Gold –Time to Buy or Sell???

BF: Good morning everyone this is Brian Fricke and I’ve got Toni on the line as well.

Toni: Good morning!

BF: Welcome to the first of what we intend to be many Coffee Clubs. This is just an opportunity for us to get together once a week every Tuesday at 9am. We’ll be available for any questions or concerns that you may have and share with you some of the questions and observations we’ve made in the past week or so. We hope you find this helpful and useful information. I’ve got a few observations and comments I’m going to share with you then in a fairly short order of time we will open the lines up for your questions. Right now we do have everybody muted and will let you know when you can ask questions.

The first big observation for us is we have gotten in the last six months many questions and concerns about inflation and gold than I remember getting in the last 18 years. I suspect that is due thanks to the media. The media is playing up the coming inflation, hyperinflation depending on who you see, read or hear. What we are currently seeing right now is not a whole lot of traction as far as inflation picking up. Everybody seems to feel like it’s just a matter of time before that occurs. And of course I can get you 100 different economists with a 100 different opinions as to when that’s going to happen.

What I can tell you is our supply and demand investing system is very efficient at kind of tracking inflation or at least investments that are affected positively or negatively by inflation and we are seeing just a very little slight hint of inflation starting to kick in. When it comes to goals specifically, we have never and still don’t like the idea of buying gold bullion. You know the physical hard asset. A friend of mine was telling me last week, he knows of someone that’s sitting on about 25 lbs of gold. Where they have it I don’t know. Think about what 25 lbs looks like and the next time you go to the grocery store, probably look at dog food in the huge bags to see what 25 lbs looks like and the space it would take up. The dilemma was they had a bank loan for $400,000 and the collateral for that loan was the gold. Now here’s the problem. The loan was coming due and the bank, you’ll be shocked at this, the bank didn’t want to renew the loan. Seems like they wanted the money repaid and they had been contacting I think 15 or 20 other banks to see if they would be interested in making a loan using that gold as collateral. Last I heard, no such luck. So one of the main reasons again we just can’t get too excited about anyone holding significant amounts of physical gold bullion coins is A: Where do you store it and B: When you need money or what money, it’s not the most liquid thing in the world and are you up to date on what the true value is without getting taken to the cleaner from any gold metals broker that may want to help you convert your gold to cash. But it’s understandable because we are concerned about inflation and gold has been considered as a hedge against inflation.

What we prefer instead is purchasing gold or other metals using index mutual funds and there are numerous mutual funds like that out there. Clients of ours we already have mutual funds in their accounts that have a position in metals as well as other commodities; wheats, grains and basic materials. So that’s where we stand right now with gold and inflation. I get all kinds of different opinions as far as inflations going to be modest or hyperinflation and everything in between. The matter of fact is no one knows for sure because if they did, we’d all be lined up outside their door. So something to think about.

The other thing that’s come about and we are seeing more and more of course. A low or no interest rate environment when it comes to interest rates on bank accounts, money markets, CD’s and we’ve seen and heard stories of people making maybe not the wisest of choices in an attempt to secure a little bit better interest rate on some of their savings and bank account. One example that comes to mind is someone that decided to put money into an annuity. And the annuity was paying a fixed interest rate I think at 5%. In this case there were no surrender charges or withdrawal penalties. They had already owned the annuity long enough so they didn’t have to worry about that. But, they were going to need or probably spend most of that money in the next six to 12 months. Here’s the problem; yes they are going to earn 5% on their money for let’s say six months, but when they go to withdraw from the annuity 100% of the earnings that had accumulated in that annuity come out first and is taxed at 100% as ordinary income and in this case the annuity has well over $50,000 of accumulated earnings and the deposit was way less than $50,000 of accumulated earnings. So they money they deposited last week, when they go to take it out in six months. Rather than paying tax on just the interest that money has accrued in the last six months, they are going to pay taxes on 100% of their full withdrawal amount. So we estimate they are going to pay an extra $12,000-$13,000 in income tax just to make an extra $500-$600 in interest. So be careful about jumping into things that look attractive search for high interests in today’s low interest rate environment. Especially if it seems like interest rates are on the way up.

The other area to be mindful and concerned about is bond mutual funds. A lot of people have put money into mutual funds in light of last year’s market down turn. Bonds are deemed to be safe. The problem with any bond mutual fund is when interest rates go up, the market value of that bond mutual fund is going to go down. It doesn’t matter if it’s investment grade, government, municipal type bond mutual fund, that’s just how they work. So now is not the time to be tying money up into a bond mutual fund. If you need money in bonds or other fixed interest instruments. The better approach is to own the individual bond. That way you get your money back when the bond matures. You get the interest between now and when the bond does come due and you are assured of getting your capital back regardless of what interest rates may do. Assuming of course you hold the bond to maturity.

So those are a couple of things that have come across our desk in the last week or so. I will tell you that investing, the big lesson that we all learned last year is the traditional high charge diversification, spread it all around investing clearly doesn’t work. The better approach we think and has been well served is more of a supply and demand relative strength approach and where demand seems to be right now is international equities, some areas in the U.S. basically the technology and basic materials, currencies foreign currencies and commodities. Not just oil or gold but a broad and wide variety of commodities. And that’s where we have the focus on in investment accounts that we oversee or manage for our clients and that flies in the face of the traditional high chart investing spread things around. We are following where the demand is.

Another question we get quite often is what about the future? The government is going to run everything into the ground. America is not what it use to be. What do we do about that? From an investment point of view we saw firsthand last year our investment system works quite well in determining where supply and demand is. So when the market forces dictate demand shifting from one area to another, we just simply shift to that area. Because the one thing you want to keep in mind about last year, a lot of people lost money but where did that money go? It didn’t just evaporate. It went somewhere. There are people believe it or not that made money last year. There are stories of hedge funds that made big bets against the mortgage industry and made a killing to the hundreds of millions if not billions of dollars. So the bottom line is money doesn’t just evaporate, it just gets redistributed and goes to where demand is.

With that, let’s open the lines up.

Samantha: If you have a question, please press 1 on your phone. Only press it one time or you will be removed from the que.

BF: While ya’ll are getting ready. This is our first call and we will continue these callers throughout the year. We appreciate feedback, which is helpful.

No questions?

Okay everybody. Thank you for joining us today on our weekly Coffee Crew program. We’ll be back next week at 9am Tuesday morning. In the meantime if you have any questions or concerns about your individual situation, just give us a call we will be happy to address those with you. Bye!!

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