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Tuesday, November 3, 2009
"What if my bank account gets wiped out?"
My friend has nightmares about a virus attack on the global computer network. He says terrorists are developing programs that will wipe out bank databases. Account records will vanish, he says, and no one will know who owns what or how much. It'll wreak havoc on the financial system.
I have different "financial wipe out" nightmares. I worry the federal government will run out of credit and won't be able to backstop the FDIC. They'll be hundreds of bank failures, like there were in the Great Depression. In my nightmare, I lose my savings in a bank collapse.
Here's another bad dream: Inflation gets so bad, the Feds impose currency controls and then devalue the dollar. My money gets stuck in the United States... losing its value.
These fears are some of the reasons I'm building a stash of gold coins... and why you should, too. Gold is real money. You can take the coins anywhere you want in the world, and they'll always have value. Gold coins are the ultimate "safe haven" insurance asset.
And here's the bonus: Right now, there's no "opportunity cost" of owning gold. Usually, you're giving up the chance to earn interest on your cash when you buy gold. But now, the dollar is paying next to no interest.
Yesterday morning, I had breakfast with one of the largest private gold bullion dealers in the world. His name is Michael Checkan. He runs a business called Asset Strategies International. I asked Michael what gold coins he likes right now...
Michael told me you should keep two things in mind when you buy gold coins. First, you want a good deal. He says you should buy the coins with the lowest premium to the international gold spot price you can find. Right now, there's an orderly market in gold coins and you shouldn't pay more than a 5% premium to spot. As I write, gold is at around $1,060. So you shouldn't pay more than $1,113 an ounce for your coins.
Secondly, you should buy coins with the highest worldwide acceptability, so you'll have no problem selling them anywhere in the world. For example, Michael says Asians prefer 24-karat gold coins, but the American Eagle and the Krugerrand are only 22-karat gold. They aren't so popular in Asia. He also says the South African Krugerrand, the British Sovereign, the Mexican Peso, and the Austrian Corona gold coins are "passé" and not as popular worldwide anymore. You won't get such a good deal when you sell these.
So which coins should you buy?
Michael likes one-ounce Canadian Maple Leaf coins best. He also likes Australian Kangaroo one-ounce nuggets and the new American Buffalo coin.
The national mints sell these coins to wholesalers at a 3% premium to spot gold. The wholesalers take another 0.5% and the retailer takes 1.5% in profit. So you pay a 5% premium to spot. (The Buffalo is a new coin and supply is still a bit tight. If you buy fewer than 10 coins, you may have to pay a 6% premium.) These coins are all 24-karat gold, they are all popular worldwide, and you can hold all three of these coins in your IRA. When you sell, you should expect to receive the spot gold price plus about 1%.
There's never been a more important time to own gold than right now, even if it's just a few gold coins. We're entering severe financial turbulence, and gold coins are the ultimate insurance. Canadian Maple Leafs, Aussie Kangaroos, and American Buffalos are the best coins to buy right now.
In my next essay, I'll discuss what you should do with your gold coins once you've bought them...
P.S. Michael Checkan has been helping investors use precious metals and foreign currencies for 30 years. He's extremely knowledgeable and has offered to answer any questions for DailyWealth readers. Visit his website at www.assetstrategies.com or call 1-800-831-0007.
THIS PAIRS TRADE WAS A BIG WINNER
Today, we check out a "pairs trade" that worked out beautifully.
A pairs trade is a two-sided position often used by professional traders. On one side, they purchase a stock, betting it will rise. On the other side, they sell as stock short, betting the price will fall. Pros use pairs trades to profit from the diverging fortunes of particular businesses. Take the Blockbuster/Netflix trade...
For many years, Blockbuster was just about the only game in town for movie rentals. But about 10 years ago, mail-order company Netflix began offering folks a way to rent movies without due dates, late fees, and trips to the strip mall. "On demand" cable offered a similar hassle-free service. As you can see from today's chart, the market likes the hassle-free method a lot better.
Netflix went public in 2002. Shares are up nearly 600% since then. Blockbuster shares are down about 94% in the same time. The chart below shows the two share prices plotted against each other since 2002. The wild divergence in share performance produced a steady, upward sloping "ratio" line. Tomorrow, we'll show you one pairs trade working right now... that will keep working for years.
In The Daily Crux