interesting to look at these numbers against the average annual income for US citizens. Unfortunately this information is not as easy to find as you might think (from Wikipedia):

In 2007, the median annual household income rose 1.3% to $50,233.00 according to the Census Bureau.^[3]The real median earnings of men who worked full time, year-round climbed between 2006 and 2007, from $43,460 to $45,113. For women, the corresponding increase was from $33,437 to $35,102. The median income per household member (including all working and non-working members above the age of 14) was $26,036 in 2006.^[4] In 2006, there were approximately 116,011,000 households in the United States. 1.93% of all households had annual incomes exceeding $250,000.^[5] 12.3% fell below the federal poverty threshold^[6] and the bottom 20% earned less than $19,178.^[7] The aggregate income distribution is highly concentrated towards the top, with the top 6.37% earning roughly one third of all income, and those with upper-middle incomes control a large, though declining, share of the total earned income.^[8][2] Income inequality in the United States, which had decreased slowly after World War II until 1970, began to increase in the 1970s until reaching a peak in 2006. It declined a little in 2007.^[9] Households in the top quintile, 77% of which had two or more income earners, had incomes exceeding $91,705. Households in the mid quintile, with a mean of approximately one income earner per household had incomes between $36,000 and $57,657. Households in the lowest quintile had incomes less than $19,178 and the majority had no income earner.^[10]

But, using the above referenced number it means that we are spending an average of $2000 on credit card interest with $50,000 dollars of income. Keep in mind that the above number is before tax! BEFORE TAX, a full 4% of our income goes to credit card interest (ONLY INTEREST). After all taxes (local, state, federal) this number probably spikes closer to 10%. How would you like to receive 10% back? The truth of the matter is that credit card interest is crushing many households, let alone the actual debt, so tighten  your belts, pay down that interest and debt and begin socking your hard earnings away – for yourself, not some credit card company!