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Generational Dynamics Web Log for 3-Feb-08
Readers comment: Gold prices and where you should put your money.

Web Log - February, 2008

Readers comment: Gold prices and where you should put your money.

What do you do if you're afraid that your 401K isn't safe?

In a recent article, "Fidelity Investments salesman admits that money market funds are not safe," I described the answers that a web site reader got when he called his Fidelity Investments salesman and asked, "If Fidelity goes bankrupt, then will my money be protected?"

The answer was "No" in every cases, except the case where you own Treasury bonds and Fidelity is holding them for you. But if you've invested in a money market fund, even one backed by Treasury bonds, then they're not safe.

I received several comments from web site readers. These are the most interesting.

Two months ago, I provided a number of additional suggestions in "Questions and answers about the 'credit crunch.'" Some of that information is repeated here.

Is gold overpriced?

I wrote that one choice is owning "Actual physical gold, if you're into taking risks, since gold is currently way overpriced."

"John - Gold is not overpriced as you will soon see (think inflation adjusted). All the best."

I'll be waiting.

"Hi, Is that your opinion that "Gold is currently way overpriced?". If you were a financial blog, I'd accept that.

Gold bars

Gold bars

If you want to know what's happening with gold please let me know and I'll send you so much information you will espouse only one investment to protect against doom and gloom. Gold will be going to 1000 pretty soon...and then 1600 this year. By next year it will be at 2500, EVEN then gold will be severely UNDER Priced, it would only then equal the 850$ reached in 1980 in real terms."

Wait ... don't tell me ... let me guess ... you sell gold. Right?

And you mean that if I rename this web log the "Generational Dynamics Financial Blog," then you'd change your mind? Weird.

"I have tried to find out without bothering you but cannot find material to justify your comment on gold being overpriced could you please help me out with this. I understand that in an deflation its price could collapse but we are in an inflationary climate. And in your opinion overpriced against what measure?

I understand gold has appreciated quickly as of late, and at these parabolic rises, a decline is inevitable and will possibly be ugly, do you mean it in the context of a coming economic collapse and great depression."

There's been a huge commodity bubble in the last five years. Gold has gone from something like $400/oz to almost $1000/oz. Copper went from $2000/ton to $8000/ton, though I think it may be down a bit now. Oil went from $30/barrel to $100/barrel, though it's down a little now. Wheat went from $2.50/bushel to $10/bushel, though it's down a little now.

It's possible that the commodity bubble will grow even larger, but sooner or later it will burst.

When this commodity bubble bursts, all of these commodity prices will collapse. There's no reason that I'm aware of that the same thing won't happen to gold. Gold is not magic, though many people believe it is. If it were magic, then I would have magic teeth.

If there's a war, then gold may or may not spike for a while, depending on how the war goes. That's a very high risk assumption and, in my opinion, does not make gold a good investment at this time.

But if you do decide to buy gold, make sure that you take possession of actual physical gold, since any gold-based securities are liable to end up being worthless.

"If you look at the current financial situation and how Ben Bernacke is handling the situation, I guess we go for global meltdown.

For me the best thing to do to protect yourself is to buy physical gold. Gold is something that is been used as money since the last 6000 years.

I guess gold will survive; dollar, euro, yen is only paper..."

Yes, gold has survived a long time, but some paper currencies (like the dollar and pound) have survived at least a few centuries of war.

Keep in mind that in the case of some national or regional emergency, you can't eat gold, and you may not be able to sell gold. So if you invest in gold, make sure that there will be other options available to you.

"For more risk, you could also consider many ETFs. You can bet on anything from Gold, grain, oil or other commodity prices rising, to indexes like the S&P500 or Nasdaq100 declining, there are even ETFs that double the inverse of these indexes (such as QID and SMN). You can bet on a decline in oil stocks via DUG (or bet on a rise via DIG). Obviously if your timing is bad, you could lose a lot of money.

If you are going to buy physical gold or silver, expect to pay extremely high commissions on both sides (buying and if you ever want to sell) which can give you an instant loss of as much as 20% right off the bat (10% to buy, and another 10 in the future when you sell). Buying the gold ETF (GLD) may make more sense for some people if you really want to buy gold but don't want to pay high upfront costs or be at risk of theft."

If gold were relatively cheap right now, then it might make sense to purchase gold, with the expectation that gold prices would increase. But with gold prices so high because of the commodities bubble, buying gold and paying a high commission as well makes no sense at all, as this reader indicates.

However, I can't recommend purchasing ETFs (exchange-traded funds), which seem to me to be the worst choice. You still pay the bubble price, but don't have the protection of having possession of actual gold.

For those who are curious about ETFs, here's the complete list of ETFs sold by Fidelity.

Finally, who are you going to believe, gold salesmen or Indian housewives?

From Financial Times: "Could Indian housewives be calling the top of the gold market? Many are selling unwanted jewellery into a surging recycling market and deferring all but essential purchases of the precious metal, commodity traders, economists and jewellers said yesterday.

India is the world's largest consumer of the precious metal and the apparent sell-signal from its value-savvy householders may prove unsettling for global investors hoping that gold will continue to be a safe haven in volatile markets.

"Demand for gold is virtually zero," said Suresh Hundia, president of the Bombay Bullion Association. "People are taking profits and selling their gold back to jewellers for 2.5-3 per cent less than international market prices."

What to do with your 401K?

"I recently inquired of you your thoughts about my 401k, which happens to be with Fidelity. I believe you suggested to find a holding that was insured by the FDIC. Well after checking my options, I found NONE of Fidelities funds that I can choose are insured. After reading the last article from a reader who questioned Fidelity, I feel like I am screwed. Would you suggest withdrawing my holdings altogether? I know the tax ramifications would be large, but that beats losing all my money. I am a novice when it comes to knowledge of the legalities of 401k's and 457 plans. Is it even an option to take all my money out???"

Whether you can take your money out is a technical question for which you'll need professional advice about your situation.

However, the answer given by the Fidelity salesman appears to provide some clues.

He said, "If you own actual government Treasuries that they're holding for you, then you're protected. But if you subscribe to a money market fund, even when it's backed by government Treasuries, then you're not protected at all."

What that says to me is that you should transfer your money out of the money market funds into actual Treasury bonds that you own.

A friend, who has an account with Merrill Lynch, told me that they offered him another option: Transfer your funds into an FDIC-insured CDs (Certificates of Deposit) in your name.

What these two solutions have in common is that the actual underlying assets (Treasuries or CDs) are owned by YOU, the investor, rather than by the securities firm. The firm is simply holding your assets for you. Some firms may offer this for other classes of assets as well, possibly even gold.

Incidentally, you don't have to go through a firm like Fidelity or Merrill to make these investments. You can get a CD from your local bank, and you can purchase Treasuries online at http://www.treasurydirect.gov/ .

However, make sure that you have some money in the form of cash that you can access quickly, so that you can survive an emergency.

If any more web site readers have discovered other solutions to this problem, please let me know and I'll post them.

Stuffing cash into your mattress

I actually was joking when I suggested stuffing cash into your mattress, but so that no one will take it seriously, here are some suggestions from a web site reader:

"About mattress comments... this is generally my current approach, keeping physical cash (although I do use my bank as a vehicle for certain funds, like paying rent and bills through checks or debit cards, depositing the amount I need when I recieve bills). However, as the financial situation of certain individuals becomes desperate, a spike in non-violent theft crimes may be expected to increase out of desperation (i.e. burglary). The mattress idea is so cliche that any knowledgeable crook would look there first. I'd suggest finding more creative ways to hide cash - places that a criminal in a hurry wouldn't bother to look (hidden in old magazines, in the fridge, maybe inside couch cushions with zippers on them, in the pocket of an old pair of pants that is never worn anymore, and so forth.)"

These are all good ideas.

If you live in a house with a basement with stone or brick walls, you might consider the following, which I've heard of in the past: Loosen one of the stones, hide your money behind it, and replace it, making sure to camouflage the result.

FDIC - Federally insured bank accounts

"FDIC: I'm sorry but I wouldn't hang my hat on any type of Federal Insurance guarantees, especially when a depression, as you say, is around the corner."

As I wrote last year in "Is your bank deposit protected by the FDIC?", there are a lot of reasons for concern:

The Federal Deposit Insurance Corporation (FDIC) has only $50 billion of assets in its Deposit Insurance Fund, while the amounts insured come to $6.5 trillion in almost 9,000 institutions and 95,000 offices. So that $47 billion in the Deposit Insurance Fund won't go very far if banks start failing.

However, for most people, placing your money into an FDIC-insured bank account is still the safest choice. A stock market panic and crash or other financial crisis will probably not begin with a mass of bank failures, and so the FDIC assets will be fine for a while. Once a major financial crisis occurs, then it will be possible to evaluate the new situation, and possibly withdraw money at that time.

However, make sure that you understand all the rules. There are limits to the amount of money you have insured.

There are ways to get around those rules, as one web site reader suggests:

"You can sock away an unlimited amount of FDIC insured cash just by creating as many accounts as you need at multiple banks if you need to. Examples of how to max out your insured accounts at one bank can be found here: http://www.fdic.gov/deposit/deposits/financial/examples.html

Best CD rates: http://www.fatwallet.com/t/52/682884/

Keep in mind that there are a lot of myths about FDIC payouts if the bank fails - the truth is that payouts are made quickly, within a few days in most cases, your money will not be tied up for months or years."

Certainly if you have more than $100,000 on deposit, be certain to check the rules very carefully to make sure that you're insured. (3-Feb-08) Permanent Link
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