What You Must Own When the Banks Go Bust
By Tom Dyson
February 23, 2009
"Have you ever heard of bullionvault.com?" my mother asked in an e-mail last week from London.
Bullion Vault is a British company that buys and sells gold over the Internet. It's a popular service with people who want to own gold bullion but don't want the hassle of gold ownership.
Later, my mother told me she'd been digging through the small print on Bullion Vault's website. She was thinking about opening an account.
It seems the European banking system is about to collapse. An article in the Daily Telegraph claims European banks may have to write down $25 trillion in losses. Compare this to the problems in America... Even "Dr. Doom" – NYU economics professor Nouriel Roubini – says the most American banks will have to write off is $1.8 trillion.
In other words, the problems faced by American banks are nothing but a skinned knee compared to what European banks face.
This is because the European banks lost money in two major financial implosions. They made trillions in loans to Eastern Europe and other emerging markets and they also participated in U.S. mortgage lending, possibly even more aggressively than American banks.
According to the Telegraph, "Europeans account for an astonishing 74% of the entire $4.9 trillion portfolio of loans to emerging markets. They are five times more exposed to this latest bust than American or Japanese banks, and they are 50% more leveraged (IMF data)."
The final clincher is, no European "Federal Reserve" bank exists to print trillions of euros and bail everyone out like we have in America. Now, the European banking system is about to fall apart.
This is why my mother wants to buy gold. She's not worried about inflation or currency debasement. She's worried about the money in her bank account. I think this is why gold and silver are rising so fast right now. And why the dollar and European government bonds are soaring at the same time. It's not a fear of price inflation that's driving gold. It's the Europeans. They are turning to safe havens because their banking system is on the brink of failure.
Here's the thing: Gold doesn't pay interest. Gold costs money to own. So I'd rather own a solid asset that cranks out 10% dividends than gold. The two pipeline investments in my 12% Letter portfolio are just as safe as gold in a financial panic. If the banking system collapses, your capital is safely buried underground.
They'll protect your capital from inflation and depressions too. In inflation, having your money in steel tubes protects you from currency devaluation. In deflation, people still need gas to keep warm. Pipelines cranking out cash become valuable assets.
Plus they're liquid. You can buy and sell any time you like. And they pay 10% dividend yields. In fact, both companies raised their dividends in the most recent quarter.
If I lived in Europe right now, I'd hold gold... But I'd park most of my money in ironclad
companies with large yields. They're productive. They are safe. They pay double-digit income yields.
If you're serious about building a fortune, make sure you are getting paid by your investments. This advice still applies in recessions and banking panics... and it's the advice I gave my mother last week.
Good investing,
Tom
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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NEW HIGHS OF NOTE LAST WEEK
IAMGOLD (IAG)... gold miner
Ultra Gold ProShares (UGL)... double gold ETF
Ultra Silver ProShares (AGQ)... double silver ETF
Central GoldTrust (GTU)... gold ETF
NEW LOWS OF NOTE LAST WEEK
General Electric (GE)... conglomerate
General Motors (GM)... automaker
American Express (AXP)... credit cards
Capital One (COF)... credit cards
Citigroup (C)... less than $3 per share
Bank of America (BAC)... less than $4 per share
iShares Financial Fund (IYF)... needs to climb above $35 pronto
Sotheby's (BID)... auctioneer
Pfizer (PFE)... Big Pharma
ConocoPhillips (COP)... Big Oil
Southwest Airlines (LUV)... airline
MGM Mirage (MGM)... casinos
Wynn Resorts (WYNN)... casinos
Nabors Industries (NBR)... oil drilling
Rick's Cabaret (RICK)... gentlemen's clubs
Spectra Energy (SE)... oil & gas pipelines
Nokia (NOK)... cell phones
Disney (DIS)... entertainment
Service Corp (SCI)... largest U.S. funeral home operator
Procter & Gamble (PG)... consumer products
New York Times (NYT)... stock price less than a Sunday edition |
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Interest rates on standard U.S. 30-year mortgages dropped in the latest week to levels just shy of record lows as concerns of a deepening recession boosted the appeal of fixed-rate investments, Freddie Mac said on Thursday.
The average fixed 30-year mortgage rate declined to 5.04 percent in the week ending Thursday, from 5.16 percent in the previous period, Freddie Mac said in a statement. That was close to the 4.96 percent reached in mid-January, which was the lowest rate since Freddie Mac began its survey in 1971.
– Reuters
Gold rose to more than $1,000 an ounce in New York [on Friday] for the first time in almost a year as investors, spooked by plunging stocks and a deepening recession, sought to protect their wealth.
"One camp of investors is buying gold because of fear the fiscal stimulus packages are insufficient to bring the economy out of recession," said Peter Fertig, owner of Quantitative Commodity Research Ltd. in Hainburg, Germany. "The other camp fears the stimulus packages will lead to inflation."
Gold last topped $1,000 on March 18 in New York, partly as a hedge against weakness in the dollar. The last time the metal traded this high, the price reached a record $1,033.90 on March 17 before retreating to as low as $681 in October.
– Bloomberg
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