The Biggest Threat To Your Personal Wealth    4 September 2002

This is an update to our prior report, “Gold’s Role in Protecting Your Wealth”. Several factors have recently taken center stage in the financial markets and further strengthen the case for investing in gold:

Huge and growing current account[1] deficit
U.S. Corporate fraud and bankruptcies
Declining U.S. dollar
Inappropriate monetary and economic policies

Huge and growing current account deficit
Direct foreign investments by the U.S. represented outflows of $440 billion in 2001. Coupled with a current account deficit of $450 billion, this implies foreign capital inflows must equal roughly $900 billion, almost $3 billion a day, just to keep the dollar from falling.

U.S. Corporate fraud and bankruptcies
With huge, high profile bankruptcies in formerly investment grade securities, such as WorldCom and Enron, foreigners are unlikely to increase their U.S. exposure.

Declining U.S. dollar
The dollar index has broken long-term technical support in the 108-110 area.

Inappropriate monetary and economic policies
Flooding the economy with money at any sign of trouble has the effect of killing the profit motive by keeping weak competitors alive. Money expansion has been ineffective and is the cause of our current problems, not a cure.

This last point is really the cause of the prior three, in that the perpetual flood of money creation leads to: growing current account deficits, a declining currency, and a stock market bubble with valuations so high that corporate chieftains use every accounting trick available to try to live up to those valuations. The investing public is only now beginning to grasp what has transpired. It is blatant, yet not unprecedented, fiat money[2] creation with no offsetting increase in production of goods and services.

Last week Mr. Greenspan proclaimed that he was powerless to deflate any suspected stock market bubble because any rise in rates would have brought about a recession in his estimation. When governments and central banks intervene in business cycles to prevent recessions at all costs, they are superseding the profit motive which capitalism is based upon. The liquidation of non-viable firms is prolonged, damaging the overall profit outlook. This can result in a deflationary environment, such as we experienced in the 1930’s, and Japan has been experiencing throughout the 1990’s.

While many claim we are “no Japan”, the bulk of our population is in much worse shape to weather deflationary forces. Japan has had very high savings and lower personal debt levels, while Americans and the economy depend on borrowing and consumer spending. With high cash levels, Japan has weathered the deflation quite well as their huge savings can buy more products and services as prices fall. This highlights the importance of holding high levels of cash during deflationary periods.

So, why gold?
In a deflationary environment, you would normally be protected by: owning bonds, holding high levels of cash, and being largely out of stocks. This would likely be correct if the Fed and government stood by and did not fight the deflation. However, if they do fight deflation, through over-aggressive money growth, bonds could plunge and cash could be devalued. Gold experiences its strongest price rise when central banks are fighting deflation and currencies are plunging. This can be seen most recently, in Japan, which has been the largest consumer of physical gold while their economy experiences deflation.

Additionally, gold makes sense as a commodity investment since production has not exceeded jewelry demand alone for over ten years. With production now in decline, much higher prices will be needed to encourage new mines, even if the demand for gold as money does not materialize, as we strongly believe it will.

When dollars are printed in an attempt to revive economic growth, and it is unsuccessful; the purchasing power of an investor’s savings is at risk. We believe this is currently the biggest threat to personal wealth. Thunder Capital offers a dynamic mix of gold exploration and production companies in its funds. Coupled with gold, we obtain exposure on the short side through “paper money” financial institutions. We believe an investment in gold is a powerful tool in protecting your assets from the effects of inappropriate monetary policies.

Richard J. Greene

[1] Current account- The difference between a nation's total exports of goods, services, and transfers and its total imports of them. Current account balance calculations exclude transactions in financial assets and liabilities.

[2] Fiat money- Money that a government has declared to be legal tender, despite that it has no intrinsic value and is not backed by reserves..