And what is happening in the world of gold?

The biggest question that has been on everyone’s mind this past year is why public interest in gold & resource stocks has been dead while the price of gold has been strong & well over 400 dollars an ounce. Don’t believe this has ever happened before. But I think I’ve discovered the answer to this mystery. Consider the following bit of interesting statistical data I came across this past week.

Last year 31% of all U.S. mortgages were interest only loans.

What this speaks in volumes, & shouts at the top of its lungs, is the fact that home owners are totally confident that this real estate market bubble is going to continue forever higher. If you trust beyond any doubt that your house is going to continue to dramatically & significantly rise in value every year then why not get an interest only loan?

Do you see the psychology in play here?

While of course not every home owner is participating in investing in real estate for immediate gains I do believe that every home owner/investor has come to view their home as an investment vehicle. And this “investment” vehicle – the home – everyone believes today will inevitably rise in value & one day will take care of their financial needs upon retirement. And under these circumstances who needs gold?

You’ve got to run out & buy the May 30, 2005 issue of Fortune magazine. There is an article titled “Real Estate Gold Rush” that does the most remarkable job yet of describing the psychological expectations of the typical American investor & home owner today.

And if you buy this issue of Fortune magazine pay very close attention to the pictures of the real estate speculators on the front cover. The emotions that literally explode off of their faces are arrogance, greed, pride & over confidence. And I would be willing to bet that these same emotions are shared by the majority of all home owners today who are sitting smug in their confidence that their home has come to represent their principal & primary personal & DEPENDABLE investment vehicle.

“Everyone now believes the economy can be manipulated, guided, and directed towards any outcome the central (bank) planners want!” “…we have a no-fault economy!” Bill Bonner, Daily Reckoning, 6-13-2005

Investors represent 23% of the home buying public according to the National Association of Realtors. Is there really a real estate bubble today or are present day real estate prices normal & “sustainable”?

While writing this a friend at church told me of his family’s visit over the weekend to a little town called Lexington. This town is about an hour outside of Columbia, South Carolina & basically out in the sticks & in the middle of no where. The big story shared was of a local who had recently purchased a parcel of land in the area. He had divided the property up into 75 small parcels & selling each of these tiny lots for $300,000 to $350,000 dollars each.

How was he able to command such an exorbitant price for these lots? Well, the property was approximately one hour drive from the bustling metropolis of Columbia, South Carolina. Population - a little over 100,000 souls. And in the area close to these lots was the “world renowned” Lake Murray – actually a local water hole owned by the resident utility power company. The area & the lake’s greatest distinction is that the land was once inhabited by the Catawba & Cherokee Indians.

An Internet site dedicated to senior citizens describes the area as follows:

“…very isolated…” “…poor transportation links to the rest of the world & limited essential services.” “Isolation also affects the cultural and recreational opportunities. There is no city in the region with outstanding opportunities for major cultural events or spectator sports.” “The cost of housing is very low…” “Education is not a strong point in this region.” “This is one of the lowest levels of educational attainment among all the regions in the country.” “Ten of the cities in our regional sample have far-above-average numbers of production workers and five of these also have a high number of agricultural workers.”

So, an area known for its high rate of “production” & “agricultural” workers is selling teeny housing lots for $350,000 dollars a crack. And of course most of the buyers of these lots are young people buying for “investment” purposes. Are we in a bubble presently? You better believe we are in a bubble & right at the extreme edge of its limit.

Again, as I said earlier – who needs gold investments if you believe your house is going to one day make you wealthy. But I really feel that we are close to the extreme top in this market & I am betting that by this winter later in the year we will see this bubble pop. My personal gut instinct is telling me this real estate bubble is on its last legs & may just see its conclusion by the end of 2005.

And how hard is this fall going to be when it comes?

“Economists at the International Monetary Fund -- which to its credit has been warning about our housing bubble for some time -- have estimated that its collapse could have as much as twice the negative impact on the U.S. economy as did the stock market crash in 2000-2002.” businessweek.com

Consider that most of these properties being purchased today are being done so with adjustable rate mortgages. Again, I highly urge you to purchase this Fortune magazine issue - May 30, 2005 - to read what I consider to be an enlightening expose on this real estate bubble’s last leg.

Any of you been to the grocery store lately?

Went for a haircut last week & upon exiting thought I would run in the local Publix grocery store next door for a couple of things. Ever run into the store to pick up just a “couple” of items? Several minutes later the buggy was full & I was looking at what I guessed was 150 bucks of a “couple” of items. As I was standing at the register waiting for the cashier to finish scanning the groceries my mind wandered back 40 years or so back when I would go to the store as a kid with my mom at the local A&P.

Remember those “8 O’ Clock” coffee machine grinders your mom would load the coffee beans into & then she let you flip the big switch to grind it?

Its funny how sometimes in just a sudden moment of time our thoughts & memories can carry us back 40 years to memories & smells we thought were long forgotten. Remember that long ago coffee smell as those beans were being ground? Remember how long it took in those days for the cashier to ring up the groceries especially with a full buggy load? Those canned vegetables, etc had to be entered individually & one can at a time. A process that seemed to take forever when you had a full buggy.

But in those days there was no fancy high tech scanning technology so we were dependent on the cashiers manual & expert dexterity to punch in the price of that loaf of bread, the ground hamburger & the bottles of Coca Cola or cases. Remember buying Coke on sale & carrying those bulky wooden bottle cases out to the family car? Not today though as everything is plastic including those bottles of Coke. Don’t think I will ever in my life time get used to drinking coke out of a plastic sterile disposable bottle.

And of course there was always one can without a price on it & the cashier had to speak over the store intercom to get a stock boy to run back & see what the price was. And the time passed slowly & you looked at the magazines to pass the time or engaged in small talk with the cashier. It was an opportunity to collect your thoughts & relax while this lengthy checkout procedure went on & on. You looked around at the other shoppers & gazed at what was in their buggies & you watched the methodical & exact art of cans & cereal boxes being stacked in those old fashioned paper sacks.

Remember the paper sacks that grocery stores used in those days? It was kind of a science & an art to open each one individually to begin the methodical process of stacking neatly the vegetable cans & cereal boxes & all. But there is no art form to merely dumping groceries in a sterile plastic bag. How much is forever lost & gone because of new advanced technology?

And while I continued to stand there with my memories of long ago in an A&P store the cashier had already finished checking my groceries & had moved on to “scanning” the next customer’s groceries & I was in the way & holding up traffic. Notice the word today is “scanning”? What a cold & digital & computerized term. I guess that is what makes gold so beautiful & long lasting. It has an appeal that continues to stretch though all the ages regardless of advancing technology.

I still attest that our world has changed & is presently changing even significantly further. But how many people “get it?” 

Remember Charles Schwab? He built the first discount brokerage firm by offering to sell stock to the masses (middle class). And now the company - since the crash of 2000 - flounders & their stock has plummeted from over 50 bucks to around 10 dollars a share. And the stock market bull simply moved next door to the real estate market & the housing bull will also soon pop, but do they get it?

”Part of the bubble's expansion is explained by the enormous wealth of the stock market spilling over into real estate…” By Mark Weisbrot, 4-12-2004

Mr. Schwab has recently come out of retirement in an attempt to save the company & what advice is he providing for the middle class today?

“…unload their stock & buy real estate.” By Betsy Morris, Fortune, 5-30-2005

I like that last recommendation – “…buy real estate.”

Again, I don’t care how successful these guys have been in the past they just are not recognizing the developing trends around us. Since the crash of 2000 there has still been fizz in the bottle but this fizz has been carried forth by the real estate bubble which is soon to crash big time.

The article goes on to demonstrate how Schwab is driven still to help the middle class increase their wealth. So was Schwab recommending gold & resource stocks when gold first moved from $255 an ounce to over $350 an ounce & the first gold fortunes were made a couple of years ago? No, as I said these guys just don’t get it & never will because their arrogance blinds them to the real trends that are shaping our world today.

“To get out of the recession, he (Greenspan) had to rely on, stay mum about, and even encourage a housing bubble. Now, that very bubble may be the thing that destroys the recovery he has sought to create.” Benjamin Wallace Wells, Editor of Washington Monthly

Oh, by the way…for you gold doom & gloomers gold is truly strengthening as the information below demonstrates.

“Gold priced in euros hit it’s highest ever on Monday…” “Traders said gold also gained in other currencies as uncertainty in foreign exchange markets attracted buyers.” “Bullion prices have recently loosened a tight link with the dollar/euro, showing independent strength despite a stronger U.S. currency.” "I actually think that for the first time during this entire rally, you could argue that gold is genuinely benefiting from concerns people have about currencies," said Kamal Naqvi, precious metals analyst with Barclays Capital.“ “Analysts say a true bull market is when a commodity rises in all currencies.” "Certainly there would appear to be room for further upside in the gold price if the tight relationship between gold and the euro/dollar rate has broken down," Alan Williamson of HSBC said.” "Any further advance is likely to start triggering renewed momentum and technically driven buying," he added. By Clare Black, Reuters, 6-13-2005

Why do you need to begin successfully investing in “other channels?”

“GOP Senators May Make 69 Retirement Age” “Key Senate Republicans are considering gradually raising the Social Security retirement age as high as 69 over several years…”“Along with curbs in benefits…” By David Espo, AP, 6-14-2005

And getting back to 2005 what lies in store for our future? For your future & your family’s future? Again, my recommendation is to look at existing trends & evaluate where we are heading as a people & an economy. Might be a good idea to take out some portfolio insurance if you do believe there are storm clouds on the horizon. And there will never be a greater & more efficient insurance to protect one’s portfolio & financial future with than gold related investments.

"The art of getting rich consists not in industry, much less in saving, but in a better order, in timeliness, in being at the right spot. RALPH WALDO EMERSON 1803-1882

© 2005 David N. Vaughn
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