Gary North's REALITY CHECK
Issue 398 November 23, 2004
[In this issue, I return to the Abraham Case Studies.
The testimonial deals with cheap newspaper advertising
that generates a huge return.]
SOLID GOLD REASONS TO OWN GOLD
Over a year ago, in September, 2003, John Embry published an
article, "15 Reasons to Own Gold." Mr. Embry is an investment
strategist with the Sprott Gold & Precious Metals Fund. As such,
I suppose he is not a disinterested observer. But I am
sufficiently impressed with his arguments that I think I should
pass them along.
What is amazing is that this appeared over a year ago. What
he said then is more relevant today. The dollar is lower. Gold
is higher.
I will add some thoughts after his article.
***************
1. Global Currency Debasement:
The US dollar is fundamentally & technically very weak and should
fall dramatically. However, other countries are very reluctant to
see their currencies appreciate and are resisting the fall of the
US dollar. Thus, we are in the early stages of a massive global
currency debasement which will see tangibles, and most
particularly gold, rise significantly in price.
2. Investment Demand for Gold is Accelerating:
When the crowd recognizes what is unfolding, they will seek an
alternative to paper currencies and financial assets and this
will create an enormous investment demand for gold. To facilitate
this demand, a number of new vehicles like Central Gold Trust and
gold Exchange Traded Funds (Elf's) are being created.
3. Alarming Financial Deterioration in the US:
In the space of two years, the federal government budget surplus
has been transformed into a yawning deficit, which will persist
as far as the eye can see. At the same time, the current account
deficit has reached levels which have portended currency collapse
in virtually every other instance in history.
4. Negative Real Interest Rates in Reserve Currency (US dollar):
To combat the deteriorating financial conditions in the US,
interest rates have been dropped to rock bottom levels, real
interest rates are now negative and, according to statements from
the Fed spokesmen, are expected to remain so for some time. There
has been a very strong historical relationship between negative
real interest rates and stronger gold prices.
5. Dramatic Increases in Money Supply in the US and Other
Nations:
US authorities are terrified about the prospects for deflation
given the unprecedented debt burden at all levels of society in
the US. Fed Governor Ben Bernanke is on record as saying the Fed
has a printing press and will use it to combat deflation if
necessary. Other nations are following in the US's footsteps and
global money supply is accelerating. This is very gold friendly.
6. Existence of a Huge and Growing Gap between Mine Supply and
Traditional Demand:
Gold mine supply is roughly 2500 tonnes per annum and traditional
demand (jewelry, industrial users, etc.) has exceeded this by a
considerable margin for a number of years. Some of this gap has
been filled by recycled scrap but central bank gold has been the
primary source of above-ground supply.
7. Mine Supply is Anticipated to Decline in the next Three to
Four Years:
Even if traditional demand continues to erode due to ongoing
worldwide economic weakness, the supply-demand imbalance is
expected to persist due to a decline in mine supply. Mine supply
will contract in the next several years, irrespective of gold
prices, due to a dearth of exploration in the post Bre-X era, a
shift away from high grading which was necessary for survival in
the sub-economic gold price environment of the past five years
and the natural exhaustion of existing mines.
8. Large Short Positions:
To fill the gap between mine supply and demand, central bank gold
has been mobilized primarily through the leasing mechanism, which
facilitated producer hedging and financial speculation. Strong
evidence suggests that between 10,000 and 16,000 tonnes (30- 50%
of all central bank gold) is currently in the market. This is
owed to the central banks by the bullion banks, which are the
counter party in the transactions.
9. Low Interest Rates Discourage Hedging:
Rates are low and falling. With low rates, there isn't sufficient
contango to create higher prices in the out years. Thus there is
little incentive to hedge, and gold producers are not only not
hedging, they are reducing their existing hedge positions, thus
removing gold from the market.
10. Rising Gold Prices and Low Interest Rates Discourage
Financial Speculation on the Short Side:
When gold prices were continuously falling and financial
speculators could access central bank gold at a minimal leasing
rate (0.5 - 1% per annum), sell it and reinvest the proceeds in a
high yielding bond or Treasury bill, the trade was viewed as a
lay up. Everyone did it and now there are numerous stale short
positions. However, these trades now make no sense with a rising
gold price and declining interest rates.
11. The Central Banks are Nearing an Inflection Point when they
will be Reluctant to Provide more Gold to the Market:
The central banks have supplied too much already via the leasing
mechanism. In addition, Far Eastern central banks who are
accumulating enormous quantities of US dollars are rumored to be
buyers of gold to diversify away from the US dollar.
12. Gold is Increasing in Popularity:
Gold is seen in a much more positive light in countries beginning
to come to the forefront on the world scene. Prominent developing
countries such as China, India and Russia have been accumulating
gold. In fact, China with its 1.3 billion people recently
established a National Gold Exchange and relaxed control over the
asset. Demand in China is expected to rise sharply and could
reach 500 tonnes in the next few years.
13. Gold as Money is Gaining Credence:
Islamic nations are investigating a currency backed by gold (the
Gold Dinar), the new President of Argentina proposed, during his
campaign, a gold backed peso as an antidote for the financial
catastrophe which his country has experienced and Russia is
talking about a fully convertible currency with gold backing.
14. Rising Geopolitical Tensions:
The deteriorating conditions in the Middle East, the US
occupation of Iraq, the nuclear ambitions of North Korea and the
growing conflict between the US and China due to China's refusal
to allow its currency to appreciate against the US dollar
headline the geopolitical issues, which could explode at anytime.
A fearful public has a tendency to gravitate towards gold.
15. Limited Size of the Total Gold Market Provides Tremendous
Leverage:
All the physical gold in existence is worth somewhat more than $1
trillion US dollars while the value of all the publicly traded
gold companies in the world is less than $100 billion US dollars.
When the fundamentals ultimately encourage a strong flow of
capital towards gold and gold equities, the trillions upon
trillions worth of paper money could propel both to unfathomably
high levels.
http://goldmoney.com/en/commentary/2003-09-26.html
***************
WAYS TO OWN GOLD
There are many ways to own gold. The best way is to buy a
few one-ounce gold coins, preferably American eagles if you're in
the United States, or Canadian maple leaf coins if you're in
Canada. With one-ounce coins, you pay the lowest commission.
The trouble with gold coins is also their advantage: they
are in your possession. They can be lost or stolen. They must
be mailed back to a coin dealer to sell them for money. There
are commissions to pay. But, in a time of national crisis, coins
are the best way to hold gold for the small investor.
In a true panic, you will have a problem selling -- not
because of low demand but the opposite: you won't be able to get
through on the phone. There are probably fewer than 400 full-
time retail coin dealers in the country, and most of them are
small operations. This number must serve up to a hundred million
American families. If one percent of these families ever decide
to buy a single one-ounce coin during a panic, the phone lines
will jam up.
You can buy gold shares. This is the standard approach of
most investors. The problem is, you're not buying gold. You're
buying a company that says it has gold in the ground. You are
also betting on future mining costs, management skills, and the
possibility than the company has already sold its output for a
fixed price.
You can buy small gold units (grams) at a company like
GoldMoney, which holds the gold in a bonded warehouse outside the
United States. GoldMoney uses a warehouse in London. Using
digital accounts is convenient. Commissions are low.
Transactions are easy. You can take delivery of your gold.
You must pay storage fees, which is evidence that your gold is
really there. There are no free lunches and no free vaults.
There is a fund, the Central Fund of Canada, that holds
mostly gold and some silver bullion. The prices of the two
metals move in tandem most of the time. Owning shares of this
fund is a surrogate for owning physical gold.
Recently, a new firm has been approved by the Securities &
Exchange Commission to trade in units of gold as low as a tenth-
ounce: streetTracks Gold Trust (GLD). This firm is part of the
World Gold Council. It is receiving considerable publicity. It
is likely that Americans who are looking for an easy way to
participate in the rising price of gold will use this firm. If
the firm becomes profitable, there will be imitators.
Always remember: if there is no proof of physical possession
of gold, and if there are no storage charges for gold held in
reserve, then you may be trading a futures contract, which is a
promise to pay gold on demand. Promises to pay are never as
reliable as gold in hand. Third-party verification of gold held
against receipts issued for gold becomes important.
I think an electronic approach to holding gold is the wave
of the future. There will come a day when banks and other
financial services companies will offer these services. But that
change will require a few currency crises that will catch the
attention of people with money.
I follow the comments of James Turk, who founded GoldMoney.
http://www.goldmoney.com/en/commentary.php
I have known Turk for several years, and I have read his reports
for much longer.
You should ask yourself what you are hedging against.
Answers include the 15 reasons in the report, plus these more
specific ones:
Dollar inflation/depreciation
Terrorist attack on the U.S.
Crisis in the bank payments system (cascading defaults)
Retirement
Capital gains taxation rather than ordinary income taxation
Speculation: Asians may start buying gold
You should also ask yourself this question: "What do I
intend to do with my gold?" Answers include these:
Hold it as a speculation: buy low, sell high
Hold it as a way to pass down wealth to my heirs
Hold it as a way to hedge against a monetary disaster
Hold it as a way to avoid paper trails
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-----------------------
WHAT IS THE DOWNSIDE RISK?
The standard ones are these:
Net central bank sales of gold to public
Recession reduces price inflation
Recession reduces demand for commodities
Asians turn out to love paper money more than gold
Government outlaws gold for Americans
Gold-owning Americans actually obey the government
The political pressure is very strong to keep a higher price
of gold from identifying reduced confidence in the dollar. We
have seen the government take steps to push down gold's price.
But the government also sells gold coins. It maintains the
official position that gold is not relevant for monetary affairs.
To outlaw gold would be to admit that gold is relevant. This
might turn into a gold-buying panic. Because Americans can
easily buy and sell gold on the Web, there are ways for people to
evade the law.
A worldwide recession is possible if China suffers a major
recession. China at some point will have to go through a
recession because of today's inflationary policies. But the
question is: When? Gold may fall 30% from $700 an ounce. If you
have no gold, it's not wise to bet the farm on a fall in price.
Besides, if gold falls, you'll probably think, "It's going to
fall even more. I had better wait."
CONCLUSION
People postpone doing what they don't really want to do.
They don't want to take action that implies that the present
system is shaky, that the government is following policies that
will debase the currency, and that there is no way for the
government to preserve the purchasing power of the dollar by
anything other than ceasing all monetary expansion, which the
Federal Reserve System never does.
I suggest that you re-think all of the reasons you have come
up with for not buying gold. See if they still make sense in the
light on the 2003 article at the beginning of this report.
***************
Appendix 104
Abraham Case Study #443 comes from a man who runs a
conventional small business, a house-cleaning service. Because
two-income families are short on time, they are ready to buy
time-saving services. House cleaning is a nice little cottage
industry because there is steady demand and because nobody in
China or India can enter the local market. The business owner
was opening a new service locally. The testimonial reveals:
I have three rules I use in marketing.
1. "Hit em' with a headline"
2. Address a desire, fear or problem
3. Make an offer
These are conventional direct-response advertising rules,
but they are rarely used. Most ad agencies are unfamiliar with
direct-response advertising. Those that are familiar with it do
not adopt it because it does not produce awards for artistic
creativity. So, a person who understands direct-response
advertising has an advantage. A small business owner has a
tremendous advantage: he will not be imitated. Competitors do
not know the rules.
I applied these three rules to a one-inch by column
inch in the Orlando Sentinel small business section.
Maid Service Half Price, We're Not Kidding!
From $25. Opening on Friday. FREE phone quote. 1st time
savings 800-YYY-ZZZZ
Ok, let's examine this ad. The headline gets attention.
How many of you would continue to read? Ah-ha, all of
you.
This is incorrect. Very few people would continue to read
the ad -- specifically, only those people who today are looking
for a maid service. But these are the targets for the ad.
Next we proved the price out by placing "from $25."
The more specific the price offer is, the more interested
will be those readers who are willing to pay this price or less.
A specific price catches the attention of specific readers. You
cannot afford to pay ad rates sufficient to catch the attention
of general readers. They are too difficult to motivate. You
will lose money.
Next we know that everyone wants Friday.
Why does everyone want Friday? I don't know. It has
something to do with the industry, I suppose. The owner knows
his business, so he made a day-specific offer.
Free Phone quote is something that makes it very easy for
reader to call.
Free anything beats something with a price. This is the
only known exception to the law: "You can't beat something with
nothing." Nothing -- the big zero -- sells.
1st time saving tells them "you gonna get a deal."
This is the reason-why. You should always offer a reason-
why when you offer a special deal. It reduces the buyer's
skepticism.
Granted I did not address the #2 in the ad but we did
when the caller on the phone.
Remember, #2 is "Address a desire, fear or problem." If you
are short of advertising space, you can skip this. The reader
will then supply his own desire, fear, or problem -- anyway, you
hope he will.
We then explained what we did. In this case it was this
scripted statement, "We do the most difficult cleaning,
the kitchen and bathrooms only, for half the price of
full service. We can do full service for just a few
dollars more."
This script up-sells the buyer. It's not bait and switch.
The seller really does sell the $25 bare-bones service. But the
buyer may want more. Offer her more.
Here's the cool part. How many of these clients do you
think took the kitchen and bathroom service only?
One!!! and even that one, a few months later, became a
regular client. . . .
Results: The ad ran 7 days a week for a totally monthly
cost of $128.00. Our sales for the month $6,000! Our
retention rate or those that became repeat clients was
70%. The 70% is where the income really comes from, of
course.
The small ad's task is to generate the phone call. The
phone call's task is to present the up-sell and an opportunity
for the buyer to take action.
When our yellow pages ad broke a few months later we
used the same headline. However, we disclosed the #2
since we had the room within the ad.
Some of you are aware that I am a believer in academic day
care centers as cash cows: $4,000 to $6,000 per year per student,
with a minimum of 120 students per facility. I am presently
negotiating for a 2-acre piece of land for a day care facility.
I figure that on the real estate alone, I can make 18% per annum
from rent, plus own an appreciating asset. In addition, the day
care business itself should generate $100,000/year, net, when the
facility is filled.
If you have read the chapter on advertising in Rev. Nick
Kozel's free manual on starting an academic day care, you know
that this same strategy is used:
1. "Hit em' with a headline"
2. Address a desire, fear or problem
3. Make an offer
The headline's goal is to generate a phone call. The phone
call's goal is to get the mother into the day care for a visit,
where the director makes the sale. To see the details of this
advertising strategy, download the manual here:
http://www.demischools.org/layman.html
-------------
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