Monday, October 26, 2009

Gold Trying to Consolidate?

The price of physical gold has hovered around $1050 per ounce for the past 2 weeks. The big question would be, "Where is gold going to go from here?" Of course, it is anybody's guess, but let's look at a few of the factors that might provide some indication as to what the next step might be.

1. Economy not getting markedly better

The economy is still in danger, and I don't see it improving significantly any time in the near future. I suspect there will likely be additional stimulus that might be required if the economy is to grow again. This economic weakness and the potential need for stimulus will continue to put pressure on the dollar which is favorable for gold.

2. Commercial real estate risk

There has been lots of talk about risks in commercial real estate. The general impression is that the commercial real estate market will start seeing increasing levels of default as the consumer continues to reign in spending. Consumer spending may not continue to decrease, but I sure don't see it increasing any time soon. This economic crisis has been more severe than most of us have seen in a lifetime. I am trying to minimize my spending since I know that my taxes and education costs will continue to increase. I will be trying to make my cars last 6 or 7 years instead of replacing them at 4 or 5.

3. Season of the year

This is typically a strong season for gold since the Indian harvest and wedding seasons occur at this time of the year. However, there has been a drought in India this year, and I suspect that farmers will not have a lot of money that they will need to exchange into gold. The high prices will also suppress demand. Normally, you would expect gold to be strong from November through February or March. It might be tough to accomplish this year.

When I look at all of these factors and more, I suspect that some will pull gold up and some down. The net effect is that I see gold consolidating and trading in a range between $1000 (possibly $980) and $1070 for the next several months. Of course, I could be wrong. I am surprised that it has been as stable as it has been over the past few weeks. In the meantime, continue to acquire funds that can be used to invest in gold and gold shares in the future.

Until next time--Keep it REAL!

Tuesday, October 20, 2009

My Philosophy on Real Estate

Here in central Indiana, it is unlikely that we will ever see the type of crazy appreciation of real estate that was seen on the coasts. There are several reasons for this:
  1. It is difficult to attract population growth. We don't have the beach or mountains or any other topographical feature that would be considered desirable.
  2. As a result of number 1, it is easy to build new houses. Just buy up a farm field and start building. There are no physical restrictions that make the land especially scarce. In fact, builders over-built so there are currently a glut of homes.
  3. Lack of major industry growth. There just aren't a ton of jobs being created. When the United Airlines hub pulled out in the early 2000's, lots of homes went into foreclosure adding to the overbuilding glut. We just don't need any more houses for awhile.

Because I can't count on appreciation, I have to look to cash flow for real estate profits. Even that can be difficult since the ready availablility of housing has kept rents fairly stable. When insurance and property taxes increase, that puts pressure on cash flow.

It has been my hope all along that the majority of my real estate expenses can be paid by tenants. Sure, I will have to come up with the occasional repair bill, but my goal is that at the end of the 30 year fixed mortgage (about the time of retirement), I will have a steady cash flow that can be used to supplement my retirement income.

It may take a year or two to get back all the cash I put in, but after that the investment will more than pay for itself. It can be difficult to take such a long term approach to investing in this day of immediate gratification. But, I would urge you to look to the future in 10, 20, and 30 years when you invest.

Consider that when investing in real assets. Will this company be around in 30 years when looking at the stocks and bonds of that company? It may be hard to say. Will this piece of land still be here in 30 years? Likely. Will this gold coin still be here in 30 years? Likely. And not only that, the land and gold will have some value. So if I can simply get the majority of the expenses paid over the 30 years of being a landlord, I will end up with a property which throws off cash or could be sold. I like the thought of that.

Until next time--Keep it REAL!

Wednesday, October 14, 2009

Turning On the Heat

When my daughter came to me wearing a knit cap and scarf two days ago asking why it was so cold in the house, I broke down and turned on the heat. I had to agree that it felt kind of chilly. It turned out to be 62 degrees. It is a balmy 69 degrees now.

Our heat is natural gas, and I always hate turning it on since I know that my gas bill will skyrocket in the next month and cost as much as a small car payment for the next 6 months. Have you noticed that the price of natural gas has gone up almost 25% in the past month? Just in time for winter.

Have You Hedged Your Living Expenses?

I suppose that is OK that natural gas is rising. Even though my heating bill will go up along with it, I will benefit more from a higher price since I own natural gas. No, I don't store it. I own a natural gas company's stock, Chesapeake Energy (symbol CHK). Every time natural gas prices go up, CHK tends to go up as well. It usually goes up more. In fact, I have some shares that I bought at $14.98 in March. Now, CHK is nearing $30 per share. Over the past month, CHK is up about 25% as well.

So, my question is: How have you hedged your living expenses? Do you drive a lot and use gasoline? Buy Exxon Mobil (XOM). Worried about food costs? Buy Kellogg (K) or Pepsi (PEP). Health care costs got you down? Buy stocks in the health sector that are making money hand over fist. Look at what expenses you have that might be impacted by inflation. Then look at which companies might benefit and purchase their stock. It is a lot easier to do that than keeping a grain silo or oil tank in your backyard. Plus you still benefit from increased prices.

So, don't get sad that you have to turn on the heat. Smile and think about all your neighbors turning on their heat and becoming your customers.

Until next time--Keep it REAL!

Monday, October 12, 2009

Getting Exposure to Gold

Purchasing physical gold can be difficult if you have to drive to a gold dealer, look through the inventory and then purchase your gold. You can buy gold online through several dealers as well. The problem is that you will pay a premium to the spot gold price when you buy and will get less than the current spot price when you sell. It is not easy to get in and out of physical gold rapidly. That is not to say that owning physical gold is not useful. It is just not for trading the gold price. I own physical gold but to get exposure to the record gold prices today, I own shares of gold mining stocks.

Why I Like Gold Mining Shares

I like the gold mining shares for several reasons:
  • I get exposure to the gold price. If gold is up, usually gold mining shares are up as well.
  • I can trade in and out relatively quickly and online through an online broker.
  • I can get portions of an ounce of gold. Rather than come up with $1000 to invest at a time, I can purchase a few shares when I am able.
  • The exposure I get can be leveraged. This is good when gold is up, but can be bad when gold is down.
  • Some gold shares pay dividends.
  • I can use options to hedge my gold exposure.

Currently, I own Goldcorp (GG) and Yamana (AUY). I have owned GG for almost 3 years now. The physical gold price is up 24% over the past year. GG one year ago closed at $24.70 and is trading now at just over $42 per share. That is an increase of 70%. See what I mean about leverage to the physical gold price. This is because most gold miners have fixed costs for mining an ounce of gold. Every time the gold price goes up, that usually goes straight to the profit column.

I have written several articles about investing in gold which you should check out:

Is investing in gold at record prices a good idea?

6 reasons you should invest in gold now

These are good articles that you should read. Feel free to look at some of my articles at HubPages as well. I strongly believe that everyone should have some exposure to gold, both through physical gold that you purchase to hold and through mining company shares that you can trade easily.

Until next time--Keep it REAL!

Tuesday, October 6, 2009

Gold At Record High

Have you been following gold recently? It surpassed the previous record set in March 2008, hitting an intra-day high of $1045 per ounce. The purpose of this blog is to discuss real assets such as gold which will maintain their purchasing power over the longer term. Gold is mainly up because the dollar is down. This means that it takes more dollars to purchase things on the world market.

It will take more dollars to purchase a barrel of oil. It will take more dollars to purchase that foreign automobile. The dollar is worth less today than yesterday and now has less purchasing power. Did your salary go up? Did you make more today than yesterday? You can bet with oil going up that a gallon of gas will cost more in the next day or so if not on your way home from work.

Why is it that gasoline can spike up by 30 and 40 cents per gallon overnight but never fall more than a few cents at a time? That certainly irritates me. Maybe I just ought to own a gas station or at least stock in an oil company. That way when the cost of oil goes up, I will be sad because I will pay more at the pump, but happy because my investments are worth more.

Another good reason to own real assets! So, the question is: Are you sad because the dollar is down? Or happy since gold is up? I'm happy today.

Until next time--Keep it REAL!

Saturday, October 3, 2009

Getting Exposure to Real Assets

There are several different ways to get exposure to real assets. This post will be a generalized introduction to the myriad ways that an investor can get exposure to real assets and benefit from the inflation that has become a constant companion of paper currency. Later on as this blog develops, I will discuss specific real assets in detail and ways to invest in those specific assets.

Ways to Get Exposure to Real Assets
  1. Direct ownership. This is the easiest to understand. If you own a piece of real estate outright, then you benefit directly from the increase or decrease in value of that piece of property. Owning a small apartment building, for example, will allow you to rent out the apartments, collect the rents, pay expenses from the cash flow and profit. You will also benefit from any increased value over time. Owning an ounce of gold or silver means that you directly benefit from any increase in the price of gold or silver over time.
  2. Leveraged ownership. This is often a way that investors may benefit from appreciation of an asset over time. However, over leverage can be problematic in times of falling values and depreciation as the recent experience for many in real estate would illustrate. It is important that an investor not use too much leverage. That is a topic for another post.
  3. Partnerships. You may not have enough money to purchase a real asset outright. Another possibility to gain exposure with or without the use of added leverage is by partnering with other investors to invest in a larger asset than you could afford yourself.
  4. Paper control. There are several sub-categories and examples that could fall under this heading. This might include stock in companies with a large collection of real assets such as real estate investment trusts. It could include exchange traded funds, like the gold ETF, GLD. It could include options or futures contracts. The main point is that while you don't directly control or own the particular asset, you can benefit from changes in asset pricing and inflation.

These are just generalized examples of how to gain exposure to real assets that should hold their value over time. This blog is devoted to looking at real assets, gaining exposure to those assets, and benefitting over time from their increased prices while maintain long term purchasing power and lifestyle.

Until next time--Keep it REAL!

Thursday, October 1, 2009

Inflation Risk and Your Retirement Investments

There are many different risks that must be considered when investing. The risk of loss of capital or default, the risk of the volatility of the asset, and the risk of foreign currency fluctuations are just a few. But one that is often forgotten about is the risk of inflation. Inflation is like a cancer. Even though it seems as if the value of your investment is increasing, your total purchasing power is decreasing.

Net Worth Means Nothing

People like to think of net worth and being a millionaire when they retire. Being a millionaire now means a lot less compared to what it used to mean. One million dollars 1980 is like having between $2 million to $3 million today. One million in 1940 is worth about $15-30 million today. Here is a fun site that you can play around with:

It allows you to compare the value of the dollar from different years in the United States from 1774 to present day. After looking at the difference from 1940 to 2008 compare a similar time period from 1840 to 1908. Look at the change in value of the CPI. There is really not much difference from $1,000,000 to $1,064,439.

The answer to that $64,000 question (pun intended) is that the United States was on a gold standard during the 1800's. The value of the dollar was fairly constant. It was impossible for the government to simply print more and more dollar bills or add some zeroes to a computer entry and create money out of thin air. The paper money that was circulating actually represented gold and silver in a vault. The paper was like a receipt and was redeemable for gold. If the bank didn't have enough gold, then a "run" on the bank occurred, and the banker was out of business.

Purchasing Power

Now, however, the value of the dollar is not constant and can fluctuate relative to many other goods and services. So instead of thinking about how much your investments and savings are worth, you need to think about what they can purchase in terms of food, clothing, shelter, transportation, health care, and travel that you would want to consume during retirement.

Real assets are valuable and tend to keep pace with inflation since people can relate to their value and have a good idea what they are worth. Is a cheeseburger worth $2? You might say yes if you make $8 per hour so that the cost is only 15 minutes of your time. But if $2 was a monthly wage, you wouldn't think so. Would you like to make $10,000 per hour? Of course, unless gasoline cost $100,000 per gallon and that same cheeseburger also cost $100,000.

As you can see, paper currency means little. The values are simply relative and are changing over time due to inflation. Do you really think a gallon of milk will ever cost under $1 again? Unlikely. That is why you want to own investments that will maintain their purchasing power in 30 years when you retire. You want to be able to afford that gallon of milk.

Forget Milk, Got Gold or Silver

I don't have any idea what milk will cost in 30 years when I am retired. I also have no idea what an ounce of gold or silver will cost at that time either. But, I do know that an ounce of silver would be worth about 4 or 5 gallons of milk. I know that I could trade that ounce of gold for about a month's lodging in an apartment. That has certainly been my experience over the past 20 years as I share with you here: Gold, Silver, and Pepperoni Pizza

So, to sum up. Inflation is a cancer which erodes purchasing power. Real assets tend to increase in cost with inflation and will maintain purchasing power. Net worth means nothing. Get exposure to real assets. Next time I will be discussing how to get exposure to real assets.

Until next time--Keep it REAL!

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