How real and safe are your retirement savings?

“The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.”

“Deficit spending is simply a scheme for the “hidden” confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statistician’s antagonism toward the gold standard.”

“Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues...”

Mr. Alan Greenspan, Chairman of the US Federal Reserve Board from August 1987 to January 2006, wrote these words in 1966 for Ayn Rand’s newsletter, The Objectivist. He was a young man then. He went on to preside over the biggest expansion of money and credit in the history of mankind - money and credit NOT backed by gold, or anything else other than a governments “promise to pay”!

What does that mean for you and your savings in 2006?

No currency in the world today is redeemable for gold. Up until August 15th 1971, the US Dollar (the global reserve currency) was redeemable for gold at $35 per ounce, but Nixon “closed the gold window” and detached the US Dollar from gold altogether. In the years that followed, all other currencies have been “floated” or linked to the USD and can only be measured or valued against other “floating” currencies or the USD itself.

Many people still believe that the ‘gold reserves’ held by their national treasury somehow back the currency, but your saved Dollars or Pounds or Ringgit are not ‘redeemable’ for a fixed measure of gold anywhere in the world. Sure, you can trade your local currency for gold at the ‘spot price’ on any day, but do not be fooled into believing that there is any connection between your cash savings and the gold in the treasury vault.

There has never been a time in history like now, where no currency anywhere, has any link to gold. The only way to get a connection with gold today is to part with some currency and buy it yourself - while it is still cheap!

But what exactly would you buy? The yellow metal itself in physical form (meaning gold bars or coin) or paper claims to gold in the form of futures and derivatives…? Just what is a paper claim to gold redeemable for? Is it physical gold itself, or is it just currency? If it is just currency (which applies to futures and derivatives) it is currency without any asset backing whatsoever and subject to the vagaries and fluctuations of the currency markets and you still have nothing tangible until you take the cash and buy some physical gold (or other tangible asset) with it.

Another option is to buy shares in gold producing companies. Shares could also be described as just a paper claim to gold, but they have the important distinction that as part ‘owner’ of the company that ‘owns’ the plant, inventory and reserves underground, you still have title to physical assets. A thing to be careful of with shares in gold companies is to be sure that the company has not ‘hedged’ its position, by pre-selling its reserves in the future at a fixed price. This was a common practice during ‘bear market’ era of falling gold prices between the all time high on January 21st 1980 of $850 per ounce and the commencement of the current ‘bull market’ era of rising gold prices since early 2002.

Hedged gold producing companies cumulatively carry billions of dollars of future losses on their books. In the search for ‘unhedged’ gold stocks to buy, a great place to start the search is the HUI Index. Referred to as the Gold BUGS index (Basket of Unhedged Gold Stocks), these companies’ have resisted the temptation to hedge in the past and their future profits in a rising market will not be affected in the same way as hedged companies’.

Buying unhedged gold stocks, which involves physical assets, directors, management, employment, real profits and a positive contribution to the community and the economy, cannot be compared with the casino like leveraged alternatives of futures and derivatives and all of the associated risks (like devastating margin calls in a market correction) when gambling with borrowed money on a small deposit.

Despite the recent severe corrections in the price of gold in May and June 2006, gold has significantly outperformed the FTSE, Nikkei, All Ords, Dow and the $US Index. Gold has performed at more than 300% higher than the $US Index. The reason for that is that gold itself is and has always been “real money” throughout recorded history. To even contemplate a secure financial future without some real money of your own is more than a risk, it is pure folly. Gold today is still one of the cheapest ways of acquiring wealth. Taking the devaluation (inflation) of the US Dollar since 1980, the 1980 gold price high of $850 in today’s dollars, is well over US$2000, so gold at less than $600 today is very cheap indeed.

Gold today is still one of the cheapest ways of acquiring wealth. Taking the devaluation (inflation) of the US Dollar since 1980, the 1980 gold price high of $850 in today’s dollars, is well over US$2000, so gold at less than $600 today is very cheap indeed.

Bill Bonner, Daily Reckoning June 2006

“You can easily forget to notice amid all the noise of share prices, Fed policies, economists’ apologia, analyst reports, charts, graphs, and new headlines. The essential truth is hard to hear. You have to hold your hands over your ears and let it whisper to you, all the world’s paper currencies have been inflated. But if paper currencies are to lose value, they must lose value against something. That something, by tradition as well as convenience, is gold.”

There is still a way for “the owners of wealth to protect themselves” ... work outside the financial policy of the welfare state and … buy gold!!